“Should we be on cash or accrual?” is one of the first questions new clients ask, and it usually contains a hidden assumption — that the choice is theirs to make. For most Canadian businesses it is not. But the distinction still matters enormously, because the method you use internally shapes every decision you make between year ends.
The two methods, briefly
Under the cash method, you record revenue when the money arrives and expenses when they are paid. It is simple and it mirrors your bank balance.
Under the accrual method, you record revenue when it is earned and expenses when they are incurred, regardless of when cash moves. Invoice a client in March and collect in June, and the revenue belongs to March. Receive a supplier invoice in December for work done in December, and the expense belongs to December even if you pay it in January.
What the CRA requires
For tax purposes the answer is settled. The Canada Revenue Agency permits farmers, fishers and self-employed commission agents to report on either the cash or the accrual method. All other self-employment income must be reported using the accrual method, and corporations report on an accrual basis.
So if you run a construction company, a consulting practice, a dental corporation or an online store, accrual is not an option you weigh — it is the basis your return must be prepared on. The real question is whether your internal books already work that way, or whether someone has to convert them every year end.
Why the conversion is where money is lost
Plenty of businesses keep cash-basis books through the year and have their accountant convert to accrual at year end. It works, but it has a cost that rarely shows up on an invoice: for eleven months of the year, you are making decisions on numbers that are structurally wrong.
A cash-basis business that has just collected on three large invoices looks like it had a spectacular month. It did not — it had a spectacular collection month, and the work was done and the costs incurred much earlier. Hiring, equipment purchases and owner draws made on that signal are made on noise.
The reverse is more dangerous. A growing business is almost always cash-poor, because it funds work before it gets paid for it. On a cash basis that looks like a bad year. On an accrual basis it looks like exactly what it is: profitable growth with a working capital problem, which is a completely different thing to solve.
What accrual accounting actually gives you
- Real margin by job or product line. Costs sit in the same period as the revenue they produced, so you can tell which work is worth doing again.
- A receivables list that means something. You cannot manage collections you are not tracking, and cash-basis books do not track them.
- Financial statements a lender will accept. Banks, bonding companies and investors expect accrual-basis statements. Handing over a cash-basis summary invites questions you would rather not spend the meeting answering.
- A year end that is a review, not a reconstruction. This is the one owners feel directly, because reconstruction time is billable time.
Keeping track of cash anyway
None of this means cash stops mattering. Accrual accounting tells you whether the business is profitable; it does not tell you whether you can make payroll on the 15th. Those are separate questions and they need separate reports.
The practical answer for most owner-managed businesses is accrual-basis books with a rolling cash flow forecast alongside them — usually thirteen weeks out. The books tell you whether the business works. The forecast tells you whether it survives the next quarter. You need both, and if you only have one of them it is usually the wrong one.
Getting the structure right
Modern cloud accounting handles accrual bookkeeping without much extra effort once it is set up properly — the difficulty is almost always in the setup, not the daily use. If your books are currently cash-basis, or you are not sure which basis they are on, that is worth resolving before the next year end rather than after it.
Talk to us about your bookkeeping structure, or read more about our accounting and advisory services.
This article is general information, not advice for a specific situation. Please confirm how these rules apply to you before acting.
