Cash vs accrual accounting, explained with three transactions
Why your bank balance is not your profit. The accrual basis behind every Singapore financial statement, shown through three simple startup transactions.
What is the difference between cash and accrual accounting?
Cash accounting records money when it moves; accrual accounting records income when earned and expenses when incurred, whatever the cash timing. Singapore statutory financial statements must use the accrual basis — the SFRS for Small Entities states that an entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting. The result is a profit figure that reflects performance, not bank movements.
The most common confusion in a founder's first year of accounts: the bank balance moved one way, the profit figure another. Both are right. They are answering different questions — and the difference is the accrual basis.
Three transactions, two answers
Consider three things your startup might do in year one:
| Transaction | Cash view | Accrual view |
|---|---|---|
| Customer pays S$300 upfront for a 3-year subscription | +S$300 income now | S$100 revenue this year; S$200 deferred to the next two years |
| You pay S$900 for a laptop that will last 3 years | −S$900 expense now | S$300 depreciation expense per year for three years |
| Your tax agent completes work; you haven't paid the S$900 bill | S$0 — nothing moved | S$900 expense accrued now, because the service was received |
Cash answers "what moved through the bank?" Accrual answers "what did we earn and consume this period?" On the cash view, this business made a healthy year; on the accrual view — S$100 revenue against S$1,200 of expenses — it did not. The accrual view is the honest one about performance, which is exactly why the rules require it.
What the standard says
For statutory accounts this is not a preference. The SFRS for Small Entities — the simplified standard most small Singapore companies may apply — puts it directly at paragraph 2.36:
"An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting. On the accrual basis, items are recognised as assets, liabilities, equity, income or expenses when they satisfy the definitions and recognition criteria for those items."
The full SFRS(I) standards say the same. And the Companies Act requires every company's financial statements to comply with the Accounting Standards — so accrual is the only basis on which Singapore statutory accounts can be prepared.
Why the rules insist
Accrual accounting exists to solve an information problem. Investors and lenders cannot watch your operations; they manage risk through your statements, and comparability — across companies and across periods — is what makes statements useful. A standardised accrual method means your S$100 of subscription revenue means the same thing as anyone else's. Cash accounting, by contrast, lets timing games manufacture whatever "profit" the owner wants to show: collect deposits early, delay paying bills, look wonderful in December.
Watch both
None of this makes cash unimportant — companies die of cash starvation while accrual-profitable. The discipline is to use each measure for its job: accrual for performance (is the business model working?), cash for survival (can we pay what falls due?). Your accounting process should surface both every month; if that sounds like more bookkeeping than you want to own, it is a core reason founders outsource it.
Frequently asked questions
This guide is general information, not legal or tax advice. Confirm requirements with ACRA and IRAS, or speak to your corporate secretary.