How to Prepare Financial Statements
How to Prepare Financial Statements
Within every business you can find their financial statements. A financial statement is exactly what it sounds like, a statement of someone's financial status. Financial statements show how much money is going into a business, how much money is coming out of a business and to what accounts that money is going to. An account is a statement of financial transactions that happens to a particular area of the business, for example, a cash account records all the transactions that happen with cash in the business. It records each time cash is received by a business or each time the business gives cash out.
There are three main financial statements: income statements, statement of retained earnings, and balance sheet. The income statement records the revenues and expenses of a business over a certain period of time. Revenue is the entire amount of income, which is the money coming into the business, before any deductions, such as taxes, is taken out. An expense is outflow of money from the business to another for its goods or services. Rent is an example of an expense. To rent a certain building for the business to operate in is an expense to that business because the business needs to give money out to the renter to use the building. Other examples of expenses to businesses are salaries expense, utilities expense, supplies expense and interest expense.
After determining the businesses revenues and expenses, you find the net income of the business. The net income is the earnings of the business or its profit. To find this you take the total revenue and subtract from it the total expenses. This number shows how profitable the business has been over a certain period of time. If the revenue is greater than the expenses, then the business has produced a profit. If the expenses exceed the revenue, however, the business has experienced a loss and need to find a way to reduce their expenses and increase their revenue.
Once you have found the business' net income, you move onto the statement of retained earnings. Retained earnings are the amount of money retained by the company to reinvest into its business or to pay off any debts. To calculate this you take the retained earnings from the previous period and add to it the net income. If there is a loss, however, you subtract the net loss from the previous periods retained earnings. Next, you subtract from that number any dividends. Dividends are payments by the business to its shareholders. Once you have that number, it is your retained earnings for that period and will be used on the next period's statement of retained earnings.
After completing the stamen of retained earnings, you can prepare your balance sheet. A balance sheet is made up of the company's assets, liabilities and owners' equity. An asset is anything that the company owns that has value. It is usually something that can be sold by the company or bought by the company to make products or provide services that the company can sell. Examples of assets include cash, supplies, inventory and accounts receivable. There are also two types of assets, current and noncurrent assets. Current assets are assets that the company expects to sell within one year. Noncurrent assets are assets that they expect to take longer than one year to sell or fixed assets, which are assets that aren't available for sale. Examples of fixed assets include supplies, equipment, or furniture. A liability is the amount of money that the business owes others. A very common liability is accounts payable. Liabilities, too, have two different types: current and noncurrent. Like assets, current liabilities are expected to be paid off in one year and noncurrent liabilities are expected to take longer than one year to pay off. This account is usually made up of all purchases made by the company through credit. They have to good from the supplier, but they still owe them the money. Lastly is owners' equity. Owners' equity is the capital, or net worth, of a business. It's the money that is left over after all assets are sold and all liabilities are paid off. This money belongs to the owner.
Once you have determined all the assets, liabilities and owners' equity of the business, you can complete your balance sheet. You do this by making sure the assets equal the liabilities plus the owners' equity. If they do not match, you have made an error in journalizing your transactions. To set up the balance sheet list your assets on the left side, current assets and then noncurrent assets, and liabilities and owners' equity go on the right side. Add up each one of their balances and you the left total should match the right total.
Financial statements are a very important way to keep track of a business' financial status. They help show the business if they are making a profit or a loss. They also help the business know if they are journalizing their transactions correctly. Without financial statements, it is hard for a business to function.
How to Prepare Financial Statements
By: Shannon McGinty
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