Financial statements help businesses diagnose their health. They are documents of interest for business owners, board of directors, governments as well as possible investors. It takes a lot of calculation to come up with complete finance statements, but in the end, there are just three statements that are of interest:
The above statements will provide written records showing the business performance. Before creating financial statements you need to have good reporting and record practices and then, these best practices can follow.
The income statement is the amount of money a business makes over a particular period. Usually, this is either annually or quarterly. It is an overview of revenue, earnings expenses, and net income per share. Here’s what must be compiled:
Select a Period: Start by choosing the period that the income statement will cover. This can be 12 months or 3 months.
Create Trial Balance Report: This will show all end balances of accounts in the general ledger over the selected period.
Compile Revenue: Calculate the total sales for the period selected. This should include money expected, not just paid. Include the total amount of items in the trial balance report.
Cost of Goods Sold: This comes right under the revenue line. It includes all expenses incurred while selling goods.
Gross Margin: This is the revenue total minus the cost of goods sold.
Operating Expenses: This is the total amount of sales and administrative expenses and appears below the gross margin.
Pre-tax Income: This is the sum of the Gross margin minus selling and administrative costs.
Net Income: Calculate the income tax owed/paid and subtract that from the pre-tax income to get net income.
All companies today use accounting software to calculate these totals and document automation software can quickly enter the values into a template for quick and accurate income statements.
A balance sheet is quite similar to an income statement, however, it gives a bigger picture of a business’s health. Some experts describe it as the book value of a business. The document gives insight into liabilities, assets, and equity. The period of reporting may vary from business to business, ranging from monthly to yearly.
A well-presented balance sheet should show analysts the organization’s current performance predicted performance as well as past performance.
The basic equation for a balance sheet is Liabilities + Shareholders Equity = Assets.
Select Reporting Date: This is the final date of the reporting period. The balance sheet gives a picture of total equity, liabilities, and assets on the specific date. It is common practice to report after every 3 months. The reporting date would therefore be the last day of the third month.
Identify Assets: The assets selected will be as of the selected date. These will be listed as individual assets as well as total assets. They will have to be split into line items for easy comprehension.
Identify Liabilities: Just like the assets, the liabilities should be arranged in separate line items and as current and non-current liabilities.
Establish Shareholders Equity: This will take some calculation if there is more than one owner of the company, however, if it's sole ownership, then establishing the equity is straightforward. It will include the following items:
Compare Assets with Liabilities: This is where the balance sheet gets its name. Add the sum of liabilities to the sum of shareholder’s equity and compare it with assets.
It is much faster to present the balance sheet if you use accounting software along with document automation software. This will ensure accurate calculations and avoid errors.
Businesses need a cash flow statement to understand how money is coming in and going out of the business. It can also help investors see how profitable a business is or how much needs to be added to make better profits. This document must be created without any errors. The following best practices can guide you:
There are 3 main components of a cash flow statement. These are:
Operating Activities: This shows all that is involved in generating revenue from day to day. It is mainly about purchases or services delivered as well as outflow of cash.
Investment Activities: This section of the statement is for transactions that relate to the purchase or sale of property and any non-current assets that are part of the investment activities. This also should include any securities sold or bought in the stock market.
Financing Activities: This section has data about transactions like borrowing to finance the purchase of new equipment or property for the business, payments of dividends, as well as giving stock to employees and the public. Non-cash transactions can also be included here, for example, bad debts and conversion of debt to equity.
To save time and money, most businesses have accounting software as part of the best practices. This makes compiling the different figures much easier. Templates are also designed to ensure that the statement is presented according to an agreed design with nothing left out.
Document automation software is the best option for quick, easy and error-free statements. Of course, to do this, you need to digitize your records.
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