Four Phases of Accounting Financial Statements

Financial statements allow investors to quickly examine a business's finances and determine whether the business represents a strong investment. Accountants generate financial statements by recording transaction data as it comes in, reorganizing it and turning it into a readable form. Business owners can also use financial statements, often with the accountant's help, to determine what changes to make to help the business become more profitable.

Identifying and Recording Transactions

The accountant's first step when dealing with financial statements is to identify and record all transactions. The accountant goes through all receipts, vouchers and other paperwork the business generates when it engages in transactions. He records each transaction in a log. Usually, recording transactions consists of listing the date, time and amount of the transaction, whether the transaction brought money in or required the business to spend money and a brief description of the transaction.

Sorting and Classifying Transactions

Once the accountant records all the transactions for a given period of time, she must classify the transactions. First, she groups transactions by whether they represent income or expenses. She categorizes transactions within those two groups into subgroups. For example, she groups all sales together, all returned products together and all travel expenses together. She records the expenses according to group and subgroup in the company's ledger.

Summarizing and Presenting

The accountant's next task is to summarize the information he organized. During this stage, the accountant may generate graphs or charts as well as putting the information in an easy-to-read format. The accountant generates financial statements such as the balance sheet or cash flow sheet during this phase so investors and customers can easily follow his summary of the information. He may use computer software to help generate these financial statements.

Interpreting Data

The accountant's final step in the financial statement process is to analyze the data and determine whether the business can reduce expenses or increase revenues. The accountant may meet with company officers to go over this information so they can make informed decisions about changes to make to the business for the next quarter. After this meeting, the business owners implement changes and begin submitting new transactions to the accountant for the next quarter's statement.