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Preparation of Financial Statements as Part of the Accounting Cycle

Prepare the Financial Statements as a Last Step in the Accounting Cycle

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One of the last steps in the accounting cycle is the preparation of the financial statements from the data generated by the entries in the accounting journal and the general ledger. Financial statements can be generated for any time period set as an accounting cycle by the firm.

1. How to Prepare the Income Statement

The income statement comes from the sales revenue and expenses that have been posted to the accounting journal and then to the journal ledger during the accounting time period. The revenue adds to the owner's equity portion of the accounting equation while the expenses subtract from owner's equity. The net effect on owner's equity is the net profit or net loss -- the bottom line of the income statement.

2. How to Prepare a Statement of Retained Earnings

The Statement of Retained Earnings is the second financial statement prepared at the end of the accounting cycle. This financial statement uses information from the income statement; specifically, net income or profit. The Statement of Retained Earnings shows the amount of net income retained by the firm for growth and the amount paid out as dividends.

3. How to Prepare a Balance Sheet

The balance sheet is prepared after the income statement and the statement of retained earnings because the amount of retained earnings and other items have to come from the income statement and go to the balance sheet. Another income statement item that is transferred to the balance sheet from the income statement is depreciation.

4. How to Prepare a Statement of Cash Flows

The last of the four financial statements that you will prepare at the end of the accounting cycle is the Statement of Cash Flows. This statement is last because information is used from both the income statement and the balance sheet to create it.

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