Glossary -> Accrual Basis Accounting vs Cash Basis Accounting
Accrual Basis Accounting
Using the accrual basis for preparing accounting records, revenues and costs or expenses are recorded in the accounting period in which they occur, even if the revenues have not been received or the costs have not been paid. Under the cash basis, the revenues and expenses are recorded when the revenues are received and the expenses are paid.
Most businesses are required to use the accrual basis for preparing their tax returns.
When the accrual basis of accounting is used, accruals are done at the end of an accounting period (usually monthly) to record costs which have been incurred but not paid for or previously recorded, and to record revenue which has been earned but not received or previously recorded.
The entry to do the accrual would be a debit to an expense account or asset account, and a credit to an accrued liability account. Once the cost has been paid, the accrual would be reversed.
See Cash Basis Accounting below re income from property, including investment income, and for people who are in a farming or fishing business, or who are self-employed commission sales agents
Modified Accrual Basis Accounting
S. 34 of the Income Tax Act allows a professional business (accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor) to use a modified accrual basis, where work in progress is not included in revenue. An election must be filed with the tax return the first year that work in progress is excluded from revenue. The election will apply for all subsequent years, unless the taxpayer, with the permission of the Minister of National Revenue, revokes the election.
Upon the death of the professional, work in progress is included in revenue. However, it is considered a "right or thing", so can be included in revenue on the rights and things return instead of the terminal personal income tax return.
Cash Basis Accounting
Under the cash basis for preparing accounting records, the revenues and expenses are recorded when the revenues are received and the expenses are paid.
Most businesses are required to use the accrual basis for preparing their tax returns. Those people who are in a farming or fishing business, or who are self-employed commission sales agents, are allowed by the Income Tax Act to use the cash basis.
Income from property, including investment income, is normally recorded using the cash basis. Income from property rentals can also use the cash method, as long as the income is not considered business income. See Rentals - Property or Business Income? for more information.
Revised: October 26, 2023