Cash vs accrual accounting: which should a Malaysian SME use?
Cash accounting records money when it moves; accrual records income and costs when they are earned or incurred. Here is which one a Malaysian SME needs, with RM examples.
Cash accounting records income and expenses when money moves; accrual accounting records them when they are earned or incurred. A Malaysian Sdn Bhd needs accrual: its financial statements must follow MPERS or MFRS, both of which use the accrual basis. A small sole proprietor may keep a cash book for LHDN, though accrual still gives a truer picture.
Your bank balance went up in April, so April felt like a good month. But half that money was for March catering jobs, and April's supplier bills haven't arrived yet. Whether April was actually profitable depends on which of two methods you use: cash accounting (asas tunai) or accrual accounting (asas akruan). For a Malaysian SME, the choice is partly yours and partly decided by the Companies Act 2016 and the accounting standards behind it.
What is the difference between cash and accrual accounting?
Cash accounting records a sale when the money arrives and an expense when you pay it. Accrual accounting records a sale when you earn it and an expense when you incur it, whether or not money has moved.
| Cash basis | Accrual basis | |
|---|---|---|
| Sale recorded when | Customer pays | Goods delivered or service done |
| Expense recorded when | You pay | You receive the goods or service |
| Tracks money owed to you | No | Yes (trade receivables) |
| Tracks money you owe | No | Yes (trade payables, accruals) |
| Shows true monthly profit | Often not | Yes |
| Effort | Lower | Higher, unless software does it |
How does it work in practice? (A Malaysian café example)
The same month can look very different under each method. Here is an illustrative example from a small café in Penang.
In March, the café:
- takes RM 18,000 in dine-in sales, paid on the day
- caters a corporate event for RM 3,000 and invoices on 30-day terms; the client pays in April
- receives RM 6,000 of ingredients from a supplier, and pays the bill in April
- pays RM 4,000 rent and RM 7,000 salaries in March
| March | Cash basis (RM) | Accrual basis (RM) |
|---|---|---|
| Dine-in sales | 18,000 | 18,000 |
| Catering sales | 0 | 3,000 |
| Ingredients | 0 | (6,000) |
| Rent | (4,000) | (4,000) |
| Salaries | (7,000) | (7,000) |
| Profit for March | 7,000 | 4,000 |
Cash basis says March made RM 7,000. Accrual says RM 4,000, because March also used RM 6,000 of ingredients that hadn't been paid for yet and earned RM 3,000 that hadn't been collected. April's cash-basis figures will then pick up the RM 3,000 receipt and the RM 6,000 payment, even though neither belongs to April. The owner who reads cash-basis figures thinks margins swing from month to month when they don't.
Under accrual, the catering invoice is recorded as:
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Trade receivables | 3,000 | |
| Sales: catering | 3,000 |
and the unpaid ingredient bill as:
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Food and beverage ingredients | 6,000 | |
| Trade payables | 6,000 |
If the debits and credits are unfamiliar, start with double-entry bookkeeping explained.
Do Malaysian companies have to use accrual accounting?
Yes, for their financial statements. A Sdn Bhd must prepare financial statements under the approved accounting standards, and both MPERS and MFRS require the accrual basis.
- Companies Act 2016, section 244 requires directors to ensure the company's financial statements are made out in accordance with the applicable approved accounting standards issued or approved by the Malaysian Accounting Standards Board (MASB).
- MPERS, which MASB requires private entities to apply for financial periods beginning on or after 1 January 2016, is based on the IFRS for SMEs. A private entity may choose MFRS (the full IFRS-based standards) instead.
- The IFRS for SMEs requires an entity to prepare its financial statements, except for cash flow information, using the accrual basis of accounting. Full IFRS has the same requirement.
So even if you track cash day to day, the year-end accounts your auditor signs off and the figures your tax agent works from will be on the accrual basis. Your accountant will make the adjustments at year end, but that takes longer and costs more if the books were kept on cash.
Can a sole proprietor in Malaysia use cash accounting?
Often, yes, for day-to-day records. Sole proprietors and partnerships are not companies, so section 244 of the Companies Act 2016 doesn't apply to them, and LHDN allows small businesses to keep simpler books.
LHDN's Public Ruling No. 5/2000 (Revised) on keeping sufficient records says a small business may keep a cash book recording bank entries, cash receipts and cash payments. It defines a small business as one with annual gross takings of not more than RM 150,000 from the sale of goods, or not more than RM 100,000 from services. Larger businesses may need a sales ledger, a purchases ledger and a general ledger.
The same ruling still expects records sufficient to explain each transaction and to prepare a true and fair profit and loss account and balance sheet, and a valuation of stock at the end of each accounting period. How your business income is measured for tax is a question for your tax agent; this article doesn't cover it.
When does a cash basis stop working?
Cash accounting stops giving a useful picture once you sell on credit, buy on credit, hold stock or have large bills that cover several months. At that point, cash-basis profit mostly tells you when money happened to move.
Signs you have outgrown it:
- You issue invoices with payment terms. Without receivables, you don't know who owes you what. See collecting what customers owe you.
- Suppliers give you credit. Unpaid bills don't appear anywhere, so profit looks better than it is.
- You hold inventory. Buying a large stock order wipes out one month's profit on a cash basis, then flatters the next few.
- You pay annually. Insurance, software subscriptions or audit fees paid once a year distort the month they are paid in.
- You need financing. Banks reviewing a loan application generally want to see proper financial statements, which means accrual.
What do accruals and prepayments mean?
They are the adjustments that make accrual accounting match costs to the right month. An accrual is a cost you have incurred but not yet been billed for or paid; a prepayment is a cost you have paid in advance for a later period.
Two illustrative examples:
- Accrual. Your March electricity bill of RM 900 arrives in April. At the end of March, you record it as an expense and an accrued liability, so March carries its own electricity cost.
- Prepayment. In January, you pay RM 2,400 for a year of business insurance. You record it as a prepayment (an asset) and expense RM 200 each month.
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Electricity expense | 900 | |
| Accruals | 900 |
Which method should a Malaysian SME choose?
If you run a Sdn Bhd, keep your books on the accrual basis from day one, because your financial statements must end up there anyway. If you are a small sole proprietor with cash sales and few bills, a cash book can be enough, but switch to accrual once you start giving or getting credit.
Accrual is more work only if you do it by hand. Accounting software records the receivable when you send an invoice and the payable when you enter a bill, so the accrual entries come from work you already do. In HumbleBear, for example, the journals are posted from your invoices, bills and payments, so your reports are on the accrual basis without separate adjustments for those items. See HumbleBear accounting software. For what the resulting reports show, read how to read your financial statements.
Frequently asked questions
Is accrual accounting mandatory for a Sdn Bhd in Malaysia?
For its financial statements, yes. The Companies Act 2016 requires directors to make sure the financial statements follow the applicable approved accounting standards, which for private companies means MPERS or MFRS, and both use the accrual basis except for cash flow information.
Can a company keep cash-basis books and convert at year end?
It can, and some small companies do, with the accountant adding receivables, payables and accruals at year end. But the monthly figures you manage the business with will be less reliable, and the year-end work usually takes longer and costs more.
What is the accrual basis in Bahasa Malaysia?
The accrual basis is usually called asas akruan, and the cash basis asas tunai. You may see these terms in Bahasa Malaysia accounting material and in documents from your accountant.
Does accrual accounting mean I pay tax on money I haven't received?
Accrual accounting is about when income and costs are recorded in your accounts. How business income is measured for income tax is a separate question that depends on the Income Tax Act 1967, so check how it applies to your business with your tax agent.
Is the cash flow statement on a cash basis?
Yes. Even under accrual accounting, the statement of cash flows shows actual money in and out, which is why the accounting standards exclude cash flow information from the accrual requirement. Reading it alongside the profit and loss account shows whether profit is turning into cash.
Sources
- Companies Act 2016 (Act 777), reprint, section 244: Suruhanjaya Syarikat Malaysia (SSM)
- MASB: MPERS issued for private entities, effective 1 January 2016
- MASB: Private entities may apply either MPERS or MFRS
- IFRS Foundation: IFRS for SMEs Accounting Standard (accrual basis of accounting)
- LHDN Public Ruling No. 5/2000 (Revised): Keeping Sufficient Records (Individuals & Partnerships)
