How to Prepare Financial Statements

PREPARE FINANCIAL STATEMENT FOR YOUR SMALL BUSINESS LIKE A PRO

How to Prepare Financial Statements: Everything in order looks fine so are your financial statements, that’s why my article is about how to be more effective in preparing good looking financial statements. It is assumed that the intended user is having knowledge of MS Excel and is well versed with Generally Accepted Accounting Principles, pronouncements and International Financial Reporting Standards.

This article is divided into two parts as below: –

• Knowledge of Accounting and Financial Reporting
• Knowledge of MS Excel

KNOWLEDGE OF ACCOUNTING AND FINANCIAL REPORTING

In a competent accounting system the flow of information is smooth and is well organized. You will be provided with two types of data/ information from your client (in case you’re a consultant), accountant, accounting system or from your bookkeeper. The data can be: –

• Un-organized data
• Organized Data

UN-ORGANIZED / RAW / INCOMPLETE DATA

This type of data generally comes either from accounting system in place or the accounting records and entered & maintained manually or the worst case would be the single entry records. When an accounting system is extracting un-organized data it is assumed that the double entry system is in practice with obvious conclusion that the reporting is not up to the mark for preparation of sensible financial statements and join the pieces of puzzle in order to have clearer & meaningful data.

The other main source is the data available on the basis of single entry records. The accruals basis of accounting means that to calculate the profit for the period, one must include all the income and expenditure relating to the period, whether or not the cash has been received or paid or an invoice received/ issued the same case applies on balance sheet items on the basis of occurrence of the business transactions and not on realization.

In both the cases the availability of raw data/ accounting information, your skills pertaining to Accounting Principles will be helpful at getting meaningful financial statements that really make sense.

A VALID TRIAL BALANCE

In these circumstances the end goal is to have a trial balance statement, remember a trial balance should have equal debit and credit side while preparation, compilation of data needed to drafting trial balance from raw data. A valid trial balance is the key to accurate, meaningful, sensible, presentable, error-free financial statements.

Now when you have the tallied trial balance you’ve reached the first milestone of getting the organized data/ accounting information, In the first instance this data/ information was supposed to be from your client (in case you’re a consultant), accountant, accounting system or from your bookkeeper, now you can easily verify/ apply accounting skills to make the final decision in putting it to some presentable form.

START FROM THE START

At this point the next question should be to check whether the accounting period/ year for which you are required to prepare the financial statements is the first year of operations/ incorporation/ setting up the organization or it is in continuity of previous accounting period(s)?

In case it’s the first year if operations/ incorporation/ setting up the organization then you should be showcasing your MS Excel skills straight away (with zero opening balances) alternatively inquire about the beginning balances of account heads or you can also get preceding year’s financial statements (audited or un-audited).

In order to make thing smooth and super easy, just ask for / extract activity trial balance to obtain beginning balances.

This is how an activity trial balance looks like: –

 

In case you have the opening balances with you you’ll be able to get the grouping of account heads used in the financial statements. If it’s the first year then make prudent decision for grouping of account heads because trial balance have balances of all account heads/ ledger balances as these account heads/ account ledgers are designed as per accountant(s), small business owners’ requirements and ease of understanding the financial reports & results.

Now for the next step you do it make a grouping of account heads/ ledger balances in trial balance on MS Excel worksheet. The following example will show what a grouping of account heads is: –

 

After making groups of account balances you will have meaningful and sensible data. Now the next thing you need is sample financial statements, for which I’ll recommend to download IFRS Model Financial Statements from IASPlus.com. Now on the basis of available (trial balance with grouping) start pulling numbers in the financial statements and as per law of simplicity and ultimate ease figures must be referred across the worksheets in MS Excel making it easier and accurate while making changes (last moment adjustments) in the financial statements.

In case you have any questions please do not hesitate in asking.