How to Prepare Financial Statements


The preparation of financial statements is easy once you've mastered the accounting elements and know the different accounts that comprise them. Most businesses today have automated accounting systems where financial statements can be prepared with a few clicks of a button.

However, as accountants we need to really understand how are made. This way, we will be able to interpret and appreciate financial statements better.

What's in Here

In this chapter, we will continue the illustration from 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.

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.

Components of Financial Statements

A complete set of financial statements comprises: (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.

Image link to Income Statement Preparation
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.
Image link to Statement of Equity Preparation
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.
Image link to Balance Sheet Preparation
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.
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