2017-11-29 00:00:00TaxesEnglishSave time filing business taxes by properly accounting for accruals when you record income and expenses.https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/12/accountant-reviews-accruals.jpghttps://quickbooks.intuit.com/ca/resources/taxes/what-are-accruals/What Are Accruals?

What Are Accruals?

1 min read

For most small-business owners and independent contractors, the Canada Revenue Agency requires you to report accruals when you file your taxes, so it’s important to understand how to handle them. [Self-employed commission sales agents, farmers, and fishermen can use either [the cash or accrual method](https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/business-income-tax-reporting/accounting-your-earnings.html#ccrlmthd), but you need to use the accrual-based accounting method if you’re self-employed or own a small business in any other industry.][1]

Accruals are income or expenses you expect to incur that you record regardless of whether cash has exchanged hands yet. Under accrual-based accounting, if you sell services based on a contract and expect payment within 60 days, you record the sale as revenue in your books when you make the sale, not 60 days later when you receive payment. Similarly, if you sign a lease to rent equipment, you enter the rent expense when you sign the contract, not when you make the payments.

Because you often record accrued expenses or income at a different time than when payment is exchanged, accrual-based accounting requires you to make two entries for each event. When you recognize income, you enter the accrual under your income account as well as an asset account, such as accounts receivable. When you recognize an expense, you enter the accrual under your expense account as well as a liability account, such as accounts payable. Then, when the payment exchanges hands, you can offset the accrual in your asset or liability account and then debit or credit your cash account.

While this requires additional steps compared to cash-based accounting, it’s much easier to record each event properly than wait for the end of the year to convert your cash-based records to comply with CRA accrual-based accounting requirements for tax purposes.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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