Basic Accounting: Preparing Financial Statements

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Preparing financial statements can be challenging. Usually a general ledger shows many accounts that need to be placed in one of the financial statements -- usually the balance sheet and income statement. The individual trying to compile financial statements must have a basic knowledge of accounting, or all numbers in a page will be meaningless. At least the person should know what accounts report in the balance sheet, such as cash, receivables, inventories, payables and owner's equity.

Accounts

Financial statements are compiled out of accounts in the general ledger, also known as "chart of accounts." Each account used by the business reports in a financial statement -- not in detail, but more often in summary form with other accounts rolling up to a total presented in the financial statement. For example, the cash shown in the balance sheet can be made up of several cash accounts, not just one. When accounts are set up in computerized systems, they must be classified correctly so that the information on them is reported correctly in financial statements and other reporting needs.

Reconciliations

Reconciliations are often performed to be sure that the numbers in the financial reports are correct. They are usually done on balance sheet accounts, comparing the final numbers with outside sources, such as bank statements, or with sub-ledger reports. Before compiling financial reports, make sure that all proper reconciliations have been done, such as bank and investment monthly reconciliations; sub-ledger reconciliations where each module/sub-ledger agrees with the number in the general ledger account. For instance, aging accounts payable report should add up to the number in the accounts payable account in the general ledger.

Adjusting Entries

A step before creating financial statements is to review all accounts and make any adjustments on as-needed basis. If you're issuing accrual basis financial statements, you may need to review both income and expenses for timing differences, such as expenses and revenues not yet recognized along with any depreciation and amortization expenses. This process is not part of daily activities in an accounting department and is done at the end of a period.

Trial Balance

If you're using a manual accounting system, the last step before financial reports are compiled is to develop a trial balance with ending balances on all accounts in the general ledger. This is a three-column report listing all accounts on the left followed by a debit column and a credit column. Total debits should agree with total credits. If not, then there is an error that needs to be corrected before financial reports are developed. Many businesses have trial balances and adjusted trial balances, after adjusting entries.

In computerized systems, this step is not performed. Software programs can often prepare financial statements without this step. Usually a trial balance is compiled only to double-check issues in the financial statements.

Considerations

To compile financial statements, data from the trial balance or adjusted trial balance are added up and put in a format that is recognized as a balance sheet and income statement. If you're in doubt what that looks like, search online for financial statement examples. A balance sheet should balance, i.e. assets should equal liabilities plus owner's equity. An income statement, another standard financial report, shows revenues at the top and expenses at the bottom. If this is a retail operation or other business with inventory, the income statement would show cost of goods sold before expenses. The result of the income statement should flow into the balance sheet through equity.

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