What is accrual accounting?
Accrual accounting records income when it is earned and expenses when they are incurred, even if payment happens later. It places each transaction in the period it belongs to, rather than using the bank payment date as the only trigger.
For example, a Hong Kong design studio completes a HK$12,000 project in March and gets paid in April. Under accrual accounting, the revenue belongs to March. The unpaid balance is an asset called accounts receivable until the customer pays.
- Accounts receivable
- Money customers owe for work or goods already supplied.
- Accounts payable
- Money owed to suppliers for goods or services already received.
- Matching principle
- Recognise related costs in the same period as the income they help generate, where appropriate.
Accrual vs cash accounting
Both describe the same business activity, but the timing is different. Here is what changes when money is received or paid in a later month.
| Transaction | Accrual basis | Cash basis |
|---|---|---|
| March project, paid in April | Revenue in March | Income in April |
| March utilities, paid in April | Expense in March | Expense in April |
| Annual insurance paid upfront | Expense over the coverage period | Expense when paid |
| Main focus | Performance and obligations | Cash received and paid |
A sale, a bill and a prepayment
These simplified HKD entries show the timing. Actual entries depend on your contracts and accounting policies.
01 / Customer invoice: HK$12,000
The project is completed in March. The customer pays in April. April’s receipt clears the receivable; it does not create a second sale.
March
Dr Accounts receivable
Cr Revenue
HK$12,000
April
Dr Bank
Cr Accounts receivable
HK$12,000
02 / Utilities bill: HK$2,000
March’s utilities are paid in April. Record the cost in March, then clear the amount owed when you pay.
March
Dr Utilities expense
Cr Accounts payable
HK$2,000
April
Dr Accounts payable
Cr Bank
HK$2,000
03 / Annual insurance: HK$12,000
If a 12-month policy benefits each month equally, record the upfront payment as a prepayment and recognise HK$1,000 of expense each month.
On payment
Dr Prepaid insurance
Cr Bank
HK$12,000
Each month
Dr Insurance expense
Cr Prepaid insurance
HK$1,000
Why it matters in Hong Kong
Credit terms, cross-border suppliers and advance customer payments can make bank balances a poor measure of performance. Accrual accounting helps a trading company separate stock purchases from cost of sales, or a service business distinguish completed work from cash still owed by clients.
Financial reporting frameworks used in Hong Kong, including HKFRS, generally use the accrual basis except for cash flow information. The appropriate framework and reporting requirements depend on your entity. Your accountant can confirm the treatment; this guide is not tax, audit or legal advice.
A clearer picture
- Compare monthly profit without payment timing distorting it.
- See unpaid invoices and supplier obligations.
- Allocate prepaid costs to the right periods.
What to watch
- Profit is not cash available to spend.
- Estimates and period-end adjustments need review.
- Overdue receivables may need an impairment assessment.
A practical month-end checklist
- 01Record sales and supplier bills in the correct period.
- 02Review unpaid invoices, overdue balances and unrecorded bills.
- 03Adjust accrued costs, prepayments and deferred revenue.
- 04Reconcile bank statement movements against the ledger.
- 05Review profit and loss, the balance sheet and cash flow together.
Common questions
Does an unpaid invoice count as revenue?
Under accrual accounting, revenue is recognised when the relevant goods or services have been delivered and the recognition criteria are met. If the customer has not paid, the amount is normally recorded as accounts receivable. Issuing an invoice alone does not always mean revenue has been earned.
Is accrual accounting the same as cash flow?
No. Profit measures income and expenses for a period; cash flow measures money moving in and out. A profitable business can still be short of cash if customers pay slowly. Review both your profit and loss statement and your cash flow.
How are deposits and advance payments treated?
Cash received before you earn it is generally a liability, such as deferred revenue, until the goods or services are delivered. A payment you make for a future benefit may be a prepaid asset. The contract and applicable accounting standard determine the treatment.
Can I move from a cash spreadsheet to accrual accounting?
Yes, but first establish opening balances for unpaid customer invoices, supplier bills, stock, prepayments and other assets or liabilities. Ask your accountant to review the cut-off date and adjustments so earlier transactions are not counted twice.