What is Financial Statement Preparation?
Preparing general-purpose financial statements ; including the balance sheet, income statement , statement of retained earnings, and statement of cash flows; is the most important step in the accounting cycle because it represents the purpose of financial accounting .
In other words, the concept financial reporting and the process of the accounting cycle are focused on providing external users with useful information in the form of financial statements. These statements are the end product of the accounting system in any company. Basically, preparing these statements is what financial accounting is all about.
How are Financial Statements Prepared?
Preparing general-purpose financial statements can be simple or complex depending on the size of the company. Some statements need footnote disclosures while other can be presented without any. Details like this generally depend on the purpose of the financial statements.
For instance, banks often want basic financials to verify the a company can pay its debts, while the SEC required audited financial statements from all public companies.
Financial statements are prepared by transferring the account balances on the adjusted trial balance to a set of financial statement templates. We will discuss the financial statement form in the next section of the course.
Here is an example of Paul’s Guitar Shop, Inc.’s financial statements based on his adjusted trial balance in our previous example.
As you can see all four general-purpose financial statements are prepared and presented here. Paul can use these statements internally to gauge the performance of his store for the year or he can issue them to lenders or investors to help raise funds to expand the store.
Once the statements have been prepared, Paul can add the financial statements to the accounting worksheet and close his books for the year by recording closing entries in the next accounting cycle step.
There is more technical information about how to prepare financial statements in the next section of my accounting course.