Accrual Accounting Explained

Start-up company owners in Singapore often face the challenge of deciding between two methods of accounting—cash accounting vs accrual accounting. However, before an individual is able to make the decision, it is important to understand the specifics of both methods. Some businesses hire professional accounting services in Singapore to decide on which is right for their company.

What is Accrual Accounting?

The accrual basis of accounting records revenues and expenses when they are earned, regardless of when the money is received. Accounts receivable and accounts payable are used to track financial data from customers’ credit and the amount your business owes to a third-party vendor.

Accrual accounting is complicated but is more widely used than cash basis accounting. It matches revenue and expenses, yielding a financial report that reflects a more accurate financial position of the business.

What is Cash Basis Accounting?

The cash basis of accounting in Singapore records revenues when cash is received and expenses when they are paid. It is a straightforward form of accounting as it does not use accounts receivable and accounts payable.

This method of accounting is often used by non-profit organisations, government entities, and small services businesses. Additionally, it is best suited for a company that considers a cash account as a foundation of its financial performance.

What do Recording Transactions mean?

To create accurate financial statements, accounting professionals record transactions using double-entry bookkeeping. Each transaction is listed in two accounts—debits and credits. This style is beneficial for auditing and can also help owners catch errors and fraud. Both accounting methods use double-entry bookkeeping. However, in accrual accounting, there are five types of accounts to categorise transactions: revenue, expense, asset, liability, and equity.

Cash Basis vs Accrual Basis Accounting: What’s Best for Small Businesses in Singapore?

In Singapore, accounting standards are known as Singapore Financial Reporting Standards (SFRS) which are based on the International Financial Reporting Standards (IFRS). Companies can choose between two accounting methods: cash basis and accrual basis.

Benefits and Disadvantages of Cash Basis Accounting

Many small businesses in Singapore prefer to use the cash basis of accounting because of its simplicity and it closely reflects the financial position of their company. Moreover, the business does not need to pay taxes on the cash yet to be collected.

Its main disadvantage is that it is not accepted by the Generally Accepted Accounting Principles or GAAP. It is a set of rules established by the Financial Accounting Standards Board (FASB). Also, the financial report in any given period may look distorted, thus making planning and forecasting complicated. In line with that, the resulting financial statements are considered insufficient by most lenders.

Benefits and Disadvantages of Accrual Basis of Accounting

The accrual basis of accounting gives a more accurate representation of the company’s financial health. Businesses can keep track of all credit transactions using the accounts receivable system. Also, transactions between the company and the vendor are listed on the accounts payable system.

According to GAAP, publicly traded companies and businesses with investors or lenders must use the accrual basis of accounting for financial reporting and tax purposes.

On the contrary, a disadvantage of the accrual basis method is the additional bookkeeping. Companies that use the accrual basis monitor receivables, prepaid expenses and other accrued liabilities.

Singapore Accounting Standards

Singapore accounting standards consist of principles and governing practises to aid in a variety of financial transactions. Its main goal is to set out recognition, presentation and measurement of financial transactions that will summarise information about the company’s performance.

What is Singapore Financial Reporting Standards (SFRS) 2020?

SFRS sets forth the accounting standards used in Singapore based on the IFRS. All companies with a financial period starting on or after 1 January 2003 must comply with SFRS.

Under SFRS, financial statements must be prepared on the accrual basis of accounting. Reports created using the accrual basis inform users not only of the past transactions but also about the obligations in the future.