Related Article:

【Entrepreneurs Must-Read】Hong Kong Profits Tax Guide 2024

What is the Difference between Accounting and Auditing? How to Distinguish between Their Duties?

In Hong Kong, the annual preparation of financial statements is one of the most important work for enterprises. A company's financial statements must be accurate and comply with regulatory requirements, as startups or SMEs can face serious consequences from errors. This article will deconstruct financial statements to help you understand their content, preparation methods, benefits, and key considerations.

What are Financial Statements?

A Hong Kong company's financial statements summarize its financial performance over the fiscal year. These statements must be prepared in accordance with Hong Kong Accounting Standards, accurately reflecting the company's financial results, position, and cash flows based on its daily accounting records.

The 3 Core Financial Statements

• Balance Sheet
• Income Statement
• Statement of changes in equity

Balance Sheet

The balance sheet presents the company's assets, liabilities, and shareholders' equity, revealing its asset, liability, and net asset positions.

Steps to Prepare a Balance Sheet:

1. Collect and organize financial information.
2. Classify assets and liabilities correctly (current/non-current assets, current/non-current liabilities, etc.)
3. Calculate and present net assets.

Income Statement

The income statement reflects the company's revenue, expenses, and profits, serving as a key indicator for evaluating its operational efficiency and performance.

Steps to Prepare an Income Statement:

1. Gather revenue and expense information.
2. Properly classify revenue and expenses (operating revenue, cost of sales, operating expenses, etc.)
3. Calculate the profit.

Statement of changes in equity

A statement of changes in equity is a financial report that reflects the increases and decreases in a company's equity. This report provides detailed explanations of how shareholders' equity is affected by the company's profits and losses, as well as the distribution of dividends. It serves as a crucial source of information to ensure shareholders are treated fairly.

Steps to Prepare a statement of changes in equity:

1. Organize the ending balance of equity from the previous period as the beginning balance.
2. Compile changes in equity for the current period (e.g. the issuance or repurchase of shares, variations in capital reserves and surplus reserves, and adjustments to retained earnings.)
3. Calculate owners' investments and net profit/loss.

In addition to these 3 main reports, financial statements often include a statement of changes in equity and financial statement notes. The cash flow statement revealing company's financial condition and ability to repay debts and pay investment returns in the future. The financial statement notes explain the basis, principles, and methods of preparing the statements, as well as other items, enhancing the reliability and usability of the entire financial report.

Benefits of Financial Statements

1. Facilitates Business Management

Financial statements enable companies to make informed business decisions. By analyzing the balance sheet, income statement, and cash flow statement, a company can identify its strengths and weaknesses, and formulate corresponding strategies and plans.

2. Attracts Investment, Loans, and Trade

Investors and creditors are more likely to support companies that can provide reliable and transparent financial information. Accurate financial statements help secure investment, loans, and other forms of support.

3. Satisfies Regulatory Procedures

Preparing financial statements is a critical step in the entire audit and tax reporting process for a company. Accurate financial statements can make the audit and tax reporting procedures much smoother, reducing the burden on the enterprise.

Key Considerations

1. Financial statements must be prepared in accordance with accounting standards issued by the Hong Kong Institute of Certified Public Accountants.
2. Financial statements should disclose relevant and reliable information, including sufficient details and explanations.
3. The accounting policies for each financial statement report must be consistent.
4. The company must appoint a registered accountant to audit its financial statements.

Conclusion

When preparing annual financial statements, it is necessary to carefully collect, organize, and classify relevant financial information. Regularly reviewing and verifying the financial statements is also an important step to ensure their reliability and credibility. Hiring a professional accountant can greatly improve the efficiency of preparing accurate and timely financial statements!

OneStart provides one-stop accounting and bookkeeping service. Simply submit all your monthly invoices and documents to us, and our expert HKCPA team will customize precise monthly, quarterly, and annual financial statements, including the balance sheet and income statement, which will greatly benefit your company's long-term financial planning and cost control. To learn more about our plans, please call 3575 6888 or WhatsApp our business consultant to find out more.

Click to WhatsApp OneStart:

Know More About Our Services: