Financial statements, though often feared as a very intimidating portion of small business accounting, are just a matter of putting the trial balance amounts onto properly formatted statements. Learn how to prepare these documents you'll need for shareholders, potential financiers and your own insight.
After you have prepared your adjusting entries in the general journal, posted the general journal totals to the general ledger, and footed the general ledger accounts, you are ready to prepare financial statements. Like most of the accounting tasks we've reviewed, your accounting software can alleviate much of the legwork.
If all adjusting entries have been made, and a trial balance done, preparing financial statements is really just a matter of putting the trial balance amounts onto properly formatted statements.
Creating the components of a financial statement
The financial statements prepared for most small businesses comprise a balance sheet and an income statement
Usually these are prepared by an accountant. But with the help of computer software, you may be able to prepare your own financial statements. If you need to prepare financial statements for a third party, such as a banker, sometimes the third party may request that the financial statements be prepared by a professional accountant or certified public accountant.
Preparing a balance sheet
Also called a statement of financial position, a balance sheet is a financial snapshot of your business at a given date in time. It lists your assets, your liabilities and the difference between the two, which is your owner's equity, or net worth. The accounting equation (assets = liabilities + owner's equity) is the basis for the balance sheet.
The balance sheet is prepared after all adjusting entries are made in the general journal, all journal entries have been posted to the general ledger, the general ledger accounts have been footed to arrive at the period end totals, and an adjusted trial balance is prepared from the general ledger amounts.
All amounts should be rounded to the nearest dollar, like in this example of a balance sheet for a sole proprietorship: