Financial statements are vital documents used to assess a company’s financial health as well as its overall performance. Accountants, in particular, must understand the proper sequence of financial statements, as it serves as a key reference in preparing accurate and reliable financial reports.
In addition, understanding the types and sequence of financial statements provides a comprehensive overview of a company’s financial condition. This structured order ensures that every financial aspect of the business can be evaluated thoroughly and transparently by all stakeholders.
Types of Financial Statements
Before learning about the sequence of financial statements, it is important to first understand the common types of financial statements that are widely used:
1. Income Statement (Profit and Loss Statement)
For business owners, information about profits and losses over a specific period serves as a key reference for making strategic decisions and setting future policies.
To accurately determine the amount of profit and loss, companies need to prepare an income statement that presents detailed information on revenue and expenses.
In summary, the income statement details all data related to a company’s revenues and expenses. This report also serves as a reliable source of information on the company’s financial condition for shareholders and investors. Typically, it is prepared at the end of each month or at the close of the fiscal year.
2. Statement of Changes in Equity (or Statement of Changes in Capital)
A company’s financial performance is not determined solely by its profits and losses; changes in equity are also important. Companies are required to prepare a statement of changes in equity as evidence of financial transparency for all levels of the organization.
This statement contains information about the amount of investment received during a specific period, including a detailed account of dividend payments to investors.
3. Cash Flow Statement
All cash inflows and outflows of a company must be accurately recorded in the cash flow statement. There are two types of cash flows that should be reported: direct and indirect.
The direct cash flow section provides information, including calculations of cash transactions arising from operations. Meanwhile, the indirect cash flow section contains information on net profit calculations, which can be used as a guide for cash inflows.
The cash flow statement is important for a company because it helps in developing optimal policies or strategies by leveraging new market opportunities. Additionally, it aids the company in evaluating its financial structure and net assets.
4. Balance Sheet
The balance sheet is considered a highly crucial type of financial statement that accountants must understand thoroughly. Also known as the balance sheet, it combines information from various other financial reports.
Through the balance sheet, business owners can gain an accurate and clear understanding of the company’s financial condition over the course of a year. The data presented is reliable and must be free from any discrepancies that could affect the final calculations.
Additionally, the balance sheet is confidential in nature, as the data it contains relates to company officers, shareholders, and creditors.
The Sequence of Financial Statements
It is important to understand that financial statements must be prepared systematically. This is why it is essential to be familiar with each step. Overall, the proper sequence of financial statements is as follows:
1. Trial Balance
The trial balance is positioned at the very top of the financial statement sequence. It contains information related to the complete list of general ledger accounts, along with their respective debit and credit balances.
You can only prepare the trial balance after completing journal entries according to the accounts in the general ledger. The trial balance itself is an important tool for checking the balance of debits and credits across all ledger accounts.
It is also important to understand that the accounts listed in the general ledger are categorized into two main groups: assets and liabilities.
2. Adjusting Journal Entries
The second step is to prepare adjusting journal entries. This section records transactions that were previously missed and have not yet been aligned with the company’s financial position at the end of the period.
The process of preparing adjusting journal entries also includes how to compile financial statements that help the company adjust estimated balances to reflect the actual financial position.
3. Worksheet (or Accounting Worksheet / Trial Balance Worksheet)
The third step is to prepare the worksheet. This stage involves adjusting all data from the previous step. At this point, accountants must reconcile balances and position them within the previously adjusted trial balance. These balances will later be incorporated into both the balance sheet and the income statement.
4. Financial Statements
The statements prepared in step three are then compiled according to proper guidelines to serve as a reference for future business decisions and policies. The figures separated in the worksheet can also be used to prepare the statement of changes in equity and the income statement.
As a result, the data becomes easier for company stakeholders to read and analyze.
Alternatif versi sedikit lebih formal:
5. Closing of Nominal Accounts
Once all ledger accounts have been reconciled, the next step in the financial statement sequence is the closing of nominal accounts in the income statement.
Next, the profit or loss balances can be transferred to the retained earnings account. Then, you can record this information in the general ledger based on the respective accounts from the journal.
6. Post-Closing Trial Balance
The final step in the financial statement sequence is preparing the post-closing trial balance. This section contains information regarding the balance of debits and credits for all accounts that have not been closed.
Preparing the post-closing trial balance is the appropriate step after closing the accounts. However, it is important to note that this trial balance includes only real (permanent) accounts. Therefore, accounts that have already been closed do not need to be included.
That was an overview of the financial statement sequence, which is important to keep in mind. For business owners, maintaining balanced operations is essential. To make the process easier, you can use Labamu.
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