Accounting in Hong Kong

Bookkeeping, financial statements and the records the law says you must keep. 52 questions answered.

What is the difference between bookkeeping and accounting in Hong Kong?Bookkeeping is the day-to-day recording of transactions: sales, purchases, payments and receipts. Accounting uses those records to prepare financial statements, interpret results and support tax and audit work. In Hong Kong the law cares about both: the company must keep adequate records, and its directors must prepare financial statements from them.
Is a Hong Kong company legally required to keep accounting records?Yes. Section 373 of the Companies Ordinance (Cap. 622) requires every company to keep accounting records that explain its transactions and show its financial position and performance at any time. Directors who fail to take all reasonable steps risk a fine of HK$300,000, and up to 12 months' jail if the failure is wilful.
What must a Hong Kong company's accounting records contain?The law names two things: daily entries of all money received and spent, with what each was for, and a record of the company's assets and liabilities. Beyond that, the records must be sufficient to explain transactions and show the financial position accurately at any time.
How long must a Hong Kong company keep its accounting records?Seven years. Under section 377 of the Companies Ordinance, a company must keep its accounting records for 7 years after the end of the financial year to which the last entry relates. The Inland Revenue Department separately requires business records to be kept at least 7 years after the transactions they relate to.
What does section 51C of the Inland Revenue Ordinance require from my business?Anyone carrying on a trade, profession or business in Hong Kong must keep enough records, in English or Chinese, to work out assessable profits, and keep them for at least 7 years. Failing to do so without reasonable excuse can lead to a fine of up to HK$100,000.
Does the Business Registration Ordinance require me to keep accounting records?Not directly. The Business Registration Ordinance deals with registering the business and notifying changes, such as a new business address or name, within one month. The duty to keep accounting records comes from the Companies Ordinance (for companies) and section 51C of the Inland Revenue Ordinance (for all businesses).
Which documents should a Hong Kong business keep for its books?Keep every document that supports an entry in your books: sales and purchase invoices, receipts, bank statements, contracts, payroll and MPF records, asset purchase papers, loan agreements, and stocktake sheets. The test is whether someone else could trace any figure back to its source.
Can a Hong Kong company keep its accounting records digitally or scan paper originals?Yes. The Companies Ordinance allows records in hard copy or electronic form, provided they stay available for reference and can be reproduced on paper. The IRD also accepts electronic books and scanned source documents if integrity, legibility and origin details are preserved, and no prior approval is needed.
Where must a Hong Kong company keep its accounting records, and can they be kept overseas?Records must be kept at the registered office or any other place the directors think fit, and directors must be able to inspect them at any time free of charge. If they are kept outside Hong Kong, accounts and returns for that business must be sent to and kept in Hong Kong.
What are the penalties for failing to keep proper accounting records in Hong Kong?Under the Companies Ordinance, a director who fails to take all reasonable steps faces a fine of HK$300,000, and a fine plus up to 12 months' imprisonment if wilful. Under the Inland Revenue Ordinance, failing to keep business records without reasonable excuse can bring a fine of up to HK$100,000.
Do I still have to keep accounting records after my Hong Kong company is dissolved?A company dissolved by deregistration or striking off leaves its former directors one duty: under s.758 of the Companies Ordinance everyone who was a director just before dissolution must make sure the company's books and papers are kept for at least 6 years after the dissolution date, or face a level 3 fine (HK$10,000). The IRD's seven-year duty no longer applies to a dissolved corporation.
Can a director demand copies of the company's accounting records?Yes. Directors may inspect the company's accounting records at any time without charge, and the company must let them copy the records and give copies free of charge if asked. A court can also authorise someone to inspect on a director's behalf.
What is a financial year end (accounting reference date) for a Hong Kong company?The accounting reference date is the date on which a company's financial year ends each year. Under the Companies Ordinance each accounting period normally runs 12 months from the end of the previous one, and the financial statements are prepared up to that date.
How do I choose the financial year end for a new Hong Kong company?Directors can specify the first (primary) accounting reference date, as long as it falls within 18 months after incorporation. If no date is specified, the default is the last day of the month in which the first anniversary of incorporation falls. Choose a date that suits your business cycle and workload.
How long can a Hong Kong company's first financial period be?Up to 18 months from incorporation, because the first year-end date the directors choose must fall within 18 months of incorporation. If the first period is longer than 12 months, the deadline to lay or send the accounts is extended to the later of two dates set in the Ordinance.
Can I change my Hong Kong company's financial year end, and how?Yes. The directors pass a resolution specifying a new accounting reference date and stating whether the period is shortened or extended. An extension cannot go beyond 18 months, and repeated extensions within five years need members' approval. Public and guarantee companies must also notify the Registrar within 15 days.
What is the deadline to approve and send financial statements to members in Hong Kong?For most private companies, the directors must lay the reporting documents at the annual general meeting, or send them to members, within 9 months after the end of the accounting reference period. Public companies have 6 months. The first period and shortened periods have special rules.
What do a Hong Kong company's annual financial statements include?They are the statement of financial position (balance sheet), a profit and loss or comprehensive income statement, and the notes, prepared under the applicable standard. HKFRS for Private Entities also requires a statement of changes in equity and a cash flow statement; under SME-FRS the cash flow statement is optional. The notes must cover director-related disclosures.
What is a directors' report in Hong Kong and who signs it?The directors' report accompanies the financial statements and gives information the Ordinance requires, such as principal activities and directors. A director or the company secretary signs it on the board's behalf after the directors approve it. Companies using simplified reporting can omit the business review and some other items.
What is simplified financial reporting (the reporting exemption) for Hong Kong SMEs?It lets qualifying companies prepare simpler financial statements and directors' reports. Such a company need not give a true and fair view, can omit the directors' business review, and may omit some director-related disclosures. It does not remove the audit requirement.
What are the size thresholds for a small private company in Hong Kong?A private company is automatically "small" for simplified reporting if it meets any two of three tests: revenue of HK$100 million or less, total assets of HK$100 million or less, and no more than 100 employees. A company that fails the tests must meet them for two consecutive years to qualify later.
How do the small group and "eligible private company" tests work for simplified reporting in Hong Kong?A holding company of a group of small private companies qualifies if the group's combined revenue, assets and employees meet two of the three small-company tests. Larger "eligible" private companies or groups, up to HK$200 million, can also qualify if members holding at least 75% of the votes approve and nobody objects.
Who prepares and approves a Hong Kong company's financial statements?The directors are legally responsible for preparing them (s.379), usually with help from an accountant. The statement of financial position must be approved by the directors and signed by two directors, or by the sole director. An independent auditor then reports on the statements.
Which accounting standards can a Hong Kong company use: HKFRS, HKFRS for Private Entities or SME-FRF?There are three main options. Full HKFRS applies to all, and is mandatory for publicly accountable entities. HKFRS for Private Entities suits any entity without public accountability. The SME-FRF and SME-FRS are only for companies that qualify for the reporting exemption in section 359.
Who is eligible to use the SME-FRF and SME-FRS in Hong Kong?Hong Kong companies that fall within the reporting exemption in section 359 of the Companies Ordinance: small private companies, small guarantee companies, qualifying groups, larger eligible private companies with 75% member approval, and single private companies with unanimous written member consent. Banks, securities firms, insurers and deposit-takers cannot use them.
Who can use HKFRS for Private Entities in Hong Kong?Any entity without public accountability that publishes general purpose financial statements, with no size test. It excludes publicly traded entities and financial institutions such as banks, insurers and securities brokers. A subsidiary of a full-HKFRS group can use it if the subsidiary itself has no public accountability.
Should a Hong Kong company use cash or accrual accounting?Day to day you can track cash, but a company's financial statements are prepared on the accrual basis, recording income and expenses when earned or incurred rather than when paid. The law also requires records of assets and liabilities, which means tracking amounts owed to and by the company.
What is a chart of accounts and how should a small Hong Kong business set one up?A chart of accounts is the numbered list of categories your ledger uses: assets, liabilities, equity, income and expenses. Keep it short, consistent and aligned to the statements you must produce. Separate accounts for director loans, MPF, tax and foreign-currency balances make year-end work easier.
What is a bank reconciliation and why should a Hong Kong business do it every month?A bank reconciliation compares the cash book to the bank statement and explains every difference, such as cheques not yet cleared or bank charges not yet recorded. Doing it monthly catches errors, duplicate payments and fraud early, and gives a reliable cash figure for the books.
How should a small business record accounts receivable and accounts payable?Record each sales invoice as a receivable when issued and each supplier bill as a payable when received, then clear them when money moves. Review ageing reports monthly to chase late customers and plan payments. Unpaid balances at year end appear as assets and liabilities in the financial statements.
How do I account for fixed assets and depreciation in my books?Record major purchases of equipment, furniture, vehicles or fit-out as fixed assets at cost, not as expenses. Then spread the cost over the asset's useful life as depreciation, using a method and rate agreed with your accountant. Keep a fixed-asset register showing cost, purchase date, life and accumulated depreciation.
What is the difference between accounting depreciation and tax depreciation allowances in Hong Kong?Accounting depreciation is the charge in your financial statements. Tax allowances are the IRD's own scheme for relief on capital spending, calculated on different rules. Depreciation charged in the accounts is added back when profits tax is computed, then allowances are claimed instead.
How should a Hong Kong business account for inventory and stocktake?Count stock physically at least at year end, value it using a consistent cost method (such as first-in-first-out or weighted average), and record the movements in the ledger. The IRD expects goods traders to keep buying and selling records plus year-end stock statements and the stocktake records behind them.
How do I account for payroll and MPF contributions in Hong Kong?Employer and employee each contribute 5% of relevant income to an MPF scheme, within a minimum and maximum income band. Record gross salary as an expense, the employee's MPF as a deduction owed to the trustee, and the employer's MPF as an additional expense. Do this each pay period and clear it when paid.
What are the minimum and maximum relevant income levels for MPF contributions?For monthly-paid employees the minimum relevant income is HK$7,100 and the maximum is HK$30,000. Below the minimum, only the employer contributes. Above the maximum, each side's contribution stops at HK$1,500 a month. Daily-paid staff have levels of HK$280 and HK$1,000 per day.
When must MPF contributions be paid, and what happens if they are late?Contributions are generally due by the 10th of the following month for the previous wage period, paid through the eMPF Platform. Late payment can bring a charge of the greater of HK$5,000 or 10% of the amount due, a 5% surcharge on default amounts, and criminal penalties of up to HK$450,000 and four years' jail in serious cases.
What are management accounts, and does a Hong Kong SME need them?Management accounts are internal monthly or quarterly reports, usually a profit and loss, balance sheet and cash summary, that help owners run the business. No law prescribes their format. They are not a substitute for audited financial statements, but they let you spot problems long before year end.
How should a small Hong Kong business choose accounting software?Choose software that handles your currencies, keeps a tamper-evident audit trail, produces the reports your accountant needs, and lets you export your data. The law lets you keep electronic records if they can be reproduced on paper and are protected against falsification.
Should I do my own bookkeeping, hire a bookkeeper, or outsource it?It depends on transaction volume, your time and the complexity of the business. Doing it yourself suits very small, simple businesses with discipline. A part-time or outsourced bookkeeper suits growing businesses. Whichever you choose, the directors remain legally responsible for adequate records.
What factors drive the cost of accounting and bookkeeping for a Hong Kong SME?Cost mostly depends on the number of transactions, how organised your documents are, the number of bank accounts and currencies, whether payroll and stock are involved, and how far behind the books are. Fees are set by each provider, so ask for a written scope and quote rather than relying on averages.
How can I catch up when my company's books are years behind?Collect all bank statements and documents first, rebuild the ledger one year at a time from the bank records, then reconcile, close each year and prepare the overdue financial statements for audit. Directors remain exposed while records are inadequate, so start promptly and get professional help for the older years.
How do I switch accountants or bookkeepers and get a clean handover?Give notice under your engagement terms, then ask the outgoing firm for the ledger, supporting documents, working papers for past years, and the closing trial balance. Directors have a statutory right to inspect and copy the company's accounting records, so the records are yours. Agree a date for the handover and a cut-off.
What is a director's current account and how should it be recorded?It is a ledger account showing money flowing between a director and the company: amounts the director has lent or paid on its behalf, and amounts the company has paid to or for the director. A credit balance means the company owes the director; a debit balance means the director owes the company, which may be a restricted loan.
Can a Hong Kong company lend money to its directors? What does Part 11 of the Companies Ordinance say?Not freely. Section 500 prohibits a company from making a loan to a director, or to a body corporate the director controls, or guaranteeing such a loan, without the prescribed approval of its members. The Ordinance lists exceptions, including small amounts up to 5% of net assets and expenditure for the company's business.
What are the risks of mixing personal and business money in a Hong Kong company?A limited company is a separate legal person. Paying personal costs from company funds, or business costs from a personal account, muddies the books, can create a restricted loan to a director, complicates the audit, and weakens your records. Keep separate accounts and record any exception clearly.
What accounting duties apply to a dormant company in Hong Kong?A qualified private company that passes a special resolution and files it with the Registrar becomes dormant and is exempt from preparing financial statements, a directors' report and an audit. It must still keep accounting records. If it enters an accounting transaction, the exemption ends.
How should I keep the books when a Hong Kong company deals in HKD, USD and RMB?Pick a functional currency, usually the one in which most of your business is done, and record each foreign-currency transaction at the exchange rate on the transaction date. Revalue foreign-currency balances at year end and record the exchange differences. Reconcile each foreign-currency bank account in its own currency.
Can a Hong Kong company present its financial statements in USD or RMB instead of HKD?Yes, where the standard allows it. HKAS 21 and HKFRS for Private Entities let a company present in any currency and translate its results and position from its functional currency. SME-FRS uses a single reporting currency instead. The Companies Ordinance requires compliance with applicable standards but contains no rule forcing Hong Kong dollars.
How should I prepare my company's books before the annual audit in Hong Kong?Close the year in the ledger, reconcile every bank account, balance receivables, payables, payroll and director accounts, finish depreciation and stock, and assemble supporting documents. Almost every Hong Kong company must be audited, and the auditor is entitled to information from officers, so tidy books save time and cost.
Am I personally liable as a director if my bookkeeper keeps poor records?The duty to keep adequate records falls on the directors, and the penalty can be a HK$300,000 fine, or that plus 12 months' jail if wilful. But it is a defence to show you reasonably believed, and did believe, that a competent and reliable person was responsible for the task and able to do it.
What accounting should I set up when I start a new Hong Kong company?Open a company bank account, choose your financial year end within 18 months of incorporation, set up a ledger or software with a clear chart of accounts, and start filing documents from day one. Appoint someone to keep the books, and arrange an auditor and an accountant early.
How often should a Hong Kong company update its books?The law requires records that show the financial position accurately at any time, and where records are kept abroad, accounts and returns every six months at most. In practice, monthly updating, with a bank reconciliation, is the sensible standard for most SMEs.