“Accounting is the language of business.”- Warren Buffet

Accounting comes from the word ‘accountability’. Financial accountability is instrumental for the success of any start-up founder; in other words, the absence of accounting means the absence of accountability. We may complain about how tedious or boring accounting is and feel like hiring an accountant obviates the need to get into it ourselves, but getting comfortable with numbers is actually the best gift you could ever give your start-up!

Accounting for your start-up can be of three types:
1. Financial Accounting
2. Managerial Accounting
3. Tax Accounting

In this blog, we’re going to delve deeper into Financial Accounting.

Tips for setting up efficient Bookkeeping Systems for start-ups in Canada

Before getting into the nitty-gritty, let’s discuss some bookkeeping best practices that don’t take much effort to set up but provide multi-fold benefits to the smooth running of accounts management. Accounts don’t just have one purpose; it is required for: 

  • Recording financial transactions
  • Tax planning
  • Payroll
  • Expense Management
  • Financial Analysis

It helps you clearly answer questions like is your business profitable? Who owes you money? Which products should you focus on? How much cash does your business have access to right now? Are you paying taxes on time and keeping the CRA (Canada Revenue Agency) happy? Are you legitimately claiming tax deductions? Can your business obtain financing?

Here are a few systems you can put in place for your start-up right away:

  1. Separate Business from Personal: Get a separate bank account and credit card for your business. Your future self will thank you for saving them from a lot of drama! 
  2. Invest in Bookkeeping and Accounting Software early on: Softwares have made tracking expenses, creating financial statements, sending invoices, child’s play. Quickbooks, Pennylane, Freebe, Dougs, Axonaut are just a few examples of subscription-based softwares you can implement today. (PS- If you are a BHive incubated start-up, you can get exclusive deals with them!) 
  3. Plan, plan, plan in advance: Don’t wait till the last minute – set budget-planning dates, plan your taxes, plan for major expenses.
  4. Set systems: Create tracking systems for inventory, simple approval processes for expenses or reimbursements. Automated features in softwares can make this pretty simple!
  5. Hire a local Accountant or CPA:  Hire the right experts on time and plan your accounting calendar in advance.

Accounting Regulations you must know as a Start-Up in Canada

Accounting is not just about numbers on an excel sheet; as a start-up, this is your backbone. Any decision, growth opportunity, strategy, must be vetted with numbers to ensure a financially fruitful direction. It’s no secret that any stakeholder, investor, bank, will always look at the bottom line first. So, not getting your accounting right, can cost you – big time.
Let’s dive in. This crash course should familiarise you with Canadian accounting basics and empower you to understand your numbers! (and hire, manage, and review a CPA’s work!)

Canadian Accounting Standards

Accounting has standards that are the mandated requirements for financial reporting and generally accepted accounting principles (GAAP). They govern how transactions and other events should be recognized, measured, presented, and disclosed in financial statements. 

The Accounting Standards Board of the Canadian Institute of Chartered Accountants (AcSB) establishes accounting and financial information standards in Canada. 

As of 2011, all publicly traded companies in Canada have to use IFRS (previously known as GAAP) to prepare their financial statements. Private companies can use IFRS or a new set of standards called Accounting Standard for Private Enterprises (ASPE).

A CPA or Accountant working in Canada can help you align your accounting systems with these guidelines.

Canadian Tax Year for Corporations

The tax year begins on 1 January and finishes on 31 December of the same year. For a new company, the day they started activities can also be the start of the tax year. For example: If your company activities began on 1 June, you can set your tax year from 1 June to 31 May. A taxation year cannot exceed 53 weeks. It is important to note that once selected, your tax year cannot be altered without approval from the tax authorities.

Canadian Publication Requirements

The guidelines in the CPA handbook apply to all Canadian companies. Specific regulations may apply to insurance companies, banks, and public organizations.
Reporting of financial statements and balance sheets are to be done every year. Companies listed on the stock exchange are required to provide quarterly financial reports.

Professional Accountancy Bodies of Canada

CICA , Chartered Professional Accountants of Canada
CPAB , Canadian Public Accountability Board

Certification and Auditing

Companies are required to seek a statutory auditor to conduct an audit of the financial health of their organization every year.

Key Financial Statements for Canadian Start-Ups

Financial Accounting is the process of recording, summarising, and reporting a company’s business transactions through financial statements. In Canada, this generally includes:

  • Income statement
  • Balance sheet
  • Cash flow statement
  • Statement of retained earnings

Source: BDC

Common Accounting and Finance Jargon for Canadian Start-Up Entrepreneurs

Getting lost in the tables? We’ve also compiled a handy guide with 30+ important accounting and finance terms you must know. These are segregated by financial statements. By the end of this section, you’ll be able to talk balance sheets, working capital, and current ratios with confidence! Ready to demystify accounting terminology?

Income Statement:

An income statement (also known as a Profit and Loss statement of earnings statement) is a financial statement that calculates net income (or profit) by looking at a business’s revenues, less expenses.

Definitions of accounting terms in an Income Statement: 

  1. Revenue: Any money made from sales of the primary activity of your business. 
  2. Cost of Goods Sold (COGS)/ Cost of Sales: Cost of Goods Sold are the expenses that directly relate to the creation of a product or service. Raw materials, labour, etc but it would not include indirect expenses such as marketing, admin, etc. 
  3. Gross Profit: Also called gross margin/contributing margin is calculated as revenue less COGS. 
  4. Operating Expense: Also called S, G&A (Selling, General and Administrative), as the name suggests, are indirect expenses. 
  5. Operating Income: Gross Profit minus Operating expenses gives us Operating Income. 
  6. Non-Operating Income: Gains and Losses from any other activities apart from the core, like dividends, interest, and asset sale. 
  1. Earnings Before Tax (EBT): The amount left after expenses and losses are subtracted from all revenue and gains, but before taxes is EBT. 
  2. Net Income: (Or Net Profit) is the amount left after income taxes are subtracted from EBT. 

Image Source: BDC

Balance Sheet:

A Balance Sheet is a financial statement that reports all of a company’s assets, liabilities, and equity at one point in time. It provides a clear picture of what you own and owe.

Definitions of accounting terms in a Balance Sheet: 

  1. Current Assets: Assets, such as cash, account receivable and inventories, likely to be turned into cash within 1 year.
  2. Fixed Assets: Assets, such as buildings, machinery and land, that are unlikely to be turned into cash or sold within 1 year.
  3. Current Liabilities: Amounts owed, such as accounts payable, wages and taxes, that will likely be paid within 1 year.
  4. Long Term Liabilities: The amounts owed which will not be payable within 1 year, like mortgages and long-term loans.
  5. Shareholder’s Equity: The accumulated profits that have not been distributed.

Source: BDC

Cash Flow Statement:

A Cash Flow statement is a financial statement that describes the inflow and outflow of cash in a business. Net Cash flow can be positive or negative. Positive means that outflow is lesser than inflow.

Definitions of accounting terms in a Cash Flow Statement: 

  1. Cost of Goods Sold (COGS)/ Cost of Sales: Cost of Goods Sold are the expenses that directly relate to the creation of a product or service. Raw materials, labour, etc but it would not include indirect expenses such as marketing, admin, etc.  
  2. Operating Expense: Also called S,G&A (Selling, General and Administrative), as the name suggests, are indirect expenses. 
  3. Earnings Before Tax (EBT): The amount left after expenses and losses are subtracted from all revenue and gains, but before taxes is EBT. 
  4. Net Profit is the amount left after taxes are subtracted from EBT. 

Image Source: BDC

Statement of Retained Earnings:

A statement of retained earnings is a financial document that shows the accumulated profit of a company after paying dividends to shareholders, and kept in the company since its inception.

Source: BDC

Other General Accounting/Financial Terms for Start-Up Entrepreneurs in Canada

  1. Accounting Period: An accounting period is a specific length of time mentioned in financial statements like an Income Statement, Balance Sheet, Statement of Cash Flows, or Statement of Retained Earnings. 
  2. Accrual Basis: A type of financial accounting, where all transactions (costs and sales) are recorded when it actually occurs
  3. Allocation:  The process of assigning funds to an account or time period.
  4. Assets: All items of value owned by a business or individual, such as Cash, Inventories, Land, and Buildings.
  5. Balance Sheet: All assets, liabilities and owner’s equity are displayed on the same statement.
  6. Bank Reconciliation: Comparing your records and identifying any differences between your bookkeeping and bank statements. Reasons they may differ include; banks making account updates at the end of the month, uncashed cheques, and deposits in transit. 
  7. Bookkeeping: Keeping track of all the company’s financial transactions
  8. Break-even: Calculating the break-even point represents the sales volume at which total revenue equals total costs. 
  9. Business or Legal Identity: This is the legal structure or type, of a business. In Canada, there are four types of business structures: sole proprietorship, partnerships, corporations and cooperatives.
  10. Cash Basis: A type of financial accounting, where all transactions (costs and sales) are recorded when cash is transferred or received
  11. Cash Flow Statement: Displays the outcome of different cash transactions in the organization; operating, investing and financing
  12. CPA (Certified Public Accountant): In Canada, CPA is the professional designation for an accountant who has passed the CPA exam. 
  13. CRA: Canadian Revenue Agency – the government organization responsible for all taxes in Canada
  14. Credit: A bookkeeping entry that either decreases assets or increases liabilities and equity on a company’s balance sheet.
  15. Current Ratio: This ratio measures a business’s capability to settle immediate debts by dividing its current assets by its current liabilities. Current Assets/Current Liabilities.
  16. Debit:  A bookkeeping entry that either increases assets or expenses or decreases a liability or equity account.
  17. Debt Capital: Capital that is borrowed to operate a business, either from oneself, individuals, or financial institutions.
  18. Debt-to-Equity Ratio: This ratio measures how much debt your business has in relation to the amount of equity. This can be high or low; a high level of debt:equity means higher risk for lenders.  
  19. Equity Capital: This represents money invested in the business by owners.
  20. Financial Statements: All the financial background information on a business for the fiscal year; there are 5 total –
    1. Balance Sheet/Statement of Financial Position
    2. Income Statement
    3. Cash Flow Statement
    4. Statement of Changes in Shareholder Equity
    5. Statement of Comprehensive Income
  21. Fiscal year: The past year of business operations.
  22. Fixed Costs: Costs of doing business that are not impacted by the level of sales, like rent, salaries and utility bills.
  23. General Ledger: A General Ledger is the complete record of a company’s financial transactions. It is the main reference to prepare all of the Financial Statements, like Cash Flow statements, Balance Sheets and Income Statements. 
  24. IFRS: International Financial Reporting Standards. 
  25. Income Statement: One of the key financial statements, displays all the expenses and revenue relating to business activities.
  26. Liability: All debts that a company is yet to pay. Liabilities include Accounts Payable, Payroll, Loans.
  27. Liquidity: A term that describes how readily assets can be converted into cash.
  28. Net Worth: This indicates a business owner’s equity in a business, calculated by deducting total liabilities from total assets. Personal Assets – Personal Liabilities
  29. Operating Loan: A short-term loan that finances working capital needs – accounts receivable and inventory.
  30. Owner’s Equity: All the assets belonging to shareholders.
  31. Proof of Payment: Proof that a bill has been paid in part, or in whole and that there is no remaining balance.
  32. Reporting Standards: General guidelines all accountants follow to stay ethical and to be analyzed by external organizations (i.e. future investors)
  33. Statement of Changes in Shareholder Equity: Displays changes in the owner’s equity and sales/buybacks of shares.
  34. Statement of Comprehensive Income: An expanded Statement of Income, displays unrealized gains of capital and losses.
  35. Term Loan: A loan for a specified length of time (term) to finance the purchase of a fixed (or long-term) asset.
  36. Variable Cost: Costs that change with volume of sales. Variable costs increase with increased sales because they are an expense that is incurred in order to deliver the sale.
  37. Working Capital: This represents liquid assets available to a company to pay off its short-term debts and other obligations. A negative working capital suggests that a company will  have difficulty paying its bills in the near term.

You can find more Canada-specific accounting/financial terms in alphabetical order here. 

Starting up in Canada?

BHive is a start-up incubator in Brampton, Ontario. We offer international start-ups the tools, resources, and space to establish – and quickly scale – their businesses in Canada and North America. You can apply to our Global Entrepreneur Incubation Program right here!