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Preparing Financial Statements

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  • 0:01 The Adjusted Trial Balance
  • 0:53 Creating the Income Statement
  • 2:36 Statement of Retained Earnings
  • 4:31 The Balance Sheet
  • 5:45 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Financial statements are the most sought after reports in the financial industry. In this lesson, you will learn how to prepare them using information found on the adjusted trial balance.

The Adjusted Trial Balance

The ultimate goal for any accounting professional is to produce clear, accurate and reliable financial statements that give the true picture of a company's financial position. To many of those people charged with this task, the entire concept can be daunting. But it really doesn't have to be. By the time that all the other steps of the accounting process have been completed, especially the adjusted trial balance, the task of putting the financial statements together should be a breeze.

Why would it be so easy after the adjusted trial balance is completed? Simply because the adjusted trial balance is the listing of all the accounts that a company has after adjustments have been made. The balances that appear on the adjusted trial balance are the most accurate and up-to-date account balances that a company has. So, let's look at exactly how simple it is to prepare the financial statements from the adjusted trial balance.

Creating the Income Statement

Now first things first. Before we even begin to jump into how to prepare financial statements from the adjusted trial balance, I think it's important that you know that only three of the four financial statements can be created with that information. They are the income statement, the statement of retained earnings and the balance sheet.

The income statement is the financial statement that tells how much a company made or lost in a given time period. In order to calculate the net profit or net loss of a company, you have to know how much money came in to the company and how much was paid out of the company. We call the money that came in to the company revenue and the money that was paid out of the company expenses. The information for revenue and expenses is found directly on the adjusted trial balance.

Let's look at the adjusted trial balance of Tifton Manufacturing. From the adjusted trial balance, we can get the following information to transfer directly to the income statement:

Revenue: $82,600

Expenses - Wages Expense: $18,200

Supplies Expense: $18,480

Rent Expense: $12,000

Depreciation Expense: $1,100

Electricity Expense: $2,470

Telephone Expense: $1,494

Interest Expense: $150

All we have to do now is to plug the information into the income statement. When we're finished, it should look like this:

Example income statement
income statement

As you see, revenue minus expenses equals a net income of $28,706.

Statement of Retained Earnings

The statement of retained earnings is next. It is the financial statement that tells how much of the money that a company made in a given time period was retained and reinvested in the company. It's calculated by subtracting any dividends, which are dollar amounts paid to investors as return on their investment from the net income during that accounting period.

Now if we look at Tifton Manufacturing, you see that there are no dividends that are listed as being paid out:

Here there are no dividends listed as paid.
statement of retained earnings

Since that is the case, the statement of retained earnings will be simple. You will add the net income from the income statement to the retained earnings that were reported on the last statement of retained earnings.

For the purpose of this lesson, we'll assume that the prior year's retained earnings were $31,287. The current retained earnings statement will look like this:

Example retained earnings statement
retained earnings statement

The retained earnings from January 1, 2013, was $31,287. You add net income of $28,706, and you get the retained earnings as of March 31, 2013, of $59,993.

But what would happen if there had been dividends reported on the adjusted trial balance? Let's say that the adjusted trial balance listed a dividend account with a balance of $12,000. In that case, we'd have a retained earnings statement that looked like this:

Retained earnings statement with dividends reported
retained earnings statement with dividends

Retained earnings from January 1, 2013, for $31,287 plus the net income of $28,706 minus the dividends of $12,000 would give you an ending retained earnings on March 31, 2013, of $47,993. As you can see, dividends are subtracted from the retained earnings balance to get the current retained earnings.

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