Financial Statements Overview & Preparation How to Prepare Financial Statements Video & Lesson Transcript

Accountants use the 10-column worksheet to help calculate end-of-period adjustments. Using a 10-column worksheet is an optional step companies may use in their accounting process. For example, IFRS-based financial statements are only required to report the current period of information and the information for the prior period. US GAAP has no requirement for reporting prior periods, but the SEC requires that companies present one prior period for the Balance Sheet and three prior periods for the Income Statement.

Since you’re making two entries, be sure to double-check the debits and credits don’t apply to the wrong account. This can result in a balance increasing when it should be decreasing leaving you with incorrect numbers at the end of an accounting period. If revenues were higher than expenses, the business had net income for the period. If expenditures were greater than the revenues, the business experienced a net loss for the period.

The key difference between balance sheet and profit and loss statement

An accountant can get an insight into the efficiency of the management in a company and an overview of various under-performing segments of the company. Let us understand how to prepare an income statement by identifying and recording the historical cost principle and business accounting the revenues and expenses. To create an income statement, you must first generate a trial balance report. We refer to an income statement as a financial statement that provides insight into a company’s financial performance.

Financial statements are a kind of financial report card for a business at a given time period. Once the accountant finalizes the statement of retained earnings, they can generate the balance sheet. Once the accountant finalizes the income statement, they can generate the statement of retained earnings.

Step 8: Calculate Net Income

As a practical matter, a company should not allow everyone to have access to the accounting system for purposes of entering year-end adjustments; too many errors and rogue entries will appear. Instead, a company will usually have a defined process where proposed entries are documented on a form (sometimes called a journal voucher). These forms are submitted to a chief accountant/controller for review and approval.

To get the $10,100 credit balance in the adjusted trial balance column requires adding together both credits in the trial balance and adjustment columns (9,500 + 600). Once all accounts have balances in the adjusted trial balance columns, add the debits and credits to make sure they are equal. If you check the adjusted trial balance for Printing Plus, you will see the same equal balance is present. To calculate total income, subtract operating expenses from gross profit. This number is essentially the pre-tax income your business generated during the reporting period. This can also be referred to as earnings before interest and taxes (EBIT).

Should the balance sheet and income statement match?

It’s calculated by subtracting cost of goods sold from sales revenue. Here’s how you can use gross profit, and the gross profit margin, to measure your business’ production efficiency. Enter each operating expense grouping on your income statement under the Operating Expenses subhead, with total operating expenses on a line beneath. Add up all the cost of goods sold line items on your trial balance and enter the total into the cost of goods sold line on your income statement directly under the revenue line. The income statement may go by other names, including the profit and loss statement or the statement of earnings.

These reports give investors and shareholders the transparency they need to make financial decisions. Failure to produce financial reports could lead to heavy fines and delisting on the stock exchange. The balance sheet will express the company’s assets, equity, and liabilities.