How To Prepare Financial Statements
How To Prepare Financial Statements
THE FINANCIAL STATEMENT is the last step in an accounting cycle, which tells you where your business money is and how it got there. Financial statements are drown from trial balance, which is gotten from all the journal entries during a particular period.
In an organisation, there are numerous activities and transactions which takes place as time goes! all of these transactions (expenses, incomes) should be recorded at the moment where it is done in order to produce financial documents which will help determine the financial position of that organization 0.this will equally help Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about its future direction of the company’s stock price.
WHAT ARE FINACIAL STATEMENTS
Financial statements are written records that convey the business activities and the financial performance of a company .That is, the statements that are prepared at the end of a particular accounting period to measure the overall result of business activities and exhibit the financial position of a business.
Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield have stated in their Intermediate Accounting (10th edition): “Financial statements are the principal means through which financial information is communicated to those outside an enterprise. These statements provide the firm’s history quantified in money terms.
What are then these statements termed financial statements?
Components of financial statements:
The financial statements most frequently provided are;
- Income statements,
- The balance sheet
- The cash flow statement
Beside these, there is the statement of owner’s equity which is also very important.
THE INCOME STATEMENT
Also called the profit and loss account, the income statement is the summary of expenses and revenue of an enterprise over a given period of time.
Statements prepared from the accounting records of an organization are called financial statements.
In the modem business world, two statements are generally termed as financial statements.in short, this statement determines the net income or net loss of a business for a particular accounting period of time. It is important for a business to know whether they are making a profit or a loss in their various exchanges with their partners. There for, a company must have a mastery of its various expenses and and revenue in order to determine its results. The determination of this result is important for the company itself, its shareholders, the government and other stakeholders of the business. Thus this result is very necessary since it’s important for decision making.
What is the meaning of result? Result is simply the difference between the revenue and the expenses incurred in a business over a given period of time (when determined in the income statement). It is also the difference between assets and liabilities (when determined from the balance sheet).
The main source of income of a business concern is sales, and for the profiteering service-oriented organization is the income received from service rendered.
You may be interested in ”How to maximize profit in an enterprise”
Besides these, other incomes are interest received on investment, profit or sale of assets, etc.
Expenditures mean merchandise purchase of a particular period and operating expenses of a particular period such as administrative expenses, selling and distribution expenses, and other expenses.
There are two ways by which we can determine our result, these two methods are; the global method and the successive stage (through the managerial account balance).
With the global method, the result is calculated using a table which is presented as follows;
|ACCOUNT N°||ELEMENT||AMOUNT||ACCOUNT N°||ELEMENT||AMOUNT|
IT CAN EQUALLY BE PRESENTED IN THE FOLLOWING TABLE;
THE BALANCE SHEET
The balance sheet is a financial table that shows the patrimonial situation of an enterprise as at a given period of time .An enterprise carries many transactions with numerous economic agents. It’s therefore necessary for the business owner to know the situation of the enterprise from time to time. The balance sheet comes then to show the image and net situation of an enterprise. The balance sheet has two parts; one for assets and the other for liabilities.
The assets is what the company owns .this is that of the balance sheet which contains all the goods of the enterprise. Assets shows how the resources of the enterprise where used. The goods or uses of funds comprises of fixed assets, current assets and treasury assets.
The liabilities expresses the origin of the resources put in the disposal of the enterprise such as contributions , dept, etc. in other words liabilities are things that the company owes and which is moving money from the enterprise .
The balance sheet equation states that; total assets=total liabilities, or total assets = liabilities + capital.
The balance sheet can be presented on a table as seen below;
|A/C N°||ASSETS||AMOUNT||A/C N°||ASSETS||AMOUNTS|
|FIXED ASSETS||OWNED CAPITAL|
|CURRENT ASSETS||CURRENT LIABILITY|
|TREASURY ASSETS||TREASURY LIABILITY|
|TOTAL ASSETS||XXXX||TOTAL LIABILITIES||XXXX|
Owner’s equity statement
The statement which is prepared to show changes of owner’s equity for a particular period is called the owner’s equity statement. In this statement, the profit of a particular period is added with the beginning capital of that period and loss, if any, drawings are deducted for ascertaining the ending capital of that particular period.
CASH FLOW STATEMENT
Changes in the working capital of a particular period can be known from the CASH flow statement. This statement provides necessary information regarding sources of working capital and their uses. The cash flow statement provides the sources of cash receipts and payments under different heads for a particular period.
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