Accounting Principles and Tools: Cash Budget and Financial Statements

This report discusses the purpose and scope of accounting, critical evaluation of accounting function, branches of accounting, accounting systems and technology, and issues of ethics, regulation and compliance. It also includes a 12-month cash budget and variance analysis, and year-end financial statements with financial ratios.

unit 5
Contents
INTRODUCTION...........................................................................................................................3

PROJECT A.....................................................................................................................................3
TASK 1............................................................................................................................................3
Discussion related to the purpose and scope of accounting in operating environment...............3
Critical evaluation of the accounting function in helping stakeholders in decision making.......4
Branches of Accounting..............................................................................................................4
Discussion related to the accounting systems and the role of technology in modern day
accounting....................................................................................................................................5
Issues of ethics, regulation and compliance and how they create threats to the organisation.....6
TASK 2............................................................................................................................................7
Production of a 12-month cash budget and making use of variance analysis.............................7
Preparation of Memorandum.......................................................................................................8
PROJECT B.....................................................................................................................................9
TASK 1............................................................................................................................................9
Preparation of year-end financial statements...............................................................................9
Calculation of financial ratios....................................................................................................12
TASK 2..........................................................................................................................................12
Writing an accompanying letter to the client.............................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Accounting Principles refers to a set of rules and guidelines which are presented to different
business enterprises on the basis of the business operations they perform which help these
businesses to better manage the accounting and bookkeeping practices of the business. The
Generally Accepted accounting principles is a set of principles which are used worldwide which
brings homogeneity and creates a basis for the different stakeholders to critically analyse the
working of different business enterprises and take decisions accordingly (Kwilinski, 2019).The
following report highlights two projects which are concerned with the use of accounting tools. In
project one, the report focuses on preparing a blog for Tesco, an FMCG organisation. It is
detailed about different information related to accounting. This project also shows a
memorandum having details about the Cash Budget of a business and variances in the same. The
second project highlights different financial statements of different organisations and a formal
letter to a client, having details about the different financial ratios of a business.
PROJECT A
TASK 1
Discussion related to the purpose and scope of accounting in operating environment.
Accounting refers to the collection, recording, bookkeeping of the financial data of a business
with interpreting the same and reporting the interpretation to the different stakeholders of the
business (Hilorme, and et.al., 2019). The accounting is an empirical concept in the field of
commerce and business as this gives insights to the users of the information of the business about
the functioning of the business with the view of deriving them to engage with the operations of
the business directly or indirectly. The management of any business has to implement accounting
processes into the working of the business as it is mandatory by law and also creates ease for
them in the working of the business.
The major function of accounting is to keep accounts of the financial transaction. The
scope of accounting covers all the financial activities of the individuals, business concerns,
governmental departments, professionals etc. the prime objective of the business is to earn a
profit while performing operations they deal in. the accounting is the concept which aids the
business to ascertain the profit of the business and its units. Controlling the financial policy of
any business, formation of objectives, preparation of budget, determining the errors and frauds

are some of the other functions of accounting (Cho, Vasarhelyi, Sun, and Zhang, 2020).
Following are the functions of accounting:
 Identification of transactions
 Recording of transactions
 Classification of transactions
 Communication of the necessary details to the diversified stakeholders.
 Calculation of profit and loss of the business
 Analysis of the financial statements
Critical evaluation of the accounting function in helping stakeholders in decision making
The accounting function of the business aids the different stakeholders of the business in
decision making. The stakeholders of any business are present with many opportunities to take
decisions which involves the business organisation. Following is a critical evaluation on how
accounting is a change maker for business:
The function of accounting is to record the financial data, interpret the same and report the
results to the stakeholders. As the reporting is done, the stakeholders get to know about the actual
working of the business and where the business stands in the market (Humphreys, 2018). This
knowledge of the business helps the stakeholders in determining whether they should engage
with the operations of the business or not, for example, potential investors get to know about the
return the business is paying to their existing investors, if the return meets their own interests and
wants, they may further take the decision to invest in the business. The negative aspect here is
that, if any wrong information is being provided to the stakeholders via the reporting, this can
defame the image of the business in front of the various stakeholders of the business and hence
these important individuals may not indulge in workings of the business.
Branches of Accounting
Branch accounting is a system of accounting which helps to keep records of various
departments and their specific activities. Some of the branches of accounting can be explained as
given below-
 Financial accounting - It is the process in which all the financial tasks of the
organisation are recorded. It basic aim is to prepare the financial statements by organising
the financial data into their respective accounts. It is prepared with a view to know the
true and fair picture of the organisation. By taking the help of GAAP and IFRS the

records are prepared with uniformity and helps to compare base (Channuntapipat,
Samsonova-Taddei, and Turley, 2020). There are several sources of finance and cost of
specific source is used to know the actual weighted average cost of capital.
 Auditing - It is the branch of accounting in which there are internal and external
auditors. Auditing helps to verify the accounts and assets of the organisation. It gives
their opinions according to varied firms such as qualified opinion refers to the
misstatement in the accounts whereas unqualified report is the one which is free of errors.
 Managerial accounting - It deals with inspecting the management activities with a
view to enhance the effectiveness of the organisation which helps to attain organisational
goals (Kumar, and et.al., 2020). The techniques such as cost profit volume (CPV)analysis
and break-even analysis are included in managerial accounting. The budgets are prepared
with a view to achieve optimum utilisation of resources.
 Cost accounting - It helps to know the cost related to each product and stage of
manufacturing. Job order costing and process costing are the two key components of cost
accounting. It helps to gain knowledge about each product line. It takes preventive
measures to control the cost of product or activity which consumes maximum resources.
It will lead to minimise the wastage of the organisation.
Discussion related to the accounting systems and the role of technology in modern day
accounting.
In a firm, an accountancy system is a way of storing and arranging financial data. This can be
done by hand or by computer. The most crucial reason to utilise a chart of accounts is to keep
records of purchases, revenue, and other business activities (Bruno, and Lapsley, 2018).
Basically, any data which has an influence on a company's financial performance should be
monitored.
Following are some of the accounting systems which are used in the field of commerce:
 Managerial Accounting
 Inventory Accounting
 Industry Specific Accounting
 Not-for-Profit Accounting

Technology has changed the accounting profession, helping organisations to pay less tax
fines and other worries thanks to newer and more complicated systems, as well as its ability to
ensure accuracy and reduce mistakes. Furthermore, it has become much easier to organise audits
in an efficient manner.
Stacks of paperwork have been replaced by apps and data, allowing accountants to migrate from
undertaking projects to today's business advisors. Cloud-based accounting solutions are a
widespread technology used by many businesses to simplify content and make it more accessible
(Remenarić, Kenfelja, and Mijoč, 2018). Accountants may access critical information from
anywhere on the internet, regardless of the time or location. Massive files may now be saved on
the web, which gives endless storage space, making real-time data processing easier.
Accountants can use accounting apps and analytics to do activities such as getting financial data
and employing tools. QuickBooks, Xero, FreshBooks, and others are among the most popular.
Issues of ethics, regulation and compliance and how they create threats to the organisation.
If a company fails to conduct ethically in a society where it is expected, it risks significant
reputational and monetary harm if its activities are made public. Ethics is increasingly seen as
advantageous to long-term business success in a more open society.
Administrators, dealers, consumers, adjudicators, and stakeholders should all be supported and
encouraged to operate ethically in a regulatory system (Rezaee, and Wang, 2019). It should
establish a culture, incentives, and rules that encourage rather than discourage individuals and
organisations from doing ethically. Lawmakers, regulators, lawyers, and courts, as well as
companies themselves, should use their enforcement strategies and procedures to encourage and
acknowledge an organization ’s commitment to an ethical position. Having an influence on both
personal and group behaviour will be crucial. The culture of a corporation is an important factor
in determining professionalism and ethics.
Many articles highlighted the inadequacies of responding to the financial crisis of 2008 by
enacting a flurry of rules while disregarding the need to build an ethical culture within
organisations. Since then, however, the widespread imposition of additional regulation has
produced a desire for greater certainty through more rules and prescriptions, limiting individuals
on the front lines' capacity to think for themselves and weakening their authority and obligation
to behave responsibly (Schaltegger, 2018).

TASK 2
Production of a 12-month cash budget and making use of variance analysis
Cash Budget for the 12 months to 31st December 2023
Jan Feb Mar Apr May Jun
A. Cash Inflows
Capital 1,00,000 nil nil nil nil nil
Loan 50,000 nil nil nil nil nil
Sales 44,000 52,800 63,360 76,032 91,238 1,09,486
Total Cash Inflow (A) 1,94,000 52,800 63,360 76,032 91,238 1,09,486
B. Cash Outflows
Purchases made 16,600 18,900 20,300 22,100 24,400 27,200
Payment to Suppliers 23,200 16,600 18,900 20,300 22,100 24,400
Marketing Budget 16,500 18,150 19,965 21,962 24,158 26,573
Utilities 4,000 4,000 4,000 4,000 4,000 4,000
Furniture 5,100 5,100 5,100 5,100 5,100 5,100
Salaries 30,000 30,000 30,000 30,000 30,000 30,000
Heat & Light 5,000 5,000 5,000 5,000 5,000 5,000
Administration Cost 10,000 10,000 10,000 10,000 10,000 10,000
Interest 200 200 200 200 200 200
Loan Principal 2,000 2,000 2,000 2,000 2,000 2,000
Rent 12,750 10,838 9,212 7,830 6,656 5,657
Total Cash Outflow (B) 1,25,350 1,20,788 1,24,677 1,28,492 1,33,613 1,40,131
Jul Aug Sep Oct Nov Dec
A. Cash Inflows
Capital nil nil nil nil nil nil
Loan nil nil nil nil nil nil
Sales 1,31,383 1,57,660 1,89,192 2,27,030 2,72,436 3,26,924
Total Cash Inflow (A) 1,31,383 1,57,660 1,89,192 2,27,030 2,72,436 3,26,924
B. Cash Outflows
Purchases made 30,000 32,000 33,500 37,500 40,000 43,500
Payment to Suppliers 27,200 30,000 32,000 33,500 37,500 40,000
Marketing Budget 29,231 32,154 35,370 38,906 42,797 47,077
Utilities 4,000 4,000 4,000 4,000 4,000 4,000
Furniture 5,100 5,100 5,100 5,100 5,100 5,100
Salaries 30,000 30,000 30,000 30,000 30,000 30,000

Heat & Light 5,000 5,000 5,000 5,000 5,000 5,000
Administration Cost 10,000 10,000 10,000 10,000 10,000 10,000
Interest 200 200 200 200 200 200
Loan Principal 2,000 2,000 2,000 2,000 2,000 2,000
Rent 4,809 4,088 3,475 2,953 2,510 2,134
Total Cash Outflow (B) 1,47,540 1,54,542 1,60,644 1,69,160 1,79,107 1,89,011
Net cash Inflow (A-B) -16,157 3,118 28,548 57,871 93,329 1,37,913
Preparation of Memorandum
MEMORANDUM
To: The client
From: Graduate Trainee
Discussion about Budget and how it plays an effective role in the planning and the
control of resources in an organisation:
Budgeting, in general, is concerned with assisting a corporation in making future plans. It
is the method through which a corporation may be certain that it will have adequate funds
to complete the necessary initiatives. We are all aware that the world we live in today is
based on competitiveness. To demonstrate its fundamental skill, any organisation must
plan new initiatives. No corporation can instantly begin investing in research and
development under these conditions (Sarkodie, and Adams, 2018). It will need a
significant amount of preparation, which will only be achievable if the company's budget
permits it to do so. In all other cases, it would be forced to shut down services due to an
excess of quantity demanded.
There are numerous additional situations in which a corporation might apply budgeting
concepts to carry out its strategy. In the case of training, this is evident. Every training
strategy must be backed up by a budget. This is one of the most important training
criterions. The plans would very probably not be carried out if the company's budget did
not allow for them. Under the circumstances, the loss might be enormous. The first
situation would result in a monetary loss since inadequate training would be useless
because it would fall short of the company's requirements.
An effective financial management system is an excellent technique to achieve measurable

and clearly defined corporate goals and objectives (Weygandt, and et.al., 2019). It not only
offers a technique of allocating and using resources inside a corporate organisation,
assisting key personnel in monitoring and exercising control, but it also leads to the
alignment of business goals with the firm's strategy and long-term plans.
Following are the Budgetary control types available:
1. Operational control- It covers income and operational expenditures, both of which
are necessary for the day-to-day operation of a firm. In most circumstances, the
actual figures to a plan are compared weekly. It assists in attaining EBITDA
(earnings before interest, taxes, depreciation, and amortisation) control.
2. Cash Flow control- This is a crucial budget for keeping track of working capital
requirements and cash management. Cash shortages may be disruptive to day-to-
day operations; therefore, this is a crucial consideration.
3. Capex control- It includes major expenditures such as the purchase of machinery
or the construction of a structure (Haider, Singh, and Sultana, 2021). Because it
involves such a large sum of money, the control here aids in the elimination of
waste and cost reduction.
PROJECT B
TASK 1
Preparation of year-end financial statements
Sole Trader
Income Statement of T King
Particulars Details Amount
Net Sales 103701
Less: Cost of Sales
Purchases 42160
Opening Stock 5,900
48060
( Closing stock ) 7220 40840
Gross Profit 62861
Less: Operating Expenses
Depreciation on plant and machinery 8700
Rent 4200

Prepaid Rent ( 600 ) 3600
Light and Gas 3700
Outstanding expenses 580 4280
Stationery 2430
Telephone 680
Travel Expenses 330
Salaries 15891
Advertisement Expenses 5000
Insurance expenses 2000
Utilities expenses 4200
Administration Expenses 7400 54511
Net Profit 8350
Balance Sheet of T king
Particulars Details Amount
LIABILITIES
Current Liabilities
Bank Overdraft 1540
Creditors 12700
Outstanding expenses 580
Non-current Liabilities
Capital 52040
Add: Net Profit 8350 60390 75210
ASSETS
Current Assets
Prepaid rent 600
Cash 1170
Closing Stock 7220
Debtors 14310
Less: Bad debts 610 14920
Non-current Assets
Plant & Machinery 87000
Less: Depreciation 8700
Less: Provision for Depreciation 27000 51300 75210
Partnership
Income Statement of Rave Music
Particulars Details Amount
Net Sales 2,50,000
Less: Cost of Sales

Purchases 1,20,000
Opening Stock 20,000
140000
(Closing stock) 30000 110000
Gross Profit 140000
Less: Operating Expenses
Depreciation on freehold Building 3000
Depreciation on Furniture and fixture 2000
Wages and salaries 35000
Add: Outstanding salaries 1700 36700
Shop expenses 20000
Less: Prepaid 800 19200
Veta's salary 10000
70900
Net Profit 69100
Balance Sheet of Rave Music
Particulars Details Amount
LIABILITIES
Current Liabilities
Bank Overdraft 6000
Creditors 7000
Outstanding salaries 1700
Non-current Liabilities
Capital:
John 54000
Less: Drawings 24000
Add: Net Profit 34550
Add: Interest on capital 5400 69950
Veta 46000
Less: Drawings 18000
Add: Net Profit 34550
Add: Interest on capital 4600 67150
Bank Loan 80000 231800
ASSETS
Current Assets
Prepaid expenses 800
Closing Stock 30000
Debtors 3000
Non-current Assets
Freehold Land and Buildings 200000
Less: Depreciation 3000

Less: Provision for Depreciation 9000 188000
Furniture & Fixtures 20000
Less: Depreciation 2000
Less: Provision for Depreciation 8000 10000 231800
Calculation of financial ratios
Calculation of Financial Ratios for the year 2020 and 2021
Ratios Details Year 2021 Details Year 2020
1 Gross profit percentage. 49000 / 700000 * 100 70
90000 / 150000 *
100 60
2 Net profit percentage. 270830 / 700000 * 100 38.69
44895 / 150000 *
100 29.93
3
Return on Capital
Employed 371000 / 933250 * 100 39.75
61500 / 240000 *
100 25.62
4 Current Ratio 153250 / 117670 1.30 50000 / 22605 2.21
5 Quick Ratio
( 153250 - 26250 ) /
117670 1.07
( 50000 - 12000 ) /
22605 1.68
6 Asset Turnover 700000 / 933250 0.75 150000 / 240000 0.62
7 Inventory Turnover 210000/ 26250 8 60000 / 12000 5
8 Average Payable Period
(117670 / 210000) *
365 204.5
( 22605 / 60000 ) *
365 137.5
9
Average Receivables
Collection Period
(105000 / 700000) *
365 54.75
( 37500 / 150000 ) *
365 91.25
TASK 2
Writing an accompanying letter to the client
Mollan and co.
Stamford Bridge Rd, York
21-01-21
Mrs. Fernsby
40 Tayfen Rd, Bury St Edmunds,
Suffolk
Respected Ma’am,
This is in respect to the query you have put forward related to how the accounting is done for
different business enterprises. This letter will explain to you how financial statements of different

organisations are prepared following a detailed interpretation of financial ratio analysis which
helps the decision makers related to any business to critically analyse the workings of business.
Please find attached excel which provides solutions to hypothetical questions related to the
financial statements of sole trader, partnership and non-profit organisation.
Sole trading refers to a type of business in which is owned and operated by a single person. They
are the sole authority who can take decisions in the business. Partnership refers to that business
enterprise which is owned and operated by more than one person and they invest capital in a
ratio which determines their ability to face liability and earn profits from the business. Non-profit
organisations refer to that enterprise which comes into existing, not for earning profit but for
providing services to the society (Mahmoudian, and et.al., 2021). The accounts of the above
businesses are prepared in a way which caters to the needs and wants of these businesses and
their stakeholders.
The ratio analysis of the business is provided in another excel attached. From the ratio
calculations it can be seen that the business is able to convert good amount of revenue into its
profit. The profitability of the business can be seen in good condition but it can be seen that in
the two-year analysis the ratio of the business profit margin have reduced 10 % in the one year.
The business should focus on maintaining the profit margin. The liquidity position of the
business can be seen as below the ideal ratio in the first year but business progressed and took
the current ratio of the business above the ideal ratio which is 2:1. The liquidity position of the
business can be said as overall good. The activity ratios of the business show a good picture
about the operations of the business as they are able to receive payment from their debtors in 50
days and the liability to pay to the creditors is 200 days which means the business can easily
meet these obligations and may also use these funds for other purposes as well.
The accounting software available in the markets are: QuickBooks, Xero, FreshBooks, and
others.
Thank you
Daniel Wood
Graduate Trainee
Mollan and co.

CONCLUSION
From the above-mentioned data, it can be concluded that accounting is one of the major concepts
in different business organisations and having detailed knowledge about the tools used in this get
essential for every user of the business information. The preparation of financial statements of
different organisations give information related to the profit and loss of the business and the
financial position that the business holds.

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