Accrual vs cash accounting

BDC says that under the cash method revenue is recorded when money comes in and expenses when they are paid, while under the accrual method revenue is recorded when a sale is made whether or not cash is received. BDC adds that the cash method is also used in small cash-based businesses.

What the CRA says

For sole proprietorships and partnerships, the CRA says farmers, fishers and self-employed commission agents can use the cash method or the accrual method, and that all other self-employment income must be reported using the accrual method. It also says the cash method leaves inventory out of the income calculation, while the accrual method includes it.

Why it matters in a sale

• Ask which method the owner’s books use and whether the statements and tax filings use the same one
• Under the cash method, unpaid sales and unpaid bills may not appear at all; ask for receivables and payables lists
• Ask for inventory counts, since they affect the income calculation under accrual

See the financial records checklist and net working capital.