The focus is on Financial Statements Preparation regularly by entrepreneurs, investors and company owners. The objective of Financial Statements Preparation is to evaluate the financial performance of institutions, analyse the work of accounting financial reports, and set the balance sheet.
It is worth noting that the Financial Statements Preparation focuses on monitoring the organisation’s financial statements, such as income statement “profit and loss” and the balance sheet. Monitoring financial statements helps clarify the company’s financial position now and, in the future, and provides monthly and annual reports that help develop appropriate financial planning. Here the question is: What is the Financial Statements Preparation? What is its importance? How is it done?
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What is Financial Statements Preparation?
The process of providing external users with their financial data. This is possible through a main financial statement consisting of four lists, namely:
- Income Statement.
- Retained Earnings Statement.
- Balance Sheet.
- Cash Flows Statement.
It is common for companies to create a master list at the end of their tax year. However, some companies and institutions update their financial statements monthly and periodically. This mechanism aims to set better Financial Planning standards for the company.
Therefore, following this mechanism helps in organising the economic and financial accounts related to the company, clearly displaying the financial information in the consolidated and organised lists, using investment accounting to monitor their investments properly, and providing accounting forms and annual financial reports for their company according to each list separately.
What is the importance of Financial Statements Preparation?
One of the essential concepts of financial accounting is Financial Statements Preparation. It can be used either internally for the organisation’s benefit or externally to share the master accounting statement with other organisations and companies to achieve a specific objective.
The importance of Financial Statements Preparation lies in the collection of various accounting data, as well as the compilation of financial information for the company according to the previous four statements. After all, all those statements are distributed in the form of financial statements to stockholders, investors and others.
It is worth mentioning here that they need these lists to achieve different goals. Let us list them for you: to evaluate the company’s overall financial performance or cash flow criteria and other accounts associated with these lists. In light of this, here is how to create your company’s Financial Statements Preparation according to the standards required for each list.
How to make Financial Statements Preparation?
These four fundamental checklists help you create financial reports more efficiently to obtain complete financial records and models for your project. We note that it is imperative to use them in order because you cannot go from step to step before you finish the first. The steps are in the following order:
- Income statement preparation
It is a statement that calculates the net consolidated financial operations of profit and loss. You can collect the net financial operations by calculating the buying and selling operations, primary and secondary expenses, revenues, and the company’s overall financial performance.
These activities help to calculate gross income as a first step in preparing reports and financial statements related to the company. On the other hand, subtracting the company’s expense account from the total revenue helps to calculate the gross income.
This is the first step you must take to start preparing and presenting your company’s financial statements. After you have completed the accounting analysis of the income data, you can take the next step.
- Preparing a statement of retained earnings
It is the second step in Financial Statements Preparation because it requires calculating the gross income in advance and then using (the resulting number) to calculate the statement of retained earnings. And here, by the resulting number, we mean identifying the profits the company retains to enhance it is business and growth.
It differs from dividends distributed to investors, stockholders, and external stakeholders. Therefore, in Financial Statements Preparation, you must calculate your total retained earnings and put them in the statements as a second step.
You can calculate your total retained earnings by subtracting the net income from the profits distributed to investors and stockholders in the first income statement. The result is the statement of retained earnings.
- Balance Sheet
On the last day of accounting, the cycle follows this step. Within this step, it is possible to calculate assets, liabilities, and equity. The balance sheet is one of the essential requirements for Financial Statements Preparation for companies in general.
The balance sheet helps you show the assets, which need to be equal to your liabilities, equity, and liabilities.
Balance sheet entries come from the general ledger. The ledger aims to record every financial transaction your company participates in through debit and credit operations so that you can move on to the last step.
- Cash Flow Statement
You should put the cash flow statement at the end of the financial statements preparation list, as it is an essential point depending on the results of all previous statements. In each company, it is vital to study the cash flow to ensure that it receives enough of these flows for an integrated analysis of the financial parameters of each institution.
In addition, cash flows are divided into operations, investing and financing flows. Next comes the stage of using the cash flow statement to compare two time periods that show the size of the cash flow assessment.
To maintain an accurate review of the listings and display precise financial performance in your company, we advise you to attend Accounting Training Courses in Dubai. These courses include the practical application of the most important methods of financial statements preparation and accounting reports.