Accounting Principles and Financial Statements - Desklib

This report discusses the purpose of accounting, ethics, and the role of accounting in decision making. It includes the preparation of financial statements using accounting conventions, principles, and standards. Financial ratios are also calculated for BAJ sole proprietor. Desklib is an online library for study material with solved assignments, essays, dissertations, and more.

Unit 5 Accounting
Principles

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Describe the purpose of accounting in meeting social, stakeholder’s needs and
Organisational goals....................................................................................................................3
2. Explain ethics and also elaborate the decision of accountant in context of interest rate.........4
3. Explain the role of accounting in decision making, society and stakeholders of the company.
.....................................................................................................................................................5
4. By using accounting conventions, principles and standards. Prepare the final accounts of the
questions mentioned below..........................................................................................................7
4.1Prepare trading account and balance sheet of BAJ sole traders according to the trial balance
provided.......................................................................................................................................7
4.2 Calculate Financial Ratios of BAJ sole proprietor................................................................9
4.3 Prepare Cash Budget for BAJ shop by using spreadsheet...................................................14
4.4 Explain the benefits and limitation of Budget, budgetary control and budgetary planning.
...................................................................................................................................................15
5. Prepare Profit and loss account and profit and loss appropriation account and balance sheet
for Mathew and Mark Partnership.............................................................................................16
6. Prepare Income Statement and Balance Sheet for Creative Kids..........................................19
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................21

INTRODUCTION
In the below report the purpose of accounting is discussed that is satisfy the organisational,
societal and stakeholders needs and wants. Accounting principles refers to the rules and
regulations which is necessary to followed by the company. Accounting principle help in
decision making process to achieve the organisational goals and objectives. This report includes
the explanation of ethics and how they are used in accounting process of BAJ Shop. The role of
accounting is elaborate with the help of given various objectives. Financial statements of BAJ
Shop are prepared with the help of trial balance which include Trading and profit and loss
account and balance sheet (Andersson and Hellman, 2019).
MAIN BODY
1. Describe the purpose of accounting in meeting social, stakeholder’s needs and Organisational
goals.
Accounting- Accounting is a process of recording the monitory transaction which are
related to a business for determining the net income of the business. The accounting function is
done by the accounts department in every organisation which helps in making important decision
for the growth of the business. Accounting includes different types of statements which are as
follows-
Balance sheet- All assets and liabilities of business are shown in this statement with the owner's
equity. Profit and loss account- profit and loss account shows net income of the organisation.
Cash flow statement- It shows the cash inflow and outflow of the business.
Purpose of Accounting-
 To determine the position- Accounting help in determining the position of the business.
Every organisation made books of account so that they evaluate the assets and liabilities
of the business which can help in determining the position of the business.
 Proper utilisation of resources- Accounting helps the organisation to determine the proper
utilisation resources of the business. so that the business can utilising their resources
efficiently or effectively. It also helps in reducing the cost and improve the growth of the
organisation (Eremin, 2021).
 Net Income- Accounting helps in ascertaining the net income of the business by the help
of which business can decide whether they should continue their operations or not.

 Helps in management function- Accounting help in management of the organisation by
the help of accounting the manager can do their function like planning, controlling,
directing etc. Because all this function requires some amount of finance to perform their
activities easily.
 Attract Investors- Accounting helps the organisation to attract their investors if an
organisation has a proper books of accounts then it will easy for the investors to
understand the organisation and by the help of this they can decide whether they have to
invest the money in the organisation or not.
 Cash Flow- By the help of Accounting business can track the inflow and outflow of cash
and control the wastage of money if its occur in business.
 Helps in taxation- Every business have to pay some amount of tax on their net Income
which they earn in an accounting period so if business prepare or maintain their account
then it will be easy for business to evaluate the tax liabilities.
Helps in creating source of finance- Accounting helps in creating source of finance because
every financial institution wants well maintained accounts so that they can easily examine the
assets and liabilities of business and also able to decide that they can give loan to the business or
not.
2. Explain ethics and also elaborate the decision of accountant in context of interest rate.
Ethics are being considered towards the principle that the organisation would be
demanding in relation to comply with it in such a manner that their functioning and working
would be carried out in a more systematic way. It is further necessary and important for
companies to plan, develop and implement specific ethics taking in account the economic
working environment being modified and ensuring that their business must work in context to
make them work in an efficient and effective manner. The accountant of this enterprise must
assure that firm must be focusing on implementation of legal and regulatory compliance on due
time duration. The instance and example would be such as filing of income tax return related to
service tax and commodities on a more reliable and accurate way, the corporate based tax must
be covered and deposited towards the local based regulatory authority on a day to day basis
which would at last work in an ethical form for the companies which it has been observed
(Ariail, Smith and Smith, 2021).

Ethics are to be taken in account in relation to moral principles being followed that would
denote and depict the ethical behaviour of a respective individual in relation with operational
activities which are being taken into account. Ethics must be applied and implemented with a
business level too by managing with demand, needs and requirements by covering timely
payment towards the debt holder from whose company would owe certain amount of funds, daily
payment of equated monthly instalment in relation with banking institution and financial
enterprise from which business could borrow and apply for loans as well.
3. Explain the role of accounting in decision making, society and stakeholders of the company.
Accounting:
The recoding, summarising and classification of a transactions in a significant manner
and in the terms of money the process is known as accounting. The accounting process starts to
record of transaction which relates on financial character is recorded in journal that is primary
books after that transferred in secondary book known as journal (Bell, 2018). Transactions are
transferred in Balance sheet and Profit and loss account on the basis of income, expenses, assets
and liabilities.
The procedure of accounting can be divided into two parts:
Generating Financial Information:
Recording -The basic function of accounting is recording. All the transactions relate to
business record which is used as a evidences such as sale book, salary bill and pay slip to
transferred in primary and secondary book.
Classification: The data is classified with the systematic analysis in a separate head that is
wages account, Printing and stationery account so that identify total expenditure incurred on
each head.
Summarising: It is classified in a manner, used by external and internal user of financial
statements.
Analysing: Balance sheet contains information of assets and liabilities which is not
describe proper details of current assets, the accountancy provides interpretation then the user
learns this aspects of later stage.
Interpreting: This is last function of accounting. The end users to make significant
judgement of financial condition and profit of the business.

Communicating: Recording, analysing and summarising the information to take business
decision.
Using the financial information
In earlier the financial statements are viewed by owner and proprietor of the business but
changing the social environment the owner, management, the user of account that is investors,
employees, lenders, government and agencies can invest in company and providing the
information of decision making (Centobelli and et.al., 2021).
The types of accounting as follow:
 Functional accounting
 Managerial accounting
 Cost accounting
 Job accounting
The financial statement is prepared bases on the U.S GAAP that is General Accepted Accounting
Principles. It is a standard which is improve the comparability of financial reporting.
Accounting play an important role in decision making process within a complex
operating environment. It is helping in decision making process and play role in management
activities. The objective of accounting providing the road map of financial information to
concern the financial situation of the company. The management understand the situations of the
company and compare with other company which works in same field and find out the
information and taking decision to achieve the objectives (DYSKOTUVANNYA, 2020).
Through the accounting, risk is to identify in business, whether is in financial or non-financial
nature. Risk management starts identify, analysing risk factor, making assessment and
mitigation. To analysing the risk timely to make proper arrangement and reduce the risk.
Through the accounting compliances that is laws and regulations which is comply in the
company to apply it to minimisation of risk and helps in decision making. To balance of
economic growth and environment it has must sustainability of the company. Management
accounting gives the financial reports to the stakeholder so that give the reports on the daily basis
and can take decision to improve the business. Users of accounting information-
Employees: The growth of the origination is depending on employment growth. It provides
remuneration, retirement benefit and pension.

Government: To control prices, exercise duty so they have continued interest in business
operation.
Investors: Investors provide risk capital to the business. They need access to information to buy
or sell the investment, how much dividend is received by the company. The owner is also need
the information so identify the business performance and financial position of company whether
still business is continuing or shut down.
4. By using accounting conventions, principles and standards. Prepare the final accounts of the
questions mentioned below.
4.1Prepare trading account and balance sheet of BAJ sole traders according to the trial balance
provided.
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 Financial Ratios of BAJ sole proprietor.
Gross Profit: It if the portion of profit which is calculated after considering the fixed expenses
of the firm.
Gross Profit Margin= (Revenue- Cost of goods sold) / Revenue *100
(Amounts in £’000)
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%

Analysis: The GP margin of the Company BAJ shop sole proprietorship business is 60.34 %
in the year 2018 which it has diminished in the consecutive year 2019. The revenue decrease
with a certain percentage but the major difference occurred due to the costs of goods sold. It was
increased even when the sales were diminished. In the year 2020, it was 71.1 %. which has a
major hike in comparison from the previous year.
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%
Analysis of Net profit margin of the company, in the year 2018 the ratio is 36.02% which
drastically declined in the year 2019 21% (approx.). Although declined in sales is not major
compared to the net profit. In the year 2020 sales increased by 3000, so as also the net profit
significantly.
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
Analysis, the company's current ratio depicts a strong position, company have more current
assets then current liabilities and can meet it its liabilities in the required time. The current ratio
of the company is better than required, company has a strong financial position.
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
Analysis, the company holds a more liquid asset which shows that company is in position to
meet its 90days liability (current liability). Company's liquidity position is strong.
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
Analysis, company's inventory turnover days in 2018 is 15.82 which means the company is
restocking in 15 days (approx.). The inventory turnover kept increasing in the following year
which depicts that company is enhancing its stock which increases company's sales.
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
Analysis, the company’s receivable collection period depicts that how often company
collects it cash from its debtor and how efficient the debtors are in meeting their liabilities
towards the company. The above scenario shows that company has good debtors as they receive
the payments quick and also the company has a conservatism collection policy and strong
collection department.
Fixed asset turnover period = revenue / fixed assets *365
Years Revenue Fixed assets
2018 7565 8640
2019 7000 8270
2020 10000 7530
2018,
= 7565/8640 *365
= 319.6 days
2019,

=7000/8270 *365
= 309 days
2020,
= 10000/7530 *365
= 484.72 days
Interpretation: Analysis, the company is able to generate revenue from its fixed assets in
319.6 days which shows that company is working efficiently, but it increases in the year 2020
which shows the weak position of the company.
4.3 Prepare Cash Budget for BAJ shop by using spreadsheet.
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 1563.44491
Rent 1000 1050 1102.5 1157.625 1215.50625 1276.28156
Lightning and
heating expenses 175 183.75 192.9375 202.584375 212.713594 223.349273
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 3249.12675
Net cash flow 7475 9545 -442 -9626.4 11552.375 12855.9733
Opening balance of
cash 4090 11565 21110 20668 11041.6 22593.975
Closing balance of
cash 11565 21110 20668 11041.6 22593.975 35449.9483

4.4 Explain the benefits and limitation of Budget, budgetary control and budgetary planning.
Budget
Advantages:
 Budget is prepared to determine the estimated future income and expenses which can be
incurred in future. It helps in fulfilling the gaps created due to unpredictable and unseen
situation.
 It provides the alternatives that can be used by the business to finance its business
operations.
Demerits of Budget:
 The budget needs to be prepared with the accuracy to avoid the future uncertainties.
 It can create organisation imbalance as it already states the areas where the amount will
be invested and there needs to incorporate more finance for other projects.
Budgetary Control
Advantages of Budgetary Control:
 Budgetary planning provides stability to the organisation and estimates future
uncertainties in advance.
 It provides future planning and how it is to be planned to achieve the organisational
goals.
Disadvantages of Budgetary control:
 Organisation needs to plan its expenditures before the actual expenditure to co-ordinate
with the resources of the company.
 Inappropriate business plan will create problem to the business concern.
Budgetary Control
Advantages:
 The main focus of the budgetary control is to focus on the key aspects of the business.
 It helps in determining the area in which organisation is lacking behind.
Disadvantages:
 It acts as a demotivation for the employees as they have to achieve the target set by the
management.

 As the target are already set by the management it needs to be fulfilled by the employees
of the organisation.
5. Prepare Profit and loss account and profit and loss appropriation account and balance sheet for
Mathew and Mark Partnership.
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. Prepare Income Statement and Balance Sheet for 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
From the report prepared above it can have asserted and concluded as well that accounting
principles would be playing a vital and essential role in carrying out operational as well as
functional activities. It would help to understand the working of business over a period of time
with the help of financials being computed. The ratios calculated as above would help managers
to have an idea as where the company is lacking and lagging behind in its working and in what
ways it can be improved as well. The report would provide a view and facilitate comparison on
the basis of performance being rendered by a firm or enterprise.

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