What is involved in financial statement preparation?
It may not seem like it, but financial statements preparation takes a lot of work and is very important to the success of your business. Partners, investors, auditors, accountants, and managers all look to financial statements to give them a sign of the financial health of the company. There are four basic financial statements and they all rely on accurate information in the accounting journal and general ledger. The information from the accounting journal and the general ledger is used to create the four financial statements:
- Income statement
- Statement of retained earnings
- Balance Sheet
- Statement of Cash flow
The statements are put together in that order because information from the previous statement acts as a building block to help develop the next.
First up is the income statement (also known as Profit & Loss statement or P&L). The income statement reports on a company’s income, expenses, and profits over a period of time. These include sales and various expenses acquired.
The next statement that gets prepared it the statement of retained earnings. The statement of retained earnings explains the amount of profit held on to during the reported period. This is prepared after the income statement because it requires the net profit or loss information to calculate correctly.
Next up is the balance sheet (also referred to as financial condition) that reports on the assets, liabilities, and owner’s equity at any given point in time. The entries on the balance sheet come from the general ledger.
Finally, the statement of cash flow can be prepared. The cashflow statement reports on your company’s cash flow activities and shows your financial position on a cash basis. The Statement of Cash Flows has to be prepared last because it takes information from all three previous financial statements.
Having accurate and well prepared information helps you make important business decisions. Bankers look at the information to help them decide if they should give your company a loan and investors use the information to see if your business is a good investment. Vendors will even use the information to decide whether or not to grant you credit.
Financial statements aren’t exactly fun to prepare, but they are the building blocks to a successful business.