Cash vs Accrual Accounting on the T2125: Which Tax Year Gets the Invoice?

December Invoice, January Payment: Which Tax Year?

A recurring question from Canadian freelancers is: If I invoice a client in December but get paid in January, which year does the income belong to?

For most sole proprietors, the answer is December. The CRA requires most self-employed business and professional income to be reported using the accrual method, not the cash method. That means timing follows when income is earned and expenses are incurred, rather than simply when money enters or leaves your bank account.

This is general information, not tax or accounting advice. Ask a qualified professional about unusual contracts, disputed invoices, or a change in accounting method.

How the Accrual Method Works

Under accrual accounting, you generally report:

Suppose you complete a $2,000 design project and invoice the client on December 20, 2026. The client pays on January 10, 2027. If the income was earned in 2026, it generally belongs in your 2026 T2125 revenue, despite the January deposit.

The same idea applies to expenses. If a contractor finishes eligible work for your business in December and bills you then, the expense can generally belong to December even if you pay in January, provided you have actually incurred an obligation to pay it.

Most Freelancers Cannot Simply Choose Cash Accounting

Cash accounting feels intuitive: report income when paid and expenses when paid. However, the CRA says all other self-employment income must use the accrual method, apart from groups allowed to choose cash or accrual accounting:

A freelance writer, designer, developer, consultant, or photographer is therefore usually on accrual accounting. Do not switch methods just to move a December invoice into the next tax year. If you are unsure whether you qualify as a self-employed commission agent, confirm before filing.

Watch Prepaid Expenses

Paying early does not always create an immediate deduction. Under the accrual method, a prepaid expense is claimed in the period or periods when you receive the related benefit.

For example, if you pay $1,200 on December 1 for business insurance covering the next 12 months, you generally should not deduct the entire amount in the current year. Allocate the cost to the months the coverage applies to. The same issue can arise with annual software plans, rent, service contracts, and advertising paid in advance.

What If the Client Never Pays?

Accrual accounting can require you to report income before receiving the cash. If an invoice later becomes genuinely uncollectible, you may be able to claim a bad debt on T2125 line 8590. The amount generally must have been included in income before, and you need evidence that it became a bad debt.

Keep:

A late invoice is not automatically a bad debt. Document why you concluded it was uncollectible.

Build a Clean Year-End Cutoff

Bank deposits alone do not produce an accurate accrual-based T2125. At each year-end:

ClaimHero is a free Canadian T2125 expense tracker for sole proprietors. Log costs under the correct CRA category throughout the year, add invoice or billing notes, and export organized totals for tax software or your accountant. A clean cutoff helps prevent income and expenses from being counted in the wrong year—or twice.