The corporate balance sheet is a snap shot in time of the net worth of a corporation. For tax purposes this snapshot is as of the fiscal year-end of the corporation. Financial Statements, which follow Generally accepted Accounting Principles (GAAP) could vary substantially in the format they are presented by the accountant. For this reason, the Canadian Income Tax Act requires that financial statements for the T2 tax return follow a specific format.
It records the assets, liabilities and shareholder(s) equity as at a specific point in time, such as December 31st of any given year. Corporate tax law requires that a corporation’s financial position be reported as an accumulation of equity over the life span of the corporation’s existence. This differs from reporting requirements of a sole-proprietorship as only the Profit and Loss are recorded on a T1 return.
The balance sheet codifies the universal accounting equation, namely:
(SHAREHOLDER) EQUITY = ASSETS – LIABILITIES
ASSETS = LIABILITIES + (SHAREHOLDER) EQUITY
The first section reported on the balance sheet includes all assets. Assets are resources owned by a company measurable in dollars that have future economic value for that particular company. Examples of assets are; cash, investments, inventory, supplies, buildings, land, vehicles and equipment. Amortization of capital property is reported so that the value of each asset is reported accurately as of the specific date of the balance sheet.
The second section of the corporate balance sheet includes all liabilities of the company. This section reports all of the amounts owed to creditors for past transactions. Amounts received in advance for services to be provided in the future are also recorded as liabilities. A monetary amount received in advance would be recorded as cash (Asset) and a reserve would be taken to defer the payment as unearned revenues or as a customer deposit.
Liability accounts would include: accounts payable, salaries payable, income taxes payable, customer deposits, interest payable. Note the word payable in most of the description of each.
Is it current or long term liability? One year is the defined limit for a short-term liability. If the payback time frame is over a year for any liability, it would be classified as a long-term liability.
The third and final portion of the balance sheet equation is where shareholder(s) equity is recorded. Equity can be defined in three different areas such as, Paid-In Capital, Retained Earnings of the Corporation and Share Capital or Stated Capital.
Understanding the corporate balance sheet for purposes of the T2 preparation is important for a number of reasons. For instance:
Schedule 100 (GIFI) requires that a balance sheet for the corporation be properly recorded on the corporate T2 Return.
Schedule 100 (S100) is used to record the corporation balance sheet in a format for income tax purposes. S100 records the Assets, Liabilities, Equity and Retained Earnings of the corporation as of the fiscal year end and, like all balance sheets, has to balance in order to be accepted by Canada Revenue Agency (CRA). Each entry has to be recorded using the proper GIFI Code. This schedule is cumulative over the entire course of the corporation’s existence. The prior fiscal year’s Balance Sheet is the starting point of data entry and is adjusted by the current year’s financial activity to show the current year’s Retained Earnings as at the end of the fiscal year.
GIFI is an acronym for General Index of Financial Information and is in essence a series of account codes developed by CRA to provide a standardization of financial statement reporting. Each General Ledger (GL) account used in a corporation’s book of account will also have a GIFI code assigned to it that accurately reflects the nature of the account makeup.
Why does CRA require this? The GIFI codes actually have a multi-functional use;
Ensuring that the GIFI code assigned to the general ledger (GL) account is accurate will assist the tax specialist in Audit Defense. For example, if “Salaries and Wages” were marked with “GIFI code 9220 – Utilities” in error, a CRA audit is a definite possibility even though there is no effect on the net income reported on the tax return. The ITA (Canada) specifies that all T2 tax returns must be filed electronically and include GIFI codes, therefore it is important that the codes be reviewed and assigned to the specific GL accounts carefully and accurately.
We can help you understand your Corporate Balance Sheet for your Small Business in White Rock or Surrey, BC. Here at Green Quarter Consulting - Accounting and Bookkeeping Services for Small Businesses in White Rock South Surrey, Langley and Surrey BC, we navigate Small Business Owners with determining your Assets, Liabilities, Equity and how they relate to your business strategy.