How it works in practice
Under the cash basis, a sale counts on the day the customer pays, and a bill counts on the day you pay it. An invoice you have sent but not collected does not appear in income, and a supplier bill sitting in your inbox does not appear as an expense. There are no receivables or payables to track, which is why many owners find it easy to follow.
The cost of that simplicity is accuracy about performance. A month in which several large customers pay late can look like a poor month even though the work was done, and a month in which you prepay a year of insurance can look unusually expensive. The cash basis answers “what came in and went out?” rather than “what did the business earn?”
An illustrative example
Suppose, with simple round numbers, you complete $10,000 of work in November and the customer pays in January. During the same period you receive a $2,000 supplier bill in December and pay it in February. On the cash basis, the $10,000 is income in January and the $2,000 is an expense in February. On the accrual basis, the income belongs to November and the expense to December.
Neither version is wrong as a description of what happened. They answer different questions, which is why comparing a cash-basis month with an accrual-based one can be misleading. The accrual accounting entry covers the other view in more detail.
What Canadian tax rules say
The CRA says you generally have to report business income using the accrual method. Farmers, fishers and self-employed commission agents are the groups the CRA names as able to choose the cash method instead, and they pick one method or the other rather than blending the two. Under the cash method you report income in the period you receive it, whether as cash, property or services, and you deduct expenses in the period you pay them, except prepaid expenses.
Changing methods is not a software toggle. The CRA describes different steps depending on the direction, including a statement of the adjustments to income and expenses. Many small businesses keep cash-basis management reports for convenience, but their tax reporting still needs to follow the rules that apply to them.
What to discuss with your accountant
Ask which method your tax return must use and whether your books, your management reports or both need adjusting to match. If you have been recording on a cash basis, bring your list of unpaid customer invoices and unpaid supplier bills at year end so the accountant can place them in the right period.
Keep the day-to-day records that support either method, including deposit slips, bank statements, cancelled cheques and receipts. Also ask how other obligations, such as sales tax reporting, deal with timing, since each regime has its own rules.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- Accounting for your earningsCanada Revenue Agency
- Business recordsCanada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.