Cash vs. Accrual Basis

Definition

Cash basis recognizes revenue when cash is received and expenses when cash is paid. Accrual basis recognizes revenue when it is earned (typically when the service is performed or the goods are delivered) and expenses when they are incurred, regardless of the timing of cash movements. ASPE and IFRS financial statements use accrual accounting, and most business income is calculated on that basis for tax. Section 28 permits an adjusted cash method for qualifying farming and fishing businesses, including corporations; it is not an individuals-only exception. CRA also permits a cash method for self-employed commissioned sales agents. A cash tax calculation still has adjustments and restrictions, including for prepaid expenses.

Key rules

The cash column illustrates simple cash bookkeeping. It is not a complete Canadian cash-method tax calculation. Revenue rows assume the service has already been performed unless stated otherwise; expense rows assume the cost has been incurred.

• Distinguish the financial-reporting framework from the tax calculation. A permitted cash tax method does not make cash-basis statements ASPE-compliant.
• Unincorporated sole proprietors generally use accrual for tax, with limited cash-method exceptions for farming, fishing and self-employed commissioned sales agents.
• An ordinary consulting CCPC preparing ASPE statements uses accrual accounting even if it invoices, collects and pays in the same month. Cash and accrual results can coincide when no timing differences remain at period end.
• GST/HST can follow a different trigger depending on the reporting method, but the underlying corporate books are still accrual.

Example

A consulting corporation signs a $12,000 retainer on November 15, 2026 for work to be performed evenly over three months.

Nov 15. Cash received, no work performed
Debit:  Cash                          $12,000
Credit: Unearned Revenue (Liability)  $12,000

Nov 30. Half a month earned
Debit:  Unearned Revenue               $2,000
Credit: Consulting Revenue             $2,000

Dec 31. Full month earned
Debit:  Unearned Revenue               $4,000
Credit: Consulting Revenue             $4,000

A cash-basis set of books would have recognized $12,000 of revenue on November 15, overstating November income and understating December, January, and February.

Common mistakes

• Assuming "we only do what the bank statement shows" is the accrual basis. It is not; bank activity is cash-basis raw data.
• Recognizing revenue at invoice date regardless of delivery. Apply the revenue-recognition criteria of the chosen framework, not just the invoice date.
• Expensing a twelve-month prepayment in the month of payment. Split it into a prepaid asset and amortize.
• Forgetting to accrue owner bonuses or professional fees at year-end. See bonus accruals.
• Switching methods informally. A financial-reporting policy change follows ASPE 1506, including its exceptions. Tax-method changes have separate requirements; a farming or fishing business needs CRA permission to change from cash to accrual.

Related concepts

The accrual basis makes the matching principle possible and is the reason adjusting entries exist in the accounting cycle. Under ASPE, accrual is the default assumption for a going concern entity.