One of the core learning units in accounting for beginners is learning how to create a financial statement. The process of accounting or better known as the accounting cycle in a financial statement is a procedure of a recording or bookkeeping process starting from the recording all transactions, conducting a general journal, and classifying each transaction into a general ledger.
Afterward, writing a trial balance in a paper format, until it becomes the financial statement consisting of balance sheet report, income statement, owner equity, cash flow report and other financial management reports.
The following sequences we are going to disclose how to create a financial statement. To create a financial statement, you simply need to process the transactions journal and classify them into the ledger of each asset, liability, and income consisting of sales and all costs.
Furthermore, if you have completed those processes, your financial statement will automatically be formed by itself in accordance with general accounting rules.
Steps to Create a Financial Statement
In creating a financial statement, commonly there are two major steps to do. They are preparing the balance sheet and preparing the financial statement. While the detail calculations would be explained after the following two steps.
Step 1: Preparing a Balance Sheet
In preparing a balance sheet, you need to understand the basic accounting equation; Total assets = Liabilities + Shareholder’s Equity. Then, specify the assets and liabilities. There are two types of assets in accounting which are fixed assets and current assets. Liabilities are also divided into two groups, which are current liabilities and long-term liabilities.
Assets may include:
- Accounts receivable
- Deposits and prepaid expenses
- Property, equipment, and plant.
While liabilities may include;
- Accounts payable
- Business credit cards
- Operating line of credit
- Unearned revenue
- Long-term mortgages
- Bonds payable
- Shareholder’s loan, and
- Pension benefits obligations.
To create the balance sheet, label every asset and liability along with the currency symbol. This tutorial will use the dollar. Account every single of the assets and liabilities to your balance sheet. Next, get the total amount of the entire assets. Then, subtract the liabilities from the assets to get the value of the shareholder’s equity.
Now, you need to find out whether or not the total you get from the previous calculations to the shareholder’s equity. To do so, expand the shareholder’s equity by listing all of them on a section. It may consist of four categories such as capital in excess par, common stock, retained earnings, and preferred stock.
When the sum of the shareholder’s equity doesn’t match the earlier calculations (assets minus liabilities), there must be a mistake expanding the list of liabilities and assets. The mistake would be either you total one or to assets on the left or liabilities on the right. It’s a common mistake in practicing accounting.
Step 2: Preparing the Income Statement
I writing the income statement, start with the net sales. To get the sum of the gross profit, subtract the cost of sales from the total revenue (Gross Profit = Revenue – Cost of Sales). In which, cost of sales may include;
- Purchases (opening inventory and delivery), and
- Closing inventory
Next, list all of the general and administrative expenses. Total all of them to get the figure of those types of expenses. Subtract the sum from the gross profit to get the figure after those expenses. Then, add the sum to the other income or expense (if any) and reduce the income tax to get the total amount of profit or loss after tax.
Step 3: Preparing the Cash Flows
To write the cash flows, you can begin with the net income. Calculate them with the operating activities and followed by the cash flows from investing activities, and the cash flows from financing activities. So, the layout of the cash flows statement will be consisting of three sections and each section followed by its categories.
Financial Statement Example
Here’s the detailed example of a financial statement in accordance with general accounting standards and rules. Generally, a compete set financial statement may consist of the balance sheet, capital statement, cash flows statement, detailed recordings of financial statement, and financial statement worksheet.
1. Balance Sheet Example
The following is an example of a balance sheet report which consists of assets statement classified by current assets, fixed assets, and non-current assets, as well as for the liabilities which are grouped under current liabilities (short-term debts), long-term liabilities (more than 1-year debts) and, equity.
2. Income Statement Example
The following is an example of an income statement consisting of sales report, cost of production, administrative and general expense, and income tax.
3. Capital Statement Example
The capital statement example below consists of the capital balance at the beginning deposited, additional capital, retained earnings, and the current year income statement.
4. Cash Flows Statement Example
While the cash flows statement consists of cash flows from operating activities, cash flow from investing activities and the cash flows from financing activities.
5. The Example of Detailed Recording sof Financial Statement
The entire accounts should be included on the balance record in creating a financial statement of the entire company or organization.
6. Financial Statement Work Sheets Example
If we talk about the work sheets in accounting, it’s all about the general ledger of a financial statement that consists of the beginning balance, debit movement, credit movement, and the ending balance of all current financial transactions.
7. General Ledger and Group Account Worksheets
You can create a general ledger summary and financial statement in excel. So, you simply group the accounts based on the financial format in your company. At the left-most column, some of the accounts are grouped together so it’s easier to read in the financial statement.
Recommended reading: Accounting core subjects for undergraduate programs.
Take note that if you want to change a format that is provide and tailored to your company account, you should be careful in changing the TYPE of every colum. Because because commonly the text in an excel accounting template is linked to the worksheet and balance sheet. If you also want to change the text, then you should also change it with the same text on the worksheet and the balance sheet likewise. (The links may use SUMIF formula).
Having an existing template of a general financial statement would be easier for you to create a financial statement. This way also helps you to learn how to create a financial statement (for students). Indeed, using an accounting software program to write a financial statement would much easier. In which, you simply export the general ledger in an excel or a text format file and then entering the numbers into provided template. But somehow, understanding and capable of creating a financial statement manually is really recommended for accounting students and accountants. Learn and get used to apply a standard of the financial statement to develop your accounting skills.
The common question is that why if already using an accounting tool but still preparing a financial statement manually. The most reasonable answer is that you may customize or to create a financial statement form to your liking. Additionally, it would be easier for you to make the other financial statement analysis and that report could become your database source.