Cash vs. Accrual

To understand these two methods, take this example. Let’s say your business orders new products from a manufacturer in January and the manufacturer sends you an invoice that same month. However, you don’t pay the fee until you’ve received all the products in February.

In the cash method, the transaction is only recorded when the money has changed hands. So even though the invoice was received in January, the expense is recorded as a cash transaction in February on the date that it was paid. Meanwhile, in the accrual method, the expense would be recorded in January on the date the invoice was received, regardless of when you pay for the products.

Depending on the size and complexity of your business, either of these two methods would work to provide an accurate picture of your business’s spending habits. The cash method is much easier, and you can simply cross-reference your bank statements with your bookkeeping records to ensure accuracy. However, the cash method can be also misleading if, say, you were late on a bill payment for a whole month. If this is the case then your records might end up showing a large sum paid for utilities one month and nothing at all another month, causing some confusion when you review the books. The cash method also does not account for inventory loss, and recording just the cost of supplies might give you an inaccurate picture of how much you are spending and how much you should be spending on supplies.

On the other hand, the accrual method is a bit more difficult because your bank statement might not reflect the amounts on your income sheet. However, Canada requires that large corporations use the accrual method of bookkeeping because it tends to provide a more accurate picture of a business’s overall finances. And so, if you’re planning on growing your business in the future, it’s a good idea to familiarize yourself with the accrual method.