How to prepare a financial statement the right way
Staring at a pile of receipts and bank statements wondering how they turn into actual financial statements? You're not alone.
Financial statements aren't mysterious accountant magic. They're systematic documents that translate your day-to-day transactions into clear insights about profitability, cash flow, and financial health.
Whether you're preparing business financial statements for investors or creating them for internal review, once you understand the structure, preparing them becomes straightforward.
In this guide, we’ll break down exactly how to prepare a financial statement that actually tells you something useful.
Key takeaways
- Financial statements translate day-to-day transactions into clear insights about profitability, cash flow, and overall financial health.
- The three core financial statements – income statement, balance sheet, and cash flow statement – work together and must be prepared in the correct order to stay accurate.
- Preparing financial statements correctly depends on consistent accounting methods, complete data, and regular reconciliation.
- Common errors like misclassified expenses or missed transactions can distort results and lead to poor decisions or compliance issues.
- Expensify helps streamline financial statement preparation by automating expense tracking, categorization, and reconciliation so accurate data flows into accounting systems in realtime.
What is a financial statement?
Financial statements are formal records that document a company's financial activities and overall position. Think of them as your business's report card; they show what's working, what's not, and where you stand financially.
Businesses use these crucial documents to:
Track profitability: See whether you're actually making money or just staying busy.
Assess financial health: Understand your company's ability to pay bills, invest in growth, and weather downturns.
Secure funding: Banks and investors require financial statements before lending money or investing.
Meet compliance requirements: The IRS, lenders, and regulatory bodies expect accurate financial records according to IRS recordkeeping guidelines.
Types of financial statements for your business
There are four main types of company financial statements. Each serves a distinct purpose, and together they paint a complete financial picture.
Income statement
Shows revenue, expenses, and profit or loss over a specific period (monthly, quarterly, or annually). Also called a profit and loss (P&L) statement.
What it tells you: Whether you're making money and where it's going.
Balance sheet
Provides a snapshot of assets (what you own), liabilities (what you owe), and equity (owner's stake) at a single point in time.
What it tells you: Your company's net worth right now.
Cash flow statement
Tracks actual cash moving in and out, organized into operating, investing, and financing activities.
What it tells you: Reading a cash flow statement tells you if you have enough cash to operate.
Statement of shareholders' equity
Shows changes in owners' investment over time, including retained earnings and stock issuances.
What it tells you: How ownership value changed and where profits went.
How to prepare an income statement
Which financial statement is prepared first? The income statement is typically the first one you'll prepare. How do you make an income statement? Follow the core formula: Revenue - Expenses = Net Income.
1. Select your reporting period
Choose a consistent timeframe – either monthly, quarterly, or annually. Most businesses prepare monthly statements for internal review and quarterly or annual statements for external reporting.
2. Gather your trial balance
Pull a trial balance from your accounting software. This is a report listing all accounts and their balances. It ensures debits equal credits before you begin.
3. Calculate total revenue
Add up all money earned from sales, service fees, and other income sources during your reporting period.
4. Determine cost of goods sold
Cost of goods sold, or COGS, represents direct costs tied to producing what you sell like raw materials, direct labor, manufacturing overhead. Service businesses may not have COGS.
5. Calculate gross profit
Subtract COGS from total revenue: Gross Profit = Revenue - COGS
6. Categorize and total expenses
Common operating expenses: rent, utilities, salaries, marketing, insurance, office supplies, professional services. Add them all up.
7. Calculate operating income
Subtract total operating expenses from gross profit: Operating Income = Gross Profit - Operating Expenses
8. Account for taxes and interest
Subtract interest expenses and income taxes from operating income.
9. Determine net income
This is your "bottom line." Final profit or loss: Net Income = Operating Income - Interest - Taxes
How to prepare a balance sheet
The balance sheet follows the fundamental equation: Assets = Liabilities + Shareholders' Equity. Both sides must balance.
1. List and total all assets
Current assets (cash within one year): Cash, accounts receivable, inventory, prepaid expenses.
Non-current assets (long-term): Property, equipment, vehicles, long-term investments, intangible assets.
Total all current assets, then non-current assets, then add them together.
2. List and total all liabilities
Current liabilities (due within one year): Accounts payable, short-term loans, wages payable.
Long-term liabilities (due after one year): Mortgages, long-term loans, bonds payable.
Total all current liabilities, then long-term liabilities, then add them together.
3. Calculate shareholders' equity
Shareholders' Equity = Total Assets - Total Liabilities. Includes retained earnings (profits reinvested) and contributed capital (money invested by owners).
4. Verify the accounting equation balances
Confirm Total Assets = Total Liabilities + Shareholders' Equity. If it doesn't balance, you have an error that needs fixing.
How to prepare a cash flow statement
The cash flow statement tracks actual cash movement, reconciling your beginning to ending cash balance.
1. Determine your starting cash balance
Pull the cash balance from the previous period's balance sheet.
2. Calculate cash flow from operating activities
Cash from core business operations: customer payments, supplier payments, employee wages. Start with net income, then adjust for non-cash items like depreciation and changes in working capital.
3. Calculate cash flow from investing activities
Cash spent on or received from buying/selling long-term assets: purchasing equipment, selling property, investments.
4. Calculate cash flow from financing activities
Cash from: taking out loans, issuing stock, paying dividends, repaying debt.
5. Calculate your ending cash balance
Add net cash flows from operating, investing, and financing activities to your starting balance. This should match the cash on your balance sheet.
How all the financial statements connect
All of the financial statements aren't standalone but are interconnected with data flowing between them.
Net income from the income statement flows into retained earnings on the balance sheet and serves as the starting point for cash flow from operating activities.
Ending cash balance on the cash flow statement must match the cash on the balance sheet.
This interconnection ensures consistency. If one statement is wrong, the others will be too. Expensify helps maintain accuracy by automating expense tracking and syncing data in realtime.
Business financial statement format and examples
Following a consistent format makes financial statements easier to read and compare. Most U.S. businesses follow Generally Accepted Accounting Principles (GAAP). What are some financial statements examples? That’s exactly what we’re about to show you, focusing on the income statement, balance sheet, and cash flow statement for the purposes of this guide.
Income statement example
What does an income statement look like? Here's a basic example. This shows what goes on the income statement and how to do an income statement step-by-step:
ABC Company - Income Statement
For the Year Ended December 31, 2025
| Line Item | Amount |
|---|---|
| Revenue | |
| Sales Revenue | $500,000 |
| Service Revenue | $150,000 |
| Total Revenue | $650,000 |
| Cost of Goods Sold | $280,000 |
| Gross Profit | $370,000 |
| Operating Expenses | |
| Salaries and Wages | $120,000 |
| Rent | $36,000 |
| Utilities | $12,000 |
| Marketing | $25,000 |
| Insurance | $8,000 |
| Office Supplies | $5,000 |
| Total Operating Expenses | $206,000 |
| Operating Income | $164,000 |
| Interest Expense | ($8,000) |
| Income Tax Expense | ($39,000) |
| Net Income | $117,000 |
This shows ABC Company made $117,000 in profit after all expenses.
Balance sheet example
Here's a basic example for when you're learning how to make a balance sheet:
ABC Company - Balance Sheet
As of December 31, 2025
| Assets | Amount | Liabilities & Equity | Amount |
|---|---|---|---|
| Current Assets | Current Liabilities | ||
| Cash | $85,000 | Accounts Payable | $45,000 |
| Accounts Receivable | $75,000 | Wages Payable | $12,000 |
| Inventory | $60,000 | Short-term Loan | $25,000 |
| Total Current Assets | $220,000 | Total Current Liabilities | $82,000 |
| Non-Current Assets | Long-Term Liabilities | ||
| Equipment | $150,000 | Long-term Loan | $100,000 |
| Vehicles | $50,000 | Total Long-Term Liabilities | $100,000 |
| Total Non-Current Assets | $200,000 | Total Liabilities | $182,000 |
| Shareholders' Equity | |||
| Contributed Capital | $150,000 | ||
| Retained Earnings | $88,000 | ||
| Total Equity | $238,000 | ||
| TOTAL ASSETS | $420,000 | TOTAL LIABILITIES + EQUITY | $420,000 |
Both sides balance at $420,000, confirming accuracy.
Cash flow statement example
Here's what a basic cash flow statement looks like:
ABC Company - Cash Flow Statement
For the Year Ended December 31, 2025
| Activity | Amount |
|---|---|
| Cash Flow from Operating Activities | |
| Net Income | $117,000 |
| Adjustments: | |
| Depreciation | $15,000 |
| Increase in Accounts Receivable | ($20,000) |
| Increase in Inventory | ($10,000) |
| Increase in Accounts Payable | $8,000 |
| Net Cash from Operating Activities | $110,000 |
| Cash Flow from Investing Activities | |
| Purchase of Equipment | ($50,000) |
| Net Cash from Investing Activities | ($50,000) |
| Cash Flow from Financing Activities | |
| Loan Proceeds | $30,000 |
| Loan Repayments | ($15,000) |
| Dividends Paid | ($20,000) |
| Net Cash from Financing Activities | ($5,000) |
| Net Increase in Cash | $55,000 |
| Cash at Beginning of Year | $30,000 |
| Cash at End of Year | $85,000 |
This shows ABC Company increased cash by $55,000 during the year.
Key financial ratios for company financial statements
Once financial statements are prepared, financial ratios help interpret the data and assess performance.
Current ratio: Current assets ÷ current liabilities. Measures ability to cover short-term obligations. (ABC Company: $220,000 ÷ $82,000 = 2.68)
Gross profit margin: Gross profit ÷ revenue. Measures production efficiency. (ABC Company: $370,000 ÷ $650,000 = 56.9%)
Debt-to-equity ratio: Total liabilities ÷ shareholders' equity. Measures financial leverage. (ABC Company: $182,000 ÷ $238,000 = 0.76)
Net profit margin: Net income ÷ revenue. Measures overall profitability. (ABC Company: $117,000 ÷ $650,000 = 18%)
Common mistakes when preparing financial statements (and how to avoid them)
The IRS regularly flags poor recordkeeping and misclassified expenses as common issues during audits, according to IRS recordkeeping guidelines.
Mixing cash and accrual accounting: Pick one method and stick with it. Cash accounting records transactions when money changes hands. Accrual accounting records them when earned or incurred. Switching between methods creates chaos, though some small service-based businesses use a hybrid form, which is called modified cash-basis accounting.
Omitting transactions: Small purchases add up. That $8 office supply run or $15 parking fee matters. Missing transactions distort your financial picture.
Misclassifying expenses: Confusing current expenses with long-term capital expenditures, or miscategorizing operating expenses, skews your results and can trigger audit flags.
Failing to reconcile accounts: Regularly match bank statements, credit card statements, and accounting records to catch discrepancies before they compound.
Pro tip: Expense management tools like Expensify reduce these errors by automatically categorizing and tracking transactions in realtime.
Simplify financial statement preparation for your business
Industry research shows that a majority of finance teams still rely on manual or semi-manual processes for financial reporting, thus increasing the risk of errors and inconsistencies as transaction volume grows.
Creating financial statements doesn't have to be overwhelming. Automating expense tracking, receipt scanning, and transaction categorization ensures accurate, realtime data flows directly into your financial statements.
Expensify automates the tedious parts – expense capture, categorization, reconciliation – so your financial data is always current and accurate. This means faster financial statement preparation, fewer errors, and more time focused on running your business instead of chasing receipts.
Get started with Expensify by clicking on the button below, and streamline your financial data collection and reporting.
FAQs about how to prepare financial statements
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Financial statements are formal records that show a company's financial activities and position over a specific time period.
The three core statements are the income statement (shows profit or loss), balance sheet (shows assets, liabilities, and equity at a point in time), and cash flow statement (shows how cash moves in and out).
Together, these documents give stakeholders – owners, investors, lenders, and tax authorities – a complete picture of business financial health and performance.
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Most businesses prepare financial statements monthly for internal review and decision-making. For external reporting (taxes, investors, lenders), statements are typically prepared quarterly or annually.
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Financial statements are specific, standardized documents (income statement, balance sheet, cash flow statement). Financial reports are broader documents that may include these statements plus additional analysis, commentary, and performance metrics.
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Yes, small businesses can prepare basic financial statements using accounting software. However, consulting an accountant is recommended for complex situations, tax planning, or ensuring regulatory compliance.
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The steps are:
Gather financial data from your accounting system,
Prepare the income statement first,
Use net income to prepare the balance sheet,
Create the cash flow statement using data from both previous statements
Review and reconcile all three statements to ensure accuracy and consistency
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A statement of financial position is another name for a balance sheet. It shows what a company owns (assets), owes (liabilities), and the owners' stake (equity) at a specific point in time.
