Understanding Suspense and Clearing Accounts

This assignment delves into the distinctions between suspense and clearing accounts in accounting. It provides definitions for both account types, outlining their purposes and functionalities. A table compares key features of each account, highlighting how they are used differently in financial record-keeping. Understanding these differences is crucial for accurate financial reporting.

FINANCIAL ACCOUNTING
AND PRICIPLES

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Financial accounting and its purpose.................................................................................1
2. Regulations regarding Financial Accounting.....................................................................2
3. Accounting rules.................................................................................................................3
4. Accounting concepts and conventions...............................................................................4
CLIENT 1........................................................................................................................................5
CLIENT 2........................................................................................................................................7
CLIENT 3........................................................................................................................................9
CLIENT 4......................................................................................................................................13
CLIENT 5......................................................................................................................................14
CLIENT 6......................................................................................................................................16
REFERENCES:.............................................................................................................................17

INTRODUCTION
The financial accounting involves identifying, classifying, summarising the financial data
in a significant manner, to make it useful for its users and interpreting the results to ascertain the
financial position of business (Financial reporting standard, 2017). It is mandatory for all
organisation either it is small or large to follow accounting rules, regulations and conventions.
“DNS Accounting” is an accounting firm in U.K is a small accountancy firm working as
accounting and auditing in U.K. In order to prepare the books of accounts in effective and
efficient manner then, it is crucial to follow the accounting terminology. In this report,
Introduction of Financial Accounting and its purpose, rules- regulations and principles of
Financial accounting and its concepts and conventions are mentioned in one part and in second
part analysation of numerical data is presented.
MAIN BODY
1. Financial accounting and its purpose
Financial Accounting: It is a branch of accounting which is engaged with recording,
classifying, summarising the financial data in proper manner, in order to present a present a
proper analysation of financial data and to ascertain the financial position of business. Moreover
under financial accounting only those transactions are to be recorded which are related to
financial character. Financial accounting involves several stages to record , analysing and
ascertaining the financial data. First stage begins from recording of financial transactions in
journal(in form of entries) after that in ledger (in form of separate accounts), after that in trial
balance(classification and interpretation of journal and ledger) and finally in consolidate Profit
and Loss accounts and Balance sheet. the final accounts shows the net profit or net loss of
business incurred in financial year and on other hand balance sheet shows the final financial
position of the business. Moreover there are some purpose of financial accounting:
 To prepare and maintain the the financial transactions of business.
 To ascertain the financial position of business: By analysing the financial data and
balance sheet.
 To shows the financial position of business: With the help of balance sheet which
shows the net assets and net liabilities of business at the end of financial year.
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 To ascertain the profit and loss: By presenting the profit and loss account that shows
net profit or net loss incurred during a financial era.
 To provide a financial report in a significant manner to its internal and external
users: Moreover, internal users includes board of directors, equity owners,
management etc. and external users includes government organisations, tax authorities,
financial organisations and potential investors.
Presentation: To present the financial data in such a way that must be relevant, reliable,
consistent, and comparable so that ascertainment of financial position becomes easier.
2. Regulations regarding Financial Accounting
Financial accounting regulatory frameworks pertains three types of regulations namely;
Professional regulations: The professional regulation pertains the valuation of
inventory use differently by different companies. Before the establishment of Accounting
Standard Board (ASB) the entities were free to select and follow the different accounting
methods and it leads to different results of profits figures, then it become very critical for users to
rely on company's annual reports. Then after the establishment of Accounting Standards Board
(ASB) the board issued several accounting standards and made mandatory for each entity to
follow these standards while preparing books of accounts. In case of international accounting
regulations, the regulations in form of accounting standards were issued by International
Accounting Standards Committee(IASC) to ensures international comparability and consistency
between the financial statements prepared by companies of two or more different nations
(Mangala and Kumari, 2015).
IFRS issued by the international accounting standard board(IASB) as a regulations regarding the
preparation of financial statements. IFRS 1 First time adoption of international financial
reporting standards: according to this standard company which decides to follow IFRS first time
to prepare financial statements then company uses the accounting policies presented in IFRS
financial statement throughout the year. The adoption of IFRS help the company to present its
financial statements comparable and consistent. So that the financial statements of that company
becomes comparable with other companies of different nations of world.
IFRS7 states the Disclosure of accounting information: Disclosing of financial statements to its
users is essential part which have to perform by the management of company as become
mandatory by IFRS following company. Disclosing it to its internal and external users. The
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internal users includes board of directors, equity owners, employees etc. on the other hand
external users includes government authorities, tax authorities, potential investors etc. The
general public also needs the true financial information of public company as public company
generates funds from public by issuing shares and correct financial position of company depicts
in its financial statements of company (Keerasuntonpong and Cordery, 2016).
3. Accounting rules
In accounting terms mostly using double entry system because every transactions affect
two accounts. First is debited and second is credited, due to it's dual aspects. The golden rules of
accounting are as follows -
 Debit the Receiver, Credit The Giver: This Rule is applied on personal accounts, when
a individual gives something to the company. The company recorded this individual as
credit in books of accounts and the receiver needs to be debited.
 Debit what comes in, credit what goes out: This Rule used for real accounts including
machinery, land and building etc. In this principle already existing these accounts when
receiving something so add balance in existing account. When giving something that time
reduce balance from existing account.
 Debit all expenses and losses, credit all incomes and gains: This Rule applied on
nominal account and including capital of the company. When credit all incomes and
gains so increase balance of capital and when debit all expenses and losses so decrease
balance of capital.
Accounting Principles:
 Economic Entity assumptions: In this principle accountant keeps all the business
transactions separate from personal transactions. In accounting terms for legal purpose
they have different different entities (Maseda and et. al., 2016).
 Time period Principle: This concept that a business results and it's operations are
reporting in standard period of time. It assumes that business should report their financial
statements (income statement/balance sheet) in specific time period.
 Monetary unit principle: In financial accounting, only those transactions will evaluate
which can be expressed in monetary terms, the transactions which cannot be expressed in
monetary terms are not to be included in accounting.
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 Cost principle: Accounting involves consistency and comparability that is why it
requires to record the accounting transactions to be recorded at their historical values.
 Full Disclosure principle: If any information important relating to financial statement
for an investor or lender so that information disclosed with in the notes of the statement.
That is why because basic accounting principle that in financial statements are attached
footnotes (Sever, Žager and Sačer, 2013).
 Going concern principle: This principle defines that the will longer carry its business
operations in foreseeable future, financial statements will also prepared on this basis till
longer company survives.
 Matching principle: In this accounting principle company would be use the accrual
basis of accounting. The matching principle requires the revenues of the financial year
must be matched with expenses of that financial year.
 Revenue Recognition Principle: In this principle revenues are recognized as money is
actually received regarding product has been sold or a service has been performed.
 Materiality: According to this concept to financial statements are prepared to maintain a
systematic record so it become useful to its users that is internal users and external users.
Helpful in making economical decision. Financial statements are the material and it's
information is known as materiality.
 Conservatism: According to this principle expenses and liabilities are recorded as soon
as possible but when you are sure for revenues and assets.
4. Accounting concepts and conventions
Accounting concepts are basic accounting assumptions or regulations on the basis of
which books of accounts and final reports are prepared. While accounting conventions are
customs, methods and process on the basis of which financial statements are prepared by a firm,
these are having universal acceptance but changes with time. Partiality is impossible in applying
accounting concepts.
Consistency: According to this, accounting method, practices and policies on which
financial statements are based should be same in subsequent financial years. Because users of
financial information compares financial reports of a firm from one year to another. Thus it will
be easy for them. For instance, depreciation is charged according to straight line method,
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valuation method of stock should be consistent over years. But in any case if change occurs in
accounting methods or procedure then it should be immediately reported in financial statements
(Howard and Warwick, 2013).
Material disclosure: 'Material' means any information which is very important and can
affect the financial decisions of users, auditors, and all the stakeholders. So every material
information and facts need to be disclosed in books of accounts to avoid mislead. These can be in
form of working or foot notes. Aim of this convention is to communicate useful information to
interested users. For example, provision for depreciation and bad debts, market price of assets
etc. Disclosure of material information should be there not of immaterial or insignificant
information because it can create extra burden on firm.
CLIENT 1
Double entry system:
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Ledger:
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Storage cost
Date Particular Amount Date Particular Amount
01-05-16 To bank 800 01-05-17 By balance c/d 800
800 800
Sales a/c
Date Particular Amount Date Particular Amount
03-05-16 By J. Wilson 1520
By T. Cole 1940
By F. Syme 2980
By J. Allen 1110
By P. White 2420
By F. Lane 770
09-05-16 By T. Cole 1480
By J. Fox 1910
20-05-16 By L. mole 1830
01-05-17
To Balance
C/d 17870 by W. Wright 1910
17870 17870
Bank a/c
Date Particular Amount Date Particular amount
16/07/18
31/07/18
To P Games a/c
To F Steel a/c
To J Wilson a/c
To F Syme a/c
To balance c/d
1330
2940
810
1590
29390
01/07/18
24/07/18
27/07/18
30/07/18
31/07/18
By storage cost a/c
By S Lyle a/c
By J Brown a/c
By R Foot a/c
By salaries a/c
By business rates a/c
By Abel motors a/c
800
3240
4140
1260
4800
1320
20500
36060 36060
Purchase a/c
Date Particular Amount Date Particular amount
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02/07/18
20/07/18
To S Lyle a/c
To D Rain a/c
To W Sone a/c
To R Foot a/c
To L Mole a/c
To W Wright a/c
1850
2860
990
1610
1830
1910
30/07/18 By balance c/d 9440
9440 9440
Salaries a/c
Date Particular Amount Date Particular amount
27/07/1
8
To bank a/c 4800 31/07/18 By balance c/d 4800
4800 4800
Motor exp a/c
Date Particular Amount Date Particular amount
04/07/1
8
To cash a/c 1170 31/07/18 By balance c/d 1170
1170 1170
Cash a/c
Date Particular Amount Date Particular amount
31/07/1
8
To balance c/d 3670 04/07/18
07/07/18
By motor expenses a/c
By drawing a/c
1170
2500
3670 3670
Business rates a/c
Date Particular Amount Date Particular amount
30/07/1
8
To bank a/c 1320 31/07/18 By balance c/d 1320
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1320 1320
S Lyle a/c
Date Particular Amount Date Particular amount
24/07/18 To bank a/c
To discount a/c
3240
360
02/07/18
31/07/18
By purchase a/c
by balance c/d
1850
1750
3600 3600
Drawings a/c
Date Particular Amount Date Particular amount
07/07/1
8
To cash a/c 2500 30/07/18 By balance c/d 2500
2500 2500
W Sone a/c
Date Particular Amount Date Particular amount
31/07/18 To balance c/d 990 02/07/18 By purchase a/c 990
990 990
D Rain a/c
Date Particular Amount Date Particular amount
31/07/18 To balance c/d 2860 02/07/18 By purchase a/c 2860
2860 2860
L Mole a/c
Date Particular Amount Date Particular amount
31/07/18 To balance c/d 1830 20/07/18 By purchase a/c 1830
1830 1830
R foot a/c
Date Particular Amount Date Particular amount
24/07/18 To bank a/c 1260 02/07/18 By purchase a/c 1610
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31/07/18
To discount a/c
To balance c/d
140
210
1610 1610
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Trail balance:
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CLIENT 2
a) Profit and loss statement for sierra Laurent for the year ended 31st July 2018
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b) Statement of financial position for Sierra Laurent as at 31st July 2018
ASSETS
Cost
Valuation
Accumulated
Depreciation
Carrying
Value
Non Current Assets
Free hold payment(40000+5600) 280000 -45600 234400
Equipment(68000+19000) 190000 -87000 103000
Motor Vehicles(12000+3600) 30000 -15600 14400
Total non- current assets 500000 -148200 351800
Current Assets
Inventory (1/1/17) 42640
Receivables 15200
Prepayments:
advertising expenses 4470
Cash in hand 3000
Total Current Assets 165310
TOTAL ASSETS 517110
EQUITY AND LIABILTIES
Equity
Capital 243800
Add: Profit 233790
477590
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Less: Drawings -28000
Total Equity 449590
Current Liabilities
Trade Payables 56000
Accruals: Wages and Salaries 1520
Bank overdraft 10000
Total Current Liabilities 67520
TOTAL EQUITY AND
LIABILITY 517110
CLIENT 3
a) Profit and loss statement
b) Statement of financial statement of Braintree Ltd.
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c). Accounting concepts
Consistency: According to this, accounting method, practices and policies on which
financial statements must be same in subsequent financial years. Because users of financial
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information compares financial reports of a firm from one year to another. Thus it will be easy
for them. For instance, depreciation is charged according to straight line method, valuation
method of stock should be consistent over years. But in any case if change occurs in accounting
methods or procedure then it should be immediately reported in financial statements.
Prudence concept: Prudence concept states that on one hand, assets and income must
not be overstated and on other hand liabilities and expenses must not be understated. It means
that sometimes, companies wants to generate more funds by showing overstated amount of profit
and assets, gains the interests of investors these unfair practices increase cases of frauds with
investors. Not only this, in fact loss incurring companies also perform these unfair practices by
understating the loss and liabilities to generate funds (Maina, 2015).
d). Purpose of depreciation: Depreciation: it is gradual and permanent decrease in value of
assets or reduction in value of assets due to use of it or due to obsolescence. This particular
method is entirely relying on matching principles concepts to which cost of production can be
matched effectively. It is systematically allocated or moves the overall assets of costs arises from
balance sheet to the profit and loss statements. These entry is recorded in respect to establish
current value of property or assets to determine scrape value of them. Depreciation can be
charged on various ways. Some of them are discussed underneath there are some importance of
depreciation:
 Company can track the remaining or real value of assets at the end of year.
 Company can use it as a tool to find out the remaining value of assets and the market
value of that assets and also estimate the profit or loss on sale of assets.
 Company can use it as a tool for tax reduction, as depreciation is non cash expenses by
showing it in profit and loss statements it reduces the profit and also reduces the amount
of tax.
Moreover, there are two methods of depreciation namely; straight line method and
written down value method.
Straight Line method: according to this method equal amount will deduct every year.
deductible amount once calculate on the basis of depreciation rate.
Written down value method: according to this method the depreciated amount
calculated each year by depreciating rate and on the basis of remaining value of asset.
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CLIENT 4
a):BRS (Bank reconciliation statement): It is an statement which shows the difference between
bank passbook and cash book on a specific date. It is very easy to identify differences with the
help of bank reconciliation statement. But sometimes it is very difficult as the observer has to
match every transaction which is recorded in the cash book of the organisation and bank pass
book in which all the transactions are recorded by the bank. Main purpose of creating bank
reconciliation statement is to identify that is there any difference between bank passbook and
cash book of the organisation. It is very important for an organisation as it can provide the reason
behind the variation between pass book and cash book.
b): Various location that cause to record all variation from the bank passbook: There are
various areas in which all the statements are recorded can vary from the bank passbook records
that are recorded by the bank (Jia and Zhao, 2014). These areas are as follows:
 One of the reason is that if cheque is issued by a business to its clients but it may not be
presented by them for payment (Kostadinovski and Gorgieva-Trajkovska, 2013).
 Different charges like collection, interest and service on overdraft charged by the banker
are not recorded in the cash book but recorded in bank pass book.
 Cheque which has been received from customers and deposited to the bank but yet not
collected by the banker.
 Recording errors: It can be arising because banks would need to record proper check or
deports into their statements incorrectly
c): Preparation of BRS:
Bank Reconciliation Statement
Dr. Cr.
Balance as Cash Book 2140
Cheque paid to C Lyons but not Subtracted from bank 870
Payment made by bank but not noted in cash book 1050
Cash received from sales but not recorded in Bank
Cash paid to C David but not deducted from Bank 1220
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Cash paid to Seems but not recorded in Bank account 1160
Bank charges paid but not deducted from cash book 360
Balance as per Passbook 3980
d): Cash book
CLIENT 5
Sales ledger control account: It is also called trade debtors control account which shows
total trade debtors of an organisation for a specific period of time. In other words, it can be
defined as the account that shows total owed amount of a company which needs to be recovered
from various customers or clients. It helps the managers to estimate accurate outstanding amount
from customers. This account is very important for the companies because it can provide actual
and transparent information of account receivables(Hsu, Moore and Neubaum, 2014).
Sales Ledger Control Account
Dr Cr
Details Amount Details Amount
Balance b/d 22600 Bad debts 1120
Credit sales 162350 Discount allowed 1380
Receipts from credit 149610 Sales return 17320
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customer
Transfer to purchase
ledger 1330
Balance c/d 313410
334560 334560
Purchase ledger control account: It is also known as trade creditors control account,
that can discover the exact amount which needs to be paid by the company to its creditors or
suppliers. It displays the amount for a specific period of time and managers have to take a look to
such accounts weekly or monthly to gather the information of actual account payables. This
account is very important for the organisations as it is used to record transactions that are related
to amount payable to creditors of the company.
Purchase ledger control account
Dr Cr
Details Amount Details Amount
Discount received 1290 Balance b/d 19160
Transfer from sales ledger 1330 Credit purchases 126500
Purchase returns 11110 Payments to suppliers 110010
Refund received from
supplier 1400
Balance c/d 240540
255670 255670
Control account: It is an account which is used to record aggregated total of transactions
that are separately recorded in the subsidiary level ledger accounts. Such accounts are mainly
used by the companies to sum up accurate amount of account receivable and payables for a
specific period of time. The balance of control account should match the total of related
subsidiary ledger. This account is mainly created by large organisations because their volume of
transactions is very high (Razali and Arshad, 2014).
Main purpose of creating control account:
 The main purpose of creating control account is to keep the detailed information of
debtor and creditors to record the same in financial statements.
 It is created by the companies to check the accuracy level of different transactions.
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 Control account helps to identify the field where an error is made by the accountant,
hence it is very beneficial for the companies and this the purpose of creating this account.
CLIENT 6
a): Suspense account: It is an account which is used to record the arrears amount in trial
balance. It is used because the proper amount cannot be determined by while transactions are
made by the company. When the amount is determined by the company than the suspense
account get transferred to the proper account.
b): Trial balance
c): Suspense account:
d) Comparison
Suspense account Clearing account
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 The amount and figures recorded in this
account are transactional. It is created
to ignore the situation of uncertainty.
 It is used when there is a problem in
trial balance.
 This account is used on temporary basis
to record transactions until the time
comes to post them in to actual account.
 Such accounts are used to hold
transaction for later posting.
REFERENCES:
Books and journals:
Razali, W. A. A. W. M. and Arshad, R., 2014. Disclosure of corporate governance structure and
the likelihood of fraudulent financial reporting. Procedia-Social and Behavioral
Sciences. 145. pp.243-253.
Hsu, P. H., Moore, J. and Neubaum, D., 2014. Tax avoidance, financial experts on the board, and
business strategy.
Kostadinovski, A. and Gorgieva-Trajkovska, O., 2013. Differences between International
Financial Reporting Standards and Genarally Accepted Accounting Principles.
Aktuelnosti-Journal of Social Issues. (22). pp.90-117.
Jia, W. and Zhao, J., 2014. Does the Market Punish the Many for the Sins of the Few? The
Contagion Effect of Accounting Restatement for Foreign Firms Listed in the US.
Maina, A. M., 2015. Effect of Corporate Social Responsibility Of Financial Performance Of
Firms Listed In Nairobi Stock Exchange.
Howard, A. and Warwick, J., 2013. Exploring the curriculum gap: Some thoughts on
management accounting education and curriculum design. MSOR Connections, 13,
pp.51-60.
Sever, I., Žager, K. and Sačer, I. M., 2013, January. Impact of geographical area and historical
inheritance on accounting culture development. In III Balkans and Middle East
Countries Conference on Accounting and Accounitng History.
Maseda, A. and et. al., 2016. Boards of directors in SMEs: An empirical evidence of board task
performance. South African Journal of Business Management. 47(4). pp.47-58.
Keerasuntonpong, P. and Cordery, C., 2016. How might normative and mimetic pressures
improve local government service performance reporting?. Accounting & Finance.
Mangala, D. and Kumari, P., 2015. Red Flag: A Mean for Preventing and Detecting Corporate
Fraud.
Online
Financial reporting standard .2017. [Online]. Available through:
<https://www.thebalancesmb.com/ifrs-and-fasb-what-are-financial-reporting-standards-
392948>
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