Financial Statements

Financial statements are simply reports which outline significant financial accounting details about your organization. There are three basic kinds of financial statements: an income statement, a balance sheet, and the cash flow statement. Together, they paint a clear picture of the health of your organization’s internal finances. Let’s learn more about how to prepare financial statements in order to get started with your own business.

What exactly is a financial statement? In general, it is an itemized account of all the different payments you made to or received from a single entity. For example, if you sold 100 units of stock to an entity, then that entity would be reporting its income or profit on its inventory. The gross profit would also be reported under the appropriate category of an income statement. This report shows what the entity made in total and the net gain or loss would be if the transaction was closed.

Income statements, balancing sheets, and cash flow statements are included as part of your yearly report for your small business. The annual report is prepared based on your records for the previous year. All transactions for the current year are reflected in the financial statements. This is why annual reports are so important; they allow you to accurately track and report all the relevant financial numbers for your small business.

How do you prepare financial statements? Preparation involves compiling the pertinent financial data, including all your paid-in capital, paid-in accounts, reserves, short-term debts, inventory, and assets, among others. Your financial statements will show any changes in property or equipment, inventory, accounts receivable, accounts payable, and net income. An accountant or financial adviser can help you complete these forms and give you detailed advice about how to present your financial information.

Before you prepare financial statements, a company must prepare its balance sheet. The balance sheet is a summary of all its financial transactions; therefore, it is referred to as the “balancesheet.” The balance sheet must report the current balance as well as the prior period covered. All revenues and expenses must be reported, including a line drawing of the income statement so that the purpose can be determined. In general, all revenues and expenses are reported in the income statement.

All major companies follow the American Institute of Certified Public Accountants (AICPA) Standards for Financial Reporting. These standards ensure that your financial statements fairly represent the status of the company. The most basic financial statements are prepared in the accounting office. However, if you operate a diverse business with local, state, or federal activities, you might have separate accounting offices at the different locations. Therefore, your financial statements will be prepared at the place where the transactions took place.

A company should prepare its financial statements on a timely basis. This will facilitate the preparation of the company’s annual report to the shareholders. The annual report is generally prepared by the accountant or a certified public accountant. An accountant may require you to prepare the financial statements within a reasonable time or provide additional advice on a timely basis. The accountant usually prepares the financial statements in tandem with the income statement of earnings.

Generally, the accountant will divide the assets, liabilities, revenue and expenses into two categories: assets, liabilities, and net worth. When preparing financial statements, an accountant will also include inventory and gross selling, cost, and gross operating costs. The net book value of an inventory is the total value of all the property and equipment depreciated either on a capital basis or on an accounts receivable basis. A positive cash flow indicator is the net asset value; otherwise, a negative cash flow indicator indicates incurring debts. Net worth refers to the market value of the company’s equity; accordingly, when a company reports its net worth or assets, it would report its stock, property, and equipment values.