Developing a Financial Statement Worksheet for Your Business
After your business’s accounts successfully pass a trial balance test (with debits and credits that equal), you can then begin developing a financial statement worksheet, as well as the financial statements, including balance sheets and income statements.
The first step in producing the financial statements is using the information from the trial balance to develop a worksheet that includes the initial trial balance, the accounts that would be shown on a balance sheet, and finally the accounts that would normally be shown on an income statement.
You create the worksheet that includes these seven columns:
Column 1: Account list
Columns 2 and 3: Trial balance (one column for debits, one column for credits)
Columns 4 and 5: Balance sheet (one column for debits, one column for credits)
Columns 6 and 7: Income statement (one column for debits, one column for credits)
In the figure below, you see a sample of a worksheet developed from trial balance numbers. Note that the numbers of the trial balance are transferred to the appropriate financial statement; for example, the Cash account, which is an asset, is shown in the debit column of the balance sheet.
This sample worksheet shows the first step in developing a company’s financial statements.
After you transfer all the accounts to their appropriate balance sheet or income statement columns, you total the worksheet columns. Don’t panic when you see that the totals at the bottom of your columns aren’t equal — it’s because the net income hasn’t been calculated yet.
The difference between the debits and credits in both the balance sheet and the income statement totals should be the same. That amount should represent the net income that will appear on the income statement.
In the figure, the $4,500 difference for the balance sheet is shown as a credit, representing an increase in Retained Earnings. The Retained Earnings account reflects the profits that have been reinvested into the company’s assets in order to grow the company.
In some incorporated companies, part of the earnings are taken out in the form of dividends paid to stockholders. Dividends are a portion of the earnings divided up among stockholders. The board of directors of the corporation set a certain amount per share to be paid to stockholders.
Many other small companies that haven’t incorporated pay out earnings to their owners using a Drawing account, which tracks any cash taken out by the owners. Each owner should have his or her own Drawing account so that you have a history of how much each owner withdraws from the company’s resources.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
