Typically, a financial statement captures and communicates information on the financial activities of an organization in a particular period of time. This information is usually used by shareholders, managers and other relevant external parties to evaluate the performance of the organization for the period under evaluation. The financial statement is also used to predict the future performance of the organization.

As a business owner, preparing a Financial Statement is probably the most important stage in the accounting cycle of your business.  The financial statements prepared for many small businesses comprise of a balance sheet and an income statement, usually these are prepared by an accountant but with the help of a cloud accounting software like Accounteer, you may be able to prepare your own financial statements.

Highlighted below are the different steps involved in developing a financial statement:

STEP 1

Get Yourself Organized:

The first step in preparing a financial statement for your organization is to get yourself properly organized. You can do these in two easy steps.

• Locate and sort all of your expense receipts by month. For effective expense records, have a habit of putting your expense receipts, by month, either in a folder or in an envelope, for easy storage and location afterwards.
• Attach all receipts to the related debit card or bank statement. This makes it easy to track how a particular expense was paid and when it was paid.

To be able to have an accurate financial statement, the following must be correctly recorded during the course of business. They are:

ASSETS

Assets include everything a company owns, such as cash, inventory, buildings, equipment, vehicles bank balance, investments, buildings, property, accounts receivable, warehouse supplies etc.

Assets can be divided into

Current assets:

Cash, bank balance, marketable securities, short-term investments, accounts receivable, prepaid expenses, and inventory, any assets that can be easily converted to cash within 12 months.

Non-Current Assets (Fixed Assets):

Real estate, plant, building equipment, furniture & fixtures, Land, machinery, office equipment, Vehicles, any assets that can be converted to cash from 1 year above. Intangible assets (trademarks, patents, copyrights, goodwill).

LIABILITIES

A company’s debts or financial obligations incurred during business operations.  Liabilities can be non-current and current liabilities.

Current liabilities are those debts that are payable within a year, such as a debt to suppliers, short term loans, accounts payable, wages, income taxes payable and accrued expenses, etc.

Non-current liabilities are typically payable over a period of time greater than one year. They could be a multi-year mortgage for office space, bonds, individual notes payable, contracts, pensions, etc.  

EQUITY

Equity is the net amount of funds invested in a business by its owners, plus any retained earnings. It can be represented with the accounting equation: Assets -Liabilities = Equity. Equity can also refer to the different types of securities available that can provide an ownership interest in a corporation. In this context, equity refers to common stock and preferred stock.

EXPENSE

An expense is a cost that occurs as part of a company’s operating activities during a specified accounting period. Expense also can be described as outflow of cash or other asset of value incurred during a particular accounting period. Example of Expense are

• Depreciation of fixed asset
• Insurance costs
• Legal fees
• Office supplies
• Property taxes
• Advertising
• Interest expense
• Wages
• Utility costs

Prepare Your Expense Sheet:

STEP 2

The next step in preparing your financial statement involves preparing the expenses template.
For example, the expense template below is a tabular format that has been created for easy record of your daily expense Date, Description, Receipt and Amount. The categories are determined by the Uniqueness of your business. 

categories.

Step 3

Preparing Statement of Financial Position

Statement of financial position (Balance Sheet), is a financial position of your business at a given date in time. It’s the list of assets, liabilities and the difference of the both is called owner’s equity or net worth. The accounting equation (assets = liabilities + owner’s equity) is the basis for statement of financial position.

Statement of financial position is prepared after all adjusting entries are made in the general journal, all journal entries have been posted to the general ledger, the general ledger accounts have been footed to arrive at the period end totals, and an adjusted trial balance is prepared from the general ledger amounts.

Statement of financial position are usually prepared by an accountant. But with the help of a cloud accounting software like Accounteer, you may be able to prepare your own financial statements.

Beta Sales Company

Statement of Financial (Balance Sheet)

February 31, 201X

Assets:
CURRENT ASSETS Cash & Short Term Investments
Short Term Receivables
Inventories
Other Current Assets
Total Current Assets
NONCURRENT ASSET Net Property, Plant & Equipment
Total Investments and Advances
Long Term Note Receivable
Intangible Assets
Other Assets
Total Assets
Liabilities:
CURRENT LIABILITIES Short Term Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Total Current Liabilities
NONCURRENT LIABILITIES Long Term Debt
Provision for Risks Charges
Deferred Tax Liabilities
Other Liabilities
Total Liabilities
Equity:
Non Equity Reserves
Preferred Stock Carrying Value
Total Common Equity
Total Shareholders Equity
Accumulated Minority Interest
Total Equity

Step 4

Preparing an Income Statement

An Income Statement (Profit and Loss statement) usually lists out your income, expenses and net income (or loss). The net income (or loss) is equal to your income minus your expenses. Your business’s tax return will use a variation of the income statement to determine your potentially taxable income. Income Statement is the financial statement that is prepared at the end of the accounting cycle, it reports the company’s revenue and expense for the year.

	N			N
Trading A/C			Trading A/C
Gross profit (transferred)	—–		Gross profit (transferred)	—–
Office and Administration Expenses:	—–		Interest received	—–
Salaries	—–		Rent received	—–
Rent, rates, taxes	—–		Discount received	—–
Postage & telegrams	—–		Dividend received	—–
Office electric charges	—–		Bad debts recovered	—–
Telephone charges	—–		Provision for discount on creditors	—–
Printing and stationary	—–		Miscellaneous revenue	—–
Selling and Distribution Expenses:			Net loss – transferred to capital A/C	—–
Carriage outward	—–
Advertisement	—–
Salesmen’s salaries	—–
Commission	—–
Insurance	—–
Traveling expenses	—–
Bad debts	—–
Packing expenses	—–
Financial and Other Expenses:
Depreciation	—–
Repair	—–
Audit fee	—–
Interest paid	—–
Commission paid	—–
Bank charges	—–
Legal charges	—–
Net profit – transferred to capital A/C	—–

Step 5

Prepare Closing Entries to Get the Books Ready for the Next Accounting Period

After your financial statements are prepared, you need to get your books ready for the next accounting period by clearing out the income and expense accounts in the general ledger and transferring the net income (or loss) to your owner’s equity account.

General Ledger Accounts

A general ledger is often prepared according to the following seven classifications.

• Assets (Cash, Accounts Receivable, Land, Equipment)
• Liabilities (Loans Payable, Accounts Payable, Bonds Payable)
• Stockholders’ equity (Common Stock, Retained Earnings)
• Operating revenues (Sales, Service Fees)
• Operating expenses (Salaries Expense, Rent Expense, Depreciation Expense)
• Non-operating revenues and gains (Investment Income, Gain on Disposal of Truck)
• Non-operating expenses and losses (Interest Expense, Loss on Disposal of Equipment)