Things You'll Need:
- Financial statements
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Step 1
Separate the business owner's personal transactions from the business.
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Step 2
Record all economic activity, including cash transactions, in U.S. dollars only. Ignore inflation and effects on the dollar value over time.
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Step 3
Estimate amounts of income relevant to the time period for 3 months ending at March 31. For example, property taxes will not be known until December of the same year. You will have to estimate what your taxes will be. Ensure that you display the time period in the header of each income statement. The time period will be 1 week ending in the month indicated on the statement, 1 month ending on the month indicated on the statement, 3 months ending on the statement or 1 year to the month indicated on the statement.
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Step 4
Locate the historical cost amounts on your company's income statement. Here you will interpret the costs as cash spent regardless of the time when an item or service was purchased.
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Step 5
Determine the value of long-term assets. Aside from bonds and stocks, assets do not tell you how much a company will earn by selling the assets. Contact an appraiser to determine the value of a company's long-term assets.
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Step 6
Use the going concern principle to determine if a company will continue to exist. Accountants are required to disclose information regarding a company that will not last long. Utilizing the going concern principle, a company can defer its prepaid expenses for later accounting periods.
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Step 7
Match expenses with revenues. Companies use the matching principle of accounting to report commissions upon the time sales were made, rather than reporting when commissions were paid.
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Step 8
Learn the revenue recognition principle of accounting. Report all earnings regardless if your company receives no money at the time of recording.
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Step 9
Utilize the principle of materiality. If an amount of revenue is insignificant, you may disregard the principles of accounting. To determine if revenue is insignificant, consult a professional accountant. Only an experienced accountant can decide which principles may be disregarded.
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Step 10
Use the principle of conservatism to decide between more than one way to report an item. Choose the method that will result in less net income. Consult an experienced accountant to determine which method is best.
