How to prepare a financial statement the right way | Expensify (2024)

Preparing financial statements is an indispensable and comprehensive task — one that you have to nail to keep your business up and running.

These statements are fundamental for assessing a company’s financial health, enabling informed decision-making, and identifying areas for growth and improvement. Financial statements also give companies of all sizes the information they need to manage expenses efficiently.

In this blog post, we’ll walk through the step-by-step process of preparing precise financial statements so you can draft and distribute these documents with confidence. Let’s get started!

5 steps to prepare your financial statements

The process of preparing financial statements begins with collecting all your financial details and organizing them into official documents. Once polished and finalized, they’re shared with key stakeholders, such as management, investors, and creditors, who use them to assess the company’s performance, cash flow, and financial health.

Not sure where to start? We’ve got you covered. Use the following steps to guide you through the process.

Step 1: gather all relevant financial data

Before you do anything else, you have to get your ducks in a row by compiling all relevant financial data, including sales invoices, receipts, bank statements, and expense reports.

This step serves as the foundation of the entire process. The collected data paints a clear picture of your business’s financial standing, allowing you to uncover areas needing cost reduction and empowering you to make informed decisions.

This process might sound daunting — after all, no one likes digging through a mountain of receipts or manually entering data from expense reports — but with the right tools, it doesn’t have to be. We recommend using software that allows you to scan receipts in real time, helping you automate the entry of transaction details and minimize manual errors.

Step 2: categorize and organize the data

Once your financial data is gathered, it’s time to sort and file. Break down the data into categories such as revenue, expenses, assets, and liabilities.

A well-organized data set streamlines the drafting process, helping you meet reporting deadlines and maintain compliance with regulatory requirements. This step ensures you're speaking the language of accounting standards, which is crucial for keeping stakeholders' trust and avoiding legal issues.

To set yourself up for success during this step, opt for a preaccounting software that categorizes your financial data continuously. Instead of waiting until the eleventh hour to manually organize your expenses, use this software to scan or upload your data automatically as it comes in.

With the right technology on your side, you can rest easy knowing not a penny is lost or misreported.

Step 3: draft preliminary financial statements

With your data neatly categorized, it’s time to start drafting your preliminary financial statements. This involves three main statements: an income statement, a balance sheet, and a cash flow statement.

Let’s go over what you’ll need to know to draft each financial statement.

The cash flow statement is like your company’s bank statement. It shows how cash moves in and out during a specific time. Here’s how to draft one:

  1. Start with net income: This comes from the income statement.

  2. Adjust for non-cash items and changes in working capital: Include things like accounts receivable (money owed to the company) and accounts payable (money the company owes).

  3. Record cash from investing: This is money spent or earned from buying and selling investments like equipment, property, or securities.

  4. Look at cash from financing: This is cash from things like issuing stocks or paying loans.

  5. Add everything up: This gives you the net change in cash. Add this to the starting cash to get the ending cash balance.

TLDR: Your cash flow statement shows how cash comes in and goes out. It’s all about tracking the money flow to illustrate where your money is going and find the ending cash balance.

Once these financial statements are done and dusted, it’s time to move on to the next step.

Step 4: review and reconcile all data

This step is all about ensuring accuracy. Review every entry and reconcile all data, matching your records with bank statements and other external documents. Double-check your math for gross profit, make sure your recorded income is right, and confirm that what you’ve written down for debts and taxes matches up. This careful validation helps prevent mistakes that could give the wrong idea about how your company is doing financially.

With Expensify integrations, your accounting and expense management software can tag-team this step to highlight any discrepancies or mismatches so you can breeze through your review and quickly find and resolve errors.

Step 5: finalize and report

You’re almost there! Once you’ve double-checked that your statements are good to go, you’re ready to finalize the statements for reporting. Depending on the nature and size of your business, this step might involve getting them audited or reviewed by external accountants to ensure compliance with relevant standards and regulations.

Remember, these statements act as a mirror reflecting the financial stature of your business to stakeholders, helping in securing loans, attracting investors, and making well-informed business decisions, so accuracy and integrity are key.

Common questions about financial statements

If you still have lingering questions about how to prepare financial statements, we can help you find the answers. Check out our FAQ below.

What’s a financial statement?

Financial statements are written records that reflect the business activities and financial performance of a company over a particular time period (often monthly, quarterly, annually, or biannually). There are three types of financial statements: income statements, balance sheets, and cash flow statements. Let’s break them down below.

A cash flow statement details the amount of cash and cash equivalents entering and leaving a company. On a cash flow statement, you’ll get a glimpse of a company’s:

  • Operating activities: Cash generated/used in core business activities

  • Investing activities: Cash used/earned from investments in assets

  • Financing activities: Cash transactions with investors and lenders

Why are financial statements important?

Financial statements are important because they give a clear picture of how well a company is doing financially at a particular point in time. They are essential for determining profitability and guiding decision-making.

Through financial statements, companies can identify trends, manage risks, and allocate resources more effectively, making it possible for them to maintain stability and achieve long-term growth. Plus, they serve as a valuable tool for investors and lenders by helping them determine whether to invest in or lend to a business.

Overall, financial statements are foundational for making informed business decisions and ensuring the sustainable growth of a company.

Which financial statement is prepared first?

An income statement is typically the first financial statement prepared. This statement lays the groundwork for both the balance sheet and the cash flow statement, showcasing the net income from revenues and expenses, which impacts assets, liabilities, and equity.

Can bookkeepers prepare financial statements?

Yes, bookkeepers can (and likely will) prepare financial statements. A bookkeeper prepares your accounts and documents daily financial transactions, so preparing these statements would fall naturally within their scope of work.

Unlock financial clarity with Expensify

Preparing financial statements the right way is like piecing together a financial jigsaw puzzle. Each piece and step must be meticulously worked on to reveal the bigger picture of your business's financial health.

No matter what the puzzle looks like when it’s done, Expensify is here to be your co-pilot on this financial journey. With expense reporting features designed to streamline and simplify, Expensify makes the process less daunting, freeing up your time to focus on what you do best — running your business.

How to prepare a financial statement the right way | Expensify (2024)


How to prepare a financial statement the right way | Expensify? ›

You begin with the net income reported on the income statement. Then, you add non-cash expenses (like depreciation and amortization) and subtract non-cash revenues (like gains on the sale of assets). Finally, you consider changes in balance sheet accounts (accounts receivable, accounts payable, and inventory).

What is the best way to prepare financial statements? ›

You begin with the net income reported on the income statement. Then, you add non-cash expenses (like depreciation and amortization) and subtract non-cash revenues (like gains on the sale of assets). Finally, you consider changes in balance sheet accounts (accounts receivable, accounts payable, and inventory).

What is the correct order of preparing the financial statements? ›

Financial statements are prepared in the following order:
  • Income Statement.
  • Statement of Retained Earnings - also called Statement of Owners' Equity.
  • The Balance Sheet.
  • The Statement of Cash Flows.

How to format financial statements? ›

Amounts at the top of each column should have dollar signs. When amounts are added or subtracted, single underscores should be drawn. Totals should be double-underscored and have dollar signs. Do not include commas or decimal points for amounts when using accounting paper.

How do you write a simple financial statement? ›

Steps on how to write a financial statement include:
  1. Write an introduction. ...
  2. Detail expenses. ...
  3. Outline financial projections. ...
  4. Include individual financial statements. ...
  5. Determine the break-even point. ...
  6. Include a sensitivity analysis. ...
  7. Feature a ratio analysis. ...
  8. Include funding requests where necessary.
Mar 19, 2024

Can I prepare my own financial statements? ›

You can prepare your financial statements in house, but if you're like many small business owners, you may prefer to have an outside professional to prepare your financial statements in accordance with an accounting framework that is appropriate for your business.

What are the standard for preparing financial statements? ›

A complete set of financial statements normally includes a balance sheet, a statement of profit and loss (also known as 'income statement'), a cash flow statement and those notes and other statements and explanatory material that are an integral part of the financial statements.

Which financial statement should be prepared first? ›

The income statement, which is sometimes called the statement of earnings or statement of operations, is prepared first. It lists revenues and expenses and calculates the company's net income or net loss for a period of time.

What is an example of a financial statement? ›

The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.

What is the basis of preparing financial statements? ›

The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets and liabilities at fair value.

How to lay out a financial statement? ›

Create Financial Statement Layouts
  1. Profit & Loss - detail income or expenses.
  2. Balance Sheet - detail assets, liabilities or equities.
  3. Cash Flow - shows how cash came into the firm & how it was spent.
  4. Profit & Loss - Expenses + Income = Net Income.
  5. Balance Sheet - Assets = Liabilities + Equity.

How do you correct financial statements? ›

Error Corrections
  1. Step 1 – Identify an Error. Accounting changes should be distinguished from error corrections. ...
  2. Step 2 – Assess Materiality of Error. ...
  3. Step 3 – Report Correction of Error.

How to prepare monthly financial statements? ›

How To Prepare A Monthly Financial Report?
  1. Step 1: Prepare A Balance Sheet. ...
  2. Step 2: Prepare An Income Statement. ...
  3. Step 3: Prepare Closing Entries To Go Forward For The Next Monthly Accounting Report. ...
  4. Step 4: Consolidate All The Above Financial Data and Visualize It.
Oct 27, 2022

How to prepare financial statements step by step? ›

5 steps to prepare your financial statements
  1. Step 1: gather all relevant financial data. ...
  2. Step 2: categorize and organize the data. ...
  3. Step 3: draft preliminary financial statements. ...
  4. Step 4: review and reconcile all data. ...
  5. Step 5: finalize and report.
Oct 24, 2023

How to finalize financial statements? ›

How to Finalize an Account
  1. Print and reconcile the Bank Book with the bank statements.
  2. Prepare an announcement of Bank Reconciliation.
  3. Reconcile cash balances and check funds, Imprest, and open claims.
  4. Make a physical stock check using the Physical Stock Report (Compilation Stock Report).

What is the easiest financial statement? ›

Perhaps the most useful financial statement, and easiest to understand, is the income statement. The income statement has a separate section for both revenue and expenses, including sales, cost of goods sold, operating expenses, and net profit.

What is the best way to present financial statements? ›

8 Tips to Make Financial Presentations (Without Being Boring)
  1. Know Your Audience.
  2. Go Heavy On Simple Visuals.
  3. Let Your Audience Know What To Expect Up Front.
  4. Find The Story Your Numbers Tell.
  5. Only Dive Deep Where It's Necessary.
  6. Keep A Narrative Thread Between Slides.
  7. Use Your Slides To Support Your Points, Not Repeat Them.
Apr 10, 2023

What are the 4 most common financial statements prepared? ›

There are four primary types of financial statements:
  • Balance sheets.
  • Income statements.
  • Cash flow statements.
  • Statements of shareholders' equity.
Nov 1, 2023

What are the three types of financial statements to prepare? ›

The balance sheet, income statement, and cash flow statement each offer unique details with information that is all interconnected. Together the three statements give a comprehensive portrayal of the company's operating activities.

When preparing financial statements what is always prepared first? ›

The financial statement prepared first is your income statement. As you know by now, the income statement breaks down all of your company's revenues and expenses. You need your income statement first because it gives you the necessary information to generate other financial statements.

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