How to Prepare Financial Statements

A complete set of financial statements comprise of: (1) an income statement, recent standards now require a statement of comprehensive income, (2) a statement of changes in equity, (3) a balance sheet, also known as statement of financial position, (4) a statement of cash flows, and (5) notes to financial statements or supplementary notes.

The preparation of financial statements is easy once you mastered the accounting elements and know the different accounts that comprise them. In fact, most businesses today have automated accounting systems. Financial statements can be prepared with a few clicks of a button.

However, as accountants, we need to know how they work and, you know, make it a part of our system. This way, we will also be able to understand and interpret financial statements better.

In this chapter, we will continue the illustration in the previous chapters and take a step-by-step approach in preparing the financial statements of the company we set up. We will work on the first three financial statements first.

The preparation of a statement of cash flows require a deeper understanding of accounting theories, hence will be discussed in advanced lessons. Notes to financial statements provide qualitative, quantitative, and financial information to supplement the financial statements.

Lesson 1

How to Prepare an Income Statement

An income statement contains information about a company's revenues and expenses and the resulting net income. Net income is computed by deducting all expenses from all revenues. Read more..
Lesson 2

How to Prepare a Statement of Owner's Equity

The "Statement of Owner's Equity", or "Statement of Changes in Owner's Equity", summarizes the items affecting the capital account of a sole proprietorship business. Read more..
Lesson 3

How to Make a Balance Sheet

The "Balance Sheet", also known as "Statement of Financial Position", shows a company's financial condition as of a certain date. Financial condition is presented by reporting how much assets the company owns, how much liabilities it owes to others, and its equity or capital. Read more..
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