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Cash vs Accrual Calculator

2025
Financial Data

Revenue

$
$

Expenses

$
$
Method Comparison

Cash Method Saves

$7,742.23

in tax this year

Outstanding AR

$30,000.00

Outstanding AP

$5,000.00

Side-by-Side Comparison
Cash MethodAccrual Method
Revenue$120,000.00$150,000.00
Expenses-$35,000.00-$40,000.00
Net Income$85,000.00$110,000.00
Federal Tax$11,317.73$16,442.73
Provincial Tax$4,912.02$7,529.26
Total Tax$16,229.75$23,971.98
Net After Tax$68,770.25$86,028.02

Note: The income difference of $25,000.00 is due to timing — $30,000.00 in uncollected receivables and $5,000.00 in unpaid expenses. This income is not permanently excluded — it will be recognized in a future period.

Cash Flow Impact
Actual Cash Received$120,000.00
Actual Cash Paid Out-$35,000.00
Net Cash Position$85,000.00
Tax if Cash Method-$16,229.75
Tax if Accrual Method-$23,971.98
Cash vs Accrual Accounting in Canada

CRA rules and considerations for choosing an accounting method

CRA allows most businesses to use either cash or accrual accounting, but the choice must be applied consistently. Certain businesses (such as those with inventory) may be required to use the accrual method. Professionals (lawyers, accountants, engineers, etc.) can use a modified accrual method where work-in-progress can be excluded from income.
Cash basis is available to most sole proprietors, partnerships, and small businesses that do not have significant inventory. Service-based businesses commonly use cash basis. If you sell goods and maintain inventory, CRA generally requires accrual accounting for the inventory component. You can use a hybrid method: cash for revenue/expenses and accrual for inventory.
Switching from cash to accrual (or vice versa) requires an adjustment in the transition year to prevent income from being counted twice or not at all. CRA does not require approval to switch methods, but the switch must be reasonable and you should document the transition. Include a note with your tax return explaining the change. Consult an accountant for the transitional adjustments.
If your business purchases and sells goods, CRA requires you to account for inventory using the accrual method for that portion of your business. This means inventory purchases are not deducted until the goods are sold. You can still use cash basis for other revenue and expenses (hybrid method).
Cash basis can defer tax when you have outstanding receivables (invoiced but not yet collected), since you only report income when received. However, it also means you can only deduct expenses when paid. If you have more receivables than payables, cash basis typically results in lower current-year taxable income and tax deferral.
Under accrual accounting, you report revenue when it is earned (when the service is provided or goods delivered) regardless of when payment is received. Expenses are recognized when incurred, not when paid. This provides a more accurate picture of profitability but may result in paying tax on income you have not yet received in cash.
You must use a consistent method for income tax purposes on your T2125. However, for GST/HST purposes, most small businesses can elect to use either the regular method (similar to accrual) or the Quick Method. The accounting method chosen for income tax does not need to match the GST/HST reporting method.

CRA-Aligned: Tax calculations use 2025 CRA rates. The choice of accounting method has real tax implications. Both methods eventually recognize the same total income — the difference is timing. Consult a tax professional before switching methods.

More Information
Understanding Cash vs Accrual Accounting in Canada

How to choose the right accounting method for your Canadian business

What is the cash method of accounting?

With the cash method, you record income when you actually receive the money and expenses when you actually pay them. If you send a $5,000 invoice in December but the client pays in January, the income counts in January. This method is simpler and gives you a clearer picture of your actual cash on hand.

What is the accrual method?

With the accrual method, you record income when you earn it and expenses when you incur them, regardless of when cash changes hands. Using the same example, the $5,000 invoice sent in December counts as December income even if payment arrives in January. This method gives a more accurate picture of profitability over time.

Which method does the CRA require?

The CRA generally requires businesses to use the accrual method for tax purposes. However, farmers, fishers, and some self-employed professionals can use the cash method. If your business earns less than $500,000 in revenue, the CRA may allow you to use a modified cash basis. Always check with the CRA or an accountant to confirm which method applies to your situation.

How does the choice affect your taxes?

The accounting method you choose can shift when income and expenses are recognised, which changes your taxable income for a given year. For example, if you use the cash method and receive a large payment in January instead of December, that income shifts to the next tax year. This can be helpful for managing your tax bracket.

Can you switch between methods?

Yes, but you need CRA approval and the switch must be done properly to avoid counting income twice or missing it entirely. You generally fill out a request explaining why you want to change and make any necessary adjustments in the transition year. It is best to work with an accountant when switching methods.

Which method is better for small businesses?

For very small businesses and sole proprietors, the cash method is often simpler because you only track actual money in and out. For larger businesses or those with inventory, the accrual method gives a more accurate view of profitability. If you carry inventory, the CRA generally requires the accrual method.

How does GST/HST reporting relate to your accounting method?

You can choose to report GST/HST using either the quick method or the regular method, independent of your income tax accounting method. However, if you use the cash method for income tax, you may also elect to report GST/HST on a cash basis — meaning you remit GST/HST only when you actually collect it from customers.

CRA-Aligned: Based on 2025 CRA rates and thresholds. For personal advice, speak to a qualified accountant or tax professional.

Disclaimer: This calculator provides estimates based on current CRA rates and thresholds for the 2025 tax year. It does not constitute professional tax, financial, or legal advice. Your actual liability may differ depending on your individual circumstances. Always consult a qualified accountant before making financial decisions. Read our terms

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