Steps to prepare a Financial Statement

Preparing a financial statement is important and one of the final steps in the accounting cycle. A Financial statement is like a performance sheet for a company, and it shows how well a company has performed over the year by the numbers. A financial statement has to be carefully prepared in a set sequence that has to be followed as the information in one is linked to the next one. Four steps are involved in preparing the financial statement, and this is better explained below.

Income Statement: The income statement is the first financial statement that is prepared at the end of the accounting cycle. The income statement reports the company’s income and revenue for the year including net income, which is revenue less expenses. There are two methods to prepare an income statement; the Single-Step method is used by small companies with straightforward finances and the Multi-Step method is preferred by companies needing more detailed financial statements.

Prepare the Statement of Retained Earnings: After the net profit or loss has been calculated, the Statement of Retained Earnings is prepared. It shows the retained earnings at the beginning and end of the accounting period along with showing the distribution of profit between retained earnings and dividends. Income that is retained by the company to be reinvested instead of being paid out as dividends to stockholders forms the Statement of Retained earnings.

Balance Sheet: A balance sheet sums up an organization’s assets, liabilities and shareholder equity at a particular point of time. It is a summarization of an organization’s overall financial position. The entries on the balance sheet come from the general ledger and the format mirrors the accounting equation. The last line of the balance sheet gives the total amount of liabilities and equities, which must be equal to the total assets on hand.

Prepare the Statement of Cash Flow: The statement of cash flow clarifies the reasons for changes in the cash balance, showing sources and uses of cash in the operating, financing and investing activities of an organization. An organization’s financial stability and its ability to pay its creditors are measured against the statement of cash flows.

Meticulously preparing a Financial Statement is essential as it acts as a scorecard that tells the story of the company in detail. By interpreting it correctly, a Financial Statement really can give you the big picture, so those that prepare it have to know how to go about doing it correctly to give a complete insight into a company’s activities.

Financial Accounting- Know your organizational status!

What is ‘Financial Accounting’?

 The aim of any business is to earn profit and remain solvent. In a nutshell, accounting helps the company to keep track of its profits or losses.

‘Financial Accounting’ is the cycle of recording, summarizing and reporting the myriad transactions from a business, so as to provide an accurate picture of its financial position and performance. The primary objective of financial accounting is the preparation of financial statements – including the balance sheet, income statement and cash flow statement – that encapsulate the company’s operating performance over a particular period and financial position at a specific point in time.

These statements which are generally prepared quarterly and annually, and in accordance with Generally Accepted Accounting Principles (GAAP) – are aimed at external parties including investors, creditors, regulators and tax authorities.

What is an Accounting cycle?

 Once a business transaction occurs, a sequence of activities identify and analyze the transaction and make journal entries etc. Because this process repeats over transactions and accounting periods it is referred to as the Accounting cycle.

Objectives of Financial Accounting

  • Systematic recording of transactions:To systematically record the financial aspects of business transactions (i.e. book-keeping).
  • Ascertaining result of recorded transactions: To prepare a profit and loss statement to know the result of business operations for a particular period of time. This helps the management and stakeholders to take rational decisions.
  • Ascertaining financial position of business: To prepare a financial position statement of assets and liabilities of the business at a particular point of time in order to  ascertain the financial health of the business.
  • Providing information to the users for rational decision-making: As a ‘language of business’, Accountancy communicates the financial result of an enterprise to various stakeholders by means of financial statements.
  • To know the solvency position:  It conveys a clear picture of the company’s ability to meet its liabilities in the short run (liquidity position) and also in the long-run (solvency position) as and when due.

What is the difference between financial and managerial accounting?

Financial accounting is aimed at providing information to parties outside the organization, whereas Managerial accounting information is aimed at helping managers within the organization make decisions.