Financial statements include several key documents, including the following:
Each of these components provides important information about a company and its financials. Financial statements may be external or internal. External statements are prepared for tax authorities, investors, or important partners that require financial information about the company and might be released annually or quarterly. Publicly traded companies release financial statements quarterly for their shareholders.
Internal financial statements are prepared for use within a company itself. They may be more flexible and contain a greater amount of analysis. Internal financial statements may be created by different divisions within a company or issued on a more frequent basis such as monthly or quarterly. The most critical components of a financial statement are the balance sheet and the income statement.
External financial statements are normally created using an accrual basis. However, Canadian businesses are allowed to choose the accounting method that they use. The accounting method that is used to prepare financial statements should be listed in the notes to the financial statement.
Bookkeeping helps you to stay in compliance with the requirements of the CRA. When your bookkeeping is accurate, you can avoid late penalties and reduce the likelihood that your business will be audited. Finally, up-to-date and accurate bookkeeping can help your business to obtain financing if it is needed.
Preparing financial statements is a multi-step process. You will need to start by organizing all of your documents and receipts. Begin by sorting all of your expense receipts and invoices by the month. This task can be much simpler if you store your expense receipts in folders by month in a filing cabinet or online as you receive them. You should similarly sort and store your credit card and bank statements by month and attach corresponding receipts to the statements to make it easier to identify the expenses.
After you have organized your documents, the next step is to prepare your expense sheet. This can be done in a spreadsheet that has your business expenses broken down by category and type. To keep your expense spreadsheet accurate, it is best to update it every month instead of waiting to enter everything as the year’s end draws near.
Your expense sheet should account for special accounts such as any GST payable that you have collected, accounts receivable, accounts receivable, income tax payable, and tax depreciation.