 Hello, in this discussion we will discuss the discussion question of why are financial statements prepared in a specific order? What is the usual order in which financial statements are prepared from the adjusted trial balance? So this is going to be getting into when we actually generate or put together those financial statements. How do we do that? What order will we do that in? If we're seeing an essay question like this, the first thing we might do is to first name the financial statements. What are we talking about in terms of financial statements? So we can say, well, the financial statements include a balance sheet, an income statement, and the statement of equity typically, and so or retained earnings or some type of equity section depending on if we are a sole proprietor or a partnership or a corporation. And then we can go into, well, how are we going to prepare these items? What's going to be the process for preparing these? Now, when we go through and actually prepare these in Excel, I actually violate the principle of the order that we typically would do if it was by hand because Excel gives us that ability to sum up large portions of numbers and that can make the process a bit a lot different for us. But if the typical answer to this type of question, and if you see this type of ordering question in any type of process in most textbooks, they're going to say that we want to create the income statement first and then use that to create the statement of equity and use that to create the balance sheet. So again, in practice, when you're using software, you may not want to do it that way. And I'll talk more on why I sometimes deviate from that principle. But when you're thinking about it in terms of an essay question, you want to list it that way. And it is a good idea to understand why they want to list it that way, because that gives us an idea of what the relationship between the financial statements are. So their argument here is that we need the income statement numbers in order to create the equity section of the statement of owner's equity. And we need the statement of owner's equity number in order to create the balance sheet. And that is how they are connected, meaning when we calculate the income statement, we have revenue minus expenses giving us net income. And that net income number is part of the statement of equity. If we're talking about a sole proprietor, we would have beginning capital, beginning equity, and then it's going to go up by net income, which we get from the income statement, and then it's going to go down by draws. So that means that we have to have net income in order to create the statement of equity. And that end number and the statement of equity will be ending capital or ending equity of some form, depending on the type of entity we're talking about. And that number is going to have to go into the balance sheet. We're going to need that number in order to create the balance sheet, because the balance sheet is assets on one side, liabilities and equity on the other side. And we're talking about this equity number. We need to calculate this equity number in order to put it on the other side of the balance sheet. And so that's the argument for creating the income statement first, then the statement of equity, then the balance sheet. You have to do the income statement to get net income so that you can use the net income to create the statement of equity and then the statement of equity resulting in ending capital, ending capital being needed to create the balance sheet for the equity portion of the balance sheet. Now, the reason you may want to deviate from this when actually preparing the financials, if you're using Excel, oftentimes is because really the balance sheet is kind of everything. The balance sheet is assets, equal liabilities plus equity. And so it really gives the big picture. So I kind of actually liked starting with the balance sheet. And when I get to the equity section, if you're using Excel, you can just sum up the equity section into that one number and just basically get that first and be in balance first. And then that gives me more surety really that everything works and then I go back through and do the income statement and the statement of equity and just double check that we get to that same number at the statement of equity. That also lines up with basically the format of the trial balance. The trial balance will be an order of assets and then liabilities and then equity, the balance sheet, and then the income statement accounts revenue and expenses. So if you do the balance sheet first, then you're basically going from top to bottom more or less or closer to going from top to bottom. You're doing the balance sheet and then jumping down the income statement and then finishing up with the statement of equity. Again, you can't really do that if you were doing it totally by hand, which of course is where the kind of tradition is coming from because if your calculation of net income is wrong or something like that, it'll be difficult to figure that out in the balance sheet. You'd basically have to do it two times. So it would be more efficient if you did all the calculations correctly if you're using a calculator to do it that way. But again, if you're using Excel, then it's just a sum function. So it might be easier in that case to just go from top to bottom on the trial balance assets liabilities and equity. But the relationship is the same and that's the point here in the relationship being that the ending number on the balance sheet, the equity section, is going to come from the statement of equity. So and the statement of equity is going to be tied to the income statement through net income being part of the equity calculation.