Before analyzing a financial statement, one must take the time to follow a certain step to arrive at a financial statement. These steps are as follows:
- Identifying the transaction
- Journal entry on a journal voucher (JV)
- Create a ledger account
- Do a trial balance
- Financial statement
All these are known as the flow of accounting data.
For the first step, which is identifying the transaction requires the manager to Identify the various transactions in an account. Transactions occur where there is an exchange in goods or services. Examples of transactions could be a purchase or sale of an item, payment of goods bought, etc.
For the second flow, it means entering the transactions into a journal voucher. That is placing transactions in their respective position based on the account involved. For example, account receivable will be under assets, accounts payable will be under liability, expenses will be in retained earnings, under owners’ equity etc.
The ledger account which is also known as a “T” account. This account explains the type of transaction made. It shows whether it is a debit or a credit kind of transaction. In the ledger account, the debit must be on the left while the credit is on the right-hand side of the “T” account. This account further explains that when assets increase, it becomes a debit and vice versa when it decreases. On the other hand, liability is credited when it increases and debited when decreased. This also applies for the owners’ equity account.
A trial balance account improves on the ledger account or rather gives further explanation to the ledger account. It shows the account title on the right of a table and on the other side, illustrates the debit and credit balance respectively.
The final step of the process is the financial statement. What is a financial statement? This shows all the transactions and account in a well-organized manner. However, there are four plus one (4 + 1) types of financial statement:
- Statement of financial position
- Statement of profit or loss
- Statement of change in owner’s equity
- Statement of cash flow
*The notes to the accounts