Before the accounting cycle begins over in a new period, preparing a financial statement is the last step. As soon as the accounts have been adjusted and closed, the financial statements are prepared. Preparing the financial statements follows a logical order as they build upon one another. In this process, the trial balance is the first step.
As information carries over from one statement to the next, financial statements are compiled in a specific order. The following are the process involved in a financial statement:
Trial Balance
A trial balance is the balance of all the accounts at the end of the accounting period. For example, if the business’s May accounting cycle runs from May 1 through May 31, the balances at the end of business on the 31st constitute the trial balance.
Trial Balance Adjustment
In order to adjust the trial balance, adjusting entries are made. For instance, wages payable, accumulated depreciation, and prepaid office supplies often require adjustments. All the accounts are included in the adjusted trial balance after the necessary adjustments have been completed. Using these totals, Financial statements are compiled.
Income Statement
As the first financial statement to be compiled from the adjusted trial balance, the income statement is self-explanatory. The income statement describes the revenue and expenses for a specific period of time for the business.
Net income is reported at the bottom of the income statement if revenues exceed expenses. Net loss is reported if expenditures exceed revenues.
Balance Sheet
An asset is anything that is not on the income statement, which is why the balance sheet includes all of the assets and liabilities of the business. Assets include cash, accounts receivables, property, equipment, office supplies, and prepaid rent. Liabilities include accounts payable, notes payable, long-term debt, and taxes owed.
Owner’s Equity Statement
The owner’s investment is summarized in a statement of owner’s equity. It includes any capital the owner invested in the business, any salary he or she paid, and the net income or loss for the current period. In order to complete the owner’s equity statement, the income statement needs to be prepared first since it provides the calculations needed.