Cash vs accrual accounting in Canada, side by side.

Two businesses can have identical sales and identical costs and still report different profits, simply because they count them at different times. That's the heart of cash vs accrual accounting in Canada. It matters most at year-end, when one late invoice or one prepaid bill can shift thousands of dollars of profit from one tax year to the next.

This post is part of our Bookkeeping Basics series. It builds on double entry bookkeeping and leads into journal entry examples, where you'll see more accruals in action.

1The difference in one sentence each

• Cash basis: income counts when the money lands in your bank; expenses count when the money leaves.
• Accrual basis: income counts when you've earned it (usually when you do the work or deliver the goods and invoice); expenses count when you've incurred them, whether or not you've paid yet.

Over the life of a business, both methods add up to the same total. The difference is timing, and timing is exactly what a tax year cares about.

2What CRA expects

For income tax, CRA's general rule is that business and professional income is reported on the accrual method. That applies to sole proprietors reporting on the T2125 and to corporations filing a T2. The main exception is farming and fishing income, which can generally be reported using the cash method. There are a few other narrow situations, so if you think you might qualify, confirm it with your accountant rather than assuming.

In practice that means if you sent a $10,000 invoice on December 20 and the client paid on January 10, that income generally belongs to the year you invoiced, not the year you were paid.

Moving from cash to accrual

If your books have been kept on a cash basis, switching to accrual means adding the opening items cash books leave out: what customers owed you, what you owed suppliers, and any prepaid costs at the start of the year. Those opening balances affect how income is split between the old year and the new one, so it's a change to make with your accountant, ideally at the start of a fiscal year rather than in the middle.

3Cash vs accrual accounting in Canada: a worked example

Say you're an incorporated IT consultant in Edmonton with a December 31 year-end. In December 2026:

• You finish a project and invoice $10,000 plus $500 GST on December 18. The client pays on January 12, 2027.
• On December 28 you pay $1,200 for a business insurance policy covering all of 2027. (Insurance premiums are GST-exempt, so there's no GST on it.)
• The rest of your 2026 year, already recorded, shows $90,000 of revenue and $30,000 of expenses.

Same business, same December, an $11,200 difference in profit. On a cash basis, the December invoice disappears into 2027 and the insurance lands in 2026. On an accrual basis, the invoice counts in 2026 when you earned it, and the insurance counts in 2027, the year it actually covers.

The accrual journal entries

Here's how the accrual version is recorded. First, the invoice on December 18:

The revenue is recognized in December. The January payment only clears the receivable; it creates no new income.

Then the insurance. You pay in December, but the cost belongs to 2027, so it starts life as a prepaid asset and is expensed $100 a month through the year:

By December 2027, twelve monthly entries have moved the full $1,200 into expenses, and the prepaid account is back to zero.

Other accruals to watch at year-end

The invoice and the insurance are the classic examples, but they're not the only items that shift profit between years. Before closing any year on an accrual basis, look for:

• Unpaid supplier bills for work done or goods received before year-end. They're an expense this year and a payable on the balance sheet.
• Accrued wages for days worked in December but paid in January.
• Accrued interest on loans, where interest has built up but hasn't been charged yet.
• Customer deposits received for work you haven't done. Under accrual these aren't revenue yet; they're a liability until you deliver. Our guide to unearned revenue and customer deposits covers how to record them.
• Prepaid costs like annual software, insurance and memberships that cover months in the next year. The accrued vs prepaid expenses guide in this series works through more examples.

Each of these needs a journal entry at year-end if your normal bookkeeping hasn't already captured it, and most of them reverse naturally in the new year when the bill is paid or the work is done.

4Why accrual gives you better numbers

Even setting tax aside, accrual books tell you more. A cash-basis profit and loss can make a slow month look great because three clients happened to pay old invoices, or make a strong month look terrible because you prepaid a year of software. Accrual matches revenue with the costs of earning it, so month-to-month comparisons actually mean something.

That doesn't make cash flow unimportant. You need both views: accrual for performance and tax, and a close eye on the bank balance, receivables and payables for cash. That's why a good monthly package includes a profit and loss, a balance sheet and an aged receivables report.

The "cash during the year, accrual at year-end" approach

Many very small businesses record transactions as cash moves during the year, then make accrual adjustments at year-end: adding unpaid invoices, unpaid bills, prepaid expenses and accrued costs. It's a legitimate approach when done carefully, and it's common for sole proprietors with simple books. The risk is that adjustments get missed, and nobody notices until a receivable from two years ago turns up.

5Cash and accrual in QuickBooks Online

• Default method: in Settings, under Account and settings, then Advanced, the Accounting section has an accounting method setting. Most Canadian businesses should leave it on accrual.
• Per-report switch: reports such as the profit and loss let you choose cash or accrual when you run or customize them. It's a quick way to see both views of the same month.
• Invoices and bills create accruals automatically. If you use invoices for sales and bills for supplier costs, your books are already accrual-based. If you only record bank deposits and payments, they're effectively cash-based.
• Prepaids and accruals need journal entries. QuickBooks won't spread an annual insurance payment for you, though you can set up recurring journal entries to do the monthly part.

6Common cash vs accrual mistakes

• Recording the payment as revenue after already invoicing. That double-counts the sale. The payment should clear accounts receivable.
• Expensing a full year of prepaid costs in December. It lowers this year's profit on paper, but under accrual the cost belongs to the period it covers.
• Forgetting year-end bills. A December contractor invoice that arrives in January still belongs to December under accrual.
• Ignoring the GST timing. Owing GST on invoices that haven't been paid catches a lot of owners out. Set some cash aside.
• Switching methods back and forth. Pick one approach for your books and stay consistent, so year-over-year comparisons hold up.

If your books have been kept on a cash basis and year-end is coming, a catch-up can add the accruals your accountant will need. Plum works with consultants, contractors and practitioners across Edmonton, St. Albert, Spruce Grove and Beaumont. Book a short call and we'll tell you which approach fits your business.

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.