Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash actually changes hands.
Under accrual accounting, a sale invoiced in December is recorded as December revenue even if the customer pays in February. The alternative, cash accounting, records the sale only when the cash arrives. Accrual gives a truer picture of profitability in a given period because it matches revenue with the expenses that produced it.
In Canada, incorporated businesses are generally required to use the accrual method for their financial statements and T2 corporate return. Both IFRS and ASPE, the two accounting frameworks used here, are built on accrual. Sole proprietors and farmers have limited access to cash-basis reporting, but most businesses of any size report on accrual.
You complete a $10,000 consulting project on December 20 and invoice the client the same day, but they pay on January 15. Under accrual accounting the $10,000 is revenue in the year the work was done, not the year you were paid, so it belongs on that year's income statement.
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