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.
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
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.