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Financial statements are records of all financial activities reflect the position of a person, business, or any other entity. Generally, they report an organization’s assets, liabilities, and owner’s capital at any given point. There are four types of statements: the owner’s equity statement, income statement, statement of cash flows, and balance sheet.
Sequence for preparing financial statements
These statements are all interlinked and dependent, therefore, they are prepared following a specific sequence.
Income statement. It comprises all the profit and loss account details of an entity’s revenues, tax costs, and expenses that impact the overall profit (Weygandt, Kimmel, & Kieso, 2015). As such, it includes information from all expense and revenue accounts, and profit and losses made during a financial year.
Statement of owner’s equity. It gives a snapshot of the profit or loss made by a company that has been retained as shareholder’s equity (Weygandt et al., 2015). Since the only way businesses can enhance the shareholder’s equity is by generating revenue, the retained earnings comprise the net profit, less any earnings distributed to shareholders in the form of dividends.
Balance sheet. It describes an entity’s assets, liabilities, and shareholder’s equity (Weygandt et al., 2015).
Statement of cash flows. It is comparatively unique to the other previous statements. This is because, rather than reflecting the change in the value of a company, it explains the changes that have occurred to the entity’s cash balance over years (Weygandt et al., 2015).
Interrelationship between statements
Financial statements are compiled in the order listed above since information from one statement can be carried over to another. For instance, the income statement’s net income is added to the starting balance of the owner’s capital in the statement of the owner’s equity. In addition, the owner’s capital at the end of the reporting period in the statement of owner’s equity is reported on the balance sheet.
References
Weygandt, J.J., Kimmel, P.D., & Kieso, D.E. (2015). Accounting principles. (12th ed.).Hoboken, NJ: Wiley.
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