Balance Sheet

The balance sheet (statement of financial position) presents the financial position of an entity at a specific date. It reports the resources controlled by the entity (assets), the claims of creditors against those resources (liabilities), and the residual interest of the owners (equity). The statement is a direct expression of the accounting equation: Assets = Liabilities + Equity. Under Accounting Standards for Private Enterprises (ASPE), presentation is governed principally by Section 1521 Balance Sheet.

PURPOSE AND USERS

• Assessment of liquidity: the capacity of the entity to meet obligations as they fall due.

• Assessment of solvency and financial structure: the proportion of assets financed by debt relative to equity.

• Support for credit decisions, loan covenant compliance, and valuation.

• Determination of the capital base, including taxable capital employed in Canada, which affects eligibility for the small business deduction and enhanced SR&ED credits of a Canadian-controlled private corporation.

FORMATS OF PRESENTATION

• Account (horizontal) form: assets presented on the left; liabilities and equity on the right.

• Report (vertical) form: assets presented first, followed by liabilities and then equity. This form is the most commonly used in Canada.

• Classified balance sheet: assets and liabilities are separated into current and non-current categories. ASPE requires current assets and current liabilities to be segregated.

ASSETS

An asset is an economic resource controlled by the entity as a result of past transactions or events, from which future economic benefits may be obtained (ASPE 1000.29).

Current assets

Assets expected to be realised in cash, sold, or consumed within one year of the balance sheet date or within the normal operating cycle, if longer. They are listed in order of liquidity:

• Cash and cash equivalents: cash on hand, demand deposits, and short-term, highly liquid investments readily convertible to known amounts of cash.

• Short-term investments: marketable securities held for trading or maturing within twelve months.

• Accounts receivable: amounts owed by customers, presented net of the allowance for doubtful accounts. Receivables from shareholders, directors, officers, and related parties are disclosed separately.

• GST/HST and other sales taxes recoverable.

• Inventories: measured at the lower of cost and net realisable value (Section 3031).

• Prepaid expenses and deposits.

• Income taxes recoverable.

Non-current assets

• Long-term investments: investments in subsidiaries, significantly influenced investees, and other long-term holdings.

• Property, plant and equipment (Section 3061): land, buildings, machinery, vehicles, computer equipment, furniture, and leasehold improvements, presented at cost less accumulated amortisation. Land is not amortised.

• Intangible assets (Section 3064): patents, trademarks, licences, and software, presented at cost less accumulated amortisation where the useful life is finite.

• Goodwill: the excess of the cost of an acquired business over the fair value of its identifiable net assets; not amortised under ASPE but tested for impairment when events indicate that carrying amount may exceed fair value.

• Future (deferred) income tax assets, where the future income taxes method is adopted.

• Long-term receivables and loans to shareholders or related parties not expected to be collected within one year.

LIABILITIES

A liability is an obligation of the entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services, or other yielding of economic benefits in the future (ASPE 1000.32).

Current liabilities

• Bank indebtedness and operating lines of credit.

• Accounts payable and accrued liabilities.

• Government remittances payable: payroll source deductions (income tax, CPP or QPP, EI, QPIP), GST/HST, provincial sales tax, employer health tax, and workers' compensation premiums. Amounts in arrears are disclosed separately.

• Income taxes payable.

• Unearned (deferred) revenue and customer deposits.

• Dividends payable.

• Current portion of long-term debt: principal due within twelve months.

• Demand loans, which are classified as current regardless of the repayment schedule.

Non-current liabilities

• Long-term debt: term loans, mortgages, and bonds, net of the current portion, with disclosure of interest rates, maturity dates, security pledged, and five-year aggregate principal repayments.

• Obligations under capital leases (Section 3065).

• Loans from shareholders, presented as non-current where there is no expectation of repayment within one year; disclosure of terms is required.

• Future (deferred) income tax liabilities.

• Asset retirement obligations.

EQUITY BY FORM OF ORGANISATION

• Sole proprietorship: Owner's Capital, representing opening capital plus contributions and net income, less drawings and net losses. A statement of owner's equity reconciles opening and closing capital.

• Partnership: a separate capital account for each partner. A statement of partners' capital shows contributions, the allocation of income in accordance with the partnership agreement, and drawings for each partner.

• Corporation: Share capital (authorised and issued classes, number of shares, and stated capital), Contributed surplus, and Retained earnings (accumulated net income less dividends declared). A statement of retained earnings is required under ASPE.

• Not-for-profit organisation: Net assets, segregated into unrestricted, internally restricted, and externally restricted (including endowment) balances.

MEASUREMENT BASES

• Historical cost: the default measurement basis for most non-financial assets.

• Amortised cost: applied to receivables, payables, and most debt instruments.

• Fair value: required for equity investments quoted in an active market and derivatives under ASPE Section 3856; optional for certain other financial instruments.

• Lower of cost and net realisable value: applied to inventories.

• Impairment: the carrying amount of long-lived assets is written down when it is not recoverable and exceeds fair value; write-downs are not reversed under ASPE.

FINANCIAL POSITION RATIOS

• Working capital = Current assets − Current liabilities.

• Current ratio = Current assets ÷ Current liabilities.

• Quick (acid-test) ratio = (Cash + Short-term investments + Receivables) ÷ Current liabilities.

• Debt-to-equity ratio = Total liabilities ÷ Total equity.

• Debt ratio = Total liabilities ÷ Total assets.

• Receivables turnover = Net credit sales ÷ Average accounts receivable; days sales outstanding = 365 ÷ Receivables turnover.

• Inventory turnover = Cost of goods sold ÷ Average inventory; days in inventory = 365 ÷ Inventory turnover.

• Payables turnover = Purchases (or cost of goods sold) ÷ Average accounts payable.

TAX REPORTING

• Corporations report balance sheet information on GIFI Schedule 100 (Balance Sheet Information) with the T2 return. Retained earnings are reconciled on Schedule 100 and supported by Schedule 125.

• Sole proprietors are not required to file a balance sheet with the T1 return; however, Form T2125 requires capital cost allowance schedules and, for businesses with inventory, opening and closing inventory figures.

• Partnerships filing Form T5013 report financial statement information using GIFI codes.

• Shareholder loan balances require monitoring under subsection 15(2) of the Income Tax Act, which may include an unrepaid loan in the shareholder's income where it remains outstanding at the end of the corporation's taxation year following the year in which it was made.

NOTES AND DISCLOSURE

The balance sheet is read together with the notes to the financial statements, which disclose significant accounting policies, the composition of major balances, security pledged, contractual commitments, contingencies, related-party transactions, and subsequent events.

SOURCES

• CPA Canada Handbook, Accounting, Part II (ASPE): Section 1000 Financial Statement Concepts; Section 1521 Balance Sheet; Section 3031 Inventories; Section 3061 Property, Plant and Equipment; Section 3064 Goodwill and Intangible Assets; Section 3856 Financial Instruments.

• Canada Revenue Agency, Guide RC4088 General Index of Financial Information (GIFI).

• Income Tax Act, s. 15(2).