The Process of Creating Financial Statements

Your trial balance and other source documents are now safe in the hands of your accountant. What does he or she actually do with them? You give your accountant papers, and he or she gives you papers back. Are they just the same as what you provided in the first place? What the heck is your accountant doing that's costing you so much money?

The first thing that your accountant does is prepare the financial statements. These statements may look much like the balance sheet and income statement that you print off from your software package, but there will be some differences.

It's the accountant's job to prepare the financial statements on an accrual basis, because that is what GAAP tells the accountant to do. The accountant will make adjusting journal entries to your statements based on what your bookkeeping has captured or missed. Here are some of the common adjusting entries:

• Capital asset depreciation: It is common to leave this entry for the accountant to calculate and post.

• Accrued liabilities: The obvious one is the estimated accounting fee. It's a cost that belongs in the year to which it relates, so the accountant will expense it and set up the liability.

• Outstanding checks: If you have been working on a cash basis throughout the year, the accountant will have to set up those checks that were written but not cleared through the bank by the end of the year.

• Allowance for Doubtful Accounts (AFDA): Your accountant may ask you if there are any receivables that you believe are uncollectible and will set up an allowance and an expense for these.

• Prepaid expenses: Some of your supplier payments may be for things that relate to next year. If you have not adjusted for the prepaid portion, your accountant will.

Once the accountant has posted all of the adjusting journal entries, he or she will prepare a balance sheet, income statement, cash flow statement, and notes to those statements on his or her letter­head. At the beginning of the set of financials, your accountant will write a standard report on the extent of what he or she did. If the statements have simply been prepared (as opposed to reviewed or audited).

Your accountant will then sign the bottom of the report. This report is focused on the readers of your financial statements to help them understand the nature and extent of the work that was done on them. It forms an integral part of the financial statement package and should be left in when you provide your statements to banks or other financial statement users.