Cash accounting records transactions when money changes hands; accrual accounting records them when they are earned or incurred, and the CRA requires most incorporated businesses to use the accrual method.

Under cash accounting, December revenue only exists if the customer paid in December. Under accrual, it exists the moment it was earned, even if collection comes in February. Most incorporated Canadian businesses are required to use accrual accounting, which means financial statements reflect economic reality rather than cash timing.

The trap is reading accrual-based financials through a cash lens. A profitable December on the income statement can align with a cash-constrained January if large receivables have not yet been collected. Distribution decisions, supplier payments, and hiring commitments made against accrual profits, without checking actual cash, create pressure that the income statement did not indicate.

Misreading financials is one of the most common and most preventable problems in growing businesses. See how Wefinx approaches accounting.

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