Prepaid and Accrued Expenses in Egypt: Recognition and Common Errors
When is a prepayment an asset and an unbilled service a liability? The accrual basis under EAS 1, two worked examples, accruals versus provisions, and the effect on tax deduction.
By Accounting & Bookkeeping Department · 15 October 2026 · 7 min read
Executive summary
- Financial statements are prepared on the accrual basis, except for cash flow information (Egyptian Accounting Standard No. 1, paragraph 27).
- An amount paid in advance for a service not yet received is an asset, charged to the periods in which the service is consumed; a service received before it is invoiced or paid is a liability recorded in its own period.
- An accrued expense is not a provision: a provision is "a liability determined neither as to timing nor as to amount", and the uncertainty in accruals is "much less" (Egyptian Accounting Standard No. 28, paragraphs 10 and 11).
- Net profit is determined on the basis of the income statement prepared under the Egyptian Accounting Standards, and the tax base by applying the provisions of the law to it (Article 17 of Law 91 of 2005); "reserves and provisions of all kinds" are not deductible (Article 24).
- To be deductible, an expense must be genuine and supported by an electronic invoice or receipt, subject to the exceptions in the text (Article 22(2), as replaced by Law 30 of 2023).
The accrual basis and the definitions of asset and liability
Paragraph 27 of Egyptian Accounting Standard No. 1, Presentation of Financial Statements (2019 revision), provides that "an entity shall prepare its financial statements using the accrual basis of accounting, except for cash flow information". Paragraph 28 adds that the entity recognises assets, liabilities, expenses and the other elements "when those items satisfy the definitions and recognition criteria in the general framework of the Egyptian Accounting Standards". The rest of the standard is covered in complete financial statements under EAS 1.
The framework in force is the Framework for the Preparation and Presentation of Financial Statements issued with Minister of Investment Decree 110 of 2015. Article 1 of Decree 69 of 2019 of the Minister of Investment and International Cooperation, and Article 1 of Prime Minister's Decree 883 of 2023, each replaced the preface appendix, not the framework. Paragraph 4-4 of the framework defines an asset as a "resource" controlled by the entity "as a result of past events and from which future economic benefits are expected to result for the entity", and a liability as "a present obligation of the entity arising from past events, the settlement of which is expected to require outflows of resources that the entity owns and that embody economic benefits".
Prepaid expenses: an asset used up over its periods
Rent, insurance or a subscription paid in advance is a right to a service not yet received. It is therefore an asset, charged to the income statement in the periods in which the service is consumed. In form this resembles depreciation: the framework requires expenses to be recognised "on the basis of a systematic and rational allocation" when the benefits arise over several periods and the link with income can only be broadly or indirectly determined, and calls the expense depreciation in the case of fixed assets (paragraph 4-51). The rules for fixed assets themselves are in fixed assets: recognition and depreciation.
Illustrative example (hypothetical figures): a company with a 31 December year end pays EGP 120,000 on 1 October 2026 for twelve months' office rent from that date, assuming the service is consumed evenly over the months and ignoring any tax.
| Date | Entry | Amount (EGP) |
|---|---|---|
| 1 October 2026 | Dr Prepaid rent, Cr Bank | 120,000 |
| End of each month, October to December 2026 | Dr Rent expense, Cr Prepaid rent | 10,000 |
| 31 December 2026 | Prepaid rent balance | 90,000 |
The 2026 charge is EGP 30,000, and EGP 90,000 remains an asset to be charged to the first nine months of 2027.
Accrued expenses: a liability recorded before the invoice
Paragraph 11(b) of Egyptian Accounting Standard No. 28, Provisions, Contingent Liabilities and Contingent Assets, defines accrued expenses as "liabilities for goods and services that have been received but not yet paid for or invoiced, nor agreed with the suppliers", including amounts due to employees such as accrued vacation pay. An expense is recognised when a decrease in future economic benefits related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably; the framework's example is "recording amounts due to employees" (paragraph 4-49).
Illustrative example (hypothetical figures): a consultant on a fixed contractual fee of EGP 25,000 a month performs the December 2026 service, and the electronic invoice arrives in January 2027, ignoring any tax.
| Date | Entry | Amount (EGP) |
|---|---|---|
| 31 December 2026 | Dr Consultancy fees expense, Cr Accrued expenses | 25,000 |
| On receipt of the invoice, January 2027 | Dr Accrued expenses, Cr Supplier | 25,000 |
The January entry clears the liability and does not charge January with a new expense.
Common errors
Errors that recur in practice include:
- Charging an annual payment to one month. In the first example, expensing the whole rent in October overstates 2026 expenses and understates assets by EGP 90,000. The monthly charge belongs in the monthly accounting close.
- Missing accruals at the close. Fees, utilities and commissions that relate to the period but are invoiced later, and vacation pay earned in it, move the expense into a period it does not belong to.
- Accruals that are never cleared. The later invoice is booked as a new expense instead of clearing the accrual, so the service is charged twice and a liability that does not exist stays on the books.
- Confusing an accrual with a provision. A provision is marked by uncertainty about the timing and amount of the future expenditure required to settle it. Accruals may sometimes be estimated, but their uncertainty is "much less than for provisions"; they are usually reported within trade and other payables, while provisions are reported separately (paragraph 11). Paragraph 7 notes that in Egypt the word "provision" is also used for depreciation, impairment of assets and doubtful debts; these are adjustments to the carrying amounts of assets and are not covered by the standard.
- Retranslating foreign-currency prepayments. Amounts prepaid for goods and services are non-monetary items; those measured at historical cost stay at the exchange rate at the date of the transaction, while monetary items are translated at the closing rate (Egyptian Accounting Standard No. 13, 2024 revision, paragraphs 16 and 23). The rest of the treatment of exchange differences is in Foreign Currency Translation and Exchange Differences in Egypt.
The tax side
The tax period "is the financial year beginning on 1 January and ending on 31 December of each year, or any period of twelve months taken as the basis for calculating the tax" (Article 5 of Income Tax Law 91 of 2005). Article 17 provides that "net profit is determined on the basis of the income statement prepared in accordance with the Egyptian Accounting Standards, and the tax base is determined by applying the provisions of this law to that net profit", and these rules apply to legal persons except where a specific provision says otherwise (Article 51). Read together with paragraph 27 of EAS 1, these texts make the accrual-basis income statement for the year the starting point of the tax base, so an expense charged to the wrong year changes the net profit of two years.
Deductible costs must relate to the activity and be necessary to carry it on (Article 22(1)), and must be "genuine and supported by electronic invoices or receipts", subject to the exceptions in Article 22(2) as replaced by Law 30 of 2023; the detail is in deductible and non-deductible expenses.
"Reserves and provisions of all kinds" are not deductible costs (Article 24(1)), and for legal persons Article 52(2) excludes "amounts set aside to create or increase provisions of all kinds", apart from the exceptions the text makes for banks and insurance companies. In our view, labelling an accrued expense a "provision" in the books exposes it to being treated as one. Correct classification under EAS 28 is therefore necessary, but it does not replace the conditions of Article 22, including those of Article 22(2).
What this requires
- Keep a schedule of prepaid expenses showing, for each item, the period covered, the monthly charge and the balance, and reconcile it to the general ledger every month.
- List services received but not yet invoiced before every close.
- Clear each accrual against its invoice when it arrives, and review the ageing of the accruals balance.
- Do not label an accrued expense a provision, and keep accruals separate from provisions in the accounts and in presentation.
- Keep foreign-currency prepayments measured at historical cost at the rate at the date of the transaction.
- Retain the electronic document supporting every accrual recorded at the year end.
The firm's Accounting & Bookkeeping Department prepares prepaid and accrued expense schedules and the entries that charge and clear them as part of the monthly close, and reviews their classification before the financial statements and the tax return are prepared.
Nehal Saied, Partner
Chartered Accountant, Ministry of Finance, Egypt
Member, Egyptian Tax Society
Member, Egyptian Society for Public Finance and Taxation
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