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There are two primary accounting methods in use in Canada today: The cash method and the accrual method. The difference between them is in when small businesses recognize revenue and expenses. With the cash method, both revenue and expenses are recognized when cash actually changes hands. Under the accrual method, the business recognizes revenue and expenses when they're earned, rather than when they are paid.

As we all know, equipment and buildings wear out over time. This gradual wear and tear results in depreciation – which is just part of the cost of doing business.

When you're operating a business, and your equipment is gradually wearing out, or getting closer to being obsolete, you're experiencing a hidden expense. It doesn't show up in a cash flow statement, of course. But it's a loss, nevertheless, and a very real one. In Canadian tax law, the way we account for this hidden cost is through capital cost allowance, or CCA.

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