Understanding financial statements: Balance sheet and income statement

At a Glance. The balance sheet provides a snapshot of what your business owns and owes as of 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, all incorporated companies attach their financial data to their T2 return (CRA) and their CO-17 form (Revenu Québec). This guide breaks down, line by line, the financial statements of a fictional but realistic SME with $850,000 in sales, and then highlights the six ratios a CPA calculates to turn these figures into concrete decisions.

Every year, thousands of Quebec SME executives 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 make decisions about your pricing, compensation, investments, and financing. Rather than explaining the theory in abstract terms, let’s go through a real set of financial statements together, those of Plomberie Rivard Inc., a fictional company that’s 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 the Accounting Standards for Privately Held Entities (NCECF) generally include a balance sheet, an income statement, a statement of retained earnings, and notes to the financial statements. The first two are the most important:

• The Balance Sheet answers the question “Where do we stand?” as of a specific date, usually the end of the fiscal year. It lists assets (what the company owns), liabilities (what it owes), and equity (what belongs to shareholders). The equation never changes: assets = liabilities + equity.
• The Income Statement answers the question “How much did we earn?” over the entire fiscal year. It starts with revenue (sales), subtracts the cost of goods sold, then operating expenses, interest, and taxes, to arrive at net income or net loss.

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

Guided reading: Plomberie Rivard inc.'s income statement

Here is the income statement for our example SME for the fiscal year ended December 31, 2025. There are about ten lines, and each one tells a story.

There are three key points to consider. First, the 40% gross margin: For every dollar billed, 40 cents remain after materials and direct labour to cover all other expenses. This is the most sensitive figure on the income statement: a shift of two or three percentage points, caused by higher material costs or overly tight bids, directly cuts into profits.

Next, the depreciation of $22,000 Included in expenses: This is an accounting expense that allocates the cost of trucks and equipment over their useful lives, without any cash outflow this year. This is one of the reasons why profit and cash on hand never change by the same amount.

Finally, the $13,700 in taxes may seem modest: the company benefits from the federal small business deduction (9%) and the reduced Quebec tax rate (3.2%, contingent in part on the number of paid hours). A CPA verifies each year that the company remains eligible, as losing the reduced rate in Quebec would cause the tax bill to rise significantly.

Guided reading: Balance sheet as of December 31, 2025

Here is Plomberie Rivard’s balance sheet as of the same date. The golden rule for balance sheets: compare each line item to last year’s figure and ask yourself why it has changed.

The key information is at the top: $42,000 in cash versus $118,000 in accounts receivable. The company is profitable, but its cash is tied up in accounts receivable, the equivalent of 51 days of sales. Add the $100,000 in current liabilities due within the year (accounts payable, taxes payable, and the current portion of debt), and you’ll see why a full order book doesn’t prevent cash flow problems.

The retained earnings of $157,900 tell the long-term story: these are the profits accumulated since the company’s incorporation and retained within the business. They serve as the basis for compensation and investment decisions, which we’ll discuss below.

Six ratios: What a CPA decides based on these statements

On its own, a number means nothing. A CPA correlates the two statements to derive ratios, which in turn inform decisions. Here are the six ratios an accountant would calculate for Plomberie Rivard, along with their practical implications.

In practical terms, three decisions can be drawn from this table:

• Tighten up debt collection. At 51 days, accounts receivable are too high for a business that pays its suppliers within 30 days. Requiring down payments upon signing, progressive billing, and systematic follow-ups would bring the payment term down to 30 days, which would reduce accounts receivable to about $70,000 and free up nearly $48,000 in cash, without making a single additional sale.
• Planning Executive Compensation. With $98,300 in net income and $157,900 in retained earnings, the trade-off between salary and dividends becomes a real tax decision: QPP contributions, RRSP limits, and personal tax rates. Our article Salary or Dividends for Executives in Quebec explains this trade-off in detail.
• Finance growth without weakening the balance sheet. A liquidity ratio of 2.0 and an interest coverage ratio of 15 indicate that financing an additional truck with a loan would be manageable. The CPA models the impact on the ratios before meeting with the banker, rather than finding out afterward.

Reliable figures first: the quality of bookkeeping

All of this analysis rests on one premise: up-to-date and well-maintained books. Accounts receivable inflated by uncollectible invoices, inventory that’s never been counted, or misclassified expenses distort gross margin, ratios, and, ultimately, decisions. Before you start analyzing your financial statements, make sure your source data is clean; our overview of Common Bookkeeping Errors in Small and Medium-Sized Businesses shows you where to look first.

Who prepares your financial statements, and at what cost?

For most incorporated small and medium-sized businesses in Quebec, annual financial statements are prepared by a CPA (a member of the Ordre des CPA du Québec) as part of a compilation engagement, governed by Canadian Standard NCSC 4200, which replaced the former notice to reader. The CPA prepares the financial statements based on your books, without providing any assurance regarding the figures. A review (moderate assurance) and an audit (high assurance) are significantly more expensive and are only required if a lender, an investor, or the law mandates them.

In terms of budget, preparing financial statements is part of the business’s overall accounting budget: a median of approximately $3,000 per year, with most projects ranging from $500 to $6,000 depending on the size and complexity of the case. Based on actual fees from 1,248 engagements secured through Bankeo (2024-2026), out of more than 15,000 requests received; the Bankeo Fee Barometer breaks down these fees by sector and by service. You can also browse the Vetted accountants in the Bankeo network to compare profiles.

Frequently asked questions

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

The balance sheet shows, as of a specific date, what the business owns (assets), what it owes (liabilities), and what belongs to shareholders (equity). The income statement shows revenue and expenses for the entire fiscal year, leading to net income or net loss. The former measures financial strength, while the latter measures profitability: they should be read together.

Is a corporation incorporated in Quebec required to prepare financial statements?

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

Why doesn’t my net income match the money in my account?

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

What is a compilation engagement?

This is the most common level of service for an incorporated SME: a CPA prepares the financial statements based on your books in accordance with Canadian standard NCSC 4200, without expressing any assurance regarding the figures. It replaces the former “notice to reader.” A review, which provides moderate assurance, and an audit, which provides high assurance, are reserved for situations where a lender, an investor, or the law requires them.

Which financial ratios should be prioritized in an SME?

Four ratios are enough to get started: the current ratio (current assets divided by current liabilities; aim for at least 1.5), the gross margin, the average days sales outstanding (DSO), and the debt-to-equity ratio. Monitored quarterly, these ratios flag most cash flow and profitability issues before they become costly.

How much does it cost to prepare financial statements for an SME in Quebec?

The preparation of financial statements is part of a business’s overall accounting budget: a median of approximately $3,000 per year, with most engagements ranging from $500 to $6,000 depending on complexity. Based on actual fees from 1,248 assignments secured through Bankeo (2024-2026), out of more than 15,000 requests received. The Bankeo Fee Barometer breaks down these figures by sector and by service.

Official sources

1. Revenu Québec, Corporate Income Tax (Form CO-17)
2. Canada Revenue Agency, Corporate Income Tax (T2)
3. Canada Revenue Agency, General Index of Financial Information (GIFI)
4. Canada Revenue Agency, Bookkeeping
5. Ordre des CPA du Québec