How to record a business loan and finance lease in the UAE, instalment by instalment

When the loan is drawn, debit bank and credit a loan liability account. Split the balance into current (due within twelve months) and non-current portions on the balance sheet. Any arrangement or processing fee is usually deducted from the loan’s carrying amount and spread over its life as part of the effective interest, or expensed if small; agree the approach with your auditor.

Bank fees charged explicitly are generally subject to VAT under Article 42 of the VAT Executive Regulation, while the interest margin itself is an exempt financial service. Collect the bank’s tax invoice for the fee if you want to recover the input VAT.

Loan: AED 600,000 at 8% a year, repaid over 36 months, monthly instalment about AED 18,802. In month one, interest is 600,000 × 8% ÷ 12 = AED 4,000. The rest, AED 14,802, reduces principal.

Journal: debit interest expense AED 4,000; debit loan liability AED 14,802; credit bank AED 18,802. In month two, interest is calculated on the new balance of AED 585,198, so it falls to about AED 3,901, and principal repayment rises. Use the bank’s amortisation schedule as the source and reconcile the loan balance to the bank’s statement every quarter.

• Keep the bank’s amortisation schedule attached to the loan account
• Post each instalment split into interest and principal
• Reclassify the current portion at each year end
• Reconcile the loan balance to the bank’s confirmation

Under IFRS 16, a lessee recognises most leases on the balance sheet as a right-of-use asset and a lease liability, with exemptions for short-term and low-value leases. IFRS for SMEs, which some smaller companies use, keeps a distinction between finance and operating leases. Either way, a four-year truck finance deal is usually on the balance sheet: the truck as an asset, depreciated over its useful life, and the finance as a liability, reduced by instalments.

Hire purchase and conventional vehicle loans work the same as the term loan above. Our view: if you are unsure which standard your company follows, find out before signing large leases, because the presentation of debt in your accounts may matter to banks and investors.

Many UAE businesses use murabaha, ijara or similar Islamic finance. The legal form differs from a loan, but the accounting usually follows the economic substance: a liability for the amount financed and a profit charge spread over the term, similar to interest. The VAT treatment of Islamic finance products has its own provisions in the VAT rules, so ask your bank for the VAT breakdown and confirm the treatment with your tax agent.

Article 30 of the Corporate Tax Law limits the deduction for net interest expenditure to 30% of accounting EBITDA, adjusted as the law sets out. Ministerial Decision No. 126 of 2023 says the limitation does not apply where net interest expenditure for the tax period does not exceed AED 12 million. Most SMEs are far below that figure, so the cap rarely bites, but groups with large property or acquisition loans should model it.

Set up each loan as a liability account and use a recurring entry for the instalment, with the split taken from the bank’s schedule. When you upload the bank statement, the AI agent recognises the instalment debit, proposes the interest and principal split from the schedule you attached, and flags any instalment that differs from the expected amount.

Ask “what is our total debt and the interest we will pay in the next twelve months?” and the agent answers from the loan accounts and schedules. You review the split before it posts.