Accrual vs Cash Basis Accounting in Nigeria: Which to Use?

One of the fundamental decisions in accounting is whether to use accrual basis or cash basis. This choice affects when you recognize revenue and expenses, which impacts your financial statements and tax calculations. This guide explains both methods and helps you choose the right one for your Nigerian business.

Understanding the Difference

Cash Basis Accounting

Record transactions when cash moves:

• Revenue: When you receive payment
• Expenses: When you make payment

Accrual Basis Accounting

Record transactions when they occur:

• Revenue: When earned (regardless of payment)
• Expenses: When incurred (regardless of payment)

Side-by-Side Comparison

Scenario	Cash Basis	Accrual Basis
Invoice customer Jan 15, paid Feb 10	Revenue in February	Revenue in January
Receive goods Jan 20, pay Feb 25	Expense in February	Expense in January
Prepay 12-month insurance Jan 1	Full expense in January	Spread over 12 months
Customer deposit for future work	Revenue when received	Revenue when work done

Practical Examples

Example 1: Service Business

A consulting firm in January:

• Invoices ₦1,000,000 for completed work
• Receives ₦500,000 from previous month's invoice
• Pays ₦200,000 for December utilities
• Incurs ₦300,000 salaries (paid Feb 5)

Item	Cash Basis	Accrual Basis
January revenue	₦500,000	₦1,000,000
January expenses	₦200,000	₦300,000
January profit	₦300,000	₦700,000

Example 2: Trading Business

A retailer in January:

• Sells goods worth ₦800,000 (₦600,000 cash, ₦200,000 credit)
• Buys inventory ₦400,000 (₦250,000 cash, ₦150,000 credit)
• Pays rent ₦100,000 (for January)

Item	Cash Basis	Accrual Basis
Sales	₦600,000	₦800,000
Purchases	₦250,000	₦400,000
Rent	₦100,000	₦100,000
Profit	₦250,000	₦300,000

Example 3: Prepayments

Company pays ₦1,200,000 for 12 months insurance on January 1:

Month	Cash Basis Expense	Accrual Basis Expense
January	₦1,200,000	₦100,000
February	₦0	₦100,000
March	₦0	₦100,000
...	...	...
December	₦0	₦100,000

Advantages and Disadvantages

Cash Basis

Advantages:

Benefit	Description
Simplicity	Easy to understand and implement
Cash focus	Shows actual cash position
Lower cost	Less bookkeeping work
Tax timing	May defer tax if income received later

Disadvantages:

Drawback	Description
Incomplete picture	Doesn't show what's owed
Manipulation risk	Easy to shift income/expenses
Not IFRS compliant	Doesn't meet reporting standards
Limited analysis	Can't track receivables/payables

Accrual Basis

Advantages:

Benefit	Description
Complete picture	Shows all commitments
Matching	Revenue matched to related expenses
IFRS compliant	Meets reporting standards
Better analysis	Accurate financial ratios
Investor ready	Required by most lenders/investors

Disadvantages:

Drawback	Description
Complexity	More bookkeeping required
Cash blindness	Profitable but cash-poor possible
Higher cost	More accounting work
Adjustments	Period-end adjustments needed

Nigerian Tax and Legal Requirements

Company Income Tax (CIT)

NRS (Formerly FIRS) generally requires accrual basis for companies:

• Income recognized when earned
• Expenses recognized when incurred
• Matching principle applies

VAT

VAT follows invoice/accrual basis:

• Output VAT: When you issue invoice
• Input VAT: When you receive invoice
• Not when cash moves

Statutory Financial Statements

Companies Act requires:

• Audited financial statements
• Prepared under IFRS/IFRS for SMEs
• IFRS requires accrual basis

Practical Reality

While tax law favors accrual:

• Very small businesses may use simplified methods
• Records must support the method used
• Consistency is required

Which Method to Choose?

Use Cash Basis If:

Criterion	Description
Very small business	Sole proprietor, minimal transactions
Cash-based operations	All transactions are immediate cash
No credit sales	Customers pay immediately
No credit purchases	You pay suppliers immediately
No external reporting needs	No investors, no bank loans

Use Accrual Basis If:

Criterion	Description
Registered company	Required for statutory compliance
Credit transactions	Sell or buy on credit
Inventory	Need to track stock and cost of sales
External stakeholders	Investors, banks, partners
Growth plans	Planning to scale the business
Tax compliance	Required for proper CIT filing

The Practical Answer

For most Nigerian businesses, accrual basis is the appropriate choice:

• Required for companies
• Required for proper VAT accounting
• Provides more useful information
• Supports business growth

Transitioning from Cash to Accrual

When to Transition

Consider transitioning when:

• Business is growing
• Need bank financing
• Taking on investors
• Hiring professional accountants
• Outgrowing simple bookkeeping

The Transition Process

Step 1: Choose transition date

• Often January 1 (new financial year)
• Or current month-end

Step 2: Identify outstanding items

Category	Examples
Receivables	Amounts customers owe
Payables	Amounts you owe suppliers
Prepayments	Expenses paid in advance
Accruals	Expenses incurred, not yet paid
Deferred revenue	Payments received for future work

Step 3: Record opening balances

• Create balance sheet with all assets and liabilities
• These become your opening position

Step 4: Maintain accrual records going forward

• Track receivables and payables
• Make period-end adjustments
• Match revenue to expenses

Accrual Adjustments

Common Adjusting Entries

Accrued Expenses: Salaries earned but not yet paid:

• Debit: Salary Expense
• Credit: Accrued Salaries Payable

Prepaid Expenses: Insurance paid in advance (monthly recognition):

• Debit: Insurance Expense
• Credit: Prepaid Insurance

Accrued Revenue: Work done but not yet invoiced:

• Debit: Accrued Revenue
• Credit: Revenue

Deferred Revenue: Payment received for future service:

• Debit: Cash
• Credit: Deferred Revenue

(Later: Debit Deferred Revenue, Credit Revenue)

Depreciation: Monthly depreciation on assets:

• Debit: Depreciation Expense
• Credit: Accumulated Depreciation

How Finora Handles Accounting Basis

Built for Accrual

Finora implements accrual accounting:

Invoice-Based Recording:

• Revenue recognized when invoice created
• Expense recognized when bill recorded
• Cash movements tracked separately

Receivables Management:

• Track outstanding customer invoices
• Age analysis
• Collection tracking

Payables Management:

• Track supplier bills
• Payment scheduling
• Creditor aging

Automatic Adjustments:

• Prepayment amortization
• Depreciation calculation
• Period-end entries

Cash Flow Visibility

Despite accrual basis:

• Cash flow tracking
• Bank reconciliation
• Cash position dashboard
• Receivables to cash forecasting

Frequently Asked Questions

Can I use cash basis for tax and accrual for management?

You could maintain dual records, but this is complex and error-prone. Better to use accrual for both and generate cash reports as needed.

Does cash basis mean I don't track receivables?

You should still track what customers owe for management purposes. Cash basis just means you don't recognize revenue until payment.

Which method shows higher profit?

It depends on timing. If you have more receivables than payables, accrual may show higher profit. If you've received more cash than invoiced, cash basis may show higher.

Can I switch methods?

Yes, but it requires careful adjustment. Once switched, you should maintain consistency. Switching frequently creates comparability problems.

What about very small businesses?

Sole proprietors and very small businesses may use simplified cash-based records. However, even small businesses benefit from accrual discipline.

Conclusion

The choice between cash and accrual basis has significant implications:

• Cash basis is simpler but incomplete
• Accrual basis is comprehensive and required for most businesses
• Nigerian tax law generally requires accrual
• IFRS reporting requires accrual

For most Nigerian businesses—especially registered companies—accrual basis is the right choice. It provides better information, meets compliance requirements, and supports business growth.

Finora is built on accrual accounting principles, giving you accurate financial information while still providing cash flow visibility.

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