Accounting Principles: Analysis, Evaluation, Financial Statements, and Ratios

This report covers the concept and scope of accounting principles, analysis of accounting functions, evaluation of regulatory and ethical constraints, preparation of financial statements, calculation of financial ratios, and their limitations. It includes the income statement and balance sheet of Village-wide catering company, and the difference between sole traders, partnership firms, and companies. The report also discusses the benefits and limitations of budgets and budgetary planning and control of an organization.

5 – Accounting
principles

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Analysis the accounting function within an enterprises..........................................................3
2. Evaluate the regulatory and ethical constraints within the organisation.................................4
3.From a given trail balance preparation of financial statements...............................................5
a) Income statement of Village- wide catering Company for the year ended 30th June 2022. .5
b) Difference between sole traders, partnership firm and company...........................................6
4. Present and calculate the financial ratios................................................................................7
a) calculate the financial ratios of the company..........................................................................7
b) Limitation of financial ratios..................................................................................................9
5. Evaluate the financial performance by using financial ratios................................................9
6. Cash budget...........................................................................................................................10
a) Cash Budget of the Village – Wide catering company.........................................................10
7.Discuss the benefits and limitations of budgets and budgetary planning and control of an
organisation. .............................................................................................................................12
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Accounting principles mean those guidelines that are followed by company to prepare
and presentation of financial statements. It is also known as Generally Accepted Accounting
Principles. It is needed because it brings consistency in the financial statements. It should be
simple and easy understandable that the investors can understand the financial statements.
Accounting concepts and accounting conventions are included in accounting principles. There
are many accounting concepts that are needed to follow by the company such as entity business
concept, principle of going concern and money measurement principle (Aggarwal, 2022). This
report includes, the concept and scope of accounting principles of Moore Kingston Smith that is
situated in UK. They provide various activities of their clients such as finance, audit and tax.
Further this report includes preparation and presentation of financial statements for
unincorporated business and advantages and disadvantages of budgetary control. With the help
of Financial ratios company evaluates the financial performance
MAIN BODY
1. Analysis the accounting function within an enterprises
Accounting functions are the set of the financial activities which helps in identifying, assessing
and recording the transactions that are in the financial form. The prime objective of accounting
function is to maintain the records and the book keeping. It helps in the collection and storing of
the information that are related to the activities which are in the financial terms. It helps in
creation and keeping the accounts from the day company was incorporated to the current day.
This is to reconcile the information from the various sources. It also helps in projecting the future
financial requirement and the formation of the budgets. The financial statement provides the
information about the profit and loss incurred during the year. It shows the income statement of
the concerned period. It helps in keeping the track records of the expenses, profit margin and the
debts. It ensures the compliance of the statutory regulations and rules. The accountant assures
that the various taxes, claims, salaries, dividends, interests, depreciation, etc. are calculated
according to the laws. This accounting is used for both internal as well as external purpose. It
clears the company about its productivity, profitability, sustainability and monitoring its growth
in the next year (Azretbergenova, 2021). It analyses the trends followed by the organisations in

the previous years and making recommendations for the improvement in the financial state of the
company .
2. Evaluate the regulatory and ethical constraints within the organisation
The accounting department of the organisation performs various functions. It maintains the
various reports, creates the budgets for the various departments and maintains the data related to
the costing. It also helps in the planning for the increment in the profits, reduction in the cost,
assessing the future requirement and delivering the important information. The functions are
discussed below-
1. Preparation of the financial reports- the accountant prepares the different financial
statements. It includes the detailed information related to the assets, liabilities, debts and
equities. It also give information about the company 's current profitable state (Gotti and
Fasan, 2020).
2. Payment of salaries and wages- Accounting department keeps the records of the salaries,
wages, provident funds, employee welfare funds ,etc. It also manages the bonuses or any
extra payment being paid to the employees.
3. Monitoring the finance related transactions- In this the proper monitoring is done. It is to
check that the transactions are updated and accurate. These transactions includes the
purchases, payments and sales made during the period.
4. Payment of the utility bill- The accounting department ensures the timely payment of the
various due bills.
5. Comply with the statutory and legal obligations- an accountant should comply with the
industrial and government rules. These rules are related to the taxation policies, payment
of the wages,etc. Such rules are made to prevent the company from the payment of the
penalties for not complying (Grimm, 2021).
6. Performance review of various departments- It includes the regular check of the financial
performances and make amendments while evaluation if it founds any need. As this
performance results in the increase of the productivity and smooth running of the
operations. It also compares the current performance of the company with the current
year 's financial statements. .
7. To avail the records to the auditor- An accountant should available all the financial
records before the auditor. So that the auditing of the enterprise will be done smoothly.

8. Monitoring the financial transactions- The account manager maintains the records of the
financial transactions which are related to the receipts ,payments, incomes and expenses.
9. Maintaining the records in electronic form- Nowadays, the accounting involves the
updating, maintaining and creating the accounting in the digital form . This helps in
maintaining the data for the long time (Khot, 2020).
3.From a given trail balance preparation of financial statements
a) Income statement of Village- wide catering Company for the year ended 30th June 2022
Particulars Amount Particulars Amount
To opening stock 30000 By sales revenue 234000
To purchases 102000 By closing stock 20000
To wages and salaries 95000
To gross profit 27000
254000 254000
To rent and rates(25000-3000) 22000 By gross profit 27000
To utility bills(9000+1000) 10000 By net loss 39800
To deprecation on machinery
(90000*20%) 18000
To deprecation on van
(12000*25%) 3000
To interest on bank loan 600
To insurance premium 2200
To petrol and repairs 1000
To provisional for doubtful
debts 8000
To bad debts(20000*20%) 2000
Total 66800 Total 66800
Balance sheet at the year ended 30 June 2022
Liabilities Amount Assets Amount

Owner's capital 100000 Tangible fixed assets
Net loss -39800
Machinery (90000-
18000) 72000
60200 Van (12000-3000) 9000
Non current liabilities Current assets
bank loan 60000 Debtors 20000
Current liabilities cash in hand and bank 27200
Trade creditors 30000 By closing stock 20000
outstanding bill 1000 Prepaid rent 3000
Total 151200 Total 151200
Interpretation of financial statements- From the above calculation shows, company suffering net
loss because operating expenses of the company are more than operating income. The company
should reduce manufacturing expenses and wages expenses that company can earn high gross
profit. And company should also reduced rent and other non manufacturing expenses to generate
net profit. The financial position of the company at the June end is not showed true and fair view.
The company current assets does not have sufficient to pay its liabilities (Kowalczyk and
Caruana, 2022).
b) Difference between sole traders, partnership firm and company
Basis Sole traders Partnership Company
Meaning It may only be one
person. The individual
person is known as
owner of the
enterprise.
The minium number
of partner is 2 but
there is no upper
limited on the number
of partners.
There is no upper limit
of stakeholders but
should have minimum
of one.
Decision making Owners takes all the
decision of a
enterprises .
All the partners are
responsible for
decision making.
The certain decision
will require
shareholder and day to

day decision are taken
by the directors of the
company.
Liability Individual is
responsible for all
liabilities of the
business. If business
does not have
sufficient assets to pay
its debt then personal
assets of the owner can
be used.
If business does not
have enough funds to
pay its liabilities then
individual partner is
responsible to pay the
debts from their own
capital.
The company is
separate legal entity
therefore no
shareholders are
responsible to pay any
debts owed to the
company.
Tax incentives and tax Individual pay tax on
their business profits.
Taxes of the firm is
paid on their profits.
Company can seek tax
benefits although there
are many schemes
available.
Transparency and
accounts
There is no need to file
the annual accounts
but it is needed to
maintain the business
expenses.
Partners are
responsible to
maintain the records of
income and expenses.
Company must
prepare the final
accounts at the end of
the financial year.
The financial statements of individual depends on the book accounting concept which
means liabilities and shareholder equity equal assets. In according to this manner enterprise's
liabilities, stakeholder equity and assets, that is alluded to as business owner's equity on account
of a sole individual (Li, Li and Wang, 2019).
The partnership firms prepares balance sheet with the cash and cash equivalents at the
starting followed by fixed assets and current and then liabilities. The profit and loss account is
prepared as similar to sole proprietor but in additionally prepares Profit and loss appropriation
and partner's capital account.

The financial statements of company is prepared in according to companies act. The
shareholder funds shows the equity share capital, preference hare capital and net profit
(Mathews, 2020).
4. Present and calculate the financial ratios
a) calculate the financial ratios of the company
Profitability -It measures the operational efficiency of the firm. The owner of the company
wants to maximise these ratio to maximise the value of the company. It includes:
1. Gross profit – it evaluates the relationship between the sale price and gross profit. The
positive GP ratio is sign of good management.
2. Net profit- It identifies the net profit of the company. Company wants to increase the net
profit because it is good for the company (Mendes, Pimentel Duarte Fonseca and
Filgueiras Sauerbronn, 2020).
Liquidity- It also refers as short term solvency ratio. It means company should have sufficient
assets to pat its debts. The different types of liquidity ratios are as follows:
1. Current ratio- It shows the relationship between current assets and current liabilities.
Current assets means those assets that are payable within the 12 months while current
liabilities are payable within 12 months.
2. Quick ratio – Some times it also known as acid test ratio. It is more conservative
approach as compare to current ratio.
Investment- It evaluates the efficiency of an investment with various investments. The net
income is divided by the cost of investment (Menicucci, 2020).
Assets usage- it is also known as capital turnover ratio. It evaluates the how efficiently a firm
converts its assets into the sales. It tends to be inversely related to net profit margin. They
include:
1. Return on assets- it creates the relationship between the net profit and assets. It evaluate
the profitability of the company in term of assets employed in the enterprises.
2. Return on capital employed- it evaluates the relationship between the operating profit anf
total capital employed.

particulars formula 2020 2021
Profitability
GP ratio (Gross profit*100) /
sales
(110000*100) /
250000 = 44%
(150000*100) /
280000 = 53.57%
NP ratio (net profit*100) /
sales revenue
(32000*100) / 250000
= 12.8%
(35000*100) / 280000
= 12.5%
Liquidity
Current ratio Current assets / current
liabilities
25500 / 15000 = 1.7: 1 30000 / 20000 = 1.5: 1
Liquidity ratio Current assets- stock /
current liabilities
(25500 – 15000) /
15000 = 0.7 :1
(30000 – 25000) /
20000 = 0.25:1
Investment ratio
Return on investment Net income /
investment
32000 /
(25500+90000) =
27.70%
35000 / (30000 +
110000) = 25%
Assets usage
Return on assets Net profit / fixed
assets
32000 / 90000 =
35.56%
35000 / 110000 =
31.82%
Return on capital
employed
Net profit / capital
employed
32000 / (25500+90000
– 15000) = 31.84%
35000 / (30000 +
110000 – 20000) =
29.17%
b) Limitation of financial ratios
A most popular tool is used by the company to evaluate the performance of the company
is financial ratios. It plays an important role in the business. The demerits of financial ratios are
as follow:
 Different industries operate a large number of divisions. The aggregate data can not used
to calculate the ratios of the company.

 The true values may be substantially different from historical value. It may influence the
financial data (Olomskaya, Tkhagapso and Khot, 2020).
 Two firms non comparable can make the accounting data.
 High current ratio may not be good as this may results from insufficient working capital
management.
5. Evaluate the financial performance by using financial ratios
In the above calculation shows, in 2021 the GP ratio is better than as compare to 2020. In
2020 the GP ratio shows 44% whether 2021 is showed 53.75%. But net profit in 2020 is better
than as compare to 2021. The company should reduce its non operating expenses. The solvency
ratio of the company is better in 2020 because in 2020 company have more assets to pay its short
term debt but the current ratio and acid test ratio are less than ideal ratio. Company must
maintain enough current assets. In 2020 the return on investment is good because company earn
more profit to utilise its fixed assets (Puri and Singh, 2021).
6. Cash budget
a) Cash Budget of the Village – Wide catering company
The cash budget is the pre prediction of the outflows and the inflows of the cash in the
next fiscal year or in the future. This budget is prepared to determine whether the organisation
has sufficient funds to continue the operations over the period of time. It could be weekly,
monthly, yearly or quarterly. In this the company manges its expenses and sales to attain the
optimum level. For the efficient budget the company predicts the production, sales, profits,
expenses and incomes. The assumptions are also made in the formation of the budget. The
company also takes different ways to raise the capital if there is scarcity or insufficient liquidity
with the company. This amount can be raised by increasing the capital by selling the stock or
taking loan or increasing the debts. The long term budget includes the detailed examination or
prudent planning. As it needs to focus in the long term investments, lease payments, annual
payments of the taxes, etc (White, 2019).
Particulars January February March April May June
Receipt
opening cash balance 0 15575 -30650 -71791 -106782.4 -

124341.
92
Owner's capital 100000
bank loan 60000
sales revenue cash 19200 23040 27648 33177.6 39813.12
47775.7
4
Credit sales 4800 5760 6912 8294.4 9953.28
Total 179200 43415 2758 -31701.4 -58674.88 -66612.9
Payment
marketing expenses 4400 4840 5324 5856.4 6442.04 7086.24
Rent expenses 7225 7225 7225 7225 7225 7225
Purchases 8000 8000 8000 8000 8000
Wages and salaries 50000 50000 50000 50000 50000 50000
machinery and
equipment 90000
utility expenses 2000 2000 2000 2000 2000 2000
Loan&interest payment 2000 2000 2000 2000 2000 2000
Total payment 163625 74065 74549 75081.4 67667.04
76311.2
4
Cash balance 15575 -30650 -71791
-
106782.4
-
124341.92
-
142924.
14
July August
Septembe
r October
Novemb
er
Decembe
r
-
142924.1
-
150669.9
-
148339.4
-
127240.
-
87133.5
-
24122.76

4 7 51 7
57330.9 65797.07 82556.48
99067.7
8
118881.
34 142657.6
11943.94 14332.72 17199.27
20639.1
2
24766.9
4 29720.33
-73649.3
-
70540.11
-
48583.72
-
7533.61
56514.7
1
148255.1
7
7794.87 8574.36 9431.79
10374.9
6
11412.4
7 12553.71
7225 7225 7225 7225 7225 7225
8000 8000 8000 8000 8000 8000
50000 50000 50000 50000 50000 50000
2000 2000 2000 2000 2000 2000
2000 2000 2000 2000 2000 2000
77019.87 77799.36 78656.79
79599.9
6
80637.4
7 81778.71
-
150669.9
-
148339.4
7
-
127240.5
1
-
87133.5
7
-
24122.7
6 66476.46
7.Discuss the benefits and limitations of budgets and budgetary planning and control of an
organisation.
Budget is a plan which is based on the expenses and the incomes. It determines that how much
money will be needed for the smooth running of the business. It examines that that the company
will have sufficient funds to fulfil the needs of the company. It plans the road map of the budget
for the next 6 months or for a year. It coordinates all the activities of the various segments of the
organisation. For the efficient budget, there will thorough study for the previous years financial

statements. The budget is totally based on the expectation. Sometimes it is failed to meet the
realistic demands if the assumptions went wrong (Yampuler, 2019).
The budgetary control is a technique where the budgeted accounts are compared with the actual
results. An authoritative individual will be held responsible for all these. So it will make the
changes or revise the budgets according to the requirement. There are various advantages of the
budgetary control and budget. Some of them are discussed below-
 It impels the management of the company to forecast the future. It compels the
company to look forward and set the targets to achieve the organisational goals.
 The budgetary control gives the proper direction and the purpose to the company.
 It enhances the communication and the coordination among the various departments.
 It clearly explains the various areas to the different managers. The responsible manager
will try to achieve the budgeted targets.
 It makes better segregation of the resources which are limited.
 The involvement of the employees in forming the budgets helps in motivating the
employees.
Along with the advantages ,there are many disadvantages of the budgetary control. Some of them
are below-
 It creates the pressure to the management to involve the employees in the formation of
the budget.
 Sometimes poor involvement leads to the inaccurate data.
 There will be conflicts between the line mangers because of the difference in the opinion.
 In case the targets are not achieved, then the different departments blame each other .
 It is too difficult to predict the actual values.
CONCLUSION
It has been concluded it the financial statements plays an vital role in every organisation
because it determines the financial performance of the company. With the help of financial ratios
the company evaluates the actual position of an enterprise. The cash budget determines the cash
requirement in the business in the upcoming month.

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