In Canada, small business owners can use two different primary tax accounting methods, the cash method or the accrual method. Although you can choose whichever method you prefer, you may find that one works better than the other for your company. Larger companies don’t have a choice in the matter and must use the accrual method.
The Cash Tax Accounting Method
The cash method requires you to report transactions after you pay or receive money. For example, if you owe rent for your office for October and pay it in November, you report that money in November when your make the payment rather than in October when your landlord initiates the bill.
The Accrual Tax Accounting Method
Conversely, the accrual method requires you to report transactions at the time of initiation rather than when you actually make the payment. Using the same October rent example, you report the money in October when your landlord initiates the bill, even though you don’t actually pay it until November.
Advantages of the Cash Accounting Method
If your small business doesn’t use an accountant, the cash method tends to reduce the chances of error. It lets you clearly follow the money trail and requires fewer adjustments, making your bookkeeping tasks a more streamlined process. In many cases, the cash method works better for small businesses due to its straightforward nature. You report your income when you receive it rather than when you earn it, and you also report expense deductions when you pay them rather than at their initiation.
Advantages of the Accrual Accounting Method
Self-employed people most often use the accrual method. They report their earnings during the fiscal period in which they earn them regardless of when they receive the payment, and they also deduct expenses during the same term. The accrual method can provide more accuracy than the cash method, as it doesn’t require you to predict future cash flow and changes. For example, if you spend a certain amount on office supplies and only use half of them by the next fiscal period, your expenses next period aren’t the same because you still have half your previously purchased supplies on hand.
Both tax accounting methods have their advantages, but whether you choose to use the cash method or the accrual method, accounting software streamlines the process. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.