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Abstract Water Mass Transformation (WMT) theory provides conceptual tools that in principle enable innovative analyses of numerical ocean models; in practice, however, these methods can be challenging to implement and interpret, and therefore remain under‐utilized. Our aim is to demonstrate the feasibility of diagnosing all terms in the water mass budget and to exemplify their usefulness for scientific inquiry and model development by quantitatively relating water mass changes, overturning circulations, boundary fluxes, and interior mixing. We begin with a pedagogical derivation of key results of classical WMT theory. We then describe best practices for diagnosing each of the water mass budget terms from the output of Finite‐Volume Generalized Vertical Coordinate (FV‐GVC) ocean models, including the identification of a non‐negligible remainder term as the spurious numerical mixing due to advection scheme discretization errors. We illustrate key aspects of the methodology through the analysis of a polygonal region of the Greater Baltic Sea in a regional demonstration simulation using the Modular Ocean Model v6 (MOM6). We verify the convergence of our WMT diagnostics by brute‐force, comparing time‐averaged (“offline”) diagnostics on various vertical grids to timestep‐averaged (“online”) diagnostics on the native model grid. Finally, we briefly describe a stack of xarray‐enabled Python packages for evaluating WMT budgets in FV‐GVC models (culminating in the newxwmbpackage), which is intended to be model‐agnostic and available for community use and development.