In Canada, small business owners can use two different primary tax accounting methods: the cash method and the accrual method. Although you can choose which method you prefer, you may find that one is more ideal than the other for your company. Larger companies do not have a choice and are required to use the accrual method.
The cash method requires that you report a transaction after the cash has been paid or received. For example, if you owe rent for your office for October and pay it in November, you report that money in November when the payment is made rather than in October when the bill is initiated.
Conversely, the accrual method requires that you report the transaction when it’s initiated rather than when the actual payment is made. Using the same October rent example, you report the money in October when the transaction is initiated, even though it isn’t actually paid until November.
The accrual method is used most often by people who are self-employed. They report their earnings during the fiscal period they are earned, regardless of when they receive the payment, and they also deduct expenses during the same term.
The cash method tends to be easier and more straightforward for small businesses, as you report your income during the fiscal period that it is received rather than when it is earned. You also report expense deductions when they’re actually paid, not when they’re initiated.
If you’re a small business owner, especially one without an accountant, the cash method tends to reduce the chances of error, as you can clearly follow the money trail. Less adjustments are required with the cash method, making bookkeeping a more streamlined process.
At the same time, the cash method can be less accurate than the accrual method, as it can be difficult to predict future cash flows 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 of your previously purchased supplies still on hand. Both options have their upsides and downsides, so consider talking to a professional accountant for advice on the best choice for your specific business.