32.  +Explain+the+processes+that+create+financial+statements.

32. Explain the processes that create financial statements.

Financial statements provide a summation of the financial operations and worth of a business. To create financial statements you have to make up two sets of numbers: the income statement and the balance sheet: The income statement provides a detailed summary of all income streams of the business and all expense of the business. Income statements are generally prepared at the end of each month to summarize one month of operations and at year-end to summarize the entire year. The balance sheet provides a detailed listing of the assets (what you own) and liabilities (what you owe) of the business at a specific point in time.The difference between these two (assets – liabilities) is your net worth.

Steps to creating financial statements: 1. Get your financial records gathered up. 2. Get your general ledger or checkbook ledger that you keep track of Income and expenses. Examples include bank statements, investment accounts If you are not keeping track of expenses and income---START! 3. Create a list of monthly expenses. 4. Break expenses into categories such as fixed and variable: Examples of fixed: rent, car payment mortgage payment, insurance, Examples of variable: food, clothing, gas, utilities, repairs, etc. These will change month to month. 5. Total your monthly income and expenses and subtract your expenses from your income. 6. Is the outcome balance positive or negative? 7. Review your income statement and make adjustments especially if it is negative. 8. Reconcile your statement to see what checks/deposits are outstanding compared to your bank statement. 9.

Create a balance sheet to help determine net worth

1. Start by listing your largest assets. Ex. house, cars, cash, Investments, other real estate 2. List your most liquid assets, Cash, CD’s, Retirement Accounts etc. and itemize them out. 3. Total these items 4. Liability Side: Ex. home mortgage, car loans, other longer term loan obligations 5. Other Liabilities: Ex. credit cards, student loans, etc. 6. Subtract the liabilities from the assets and arrive at your net worth.

If this was for a business, it would look the same but there would be more “stuff” to keep track of.

Businesses would also have statement of cash flows, retained earnings, vesting activities, and more items to be listed in both the income statement and balance sheet.