The time period assumption is that businesses must have consistent periods of reporting, and that these periods are consecutive--monthly, quarterly, or annually.
So, how do you determine your report timing? Well, law dictates report timing for publicly traded companies; they have SEC requirements to report quarterly and annually. Therefore, in order to be SEC compliant, publicly traded companies have to report quarterly as well as annually.
Privately owned companies, on the other hand, don't have an SEC requirement, so they don't have that same regulatory requirement to report every quarter. However, they do have to report annually for tax purposes.
Now, it is important to report consistently to ensure report accuracy. At the end of the reporting period, a business provides accurate reporting, and in order to do this, their data needs to be complete. The way to ensure that the data is complete and accurate is through the use of the trial balance, which we will discuss next.
The trial balance worksheet is a listing of all the general ledger accounts. It details all account balances, and the debits and the credits for the individual general ledger accounts.
In a trial balance worksheet, the sections include:
Once you have the trial balance, you can begin to make your adjustments. You will adjust for any accruals and prepaids, and correct any errors and omissions. This is also where you perform your matching, making sure that your revenues are matched with your expenses.
After you've made all of your adjustments, you can prepare your adjusted trial balance. The adjusted trial balance is going to be the source for your financial statements.
Now that you have your adjusted trial balance, you can prepare your financial statements; this trial balance worksheet can be used to prepare your income statement. The income statement comprises all of your revenues and expenses, and it is also where you can identify your net income. As you can see in this example, your net income is $13,500, which is the difference between your credits and debits.
So, after you have your income statement, you can prepare your balance sheet. The balance sheet has all of your assets, liabilities, and equity--all of your permanent accounts.
Once you have your financial statements, that part is complete. You can move on to making your closing entries. You can close out your temporary accounts--which are your revenues and expenses--for the period to start fresh for the next period.
The financial statements are the final step in the reporting process. There are four main financial statements:
It's important to note that there is a specific order to the preparation of the financial statements:
As you can see, the reason behind the specific order to the financial statements is because information from one financial statement flows into the succeeding one.
Source: Adapted from Sophia instructor Evan McLaughlin.