Financial statements are the backbone of any business’s financial health. Whether you're a small business owner, a startup founder, or a freelancer, understanding how to prepare financial statements can help you make informed decisions, secure funding, and stay compliant with tax laws.
In this blog, we’ll walk you through the step-by-step process of making financial statements, explain why they matter, and help you build a strong foundation for your business finances.
📘 What Are Financial Statements?
Financial statements are formal records of the financial activities of a business. They include:
- Profit & Loss Statement (Income Statement) – shows your revenues, expenses, and profit or loss.
- Balance Sheet – shows assets, liabilities, and equity at a specific point in time.
- Cash Flow Statement – tracks the flow of cash in and out of the business.
🧾 Step-by-Step Guide to Preparing Financial Statements
✅ Step 1: Gather Financial Records
Start by collecting all relevant documents:
- Sales invoices
- Purchase bills
- Bank statements
- Salary and expense records
- Loan agreements
- Asset purchase receipts
Tip: Use accounting software like Tally, Zoho Books, or QuickBooks for automated data syncing.
✅ Step 2: Record Daily Transactions
Maintain a proper bookkeeping system. Use a journal and ledger or accounting software to record:
- Revenue from sales or services
- Purchases and expenses
- Payments made or received
- Loan or investment activities
This lays the foundation for accurate financial statements.
✅ Step 3: Prepare a Trial Balance
At the end of the accounting period:
- Summarize all ledger accounts
- Create a Trial Balance to ensure that debits equal credits
- Identify and correct any discrepancies
A balanced trial balance ensures accuracy for your final statements.
✅ Step 4: Make Adjusting Entries
Adjust for:
- Accrued income/expenses (not yet paid or received)
- Depreciation of assets
- Prepaid expenses
- Bad debts
This gives a true and fair view of your financial position.
✅ Step 5: Create the Profit & Loss Statement
The Profit & Loss (P&L) or Income Statement shows:
Total Revenue
Less: Cost of Goods Sold (COGS)
= Gross Profit
Less: Operating Expenses (Rent, Salaries, etc.)
= Operating Profit
Add/Less: Other income/expenses
= Net Profit Before Tax
Less: Taxes
= Net Profit After Tax
This tells you whether your business is profitable.
✅ Step 6: Prepare the Balance Sheet
A Balance Sheet consists of:
- Assets (cash, inventory, receivables, equipment)
- Liabilities (loans, payables, accrued expenses)
- Equity (capital, retained earnings)
Follow the formula:
Assets = Liabilities + Equity
It provides a snapshot of your financial position on a particular date.
✅ Step 7: Prepare the Cash Flow Statement
Split cash flow into:
- Operating Activities (day-to-day transactions)
- Investing Activities (buying/selling assets)
- Financing Activities (loans, dividends)
This statement shows whether your business generates enough cash to sustain operations.
📊 Importance of Financial Statements
💡 Helps in decision-making
🧾 Required for tax filing
🏦 Needed for bank loans & investor funding
📉 Tracks financial performance
📅 Ensures legal and regulatory compliance
🛠 Tools That Can Help You Create Financial Statements
- Accounting Software: QuickBooks, Zoho Books, Tally
- Excel Templates: Use free templates for small businesses
- Professional Help: Hire a CA, accountant, or firm like Verotus Finlegal Solutions LLP
🧩 Common Mistakes to Avoid
- Mixing personal and business expenses
- Not reconciling bank statements
- Ignoring depreciation and accruals
- Delaying record-keeping until year-end
✅ Final Thoughts
Creating financial statements might sound technical, but with the right steps and tools, it's manageable—even for non-accountants. A clear understanding of your business’s financials empowers you to grow confidently and comply with tax regulations.
At Verotus Finlegal Solutions LLP, we help startups, small businesses, and professionals with accurate financial statement preparation, tax filing, and compliance.
🔍 FAQs
Q1: Can I make financial statements without an accountant?
Yes, if you have basic accounting knowledge and good records. For complex situations, a professional is advisable.
Q2: How often should I prepare financial statements?
Ideally, monthly or quarterly for internal analysis; annually for compliance.
Q3: Are financial statements mandatory for small businesses in India?
Yes, especially if your business is registered or subject to audit under the Income Tax Act or GST laws.
📞 Need Help With Your Financial Statements?
Let our experts at Verotus Finlegal Solutions LLP assist you with seamless accounting and compliance. Contact us today!
