By K.A. Francis Updated January 31, 2019
Preparing a financial statement is the last step in the accounting cycle before the cycle starts over in a new period. After the accounts have been adjusted and closed, the financial statements are compiled. There is a logical order to preparing the financial statements because they build on one another. The first step in the process is the trial balance.
Tip
Financial statements are compiled in a specific order because information from one statement carries over to the next statement. The trial balance is the first step in the process, followed by the adjusted trial balance, the income statement, the balance sheet and the statement of owner's equity.
The Trial Balance
The trial balance is the balance of all the accounts at the end of the accounting period. For example, if the business's accounting cycle for May runs from May 1 through May 31, the balances at the end of business on the 31st become the entries for the trial balance.
The Adjusted Trial Balance
After the trial balance is complete, adjusting entries are made. Examples of accounts that often require an adjustment include wages payable, accumulated depreciation and prepaid office supplies. After the needed adjusting entries are completed, all the accounts are included in the adjusted trial balance. These totals are used to compile the financial statements.
The Income Statement
The first financial statement that is compiled from the adjusted trial balance is the income statement. Its name is self-explanatory. It's the statement that lists the revenues and expenses for the business for a specific period. Revenues are listed first, and then the company's expenses are listed and subtracted.
At the bottom is of the income statement is the total. If revenues were higher than expenses, the business had net income for the period. If expenditures were greater than the revenues, the business experienced a net loss for the period.
The Balance Sheet
One way of explaining the balance sheet is that it includes everything that doesn't go on the income statement. The balance sheet lists all the assets and liabilities of the business. For example, assets include cash, accounts receivable, property, equipment, office supplies and prepaid rent. Liabilities include accounts payable, notes payable, any long-term debt the business has and taxes payable.
Owner's equity is also included on the balance sheet. This statement should prove that the accounting formula "Assets = Liabilities +Owner's Equity" is in check because the asset side should equal the combined totals of liabilities and owner's equity.
Statement of Owner's Equity
The statement of owner's equity is a summary of the business owner's investment in the business. It shows any capital the owner put into the business, any withdrawals made as a salary, and the net income or net loss from the current period. This is one reason the income statement has to be prepared first because the calculations from that statement are needed to complete the owner's equity statement.
FAQs
The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.
What is the correct order for preparing financial statements? ›
Read on to learn what that order is and why it is important.
- First: The Income Statement.
- Second: Statement of Retained Earnings.
- Third: Balance Sheet.
- Fourth: Cash Flow Statement.
While there is a difference in the accounting standards between GAAP and IFRS, the purpose of each financial statement remains the same.
- Step 1: Prepare a Trial Balance. ...
- Step 2: Prepare the Income Statement. ...
- Step 3: Prepare the Statement of Changes in Equity. ...
- Step 3: Prepare the Balance Sheet.
The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.
What is the sequence of notes to financial statements? ›
There is a paragraph setting out the order in which notes to the financial statements are normally presented: this begins with a statement of compliance, then a summary of significant accounting policies, supporting information for individual line items following their sequence in the primary statements, and finally ' ...
What is the correct order of the financial planning process? ›
Financial Planning Process
- 1) Identify your Financial Situation. ...
- 2) Determine Financial Goals. ...
- 3) Identify Alternatives for Investment. ...
- 4) Evaluate Alternatives. ...
- 5) Put Together a Financial Plan and Implement. ...
- 6) Review, Re-evaluate and Monitor The Plan.
Income statement: This is the first financial statement prepared. The income statement is prepared to look at a company's revenues and expenses over a certain period, such as a month, a quarter, or a year.
What is the correct sequence of accounting process? ›
The correct sequence of the accounting process is "Identifying -- recording -- communicating". Q. Accounting is a process of recording, classifying, summarising, analysing and interpreting the financial transactions and communicating the result thereof to the users of such information.
Which is the correct sequence for recording transactions and preparing financial statements? ›
The correct answer is option b. Journal, ledger, trial balance, financial statements.
Is there an order for financial statements? ›
The order usually is: the income statement, the balance sheet, the statement of changes in equity, and the cash flow statement. The income statement starts off by showing company earnings and expenses. This tells us if the company made a profit or a loss.
Financial statements are compiled in a specific order because information from one statement carries over to the next statement. The trial balance is the first step in the process, followed by the adjusted trial balance, the income statement, the balance sheet and the statement of owner's equity.
What is the correct order for the balance sheet? ›
Balance Sheet Example
As you will see, it starts with current assets, then non-current assets, and total assets. Below that are liabilities and stockholders' equity, which includes current liabilities, non-current liabilities, and finally shareholders' equity.
What is the order of the three financial statements? ›
The three financial statements are (1) the income statement, (2) the balance sheet, and (3) the cash flow statement. Each of the financial statements provides important financial information for both internal and external stakeholders of a company.
Which of the following is the correct order of preparing the financial statements in Quizlet? ›
The correct order of preparing the financial statements would be B. income statement, statement of owner's equity, balance sheet, and statement of cash flows.
