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. Canadian corporations are required to compute income on the accrual basis for both financial reporting (ASPE or IFRS) and for tax (ITA s. 9). Only individuals carrying on certain farming or fishing businesses may use a strict cash method for tax.

Key rules

• Corporations: accrual only. This is both a GAAP requirement and an ITA requirement.
• Unincorporated sole proprietors generally use accrual for tax, with limited cash-method exceptions (farming, fishing).
• Even a very small CCPC that "feels cash-based" (invoice, collect, pay, all in the same month) is technically on accrual; it simply has no accruals 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 and January.

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. Revenue is earned when performance obligations are satisfied, not when the invoice prints.
• 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. Any change is an accounting policy change under ASPE and must be applied retrospectively with disclosure.

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.