Accounts Payable vs Receivable in the UAE: Key Differences Explained

If you’re running a business setup in the UAE or thinking of starting one, there’s one thing you absolutely need to stay on top of: how money flows in and out of your business. That means understanding two big players in the world of accounting: Accounts Receivable (AR) and Accounts Payable (AP).

Whether you’re operating as a mainland LLC or inside a free zone, knowing the difference between what you’re owed and what you owe isn’t just good practice, it’s critical for staying compliant with VAT and corporate tax rules. So let’s break it all down and make this as painless (and useful) as possible.

What Are Accounts Receivable and Accounts Payable, Really?

Alright, quick refresher:

• Accounts Receivable (AR) is the money your customers owe you. These are your unpaid invoices, the sales you’ve made, but haven’t been paid for yet. On your balance sheet, these sit under assets.
• Accounts Payable (AP) is the money you owe your vendors or suppliers. Think of all those invoices you’ve received but haven’t paid yet. These are recorded as liabilities.

Sounds simple, right? But here’s where things get real, especially in the UAE, where every invoice, every payment, and every missed due date can mess with your VAT filings and your corporate tax returns. This isn’t just bookkeeping—it’s your compliance lifeline.

The UAE Angle: VAT, Corporate Tax, and Why It Matters

Let’s talk numbers for a second.

VAT has been applicable in the UAE since January 1, 2018, at a standard rate of 5%, as per the Federal Tax Authority (FTA). Businesses with taxable supplies (including imported services) exceeding AED 375,000 in the last 12 months must register for VAT, as per FTA rules. Voluntary registration is allowed if taxable turnover exceeds AED 187,500.

And now there’s corporate tax too. From June 1, 2023, UAE-resident businesses are subject to a 9% corporate tax on taxable profits exceeding AED 375,000. Income up to that threshold is taxed at 0%. Even tax-exempt free zone companies need to register, especially if they qualify under the Small Business Relief scheme (valid until 2026 for companies with revenue up to AED 3 million). However, free zone entities that meet the ‘Qualifying Income’ criteria may continue to enjoy 0% corporate tax on such income, provided they comply with all FTA requirements.

Starting January 1, 2025, large multinational groups operating in the UAE with consolidated global revenues exceeding EUR 750 million will be subject to a 15% Domestic Minimum Top-Up Tax (DMTT) under OECD Pillar Two rules. This applies only to large multinational groups, most SMEs and local UAE businesses will not be affected.

Now, here’s the twist: both AR and AP directly affect your profit calculations, tax filings, and VAT returns. Get them wrong, and you could either overpay tax, underpay it, or worse, attract penalties from the Federal Tax Authority (FTA).

What’s the Actual Difference? Let’s Lay It Out

Focus Area	Accounts Receivable in UAE (AR)	Accounts Payable in UAE (AP)
What it is	Money your clients owe you	Money you owe your suppliers
Balance Sheet	Recorded as a current asset	Recorded as a current liability
Cash Flow Impact	Faster collections = better liquidity	Timely payments = healthier working capital
VAT Impact	You collect output VAT on invoices	You reclaim input VAT (if invoice is valid)
Corporate Tax Role	Affects revenue and taxable income	Affects expense claims and profit figures
Risk & Compliance	Delays hurt cash flow and VAT accuracy. Delayed collections may cause cash flow issues and VAT misreporting penalties.	Late payments strain vendor relationships. Late payments may cause vendor disputes and loss of VAT recovery if deadlines are missed

A Real-World Example (Because Theory Gets Boring)

Let’s say you’ve set up shop in Dubai.

• You buy office equipment. Supplier sends you an invoice for AED 50,000 + 5% VAT = AED 52,500. Until you pay, that AED 52.5K sits in AP. You’ll also claim back the AED 2,500 input VAT in your return—if the invoice is compliant.
• Then, you bill your client AED 75,000 + 5% VAT = AED 78,750. That becomes AR. And yes, you’re now responsible for collecting and reporting that AED 3,750 as output VAT.
  

Simple? Kinda. If the supplier invoice lacks a valid TRN, correct date, supplier and customer details, VAT amount, or does not follow the FTA’s mandatory format, your input VAT claim may be denied. And if you mess up the timing, say, by recording things in the wrong month, you could end up misreporting your profit.

That’s where trouble begins.

The Step-by-Step Flow: How AR and AP Work in UAE Businesses

Here’s how things typically play out on both ends:

The AR (Receivables) Process

1. Onboard a client and agree on payment terms.
2. Raise a VAT-compliant sales invoice.
3. Record it in your accounting software.
4. Track aging reports and follow up on payments.
5. Once paid, record the receipt.
6. If necessary, issue a credit note.
7. Report the sale and output VAT in your VAT return.

The AP (Payables) Process

1. Receive an invoice from a supplier.
2. Match it with a purchase order or contract.
3. Verify the goods/services and VAT info.
4. Record the invoice in your ledger.
5. Schedule the payment.
6. Record input VAT for your next return.

And just so you know, you need to keep all supporting documents, invoices, notes, ledgers, VAT-related records must be kept for at least 5 years, and corporate tax-related records (including financial statements) must be retained for a minimum of 7 years from the end of the relevant tax period.

Why Outsourcing AR/AP Makes Sense (Especially for Startups & SMEs)

Let’s be honest, keeping tabs on all this can feel overwhelming. That’s why a lot of business setup in the UAE hand over their AR and AP management to experts.

Several licensed tax consultants and accounting firms in the UAE offer services ranging from VAT filing and corporate tax advisory to outsourced CFO support. If the consultant will file VAT or corporate tax on your behalf, ensure they are a registered Tax Agent with the FTA.

Here’s what outsourcing gets you:

• Clean, compliant invoicing that aligns with FTA standards.
• No missed deadlines (goodbye, late payment fees).
• Accurate financials, which is gold when filing tax returns.
• Scalability—whether you’re growing, shifting from a free zone to mainland, or winding things down.

Key Takeaways: Make AR & AP Work for You, Not Against You

Here’s what you want to do if you’re serious about keeping your business in check:

• Set up solid accounting systems early. Tools like Zoho Books, QuickBooks, Xero, or Tally Prime are FTA-accredited and help generate VAT-compliant invoices, track AR/AP, and simplify tax reporting.
• Keep an eye on Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO). These numbers tell you if your cash flow’s healthy.
• Don’t skip documentation. Ever.As per FTA guidelines, VAT-related records must be retained for at least 5 years. However, corporate tax records, including financial statements and supporting documents, must be retained for a minimum of 7 years from the end of the relevant tax period.
• Use consultants when things get complex, especially with VAT, corporate tax, ICV certifications, or liquidation.
• Know your thresholds. Even if you qualify for Small Business Relief, you still have to file, maintain records, and play by the rules.

Quick Checklist: AR/AP Compliance for UAE SMEs

• Register for VAT (mandatory if turnover exceeds AED 375,000)
• Register for Corporate Tax (even if you fall under relief schemes)
• Issue VAT-compliant invoices
• Track AR/AP aging reports
• Keep records for a minimum of five years
• Seek expert help if you’re unsure about filings

Final Thoughts

Here’s the big picture: AR and AP aren’t just about crunching numbers, they’re about staying compliant, keeping your business running smoothly, and making sure you’re not burning cash or picking fights with the FTA.

Even if you’re a small business with limited turnover, your books still matter. Handle AR and AP with care, and you’ll save yourself a lot of stress down the line.

Disclaimer:
This blog is for informational purposes only and does not constitute legal, financial, or tax advice. UAE tax laws, including VAT and Corporate Tax, are subject to change. Please consult a registered tax advisor or the UAE Federal Tax Authority (FTA) for personalized guidance. Tax laws, rates, and thresholds may change, always refer to the latest official FTA and Ministry of Finance updates.

Sources

• FTA VAT Registration
• UAE Corporate Tax Law
• FTA Invoice Guide (PDF)

FAQ

1. Why are accounts payable and accounts receivable important in accounting?
Because they tell you what’s coming in and what’s going out and that’s the heartbeat of any business. Accounts receivable shows how much money you’re waiting to collect from clients. Accounts payable shows what you owe to others. When managed right, they help you avoid cash crunches, keep vendor relationships smooth, and stay compliant with tax and VAT filings in the UAE.

2. Is accounts payable a debit or credit?
In accounting terms, accounts payable is a credit. When you receive a supplier invoice, you record it as a liability, because it’s money you owe. When you finally pay it off, the liability decreases (you debit the account). So if you see AP showing up on your balance sheet as a credit, it’s working as expected.

3. Is accounts receivable an asset or liability?
It’s an asset, specifically, a current asset. Why? Because it’s money owed to you by customers, and it’ll likely come in within a few weeks or months. On your balance sheet, it sits under assets, showing the value of future cash you’re expected to receive. In the UAE, this also affects your VAT calculations, since you’ll be reporting output VAT based on your invoices.

4. How do accounts payable and receivable affect cash flow?
Significantly, effective AR and AP management directly impacts cash flow health. But if your payables (AP) pile up without timely payments, you risk late fees or strained vendor ties. Managing both well helps smooth out your cash flow, avoid borrowing unnecessarily, and stay tax-compliant

5. Which comes first: accounts receivable or accounts payable?
There’s no hard rule, it depends on your transaction flow. But generally, accounts receivable happens first if you’re selling a product or service and then billing the client. Accounts payable shows up when you’re buying something from a supplier on credit. In either case, the key is timing. Get it wrong, and you might mess up your cash flow or misreport VAT in the wrong period.