The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues and costs, as well as its cash flows from operating, investing, and financing activities. Last week we outlined the four primary types of financial statements. These statements include the cash flow statement, the balance sheet, income statement, and the statement of retained earnings. These statements are essential for assessing the current state of your business’s finances, as well as projecting future earnings.

In short, changes in equipment, assets, or investments relate to cash from investing.
Anything that you spend money on–whether it’s your monthly lease payment, utilities, office supplies, or postage fees–should be recorded in your accounting system.
Or, you can add your retained earnings statement to your balance sheet.
You can sync financial accounts to easily import transaction history, track expenses, double-check transactions for accuracy, and generate important financial statements.

Again, your balance sheet lists all of your assets, liabilities, and equity. Your total assets must equal your total liabilities and equity on your balance sheet. The statement of cash flows presents the cash inflows and outflows that occurred during the reporting period.

How to Prepare an Income Statement

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 eight-step accounting cycle starts with recording every company transaction individually and ends with a comprehensive report of the company’s activities for the designated cycle timeframe. Many companies use accounting software to automate the accounting cycle.

This allows accountants to program cycle dates and receive automated reports. The fundamental concepts above will enable you to construct an income statement, balance sheet, and cash flow statement, which are the most important steps in the accounting cycle. As you know by now, the income statement breaks down all of your company’s revenues and expenses. You need your income statement first because it gives you the necessary information to generate other financial statements. Your statement of retained earnings, or statement of owner’s equity, lists what your business’s retained earnings are at the end of an accounting period.

Accounting records are all of the documentation and books involved in the preparation of financial statements or records relevant to audits and financial reviews. Accounting records include records of assets and liabilities, monetary transactions, ledgers, journals, and any supporting documents such as checks and invoices. Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account.

The income statement, also known as a profit and loss statement, is important because it shows the overall profitability of your company for the time period in question. Information on sales revenue and expenses from both your accounting journals and the general ledger are used to prepare the income statement. It shows revenue from primary income sources, such as sales of the company’s products, and secondary sources, like if the company sublets a portion of its business premises. The accounting cycle is a step-by-step process to record business activities and events to keep financial records up to date. The process occurs over one accounting period and will begin the cycle again in the following period.

Financial statements provide vital information about your business

Expenses could be various operating costs, like inventory, rent, or utilities. Below is a portion of ExxonMobil Corporation’s (XOM) balance sheet for fiscal year 2021, reported as of Dec. 31, 2021. These three core statements are intricately linked to each other and this guide will explain how they all fit together. By following the steps below, you’ll be able to connect the three statements on your own.

Account overview

If you’re looking to move to an automated accounting system, be sure to check out The Ascent’s accounting software reviews. On the other hand, negative cash flow can potentially be an indicator of financial difficulty. From the income statement, you can find information such as the total sales, cost of goods sold, gross profit, operating profit, interest income, taxes paid, and net income/profit.

Step 4: Unadjusted Trial Balance

In ExxonMobil’s statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activity. This information is useful to analyze to determine how much money is being retained by the company for future growth as opposed to being distributed externally. Investing activities include any sources and uses of cash from a company’s investments in the long-term future of the company. A purchase how to check if an ein is valid or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition is included in this category. Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about the future direction of the company’s stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm’s financial statements.

Instead of crunching numbers, you’ll be free to focus on other tasks that are necessary to run or scale your business. An accountant can also ensure greater accuracy and they may be more knowledgeable about the tax code and reporting requirements. You’d follow this system for all of the account categories that you have. Common categories include asset, liability, equity, revenue, and expense accounts.

The choice between accrual and cash accounting will dictate when transactions are officially recorded. Keep in mind that accrual accounting requires the matching of revenues with expenses so both must be booked at the time of sale. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish.

Go from closing in days to closing in hours.

The cycle repeats itself every fiscal year as long as a company remains in business. 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. No matter what accounting method your business uses, you can create financial statements. Most business owners will find it much easier to prepare financial statements when using accounting software. Financial statements are reports that provide information regarding a company’s financial position and cash flow.

If you buy some new business cards, for example, your marketing expense account is debited, and your bank account is credited. Or, if you receive a payment, your sales revenue is credited while your bank account is debited. At the end of the accounting period, a trial balance is calculated as the fourth step in the accounting cycle.