Cash vs. Accrual Accounting: The Ultimate Guide for Canadian Entrepreneurs

When starting your business or becoming self-employed, numbers can quickly become overwhelming. One of the first—and most important—technical questions is: should you use cash accounting or accrual accounting?

This choice isn’t just an administrative preference; it changes how you perceive your business’s financial health and, importantly, how the Canada Revenue Agency (CRA) and Revenu Québec tax you.

Let’s demystify these two methods.

1. Cash Accounting

What is it?Cash accounting is the most intuitive method. You record a transaction only when money changes hands.

• Revenue is recorded when money actually enters your bank account.

• Expenses are recorded when you pay the bill.

Concrete Example:You’re a graphic designer. You finish a logo in December 2024 and invoice the client $1,000. The client pays in January 2025.

• Cash accounting: You report the $1,000 revenue in 2025. In 2024, the revenue is $0.

Who uses it?In Canada, cash accounting is limited to:

• Farmers

• Fishermen

• Independent commission-based sellers

Pros: Simple, and you don’t pay tax on money you haven’t received.Cons: Provides a short-term view and doesn’t reflect future debts or expected income.

2. Accrual Accounting

What is it?Accrual accounting is the standard method for most businesses. You record transactions when they occur, regardless of payment timing.

• Revenue is recorded when the work is done (or goods delivered) and invoiced.

• Expenses are recorded when you receive the supplier’s invoice, even if you pay it later.

Concrete Example:Using the same graphic designer example: Invoice sent in December 2024, payment received in January 2025.

• Accrual accounting: The $1,000 revenue is reported in 2024. You pay taxes on it for 2024, even if the cash isn’t yet in your account.

Who uses it?Most self-employed professionals, consultants, and corporations in Canada are required to use accrual accounting.

Pros: Provides an accurate picture of financial health (income earned vs. expenses incurred) over a period.Cons: More complex and may create a cash flow mismatch (taxes owed on invoices not yet collected).

Quick Comparison Table

Feature	Cash Accounting	Accrual Accounting
Revenue Timing	When money is received	When service is rendered (invoiced)
Expense Timing	When the bill is paid	When the invoice is received
Complexity	Simple (like a bank statement)	More complex (tracking accounts receivable/payable)
Financial Picture	Cash flow view	Real profitability view
Users in Canada	Farmers, fishermen, commission agents	Most other businesses

Which Should You Choose?

Often, it’s less about preference and more about law.

• Check your status: If you’re not a farmer, fisherman, or commission agent, the CRA generally requires accrual accounting. This means you report income when it’s earned, not when it’s paid.

• For internal management: Even if you could choose, accrual accounting is superior. It tells you exactly what clients owe you (Accounts Receivable) and what you owe suppliers (Accounts Payable).

Expert Tip: Modern accounting software like QuickBooks, Xero, or Sage usually handles this automatically. They default to accrual mode but can generate cash-based reports to show available cash.