BDC Explains Differences Between Cash and Accrual Accounting

The Business Development Bank of Canada (BDC) has issued a clarification on two primary accounting methods: cash-based and accrual accounting. These approaches determine the timing of financial transactions recorded in a company's statements.

Under cash-based accounting, revenues are recorded only when cash is received, and expenses are recorded when they are paid. This method is often considered simpler and is commonly used by small businesses and in agriculture, where significant time may pass between incurring costs and receiving revenue.

Accrual accounting records revenue when it is earned, regardless of when payment is received, and expenses when they are incurred, irrespective of the payment date. For instance, a service provided today is recorded as revenue now, even if payment is due later.

While accrual accounting is more complex, it is frequently preferred as it provides a more accurate reflection of a company's financial performance by matching revenues with the expenses incurred to generate them. Both methods are permissible under International Financial Reporting Standards (IFRS).