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.
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.
Legal basis
- Companies Ordinance (Cap. 622), ss.373, 380
Sources
Applies to 2026 · Last reviewed 29 October 2026
General information for business owners, not legal, tax or professional advice. Rules change, so check the sources or ask a licensed professional before you act.
Related questions
- 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.