Why are Balance Sheets and Profit & Loss Statements so important?

What is a Balance Sheet?

A Balance Sheet is one of the main financial statements prepared for any company. It reports the company's assets, liabilities and shareholders' equity.

What is a Profit & Loss (Income) Statement?

A Profit & Loss or Income Statement is another core financial statement prepared for a company. It is usually comprised of the company’s revenues, expenses, gains, and losses. All items of receipts and payments/disbursements are reported, regardless of their cash or non-cash nature.

Why are these statements important?

The Balance Sheet provides a ‘snapshot’ of the company’s situation at any given time, allowing the small-business owner/manager a get a glimpse into how proportionate the company’s assets are in relation to its liabilities and equity (higher is usually, but not always, better!).

Liabilities should generally be undertaken to develop assets, which should then help in generating equity (or earnings) within your business. The growth of the company’s assets and equity are strong indicators of a good business model. Determining Key Performance Indicators (KPIs) for your business, and establishing financial ratios to monitor the performance of your Balance Sheet components can help provide a quick reference about the state of your business at any given time.

Also check out our blog posts on How to Determine Key Performance Indicators, and 5 Key Financial Ratios Every Small Business Should Monitor.

On the other hand, the Profit & Loss Statement indicates how much profit or loss the company is generating over a period of time. Small-business owners/managers compensation and dividends/bonuses are directly related to the overall performance of the company.

If your company has more than one shareholder, higher profits mean more dividends and higher values of each share. Since Income Statements are not cash-centric, they are a good indicator of prior year performance, which could not only impact the business decisions you make today, but also the budget you set for the upcoming year.

Schedule a meeting

At Arria CPA, we frequently work with our clients to prepare timely Balance Sheets and Profit & Loss Statements as part of our Compilation Financial Statements package (which also includes preparing and filing the associated annual corporate (T2) tax returns).

We also schedule a year-end review meeting to discuss your business’ performance and activities during the year, allowing you to ask questions and clarify any confusing items. In addition, we provide a detailed management letter outlining your upcoming tax liability and filing responsibilities, and any other concerns identified during the financial statement compilation process.

Contact us for a no-obligation consultation to learn more about how Arria CPA can help prepare Balance Sheets and Profit & Loss Statements for your business this upcoming year-end.

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Disclaimer: Please note that this is only a brief summary and is based on current accounting regulations and tax law interpretations. Accounting regulations and tax laws are subject to continual review and change, so should the facts provided to us be inaccurate or incomplete, or should the law or its interpretation change, our summary may be inappropriate for your uses. This article is written for educational purposes only, and as such, we recommend you consult a professional before making an accounting or tax decision. If you have any concerns, or would like further consultation regarding this matter, please contact us.