Cash vs accrual accounting: which basis your business has to use

Cash accounting is intuitive: money in is revenue, money out is expense. Accrual accounting is not intuitive, and it is what almost every Canadian business has to use for tax. Knowing which basis applies to you — and why your bank balance is not your profit — removes a lot of year-end confusion.

The general rule

The Canada Revenue Agency puts it plainly: generally, you have to report business income using the accrual method of accounting. The cash method is not a general option. It is a narrow permission granted to specific types of business.

What the accrual method means

Under the accrual method, you report income in the fiscal period you earn it, no matter when you receive it. You also deduct allowable expenses in the fiscal period you incur them, whether or not you pay for them in that period — and “incur” usually means you paid or will have to pay the expense.

In practice that means:

• An invoice issued in December for work completed in December is December revenue, even if the customer pays in March.
• A supplier bill received in December for materials used in December is a December expense, even if you pay it in January.
• A deposit received in December for work you will do in the spring is generally not December revenue — the work has not been earned yet.

This is why a profitable business can be short of cash and why a cash-rich month can hide a loss. It is also why accounts receivable and accounts payable exist as balance-sheet accounts rather than being ignored. Getting these wrong is one of the more consequential bookkeeping mistakes small businesses make.

Who can use the cash method

Under the cash method, you report income in the fiscal period you receive it — whether in cash, property or services — and you deduct allowable expenses in the fiscal period you pay them, except prepaid expenses. The CRA permits it for:

• Farmers
• Fishers
• Self-employed commission agents

These taxpayers can use the cash method or the accrual method, but not a combination of both. Everyone else — including every corporation carrying on an ordinary business — uses accrual.

Where the confusion usually starts

Two things create most of the friction for owner-managed businesses.

Cash-basis reports inside accounting software. Most packages will show a cash-basis profit and loss on request. Owners sometimes manage the business from that report and are then surprised at year end when the accountant’s figures differ. Both numbers can be right — they answer different questions.

The GST/HST reporting basis. GST/HST is generally accounted for on an accrual basis as well, so the tax becomes collectible when the invoice is issued rather than when the customer pays. That timing catches out businesses with slow-paying customers, and it interacts with the simplifications available under the quick method.

Changing methods

If you are a farmer, fisher or self-employed commission sales agent, you can decide to change from one accounting method to the other, and the process differs by direction:

• Accrual to cash: file your return using the cash method and attach a statement showing the adjustments made to income and expenses as a result of the change.
• Cash to accrual: submit a written request to the director of the taxpayer’s tax services office before the due date of the tax return.

Note the asymmetry: moving to cash is done with the return, while moving to accrual needs permission in advance. Missing that deadline means waiting a year.

Fiscal periods

Whichever method applies, income has to be reported annually. Sole proprietorships and most partnerships with individual members report on a calendar-year basis, with an election available to use a non-calendar fiscal period by filing Form T1139. A corporation’s tax year is its fiscal period, and a new corporation can choose its year end — a decision with real planning consequences, covered in choosing a corporate fiscal year end.

What this means for your bookkeeping

If you are incorporated, keep the books on an accrual basis all year rather than converting once at year end. That means entering supplier bills when they arrive, invoicing when work is complete, and reviewing receivables and payables monthly. The reward is management figures you can trust and a year-end file that does not need reconstruction — which is the same discipline that keeps advertising, payroll and every other category clean, as covered in advertising and promotion deductions.

The bottom line

Accrual is the rule; cash is a narrow exception for farmers, fishers and commission agents. If you run a corporation, the question is already answered — the useful work is making sure the books are actually kept that way.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique — please speak with a CPA before acting on anything here.