Unit 5 Accounting Principles: Role of Accounting in Decision Making

This report discusses the role of accounting principles in decision making for business enterprises, societal and stakeholder requirements within a complex management system. It includes the computation of financial statements and financial ratios, and insights on BAJ Shop's regulative and ethical constraints.

Unit 5 Accounting
Principles

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK ..............................................................................................................................................3
1. Ascertain the role of accounting principles in meeting, social, organizational, investors and
shareholders requirement and notion in informative business decision making within in a
energizing environment..........................................................................................................3
2. Evaluate the regulative and ethical constraints of BAJ shop.............................................4
3. Role of accounting in informing decision making to meet business enterprises, societal and
stakeholder requirement within a complex management system ..........................................4
4. Computation of financial statement of BAJ Shop..............................................................6
4.1 Trading Account, Profit and Loss Account......................................................................6
4.2 Calculate the Financial Ratio ...........................................................................................8
4.3 Compare both the year financial ratio of BAJ Shop.......................................................12
4.4 Cash Budget ...................................................................................................................13
4.5 Demerits of Budgetary Planning, Budgetary Control and Budgets for BAJ shop.........14
5. Ready the partnership trading accounting, profit & loss account , and balance sheet.....15
6. Ready an income statement and balance sheet of Creative Kids.....................................17
CONCLUSION .............................................................................................................................18
REFERENCES..............................................................................................................................20

INTRODUCTION
The report developed and prepared as under helps to have a better understanding of
accounting principles such as development of records and statements, comparison of ratios being
computed and how they would help the firm to grow in a competitive environment (Abdel-Kader
And M., 2019). It would also help to maintain stability and sustainability in the economy. The
report would be useful and helpful to have a better understanding about the work being carried
out and if it would help the business to earn adequate funds and revenues from the working and
functioning of business considering long life cycle of business. The report would further render
an idea with the help of ratios about performance of a company in relation to others already
existing in environment.
TASK
1. Ascertain the role of accounting principles in meeting, social, organizational,
investors and shareholders requirement and notion in informative business decision
making within in a energizing environment
Accounting- It is a process of recording the Financial transactions related to the business.
It Include analysing, classifying or reporting of transactions to regulatory bodies & tax collection
entities. The financial statement used in accounting are a summary of financial operations over a
period of time. Accounting is a very important function of business by the help this function
business can track there income & expenditure & also help in determining that the businesses are
using there resources properly or not (Davalos, S. And Feroz, 2022). Accounting Department
keeping record of all financial information with in the company which further used to prepare
financial statements such as-balance sheet, Profit & loss account, Cash flow statement. Balance
sheet includes all assets and liabilities of an organisation on the other hand profit and loss
account contains incomes and expenditures and cash flow track the all cash related activities over
a period of time. These statements help a firm to make decisions for future productivity.
a) Management Accounting data- Management accounting is a activity of preparing
report for business transaction that helps manager to make short-term & long-term decisions.
Management Accounting provide fresh monitory & non monitory information by the help of
which the manager can make the decisions for running the business effectively & efficiently.

Management Accounting help in performing management functions like planning, Organising,
Directing, Controlling, etc.
b) Reporting financial information-Financial reporting is a procedure of recording &
presenting financial activity & performance over a specific period of time. It is a very important
process for the organisation & investors because it provide crucial information like Assets &
liabilities of the business, Income & expenditure of business so that investors can decide whether
they should invest in this organisation or not. Financial reporting helps the organisation to make
new business strategy so that organisation can increase there profitability and growth (Donleavy,
2022).
2. Evaluate the regulative and ethical constraints of BAJ shop
Define Ethics:Ethics are considered to be the principle that the organisation needs to
comply with so that their working could be carried out in the systematic manner. It is
necessary for the organisation to plan and adopt certain ethics for their working environment
and must ensure that their organisation must work accordingly by complying them.
Ethics in context of accountant:The accountant of the business must ensure that
business must comply with all the legal and regulatory compliance on due time. The
example could be that to file income tax return of the firm and goods and service tax return
on timely manner, the corporation tax should be deposited to the local authority on regular
basis etc. that ultimately should that work ethic for the business has been complied with.
Ethics are considered to be the moral principles that shows the behaviour of an individual
toward the activity they are carried upon. Ethics must be complied with at business level too
by complying with all the laws and requirement that business governs, making timely
payment to the debt holders from whom business owes certain amount of fund, regular
payment of equated monthly instalment to banks and public financial institution from which
the business obtain bank loans and so on (Galvagno And et.al., 2019).
3. Role of accounting in informing decision making to meet business enterprises, societal
and stakeholder requirement within a complex management system
Accounting plays an important role in the business decision-making process. It keep
eyes on the financial activities and record them in various statement. These statements
further used to measure the financial position of the company. Financial statements help a
firm to measure the performance of each and every departments. This report is provided to

investors, stakeholder and management to make decisions. Accounting helps manager to
control cost and expenses which incurred in the business operations.
There are some objectives which provide more support to above topic:
 Increased Regulation: In the growing economy, the need of accounting regulation is
continuously increasing. There are many scandal in early 2000s which harm the
accounting process and procedure. It refers to the legal regulation, standards and rules
which is necessary to follow in the process of accounting (Griffin, P. And Lont,
2021). Increase in accounting standard provide more accuracy and consistency to the
accounting process.
 IFRS Standard: The full form of IFRS is International financial reporting standard
and it refers to the set of accounting rules and regulations which guide how specific
kind of activity and transaction should be include in financial statements. These
standards are formed and settled by the International accounting standard board
(IASB). These standards are formed to provide financial reports of every company to
the investors and other organisation which help them to compare its financial reports
to the other companies. IFRS standard maintain transparency and creditability in the
financial existence, which help investors and proprietors to take business financial
decision. These standard are followed by many countries world wide.
 Risk Management: It is a process of determination, measurement and acceptance of
risks or uncertainties in the business operations. Risk is indivisible form of return in a
business. Risk involve in every operation of a firm it includes various types of risk
such as investment risk, market risk, performance risk and financial risk and so on. It
is very important to understand these risks and run operation after considering this
risks. A good understanding of uncertainties can help capitalist to better
understanding the future opportunities (KURNAZ, 2019).
 Reputation:It refers to the public perception for the company and its activities, in
order words it refer to the company image in the eyes of people. It includes people
views on the products and services and they may be negative or positive in nature.
Reputation of a firm change over a time period. It is very important aspect for any
business to reach at highest position in the market. It affect the business operations

good value increase the sale of organisation and also attract maximum number of
people. It also define the trust and faith of the people on the company.
 Sustainability: It refers to the capability to maintain a process or position
continuously over a period of time. In the context of business organisation it refers to
the capability to hold a place or position in the continuous changing marketplace or
environment. Sustainable business strategy involve a vast understanding about
environment, economic and social factor while making decisions. Many organisation
uses sustainable materials, cheaper supply chains, relying on renewable energy to
face future uncertainties and to remain sustain in these uncertainties (Lebedev And
K, 2018).
 Governance: it refers to the combination of rules, regulations, practices and
procedures which help company to manage its operations. Board of directors of a
company are mainly influence the governance. It govern the employees and workers
to work with the full efficiency to achieve organisational goal. This framework
include all areas of management, by action plans and internal control to the outcome
measurement. It is important in the eyes of investors science it provide direction and
integrity to the company.
4. Computation of financial statement of BAJ Shop
4.1 Trading Account, Profit and Loss Account
TRADING and P&L ACCOUNT
PARTICULARS AMOUNT (£’000) PARTICULARS AMOUNT (£’000)
Opening stock 400 Sales 10000
Purchases 2500 Closing stock 10
Wages 1225
Gross profit 5885
10010 10010
Rent 1000 Gross Profit 5885
Lighting and expenses 175
Insurance 20
Donation 100
Depreciation 370
Net profit 4220
5885 5885
BALANCE SHEET

PARTICULARS AMOUNT (£’000)
Assets
Current Assets
Cash & cash equivalents 4090
Accounts receivable 1200
Inventories 10
Insurance prepaid 5
Property, plant & equipment 7530
Total assets 12835
Equity and Liabilities
Capital 12260
Accounts payable 550
Wages accrued 25
Total liabilities 12835
WORKING NOTES
Wages 1200
Add: Accrued wages 25
1225
Depreciation
Shop fixtures 150
Machinery & Equip 120
Motor Vehicle 100
370
Cash & cash equivalents
Cash 50
Bank 4040
4090
Property, plant &
equipment
Premises 4200
Depreciation 0
accumulated depreciation 0
4200
Shop fixtures 1950
Depreciation 150
accumulated depreciation 450
1350

Machinery & Equip 1560
Depreciation 120
accumulated depreciation 360
1080
Motor Vehicle 700
Depreciation 100
accumulated depreciation 300
300
Computer 600
Depreciation 0
accumulated depreciation 0
600
Total 7530
Capital 5000
Net profit 4220
Retained earnings 4290
Drawings 1250
12260
4.2 Calculate the Financial Ratio
a) Profitability Ratio
 Gross Profit: It refers to the part of profit which is generated from the sales before
incurring selling and administrative expenses (Li And et.al., 2020).
Gross Profit Margin= ( Revenue- Cost of goods sold) / Revenue *100
Years Revenue Cost of goods sold
2018 7565 3000
2019 7000 4000
2020 10000 2890
2018,
=(7565 - 3000) / 7565 * 100

= 60.34%
2019,
= (7000 - 4000) / 7000*100
= 42.86%
2020,
=(10000-2890) / 10000* 100
= 71.1%
 Net Profit Ratio: It refers to the profit which is generated after meeting tax liabilities
over the net sales of products (Li, Xiang And Jing, 2020).
Net Profit Margin = Net profit / Sales *100
Years Net Profit Sales
2018 2725 7565
2019 1080 7000
2020 4220 10000
2018,
= 2725 / 7565*100
= 36.02%
2019,
= 1080/ 7000 *100
= 15.43%
2020,
= 4220/10000 *100
= 42.2%
b) Liquidity Ratio
 Current Ratio: It shows the short-term solvency position of the company. It shows a
firm can able to meet its short term debts after realisation of its current assets over a
period of time.
Current Ratio: Current assets / Current liabilities

Years Current assets Current liabilities
2018 1285 400
2019 1620 600
2020 5305 575
2018,
= 1285 / 400
= 3.21:1
2019,
= 1620 / 600
= 2.7:1
2020,
= 5305 / 575
= 9.23:1
1. Quick Ratio:It shows the capability of a firm to meet its current liability in more
accurate manner from its current assets. It exclude stocks from current assets to get
quick assets (Linnenluecke And et.al., 2020).
Quick Ratio= Current assets-Inventory / Current liabilities
Years Current assets Inventory Current liabilities
2018 1285 10 400
2019 1620 400 600
2020 5305 10 575
2018,
= 1285-10/ 400
= 3.2:1
2019,
= 1620-400/ 600
= 2.03:1

2020,
= 5305-10/ 575
= 9.21:1
c) Efficiency Ratio
 Inventory Turnover Ratio: It measure, how many times a company take to convert its
inventories into cash.
Inventory turnover days = (opening stock + closing stock/2) / cost of sales * 365
Years Opening stock Closing stock Cost of sales
2018 250 10 3000
2019 10 400 4000
2020 400 10 2890
2018,
= (250+10/2) / 3000 *365
= 15.82 days
2019,
= (10+400/2) / 4000 *365
= 18.71 days
2020,
=(400+10/2) / 2890 *365
= 25.9 days
 Fixed Assets Turnover Ratio: It refers the profit generated from the sell of fixed
assets.
Fixed asset turnover ratio = revenue / fixed assets *100
Years Revenue Fixed assets
2018 7565 8640
2019 7000 8270
2020 10000 7530

2018,
= 7565/8640 *100
= 87.56%
2019,
=7000/8270 *100
= 84.64%
2020,
= 10000/7530 *100
= 132.80%
 Accounts Receivable turnover: It refers to the number of time a firm collect its
average account receivables (Zhang, 2021).
Receivable collection period = accounts receivable from trade/ sales *365
Years Accounts receivable from trade Sales
2018 1100 7565
2019 1000 7000
2020 1200 10000
2018,
= 1100/ 7565 *365
=53.07 days
2019,
= 1000/ 7000 *365
= 52.14 days
2020,
= 1200/ 10000 *365
= 43.8 days

4.3 Compare both the year financial ratio of BAJ Shop
1. According to the above calculation of ratios it is analyse that the company BAJ Shop
has gross profit ratio is 60.34% in year 2018 but there is decline in year 2019 and it
again rises to 71.1% in 2020. Net profit margin ratio of the company in 2018 is
36.02% and it decrease in 2019 but a good increase is recorded in year 2020.
Current and quick ratio is showing good capability of the firm in year 2018 but both
ratio decrease massively in 2019. In 2020 company performing effectively and
increase it quick and current assets impressively. Inventory turnover days is
calculated and it is increasing year by year which is good for the company it shoes
company is efficiently working in order to sale their stocks. According to the
computation of fixed assets turnover ratio company is able to generate good revenue
form its fixed assets in year 2018 but in 2019 a little fall is recorded and finally in
year 2020 it rise efficiently. Account receivable turnover ratio is decreasing year by
year. It decrease form 53.07 days to 43.8 days which shows company collect its
payment from its debtors more efficiently as compare to previous year
4.4 Cash Budget
BAJ SHOP Cash Budget
BAJ SHOP Cash Budget
Cash Inflow 2020 2021 2022 2023 2024 2025
£’ 000 £’000 £’000 £’000 £’000 £’000
Sales 10000 11000 12100 13310 14641 16105.1
Receivables 0 1200 0 0 0 0
Other receipt 0 0 250 0 0 0
total cash outflow 10000 12200 12350 13310 14641 16105.1
Cash outflow
Wages 1225 1286.25 1350.5625 1418.09063 1488.99516
1563.4449
1
Rent 1000 1050 1102.5 1157.625 1215.50625
1276.2815
6
Lightning and
heating expenses 175 183.75 192.9375 202.584375 212.713594
223.34927
3
Insurance 20 20 20 20 20 20
Prepayment 5 5 5 5 5 5
Donation 100 110 121 133.1 146.41 161.051
Other payment 0 0 10000 20000 0 0

total cash outflow 2525 2655 12792 22936.4 3088.625
3249.1267
5
Net cash flow 7475 9545 -442 -9626.4 11552.375
12855.973
3
Opening balance of
cash 4090 11565 21110 20668 11041.6 22593.975
Closing balance of
cash 11565 21110 20668 11041.6 22593.975
35449.948
3
4.5 Demerits of Budgetary Planning, Budgetary Control and Budgets for BAJ shop
Budget- Budget is a plan which is based on future assumptions of Financial gain and Financial
loss. It is an assessment of a sole-trader that how much money a sole trader will pay and gain in a
particular period of time (Mali And Lim, 2022).
Benefits of budget-
1.Control of money- Budget helps the sole-traders to control there money without
wasting it .Budget provides the direction to the sole-traders that where they can spend
there money by the help which they can earn maximum profit and growth.
2.Helps to set priorities- Budget helps the sole-trader to set priorities which means that
only important transaction will take place first into there business the transaction which
are not so important will be there second priority. This will leads to proper utilisation of
resources.
Limitations of Budget-
1.Very Costly- The process of budget is very large and difficult It is only done by
professionals so the sole-traders have to hire them which leads to increase in cost and the
complexity and it is not suitable for the sole-trader because they have a very small scope.
This function is adopt by big companies where they have large number of employees and
also have funds to hire the professionals.
2.Inaccuracy- Budget is totally based on assumptions, It is not always accurate some time
the business can face the consequences also which can leads to shutdown of the
proprietorship business .

Budgetary planning- Budgetary planning is a procedure of making a budget to control the
activities of business. By the help of budgetary planning sole-proprietors can reduce the risk
which they can face in future (Marais And Jagwanth, 2021).
Benefits of Budgetary planning-
 Identify problems- Budgetary planning help the business to identify the problems which
may happen in future such as problem in lack of capitals, change of trends, change in
technologies etc. All these kinds of problems will bring loss to the business, so by the
help of budgetary planning sole proprietor can save there business easily.
 Improve profitability- Budgetary planning improve the profitability of the business by the
help of proper allocation of resources it also helps in reducing the cost which increase
profit margin for the sole-proprietor.
Limitations of budgetary planning-
 Financial Outcome- It only consider the Quantitative aspects and always focus on
increasing of profitability of the business whether the quality of the product is reducing it
this happen then it will lead to loosing the costumer and the sole-proprietorship can be
shutdown.
 Time Consuming-The another limitation of budgetary planning is that it take lot of time
to prepare because it contains various steps which leads to increasing in cost and reducing
the productivity and growth of the sole-proprietor.
Budget Control- Budget control is a method of managing the cost which contains Formation of
budget, combining the department,establishing accountability ,matching performance with the
budgeted and acting on the result to attain the maximum profit (Okere, 2019).
Benefits of Budget control-
 Enhance efficiency- Budget control help the sole-proprietor to enhance there efficiency
so that they can use there resources properly.
 Definite plans- Budget control helps the sole proprietor to make a definite plan so that the
proprietor can earn the maximum profits.
Limitation of Budget control-
 Conflicts- Budget control raise the conflict among the different department of sole-
proprietorship firm because of there different different goals (Shneiderman, 2020).

5. Ready the partnership trading accounting, profit & loss account , and balance sheet
Trading and Profit and Los s A/c
for the year ended December, 2020
Particulars Amount Particulars Amount
To Opening Stock 50000 By Sales 132000
To Purchases 85416 By Carriage Outward 1288
To Gross Profit 54212 By Closing Stock 56340
189628 189628
To Interest on King's Loan 4000 By Gross profit 54212
To Interest on Capital
Matthew 3500
Mark 2950 6450
By provision for bad debts 80
To discount allowed 110 By Interest on Drawings
Matthew 180
Mark 120 300
To office expense 2550
Add : Accrued expense 96 2646
By provision for depreciation 3300
To Salary and Wages 18900
Add : Accrued Wages 200 19100
To bad debts 450
To depreciation
Fixtures 770
Buildings 1000 1770
To Salary to Matthew 800
To net profits 22566
57892 57892

Balance Sheet
as on 31 December 2020
Liabilities Amount Assets Amount
Current A/c Matthew 1306
Mark 298 1604
Building 50000
less : depreciation 1000 49000
Capital A/c
Matthew 32280
Mark 26920
59200
Add : Net Profit 22566 81766
Fixtures 11000
less : depreciation 770
10230
Creditors 11150 Debtors 16240
less :Provision for Bad Debts 80 16160
Loan from J Ling 40000 Cash 950
Accrued expenses 296 Closing Stock 56340
Other Assets 2136
134816 134816
Capital A/c

Matthew 35000
Add : Interest On capital 3500
38500
Less : Drawings 6400
Add : Interest On Drawings 180
32280
Mark 29500
Add : Interest on capital 2950
32450
Less : Drawings 5650
Add : Interest On drawings 120
26920
6. Ready an income statement and balance sheet of Creative Kids
STATEMENT OF ACTIVITIES
Particulars Amount
Income
Profit from raffle 4980
subscription 18760
Total Income (A) 23740
Expenses
Staff wages 7600
General expenses 420
Depreciation of equipment 139
Insurance 93
Total expenses (B) 8252
Change in Net Assets (A - B) 15488
BALANCE SHEET
Assets Amount
Club house 21000
Prepaid assets 160
Equipment 6700
Cash at bank 1570
Total Assets 29430

Liabilities
Creditor 25
Accumulated funds 13917
Change in Net Assets 15488
Total Liabilities 29430
CONCLUSION
The above report provides better knowledge about accounting principle which would hep
a company to prepare financial statements. These statements help a business to operate business
activities in efficient manner. These statements helpful for the management of a company to take
future investments and finance decisions. It world also assist about the where firm is lacking
behind and which areas needs more attention. Financial ratios provides better understanding
about company's performance by the comparisons of 3 year calculations. These calculations used
to provide recommendations and ideas to maximise company's performance.

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