The short answer: the balance sheet shows what your business owns and owes on a single day. The income statement shows whether it made money over a period. The cash flow statement shows where cash came from and where it went. The notes explain the numbers. Your T2 return, your bank and your own decisions all depend on them.
The balance sheet: what the business owns and owes
The balance sheet is a snapshot at one date, usually your fiscal year-end. It always balances:
Assets = Liabilities + Equity
- Assets are what the business owns or is owed: cash, accounts receivable, inventory, equipment, vehicles, property.
- Liabilities are what it owes: supplier bills, loans and lines of credit, GST/HST and payroll deductions owing to CRA, corporate tax payable.
- Equity is what’s left for the owners: share capital plus retained earnings, the profits kept in the business over the years.
For an owner-managed corporation, one line deserves special attention: the shareholder loan, which records money moving between you and the company. We explain why in our chart of accounts guide.
When you’ll need it: lenders use it to judge whether you can carry a loan, a buyer uses it to value the business, and it feeds straight into your corporate tax return.
The income statement: did the business make money?
Also called the profit and loss statement, it covers a period, such as a month, a quarter or a year:
Revenue − Expenses = Net income (or loss)
- Revenue: sales, service fees, commissions, rental income.
- Expenses: cost of goods sold, wages, rent, subcontractors, advertising, insurance, interest, amortization.
Accounting profit isn’t the same as taxable income. The T2 return starts from your net income and adjusts it: for example, only half of most meals and entertainment is deductible, and capital cost allowance replaces amortization.
When you’ll need it: to price your work, to see which services or products actually make money, and to plan tax before year-end rather than after it.
The cash flow statement: where did the cash go?
Profitable businesses run out of cash all the time. The cash flow statement shows why, sorting cash movements into three groups:
- Operating: cash from customers, paid to suppliers and staff.
- Investing: buying or selling equipment, vehicles or property.
- Financing: loans received and repaid, shareholder loans, dividends paid.
Customers who haven’t paid yet, loan principal repayments and equipment purchases all move cash without showing up as income or expenses in the same way. That’s why the bank balance and the profit rarely match.
The notes: the part most owners skip
The notes explain the accounting policies used and add detail the statements can’t show: amounts owed to or by shareholders and related companies, loan terms, commitments such as leases, and significant events after year-end. If a number looks odd, the answer is usually in the notes.
Which accounting standards apply?
Most Canadian private corporations prepare their statements under Accounting Standards for Private Enterprises (ASPE). Not-for-profit organizations usually use the standards for not-for-profit organizations (ASNPO), and public companies use IFRS.
What does CRA need from your financial statements?
Your T2 corporate return must include your financial statement information, reported using CRA’s General Index of Financial Information (GIFI). Each line of your balance sheet and income statement is given a GIFI code. CRA doesn’t require an audit to file a T2.
Lenders are different. If a bank asks for statements “with a Notice to Reader”, it now means a compilation engagement report: the CSRS 4200 standard replaced Notice to Reader for periods ending on or after December 14, 2021. A review engagement or an audit gives more assurance, costs more, and must be performed by a licensed public accountant.
Don’t wait for year-end
If your bookkeeping is current, you can produce a balance sheet and income statement for any month and catch problems while they’re still small. If the books are a year or more behind, the statements are too, and so is everything that depends on them. That’s where a catch-up starts.
Sources: CRA, RC4088 General Index of Financial Information (GIFI); CRA, Preparing your financial statements using GIFI; CPA Canada, The new compilation engagements standard. First published July 2023 and fully revised in September 2026. General information, not advice for your specific situation.
