DomowCPA; Accounting Services - Financial Statement Preparation

4 Steps Needed to Prepare Financial Statements

Financial Statement Preparation

Step 1: Chart of Accounts

Your chart of accounts is the list of the accounts in your accounting system. Many businesses use accounting software like QuickBooks to manage their finances. Before you begin to prepare the financial statements, you will first need to create the chart of accounts. If you have already created one, then great, you can skip this step. If not, you will need to create one for the financial statements. The chart of accounts can be as simple or as complex as you choose. It is best if it is simple and easy to track your assets, liabilities, income and expenses.

Step 2: Financial Statements

The financial statements are broken down into three documents: the balance sheet, the Profit & Loss Statement, and the Statement of Cash Flows.

Balance Sheet

The balance sheet is a summary of the assets, liabilities, and equity of the company. It is important for the balance sheet to report positive equity. This shows that the company is self-funding its operations rather than surviving on borrowing from other. Additionally positive equity indicates that the company’s owner has their own “skin-in-the-game” and is more likely to be committed to the success of the company as they have more to lose.

Profit & Loss Statement

The profit and loss statement shows the revenue earned from customers, cost of sales, and operating expenses. The operating expense items on the profit and loss statement are items that are directly tied to the day to day operations of the business. Cost of sales is the amount of money spent on goods sold.

Statement of Cash Flows

Considered by many as the most important part of the overall financial statement package as it connects the Balance Sheet and Profit & Loss Statement. The statement of cash flows shows how the changes in balance sheet accounts and income affect cash and cash equivalents further breaking the analysis down in the activities of operating, investing and financing. Unlike the Balance Sheet and Profit & Loss Statement which are relatively easy for a business owner to prepare, the Statement of Cash Flows is substantially more complex and should be prepared by a professional to gain the most benefit from the statement.

Step 3: Add Accounts

You must make sure that as you record transactions in your accounting system, they are recorded to the proper accounts. For example, if you are preparing financial statements, your activity should not just be recorded to general income or expense accounts. Your activity should be recorded to specific expense (i.e. advertising, insurance, office, and supplies) or revenue (i.e. sales, interest and dividends, services) accounts. However, an easy trap to fall into is adding to many accounts, for example you would want an account for office supplies but it is not necessary to have subaccounts for every office supply provider a company uses. When you check your accounts, you should make sure that expenses are in the proper accounts, and revenues are recorded to their Yproper accounts.

Step 4: Review and Check your Records

Now that you are done recording transactions, it is time to review your accounts. As you review your transactions, you must make sure that you have recorded all transactions correctly. It is a good idea to open your books each month and go through all of your transactions to make sure they are recorded correctly. If you miss transactions, or if you record a transaction in the wrong account, you will need to correct it.
Financial statements are a very fundamental part of accounting. They provide great insight into the financial health, viability, and profitability of the business. Financial statement preparation gives you everything you need to prepare your numbers accurately so when it comes time for review there is nothing more to be done except sign off on the documents provided by Adam M. Domow CPA, your trusted CPA firm.
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