Financial statements are created step by step, just like a story is told one chapter at a time. Let’s break it down into simpler parts:
Transaction Analysis: Everything begins by looking at different transactions. For example, when a company sells something, you need to see how it affects their money, like increasing sales and cash.
Journal Entries: After recognizing the transactions, you write them down in a journal. This uses a method called double-entry accounting. This means that each transaction changes at least two accounts. For example, if cash goes up, revenue goes up too. It’s like balancing a scale—if one side rises, the other side has to balance it out.
Posting to the Ledger: After writing in the journal, the entries are moved to the general ledger. This is where all related accounts are kept together. It’s like having a tidy closet—everything has its own space so you can find it easily later.
Trial Balance: Once everything is recorded, you create a trial balance. This step checks if the total debits equal the total credits. If they match, you can be confident that your numbers are correct.
Adjusting Entries: Before making the financial statements, you need to adjust some entries. This includes things like unearned revenue or prepaid expenses, which need to be updated to show the real financial situation.
Financial Statements: Finally, you put together the main financial statements: the income statement, balance sheet, and cash flow statement. These special reports summarize how well the business is doing over a certain time.
Closing Entries: The cycle ends by closing temporary accounts, which means resetting places for revenue and expenses. This gets everything ready to begin the process all over again.
Understanding this cycle makes it easier to see how financial statements show the money health of a business over time!
Financial statements are created step by step, just like a story is told one chapter at a time. Let’s break it down into simpler parts:
Transaction Analysis: Everything begins by looking at different transactions. For example, when a company sells something, you need to see how it affects their money, like increasing sales and cash.
Journal Entries: After recognizing the transactions, you write them down in a journal. This uses a method called double-entry accounting. This means that each transaction changes at least two accounts. For example, if cash goes up, revenue goes up too. It’s like balancing a scale—if one side rises, the other side has to balance it out.
Posting to the Ledger: After writing in the journal, the entries are moved to the general ledger. This is where all related accounts are kept together. It’s like having a tidy closet—everything has its own space so you can find it easily later.
Trial Balance: Once everything is recorded, you create a trial balance. This step checks if the total debits equal the total credits. If they match, you can be confident that your numbers are correct.
Adjusting Entries: Before making the financial statements, you need to adjust some entries. This includes things like unearned revenue or prepaid expenses, which need to be updated to show the real financial situation.
Financial Statements: Finally, you put together the main financial statements: the income statement, balance sheet, and cash flow statement. These special reports summarize how well the business is doing over a certain time.
Closing Entries: The cycle ends by closing temporary accounts, which means resetting places for revenue and expenses. This gets everything ready to begin the process all over again.
Understanding this cycle makes it easier to see how financial statements show the money health of a business over time!