The preparation of financial statements involves the process of aggregating accounting information into a standardized set of financials. The financial statements are then distributed to completed management, lenders, creditors, and investors, who use them to evaluate the performance, liquidity, and cash flows of a business. The preparation of financial statements includes the following steps (the exact order may vary by company).
Step 1: Verify Receipt of Supplier Invoices
Compare the receiving log to accounts payable to ensure that all supplier invoices have been received. Accrue the expense for any invoices that have not been received.
Step 2: Verify Issuance of Customer Invoices
Compare the shipping log to accounts receivable to ensure that all customer invoices have been issued. Issue any invoices that have not yet been prepared.
Step 3: Accrue Unpaid Wages
Accrue an expense for any wages earned but not yet paid as of the end of the reporting period.
Step 4: Calculate Depreciation
Calculate depreciation and amortization expense for all fixed assets in the accounting records.
Step 5: Value Inventory
Conduct an ending physical inventory count, or use an alternative method to estimate the ending inventory balance. Use this information to drive the cost of goods sold, and record the amount in the accounting records.
Step 6: Reconcile Bank Accounts
Conduct a bank reconciliation, and create journal entries to record all adjustments required to match the accounting records to the bank statement.
Step 7: Post Account Balances
Post all subsidiary ledger balances to the general ledger.
Step 8: Review Accounts
Review the balance sheet accounts, and use journal entries to adjust account balances to match the supporting detail.
Step 9: Review Financials
Print a preliminary version of the financial statements and review them for errors. There will likely be several errors, so create journal entries to correct them, and print the financial statements again. Repeat until all errors have been corrected.
Step 10: Accrue Income Taxes
Accrue an income tax expense, based on the corrected income statement.
Step 11: Close Accounts
Close all subsidiary ledgers for the period, and open them for the following reporting period.
Step I2: Issue Financial Statements
Print a final version of the financial statements. Based on this information, write footnotes to accompany the statements. Finally, prepare a cover letter that explains key points in the financial statements. Then assemble this information into packets and distribute them to the standard list of recipients.