Guide to Preparing Financial Statements for Your Business

In this guide, we’ll break down the process of creating financial statements for your enterprise or corporation. 

1. Organizing Your Financial Data:

• Gather and categorize your expense receipts by month. Consider using folders or envelopes for each month to keep things tidy. 
• Obtain all bank and credit card statements and arrange them chronologically. 
• Match and attach receipts to their respective bank or credit card statements. This helps in tracking payment methods and timings. 

2. Crafting Your Expense Spreadsheet:

• Begin by setting up an expense spreadsheet. For illustration, we’ll use an IT contractor as an example. 
• Segment your expenses into primary categories. In our example, they are: 
• Vehicle-related expenses 
• Operational costs 
• Home office expenses 
• Further break down these categories by specific expense items. Regularly updating this spreadsheet monthly can be beneficial. 
• For home office costs, only include the deductible portion, which is proportional to the office’s size compared to the entire home. 

3. Special Accounts Overview:

• HST Payable: This is the net amount of HST owed to the Canada Revenue Agency after considering HST collected and paid. 
• Income Taxes Payable: This represents the net income tax due after accounting for tax installments made. 
• Accounts Receivable: Represents the balance of invoices issued minus the cash received. 

• Accounts Payable: The outstanding amount owed to vendors or suppliers. 
• Shareholder Drawings: This reflects the net amount withdrawn by the shareholder from the company’s account. 

4. Calculating Tax Depreciation:

• Tax depreciation, termed as “capital cost allowance” by CRA, indicates the asset value reduction over time. 
• Different assets have varying depreciation rates. For instance: 
• Desk: 20% 
• Computer: 55% 
• Software: 100% 
• The first year of asset acquisition allows for half the purchase price to be claimed for depreciation. 

5. Drafting the Income Statement:

• This statement showcases the profit made during the year. It’s derived by deducting expenses and taxes from sales. 
• Revenues reflect the invoices issued, not necessarily the cash collected. 
• Depreciation and other expenses are linked to their respective tabs. 

6. Constructing the Balance Sheet:

• This statement, which can be intricate, comprises assets, liabilities, and equity sections. 
• Assets should equal the sum of liabilities and equity. Any discrepancy indicates an error. 
• Assets include cash, accounts receivable, and physical assets. Accumulated amortization denotes total depreciation since the company’s inception. 

• Liabilities are derived from special accounts. 
• Equity represents retained business assets and cash. It’s the difference between net income and dividends.