What is accruals basis accounting in Hong Kong

What Accruals Basis Accounting Means for Hong Kong Companies

Under the accruals basis hong kong accounting method, revenue is recognised when it is earned and expenses are recognised when they are incurred, regardless of when cash is received or paid. This is the standard accounting approach used by Hong Kong companies when preparing their statutory financial statements.

For most Hong Kong companies, accrual accounting is the basis required for compliance with the statutory audit obligation. The Companies Ordinance (Cap. 622) requires every Hong Kong incorporated company to have its financial statements audited annually by a practising certified public accountant holding a valid practising certificate issued by the HKICPA. The auditor's opinion is formed on whether the financial statements present a true and fair view, which the accruals basis supports by matching income and expenditure to the correct accounting period.

Accrual Accounting Hong Kong

In practice, accrual accounting in Hong Kong means your company must maintain complete accounting records that show transactions when obligations arise, not when cash moves. This affects how you record sales invoices issued, supplier bills received, and provisions for expenses such as depreciation or accrued salaries. The general ledger and trial balance prepared at each month-end will reflect these accruals.

Accrual Basis vs Cash Basis Hong Kong

The key distinction between accrual basis vs cash basis hong kong is timing. Under the cash basis, income and expenses are recorded only when money is received or paid. For Hong Kong companies subject to audit, the cash basis is not permitted for statutory financial statements. The accruals basis is required by accounting standards (HKFRS or SME-FRF/SME-FRS) and is the method your auditor will expect to see when examining your management accounts and preparing the directors' report and auditor's report for filing with the Companies Registry.

Hong Kong Accrual Accounting

Hong Kong accrual accounting requires your company to prepare financial statements that recognise income and expenditure in the period they relate to. This applies to all revenue and expense items, from sales revenue and cost of goods sold to interest income and rental expenses. The accounting records must be kept for seven years as required by the Companies Ordinance.

Accruals Basis Financial Statements

When preparing accruals basis financial statements for a Hong Kong company, the balance sheet will show trade debtors (amounts owed by customers) and trade creditors (amounts owed to suppliers) that do not appear in a cash-based system. These statements form the basis of the statutory audit and must be approved by the board of directors and signed by a director on behalf of the board before being delivered to the Companies Registry. The Inland Revenue Department also expects profits tax returns, filed on BIR51, to be prepared on the accruals basis, as the assessable profits are derived from the audited financial statements.