Financial statements are the core of a company’s activities. These reports are prepared by an organization’s management from time to time to devise a clear financial picture of the business and forecast its performance for the future. In fact, they are the main source of information for the outsiders such as investors and creditors, planning to work for you or partner with you. Hence, special attention has to be paid on the accuracy, reliability, and relevance of the figures on them.
The process of creating financial statements is an art and a science that actually starts with bookkeeping. Bookkeeping is the systematic recording and organizing of day-to-day transactions to serves as a basis of your yearly financial plans. It can be done either manually or with the help of bookkeeping software. So, if you have been lately struggling with outdated books or wish to avoid any lagging, develop a habit of updating them daily and take a note of the following elements –
- Revenues & Expenses
- Gains & Losses
- Assets & Liabilities
- Distribution to Owners
- Comprehensive Income
After you have the exact figures, you are ready to put these amounts onto properly formatted financial statements. The four basic financial statements you need to work on are Income Statement, Statement of Retained Earnings, Balance Sheet, and Cash Flow Statement.
Also known as Profit or Loss Statement, this report enlists your incomes, expenses, and net income (or loss). It shows how much revenue a company earned or lost over a specific time.
To create this statement, you need to sum up all types of earnings. Next, you summarize all the expenditures. In the end, total expenditures are subtracted from total income, and there you have your net income/loss.
Statement of Retained Earnings
Retained earnings is the amount of net income left over for the business after paying out dividends to its shareholders. You can use this format to create your statement of retained earnings:
Beginning Balance, Retained Earnings (from the adjusted trial balance)
Plus: Net Income
Less: Dividends to Shareholders or Distributions to Owners
Equals: Remaining Balance of Retained Earnings (adjusted on the Balance Sheet under Owners’ Equity)
It is a financial snapshot of your business at a certain time and date. It is prepared after adjusting all journal entries and includes your assets, liabilities, and equity figures.
This report is prepared based on the accounting equation (assets = liabilities + owners’ equity). Assets are listed on one side, and your liabilities on another. Then the difference between the two is calculated giving you your net worth for the year.
Cash Flow Statement
As the name suggests, cash flow statements report a company’s inflows and outflows of cash. The motive of this statement is to explain the difference between the net income and the change in cash over the same period, not at a point in time.
It reviews three major activities of a business: operating, investing activities, and financing. And, it ends with the final amount of increased or decreased cash during a specific duration.