The process of preparing an accounting report generally depends on the report, the size and scope of the business, the amount of detail you want to include in the report, and the time periods being compared. Generally, the process involves totaling certain accounts for a set period of time.
Modern accounting software can generate most accounting reports automatically, so the process for creating them varies only based on the accounting software you use. Here are some popular reports and what they entail:
Balance sheet. Add up the value of all company assets (cash and cash equivalents, inventory, equipment, property, etc.) and subtract all liabilities (outstanding loans, unpaid bills). Break down what remains (shareholder equity) into appropriate categories (shareholder equity, goodwill, etc.)
P&L. Aggregate revenue by category over the preceding month, quarter, year, etc. (whatever range you want) and then deduct expenses (by category) over the same time frame.
Statement of shareholder equity. Calculate total equity (measured by the difference between total assets and total liabilities), then break out the total into relevant accounts – contributed capital, net income, retained earnings, dividends, and so on.
This process can be repeated for other reports you wish to generate. What’s more, most accounting software usually offers the option to customize reports – to select dates and to decide which accounts to include/exclude –to generate the most insightful reports for company management.
How accounting reports are used, Accounting reports are predominantly used by a business’s senior managers to assess financial situations and measure results. Even more importantly, the insights gleaned from various reports are used to make decisions about a company’s general strategy.
For example, a P&L statement can be used to compare operating results with previous periods to see which parts of a business are growing or shrinking. A balance sheet shows how liquid a company is – how much cash is available for investment in expanding business. Reviewing these statements can help managers determine where and how to invest company resources to increase revenues, cut costs, and maximize revenue.
Managers aren’t the only ones looking at accounting reports. Here are a few examples of who else looks at financial statements and why:
Accountants. A company’s accountants may review reports to decide whether certain tax strategies may be advantageous, or when valuing a business for a potential sale. Sometimes these reports may be required by regulators, depending on what industry a business operates in.
Lenders. Banks and other lenders assess a company’s financial condition to decide whether it qualifies for a loan. Banks have their own forms and reports that need to be completed as part of a loan application, but company accounting reports can provide a preliminary indication of whether a business may qualify.
Insurers. Insurers can look at company financials to determine what types of insurance a business may need and how much coverage may be required to provide it adequate protection.
Shareholders. Current and prospective investors often review company accounting reports to assess the value of the company and its future prospects. These reports can be extremely thorough but are also often condensed.
These are a few of the hypothetical situations that illustrate why it’s important to be able to customize financial reports ‒ they help you provide better insights for the shareholders, lenders, accountants, and others who may review them.