How To Prepare The Financial Statements

The following are simple snapshot to prepare the following financial statements:

(a) Income Statement
(b) Owner's Equity Statement
(c) Balance Sheet

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(a) How to prepare the Income Statement:

• All temporary or nominal accounts relating to incomes and expenses are closed by using closing entries and transferred to the Income Statement/Summary

Journalize the closing entries as follows:

For all Revenue accounts:

• Debit Revenue Account Credit Income Summary

For all Expenses accounts:

• Debit Income Summary Credit Expense Account
  

(b) How to prepare Owner's Equity Statement:

• From (a) the Income statement is transferred to the Owner's Equity Statement

For Profit in the Income Summary:

• Debit Income Summary Credit Owner's Capital

For Loss in the Income Summary:

• Debit Owner's Capital Credit Income Summary
  

• The Owner's drawing account which is part of temporary/nominal account is similarly closed by using closing entry and transferred to the Owner's Equity Statement

Accounting entries:

• Debit Owner's Capital Credit Drawings Account
  

(c) How to prepare the Balance Sheet:

• All permanent or real accounts like all asset accounts, all liability accounts and owner's capital account are not closed and transfer to the Balance Sheet(refer to vertical and horizontal format)