Understanding your financial statements: balance sheet and income statement

In short. The balance sheet captures what your business owns and owes at a specific date; the income statement shows what it earned and spent during the fiscal year. Together, they answer three questions: Is your SME profitable, solvent, and well-managed? In Quebec, every incorporated company attaches its financial data to its T2 return (CRA) and its CO-17 form (Revenu Québec). This guide analyzes, line by line, the financial statements of a fictional but realistic SME with $850,000 in sales, then demonstrates the six ratios a CPA calculates to translate these figures into concrete decisions.

Every year, thousands of Quebec SME owners receive their financial statements, sign the last page, and file them away without really reading them. That's a shame: these two documents contain almost everything you need to know to decide on your pricing, compensation, investments, and financing. Rather than explaining the theory in the abstract, we'll examine a real set of financial statements together—those of Plomberie Rivard Inc., a fictional company but representative of the files that accountants in the Bankeo network see every week.

Balance sheet and income statement: two documents, two different questions

The financial statements of a Quebec SME prepared in accordance with Accounting Standards for Private Enterprises (ASPE) generally include a balance sheet, an income statement, a statement of retained earnings, and notes to the financial statements. The first two do the bulk of the work:

• The balance sheet answers the question "Where are we?" at a specific date, usually the end of the fiscal year. It lists the assets (what the company owns), the liabilities (what it owes), and the shareholders' equity (what belongs to the shareholders). The equation never changes: assets = liabilities + shareholders' equity.
• The income statement answers the question "What have we earned?" over the entire fiscal year. It starts with revenue (sales), subtracts the cost of sales, then operating expenses, interest, and taxes, to arrive at the net profit or net loss.

These documents aren't just for you. The IRS requires your company's financial data in the General Index of Financial Information (GIFI) format with the T2 return, and Revenu Québec requests it with the CO-17 form. Your banker reviews them before renewing your line of credit, and a potential buyer will examine them when you sell.

Guided reading: Statement of results of Plomberie Rivard inc.

Here is the profit and loss statement of our example SME for the financial year ending December 31, 2025. About ten lines, and each one tells a story.

Three key points need to be considered. First, the 40% gross margin : of every dollar billed, 40 cents remain after materials and direct labor to cover everything else. This is the most critical figure in the income statement: a two- or three-point drop, caused by higher material costs or tighter quotes, directly reduces profit.

Next, the €22,000 depreciation included in the expenses: this is an accounting expense that spreads the cost of the trucks and equipment over their useful life, without any cash outflow this year. This is one of the reasons why profit and cash flow never change by the same amount.

Finally, the $13,700 in taxes seems modest: the company benefits from the federal small business deduction (9%) and the reduced Quebec tax rate (3.2%, subject to factors such as the number of paid hours). A CPA verifies annually that the company maintains its eligibility, as losing the reduced Quebec rate would significantly increase the tax bill.

Guided reading: the balance sheet as of December 31, 2025

Here is the report for Rivard Plumbing as of the same date. The golden rule of reporting: compare each item to last year's and ask yourself why it has changed.

The key takeaway is at the top: $42,000 in cash versus $118,000 in accounts receivable . The company is profitable, but its money is tied up in unpaid invoices, the equivalent of 51 days of sales. Add the $100,000 in short-term liabilities to be met within the year (suppliers, taxes payable, and the portion of debt due), and you understand why a full order book doesn't prevent cash flow problems.

The retained earnings of $157,900 tell a long story: these are the profits accumulated since the company's inception and left within the company. This is the raw material for the compensation and investment decisions we will discuss later.

Six ratios: what a CPA decides based on these statements

A single number means nothing. A CPA connects the two states to derive ratios, and then makes decisions. Here are the six they would calculate for Rivard Plumbing, along with their concrete implications.

Specifically, three decisions stand out from this table:

• Tighten up collections. At 51 days, accounts receivable are too burdensome for a company that pays its suppliers in 30 days. Deposits upon signing, progressive invoicing, and systematic reminders would bring the collection period back down to 30 days, reducing accounts receivable to approximately $70,000 and freeing up nearly $48,000 in cash, without any additional sales.
• Planning executive compensation. With $98,300 in net income and $157,900 in retained earnings, the trade-off between salary and dividends becomes a significant tax decision: contributions to the Quebec Pension Plan (QPP), RRSP entitlements, and personal income tax rates. Our article on salary versus dividends for executives in Quebec details this trade-off.
• Financing growth without weakening the balance sheet. A liquidity ratio of 2.0 and an interest coverage ratio of 15 indicate that an additional debt-financed truck would pass without a hitch. The CPA models the impact on ratios before meeting with the banker, rather than discovering it afterward.

Reliable figures above all: the quality of bookkeeping

This entire analysis rests on one premise: up-to-date and well-maintained books. Accounts receivable inflated with uncollectible invoices, inventory that is never counted, or misclassified expenses distort gross margins, ratios, and ultimately, decisions. Before you delve into your financial statements, ensure that the input data is clean; our overview of common bookkeeping errors in SMEs shows you where to look first.

Who prepares your financial statements, and at what cost?

For most SMEs incorporated in Quebec, annual financial statements are prepared by a CPA (member of the Quebec CPA Order) as part of a compilation engagement, governed by Canadian Accounting Standard 4200 (CAS 4200), which replaced the former Notice to Reader. The CPA prepares the statements based on your books, without expressing assurance on the figures. A review (moderate assurance) and an audit (high assurance) are significantly more expensive and are only required if mandated by a lender, investor, or the law.

Côté budget, la préparation des états financiers s'inscrit dans l'enveloppe comptable globale de l'entreprise: une médiane d'environ 3 000 $ par année, la plupart des mandats se situant entre 500 et 6 000 $ selon la taille et la complexité du dossier. Basé sur les honoraires réels de 1 248 mandats conclus via Bankeo (2024-2026), sur plus de 15 000 demandes reçues; le Baromètre Bankeo ventile ces honoraires par secteur et par service. Vous pouvez aussi parcourir les comptables vérifiés du réseau Bankeo pour comparer les profils.

Frequently asked questions

What is the difference between a balance sheet and an income statement?

The balance sheet presents, at a specific date, what the company owns (assets), what it owes (liabilities), and what is due to shareholders (equity). The income statement presents revenues and expenses over the entire fiscal year, up to the net profit or net loss. The former measures financial strength, the latter profitability: they are read together.

Is a company incorporated in Quebec required to produce financial statements?

Yes. A corporation submits its financial data to the CRA with its T2 return, in the format of the General Index of Financial Information (GIFI), and attaches it to its CO-17 return filed with Revenu Québec. It must also maintain proper accounting records and keep them for at least six years after the end of the tax year in question.

Why doesn't my net profit match the money in my account?

Because the income statement follows accrual accounting: a billed sale counts as revenue even if the customer hasn't yet paid, and depreciation reduces profit without any cash outflow. In our example, the company shows a net profit of $98,300, but only $42,000 in cash, primarily because $118,000 is tied up in accounts receivable.

What is a compilation mission?

This is the most common level of service for an incorporated SME: a CPA prepares financial statements from your books according to Canadian Accounting Standard 4200 (ASC 4200), without expressing assurance on the figures. This replaces the former Notice to Reader. A review, which offers moderate assurance, and an audit, which offers high assurance, are reserved for situations where a lender, investor, or the law requires them.

What financial ratios should be monitored as a priority in an SME?

Four ratios are sufficient to begin with: current ratio (current assets divided by current liabilities, aim for at least 1.5), gross margin, average accounts receivable collection period in days, and the debt-to-equity ratio. Monitored quarterly, these ratios signal most cash flow and profitability issues before they become costly.

How much does it cost to prepare the financial statements of a small or medium-sized enterprise (SME) in Quebec?

La préparation des états financiers s'inscrit dans le budget comptable global de l'entreprise: une médiane d'environ 3 000 $ par année, la plupart des mandats se situant entre 500 et 6 000 $ selon la complexité. Basé sur les honoraires réels de 1 248 mandats conclus via Bankeo (2024-2026), sur plus de 15 000 demandes reçues. Le Baromètre Bankeo détaille ces chiffres par secteur et par service.

Official sources

1. Corporate tax (CO-17 declaration);
2. Revenue Agency of the | Canada , Corporate Income Tax (T2);
3. Revenue Agency of the | Canada General Index of Financial Information (IGRF)
4. Revenue Agency of the | Canada , Maintaining accounting records;
5. Quebec CPA Order