Cash vs accrual accounting in Canada

There are two ways to decide when money counts.

• Cash basis: income counts when you're paid, and an expense counts when you pay it.
• Accrual basis: income counts when you earn it, and an expense counts when you incur it, whatever the bank account says.

Over a business's life the two come to the same total. Within a year they can be far apart, and for tax that gap decides which year you're taxed in. In Canada the choice is mostly made for you.

What the CRA allows

For self-employed income, the CRA's guide T4002 is direct:

Farmers, fishers, and self-employed commission agents can use the cash method or the accrual method to report income. All other self-employment income must be reported using the accrual method.

So if you're a sole proprietor or partner running anything other than a farm, a fishing operation or a commission-sales business, you report on accrual. That covers consultants, trades, retail, restaurants, designers and almost everyone else.

Even the exceptions are narrower than they look. The same guide says a farmer can use the cash method for farming, but must use accrual for any separate business activity, and for GST/HST and QST purposes.

That T4002 rule is written for the self-employed. If you're incorporated, your accountant prepares the corporation's financial statements and T2. Ask them which basis they use, and assume your books need to support accrual.

What accrual means in practice

Under the accrual method, the CRA says you must:

• report income in the fiscal period you earn it, no matter when you receive it
• deduct expenses in the fiscal period you incur them, whether or not you paid them in that period

"Incur" usually means you either paid it or will have to pay it. If you carry inventory, it comes into the calculation too. You count it at the end of the fiscal period and keep the list with your records.

A worked year-end

A sole proprietor electrician in Winnipeg, December 31 year-end. In the last weeks of 2026:

• December 18: finishes a job and invoices $6,000. The customer pays on January 12, 2027.
• December 22: a supplier delivers $1,800 of wire and fixtures for that job, with net 30 terms. It's paid on January 15, 2027.
• December 28: pays $1,200 for a January 2027 trade show booth.
• January 2027: a customer pays $2,500 for work invoiced back in November 2026.

On a cash basis, 2026 would include none of the $6,000, none of the $1,800, and all of the $1,200 booth fee, and the $2,500 would land in 2027.

On accrual, which is what this electrician has to use:

• The $6,000 is 2026 income. It was earned and invoiced in 2026.
• The $1,800 is a 2026 expense. It was incurred in 2026.
• The $1,200 is a 2027 expense. It was paid in advance for something that happens in 2027, so it's a prepaid expense at December 31. Under accrual, T4002 says to claim a prepaid expense in the year you get the benefit.
• The $2,500 was already 2026 income, back when it was invoiced in November. The January payment just clears the receivable.

The difference to 2026 profit: cash basis shows $6,000 − $1,800 + $1,200 = $5,400 less profit than accrual. On accrual, that $5,400 is taxed in 2026. How to read a profit and loss statement shows where that difference turns up.

Why owners like cash anyway

Cash is intuitive. The bank balance is the truth, and there are no receivables or payables to track. Plenty of owners keep their day-to-day books on cash, and the accountant makes year-end adjustments to put them on accrual for the return:

• add receivables: invoices issued but not paid at year-end
• add payables: bills received but not paid
• pull out prepaid expenses that belong to next year
• adjust for inventory

That works if you're disciplined about it, and if your accountant knows they have to do it. The risk is that nobody does, and a December invoice paid in January quietly lands in the wrong year. If the CRA reviews it, that's income reported late.

If you invoice customers and wait to be paid, keeping your books on accrual all year is simpler. Each invoice is recorded when it's issued, and the books show what you're owed at any moment.

GST/HST runs on its own timing

GST/HST doesn't follow your income tax method. The CRA says you're liable for the GST/HST you charge on the day you receive payment or the day payment is due, whichever is earlier, and it generally considers payment due on the date you issue the invoice.

In practice, the HST on an invoice is reported in the period you issue the invoice, even if the customer pays three months later. A business that books sales only when cash arrives will under-report on its GST/HST return in some periods and over-report in others. Under the quick method, you report sales including GST/HST on the same basis.

The flip side helps you: you can generally claim the input tax credit on a supplier's bill once the tax is paid or payable, so a bill you haven't paid yet can still be claimed.

Switching methods

For farmers, fishers and commission agents who have the choice, T4002 sets out how to switch:

• Accrual to cash: start using cash on your next return, with a statement showing each adjustment caused by the change.
• Cash to accrual: get permission from your tax services office first, in writing, before your return is due, explaining why you want to change.

For everyone else there's nothing to switch. Accrual is the method.

The rule of thumb

• You're a farmer, fisher or commission agent: you can choose. Cash is simpler. Accrual matches income to the year better. Ask your accountant which suits you.
• You're any other sole proprietor or partnership: you report on accrual. You can keep your books however you like day to day, but at year-end they have to support accrual figures.
• You're incorporated: your accountant decides. Make your books support accrual.

Bookkeeping for sole proprietors covers the rest of the self-employed setup, and how to do bookkeeping for a small business covers the monthly routine.

Spark Books

Spark Books handles both sides of accrual: the invoices you send and the bills you owe, not just what passes through the bank. When a customer pays, Spark spots the deposit and marks the invoice paid. Every transaction from the statements you upload is sorted with the GST/HST split out, and Spark works out your GST/HST return figures with the due date. It's free, with no card. If you'd rather a bookkeeper kept it up for you, that's $350 a month.