Prioritizing the Preparation- Understanding What Comes First in Financial Statements

What is Prepared First in Financial Statements?

Financial statements are crucial documents that provide a comprehensive overview of a company’s financial performance and position. They are essential for stakeholders, including investors, creditors, and regulators, to make informed decisions. However, the process of preparing these statements involves several steps, and it is important to understand what is prepared first to ensure accuracy and compliance with accounting standards. In this article, we will explore the initial steps involved in the preparation of financial statements.

1. Gathering and Verifying Financial Data

The first step in preparing financial statements is to gather and verify the necessary financial data. This data includes information on the company’s assets, liabilities, equity, revenue, and expenses. The data is typically sourced from various departments within the organization, such as accounting, finance, and operations. It is crucial to ensure that the data is accurate, complete, and up-to-date to reflect the company’s financial position accurately.

2. Adjusting Entries

Once the financial data is gathered, the next step is to make adjusting entries. Adjusting entries are necessary to ensure that the financial statements reflect the company’s financial position and performance accurately. These entries are made to record transactions that occurred during the accounting period but were not recorded in the books of accounts. Adjusting entries can include accruals, deferrals, and estimates, such as depreciation, amortization, and provision for bad debts.

3. Preparing the Unadjusted Trial Balance

After making the adjusting entries, the next step is to prepare the unadjusted trial balance. The trial balance is a list of all the accounts and their balances, which helps in identifying any discrepancies or errors in the accounting records. The unadjusted trial balance is prepared by transferring the balances of all the accounts from the general ledger to a trial balance sheet. This step ensures that the total debits equal the total credits, which is a fundamental principle of double-entry bookkeeping.

4. Making Closing Entries

Once the unadjusted trial balance is prepared, the next step is to make closing entries. Closing entries are necessary to transfer the balances of temporary accounts, such as revenue, expenses, and dividends, to the retained earnings account. This step resets the temporary accounts to zero, preparing them for the next accounting period. Closing entries help in determining the net income or loss for the period and updating the retained earnings balance.

5. Preparing the Adjusted Trial Balance

After making the closing entries, the next step is to prepare the adjusted trial balance. The adjusted trial balance is similar to the unadjusted trial balance but includes the effects of the adjusting entries. This step ensures that the financial statements reflect the correct balances of all accounts, including the temporary accounts that have been closed.

In conclusion, the preparation of financial statements involves several steps, starting with gathering and verifying financial data. The initial steps include making adjusting entries, preparing the unadjusted trial balance, making closing entries, and preparing the adjusted trial balance. Understanding these steps is essential for ensuring the accuracy and reliability of financial statements.