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Evaluating Financial Statements Before Granting Loans
Bank employees need to evaluate the set of financial statements before granting loans. The income statement, statement of owners equity, and balance sheet provide information on whether the borrower can repay the loan and make it possible to assess the likelihood of repayment in the case of bankruptcy (Chron, 2020). Bank determines how the borrower makes a profit and how much of it is taken away by various expenses. Documents inform whether the bank will be able to get money from another source if the borrowers profit is not enough.
Adjusting entries are necessary to reflect the borrowers financial position more accurately. In this case, potential entries can be supplies, rent and wages expenses, and service revenue. Adjusting entries must account for all earnings and costs not included in the initial trial balance. After adding the entries, an adjusted trial balance is created, and the bank will receive more accurate data for its analysis.
In addition to financial statements, the bank also requires other documents and information to assess its risks. The bank can check legal records in the courts, find out news about the company, and even hold conversations with employees (Chron, 2020). The personal information of the owner and the company, like a social security number or address, will allow bank employees to get background information.
The financial statements cover the accounting period, which is usually 12 months. Concrete steps are being taken to systematize and analyze financial information these steps represent the accounting cycle ( Accounting, n.d.). Some organizations consider the accounting period the year from April to March, and therefore Goldworks closes its year on March 31. The main influence factor is the convenience and preferences of the company in choosing the accounting period.
References
Accounting information and the accounting cycle. (n.d.). Lumen Learning. Web.
Chron. (2020). Do banks look at a companys balance sheet or income statement when extending credit? Chron Small Business. Web.
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