Understanding Financial Statements

How Do Financial Statements Relate to One Another?

When you prepare your financial statements, you should complete them in a certain order:

Income statement
Statement of owner's equity
Balance sheet

Why must they be prepared in this order? Because financial statements are interrelated: Numbers generated on one financial statement appear on other financial statements. Figure 12.12 "How Financial Statements Relate to One Another" presents Stress-Buster's financial statements for the month ended September 30, 20X1. As you review these statements, note that in two cases, numbers from one statement appear in another statement:

Figure 12.12 How Financial Statements Relate to One Another

How Financial Statements Relate to One Another

If the interlinking numbers are carried forward correctly, and if assets and liabilities are listed correctly, then the balance sheet will balance: Total assets will equal the total of liabilities plus owner's equity.

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