describing why financial statements are prepared in a specific order and what documents they are prepared from In the world of accounting, there are four financial statements are the backbone of a companies financial health. Without them, business owners, stock holders, and other parties would not know what the financial status is of a company at a given time. Moreover, these financial statements are required when using general accepted accounting practices (GAAP). These four documents are the income statement, statement of owner's equity, balance sheet, and statement of cash flows. When preparing the financial statements, it is imperative that they are done in a specific order. The reason for this is that each document flows into each subsequent statement and to ensure the accuracy of each document. The income statement shows either net income or net loss by only looking at the company's revenues and expenses. These …show more content…
This document shows the position of the owner(s) of a company and any change from one period to another. The statement starts with the balance of the owners capital at the start of a certain period and creates a new capital balance after adding any net income for the period or subtracting any owner withdrawals or net loss during the same period. The net income/net loss figure is taken directly from the income statement. This is an example of why the income statement is the first document to be created. After the owner's equity statement is completed, the next document to prepare is the balance sheet. This report is the accounting equation that ensures that all assets equal the sum of the liabilities and equity at a certain point in time. The balance sheet lists each asset and liability account and then takes the owners equity amount that was derived in the statement of owner's equity. Again, we need numbers that come from a previously prepared