Should a Hong Kong company use cash or accrual accounting?

Cash basis records income when money arrives and expenses when money leaves. It is simple and shows your bank position, but it ignores what customers owe you and what you owe suppliers.

Accrual basis records revenue when it is earned and costs when they are incurred, whatever the payment date. Unpaid invoices, accrued expenses, prepayments, stock and depreciation all appear in the figures.

What the law points to

• Section 373 requires daily entries of money received and spent and a record of assets and liabilities. A cash-only record leaves out receivables and payables, so it is rarely enough for a company.
• Section 380 requires the financial statements to follow the applicable accounting standard. HKFRS for Private Entities requires the accrual basis for all its statements except cash flow information (s.2.36). Cash-only books therefore need converting to accrual before they can support financial statements under that standard.

A practical approach. Many small businesses record on a cash basis during the year and let the accountant convert to accrual at year end through adjustments. That works but gives poor monthly insight. Recording sales and purchase invoices as they arise (accrual from day one) usually gives more reliable management figures and a smaller year-end clean-up.