Tax and accounting terms
Accrual vs Cash Accounting: Which Method Canadian Businesses Must Use
Accrualis the method the CRA requires for self employment income, except for farmers, fishers and self employed commission agents, who may choose cash.
Sources checked October 20263 min read
Key points
- Accrual records income when it is earned and expenses when they are incurred, whatever the payment date
- Cash records income when it is received and expenses when they are paid
- Only farmers, fishers and self employed commission agents may report income on the cash method
- GST/HST follows accrual timing for every registrant
The difference is timing
Both methods record the same transactions. They differ only in when income and expenses count. Under the accrual method, income is reported in the fiscal period it is earned, no matter when it is received, and expenses are deducted in the period they are incurred, whether or not they are paid. Under the cash method, income is reported when it is received and expenses are deducted when they are paid.
Inventory is where the two part most clearly. An accrual business counts its inventory at the end of each fiscal period and includes it in calculating income; a business on the cash method generally leaves inventory out.
| Item | Accrual method | Cash method |
|---|---|---|
| Invoice for December work, paid in January | Income this year | Income next year, when paid |
| Supplier bill for December, paid in January | Expense this year | Expense next year, when paid |
| Unpaid customer invoices at year end | Recorded as accounts receivable | Not recorded |
| Unpaid supplier bills at year end | Recorded as accounts payable | Not recorded |
Who may use the cash method
For income tax, farmers, fishers and self employed commission agents can choose the cash method or the accrual method. All other self employment income has to be reported on the accrual method, which means most sole proprietors and partners report on accrual whatever method their day to day books follow.
A farmer using the cash method for farming still has to use the accrual method for any separate business and for GST/HST and QST, keeping a separate set of records for each method. GST/HST follows accrual timing for everyone: tax charged on an invoice is reported in the period the invoice is issued, even if the customer has not paid, and input tax credits can be claimed on bills received but not yet paid.
Changing methods
Moving from accrual to cash, where the cash method is allowed, needs no permission: use it on the next return and include a statement showing each adjustment made because of the change. Moving from cash to accrual needs permission from the tax services office, asked for in writing before the return is due and explaining why, and the first accrual return also needs a statement of the adjustments.
Choosing a method for your own books
Day to day bookkeeping on a cash basis can feel simpler for a very small business, but the income tax return, the GST/HST return and any financial statements prepared for a lender all need accrual figures. Keeping the books on accrual from the start, recording receivables and payables as invoices go out and bills come in, avoids rebuilding the year at every year end and shows what the business is actually owed and owes at any date.
Quick answers
Can a small business use cash accounting in Canada?
For income tax, only farmers, fishers and self employed commission agents can report on the cash method. Other businesses report self employment income on the accrual method, though their day to day books can be kept differently and adjusted at year end.
Is GST reported on a cash or accrual basis?
On an accrual basis. GST/HST is owed when the customer pays or when payment is due, whichever comes first, and payment is usually due on the invoice date.
Do I need permission to change accounting methods?
Only to move from the cash method to the accrual method, which needs written permission from the tax services office before the return is due.
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Official sources
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Important. This article provides general educational information, not legal or tax advice for a specific business. Rules, administrative policies, rates and deadlines can change. Confirm your facts and current obligations with the responsible government agency and a qualified adviser.