Financial Accounting Analysis and Reporting

This assignment delves into the world of financial accounting, examining various aspects like cash book reconciliation, depreciation methods (SLM and WDV), suspense and clearing accounts, and their role in accurate financial reporting. It highlights the importance of adhering to accounting standards (IAS, IFRS, GAAPs) for transparent financial presentation and informed decision-making by stakeholders. The analysis also touches upon Bank Reconciliation Statements (BRS) used for matching cash book and passbook balances.

Financial Accounting

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................1
LEARNING OUTCOMES........................................................................................................1
1. Financial accounting..........................................................................................................1
2. Key regulations with financial accounting.........................................................................2
3. Describing accounting rules and principles.......................................................................3
4. Explaining the concept and convention in relation to consistency & materiality..............4
CLIENT 1...................................................................................................................................4
a. Journal entries.....................................................................................................................4
b. Ledgers account.................................................................................................................7
c. Trial balance.....................................................................................................................16
CLIENT 2.................................................................................................................................16
a. Income statement..............................................................................................................16
b. Statement of financial position.........................................................................................17
CLIENT 3.................................................................................................................................19
a. Assessing gross and net profit margin of the business organization................................19
b. Calculating assets and liabilities of firm..........................................................................20
c. Presenting accounting concepts........................................................................................20
d. Evaluating different methods of depreciation..................................................................21
CLIENT 4.................................................................................................................................23
(A). Bank Reconciliation Statement....................................................................................23
(B). Reasons for differences in pass book and three column cash book..............................23
(C). (i) Opening bank reconciliations statement..................................................................24
(C). (ii) Closing bank reconciliation statement....................................................................24
(C). (iv). Corrected cash book..............................................................................................25
CLIENT 5.................................................................................................................................25

A. (i). Sales Ledger control account.....................................................................................25
A. (ii). Purchase Ledger Control account.............................................................................25
B. Control account...............................................................................................................26
CLIENT 6.................................................................................................................................26
(A). Suspense account..........................................................................................................26
(B). Trial balance.................................................................................................................27
(C) Journal entries................................................................................................................27
(D). Difference between Suspense and clearing account.....................................................27
CONCLUSION........................................................................................................................28
REFERENCES.........................................................................................................................29

INTRODUCTION
Financial accounting field of finance lays high level of emphasis on recording,
summarizing and evaluation of monetary information. Hence, it is highly associated with the
preparation of financial statements that furnishes highly valuable information to the
stakeholders and assists them in making suitable decision. Tools and techniques of financial
accounting are highly significant which in turn helps business organization in getting
information about the firm’s financial position and performance. The present report is based
on varied case situations which will provide deeper insight about the manner in which
financial statements are prepared. Besides this, report will also shed light on the concepts of
accounting, depreciation, suspense and clearance account.
LEARNING OUTCOMES
1. Financial accounting
In UK, it is legal compulsion for every entity to maintain proper records of their
trading activities in a proper way by making necessary accounts, called financial accounting.
There are three major accounts that ever entity needs to prepare includes following
statements, detailed below:
Profitability statement: It provides comprehensive details regarding company’s
revenues and spending level. Revenue are all the income and money received as a
consideration for giving something (Giles, 2014). However, expenses includes money spent
for acquiring necessary resources like material, labor and payment to others like overhead,
staffing expense, rent and others. It follows accrual concept and record all the results when
they takes place without knowing their cash impact. It is useful to know profitability results.
Balance sheet: It integrates three elements that are assets, liabilities and shareholders’
equity. Assets shows enterprise ownership, liabilities is obligations towards external parties
whereas equity is owner’s fund. This shows key results including liquidity health and
solvency position of the company.
Cash flow statement: As name itself, it follows cash concepts of accounting as it
integrates the results of transactions only when they either increase cash at bank balance or

decline it as a result of payment to others. Thus, non-cash transactions are excluded from the
same like profit/loss on sale of assets, depreciation, provisions and others (Schipper, Francis
and Weil, 2017). Besides this, another reason of distinguish from profitability statement is
that it incorporate all the functions whether they are operating, investing or of financing
nature. Such statement helps firm knowing their net increase in cash position.
All these accounts are constructed applying necessary accounting principles i.e. going
principles, monetary measurements, prudence, separate entity, consistency and others. It not
helps companies only to determine their financial health but also helps outside stakeholders
like shareholders, lenders, creditors and others to extract useful information from the
accounts like gearing, liquidity, interest bearing capability and others and make well
informed decisions.
2. Key regulations with financial accounting
It is legally necessary for both the private and public companies in UK to prepare
their annual accounts complying with the accounting principles, called UK GAAP. It is
designed by the regulatory body in UK, named Financial Reporting Council. As per the
framed rules, all the companies whether private or public needs to follow accounting
concepts and key conventions while making their annual accounts. GAAPs, however, are the
domestic or localized principles and with the coming of liberalization in the economy, more
and more companies started and expanded business across worldwide. As a result,
international accounting and reporting standards were designed called IAS and IFRS with the
key target of maximizing transparency and comparability (Henderson and et.al.,2015). The
regulations required from the all the multinational or overseas companies to prepare their
accounts complying with such globalized standards. It helps in gaining trust among investors
as they take huge risk by investing their own money in various business units all over the
world. Thus, harmonization in all the companies’ accounts helps them comparing their
financial results easily and make better decisions.
In addition, in UK, companies are established as a separate legal entity by compliance
with the company act 2006. The act clearly presents that it is necessary for all organizations
to prepare all the accounts. Moreover, not only the preparation is sufficient, but also, needs to
be audited every year before final publishing with the key aim to inform all the stakeholders
with the true and valid information(Kaplan and Atkinson, 2015). Companies need to clearly
present their auditors opinion in their annual accounts, so that, user can easily know any

discrepancies or manipulation, if auditor had presented qualified report. Besides this, any
company who are keen to offer IPO (Initial Public Offer) to raise money need to list itself at
stock exchange and as per listing rules, they must present their true financial position and
profitability results by presenting annual reports.
3. Describing accounting rules and principles
Main accounting principles and concepts are enumerated below:
 Dual aspects concept: As per this concept, accountant is required to present the dual
impact of transactions in the financial statements (Accounting Concepts, Principles
and Basic Terms, 2017). On the basis of such concept, for every debit there must be a
corresponding credit.
Assets = liabilities + shareholders equity
 Accounting year concept: In accordance with such concept, financial statements and
reports need to be related with the specific time frame such as monthly, quarterly &
half yearly.
 Going concern concept:According to the name, the applying the concept, companies
believes that they have long-lasting and never-ending business life means company
expects to continue their activities and functioning in future and there is no suspicion
that it can liquid in future. The concept believes deferring expenses over few years
like depreciation and write off preliminary expenses.
 Accrual accounting concept:As discussed earlier, all the results of financial
activities should be entered in the final accounts at the period of their actual
occurrence without knowing their original cash incoming or outflow. Applying the
concept, current year’s outstanding payments are reported in P&L account whereas
prepaid expenses are shown in next year.
 Monetary measurement concept: Final accounts display only the quantifiable
results which are easy to express or present quantitatively like cost, income, liabilities,
assets and others. However, other information like employees strength, talent,
consumer satisfaction which are qualitative are not expressed in the financial
accounts.
 Matching principle: It follows double entry concepts as per which, every
activities has dual impact, therefore, entry must be passed both the sides.

 Full disclosure concept: Each and every detail needs to properly presents and
displayed in company’s financial accounts which make it free from any material
misstatement. Auditors focuses on it and present opinion whether company had fully
disclosed all the results or not and accounts are error free from any mistakes or errors
or not.
4. Explaining the concept and convention in relation to consistency & materiality
 Consistency concept: This principle of accounting states that once specific principle
or rule is considered for dealing with business transaction then the same should be
continuously followed in the future period. It allows firm to change method or apply
new version only when it improves reported financial results. Thus, it can be
presented that such principle focuses on applying similar principles, methods,
practices and process over the years. IASB recognized consistency as one of the main
important element that makes accounting information highly valuable for the purpose
of decision making.
 Material disclosure: In accounting, full disclosure principle is highly associated with
the concept or aspect of materiality. On the basis of such principle, accountant needs
to disclose all the material information either in the main financial statements or in
notes section (Materiality concept, 2017). Hence, materiality concept of accounting
lays emphasis on including all the information’s that may have influence on the
opinion of financial statement user’s.
CLIENT 1
a. Journal entries
Journal of Alex Study’s

b. Ledgers account
Day books

Sales ledger

Nominal Ledgers account

Real Ledger
JOURNAL ENTRIES
ASSETS debit £ credit £
premises 340000
VAN 51250
FIXTURES 8100
INVESTMENTS 63900
RECEIVABLES:
P MULLEN 1400
F LANE 3100
CASH AT BANK 62400
CASH IN HAND 5600
LIABILITIES
PAYABLES

S HOOD 2150
J BROWN 4600
CAPITAL( (balancing figure) 529000
535750 535750
c. Trial balance
CLIENT 2
a. Income statement
Profitability statement of Peter Pipe’s for the year ended at 31st December 2017
Particulars
Amount (in
£)
Revenue 1215000

Closing inventory
10164
0
Opening stock 82200
Purchase
77880
0
COGS (Opening stock + purchase – closing
inventory) 759360
Gross profit 455640
Expenses
Wages & salaries 177500
Add: Outstanding wages & salaries 1220
17872
0
Less: Indirect expenses
Motor expenditure 87400
Administration cost 17650
Heating & lighting 4950
Advertising cost 13280
Less: prepaid expenses 8470 4810
Depreciation on premises 5400
Depreciation (equipment) 17250
Depreciation (motor vehicle) 2800
Total indirect expenses 318980
NP 136660

b. Statement of financial position
Balance sheet Peter Pipe for the year ended at 31st December, 2017
Particulars Amount (in £)
Current assets
Closing inventory 101640
Prepaid advertising 8470
Bills receivables 106960
cash in hand 2440
Total current assets 219510
Fixed assets
Freehold premises 270000
Less depreciation on
premises: 42900 227100
Equipment 172500
Less: Depreciation on
equipment 114750 57750
Motor Vehicles 28000
Less: Depreciation 16800 11200
Total fixed assets 296050
Total assets 515560
Liabilities

Current liabilities
Bills payables or creditors 76910
Outstanding salaries 1220
Bank overdraft 11290
Total current liabilities 89420
Capital 332120
Add: NP 136660
Less: Drawing 42640
Total shareholder’s capital 426140
Total liabilities or
obligations 515560
CLIENT 3
a. Assessing gross and net profit margin of the business organization
Profitability statement of Raintree Ltd for the year ended at 30th September 2017
Particulars Amount (in £)
Sales 107000
Less: Sales return 2000 105000
Inventory at the end of period 18000
Stock at the beginning of the year 17000
Purchases 32000
Cost of Goods sold (COGS) 31000
GP (Gross profit) 74000
Depreciation on building 1000

Depreciation on plant and machinery 10000
Administration expenses 28000
Expenses pertaining to distribution 22000
Less: Prepaid rent 3000
Add: Outstanding salaries 2000 21000
Corporation tax 4000
64000
NP (Net profit) 10000
b. Calculating assets and liabilities of firm
Statement of financial position for the year ended at 30th September 2017
Particulars Amount (in £)
Current Assets (CA)
Debtors or bill receivables 24000
Prepaid rent 3000
Inventory at the end of year 18000
45000
Fixed assets
Land & building 60000
Less: Depreciation 8000 52000
Plant & machinery 65000
Less: Depreciation @ 20% 25000 40000
92000
Total assets 137000
Liabilities
CL (Current liabilities)
Creditors or bills payables 14000
Outstanding salaries 2000
bank overdraft 15000
Tax 4000
Total current liabilities 35000
Capital or equity 50000
share premium 20000
Retained earnings 22000
NP 10000
Total shareholders’ equity or capital 102000
Total liabilities or obligations 137000

c. Presenting accounting concepts
Accounting concepts and principles enable accountant to present fair view of financial
aspects by recording transactions in an appropriate manner. Concepts and principles of
accounting are highly significant which in turn helps in indulging the aspect of
standardization.
 Consistency concept: Such concept of accounting lays focus on undertaking similar
rules for business transactions. In other words, as per consistency concept business
unit should follow same rules for recording and evaluating similar kind of
transactions. By using such concept business unit can build and maintain
standardization in financial statements. Hence, annual reports which are drafted on the
basis of consistency concept are highly prominent as it helps business entity to make
comparison of financial performance and take further decisions (What is the
consistency principle?, 2017). For instance: In one year, if diminishing value method
is used by the firm for calculating the amount of depreciation then the same needs
to be considered in the upcoming time period or following years. Consistency
concept does not mean that new concept cannot be undertaken for recording
transactions. However, if business organization considers new rules as compared to
the old one then there is requirement to give justification for the same.
 Prudent concept: This concept of accounting is introduced for avoiding the issue of
under and over estimation. The main objective of such concept is to provide
stakeholders of financial statements with suitable reports. As per such concept,
accountant or finance personnel should record transactions pertaining to expenses and
liabilities as soon as they occur. Further, it entails that firm should record transactions
regarding income when it is attained or realized. Along with this, prudent concept
presents that assets must be recorded in the balance sheet when they are assured.
Hence, business unit should record liabilities or expenses on the probability of their
occurrence and assets as well as revenue only when they are assured & properly
assessed. Thus, by using such concept accountant can present reliable view of
financials in front of management, investors, suppliers and other stakeholders.

d. Evaluating different methods of depreciation
Depreciation implies for the reduction in the value of assets due to its usage over the
time period. Treatment regarding depreciation in financial accounts helps firm in gaining tax
benefits. Hence, there are mainly two methods that are undertaken by the large number of
firm for calculating the amount of depreciation such as:
Straight line method: On the basis of such method, similar value is depreciated by the
business entity each year. Unlike WDV method, depreciation is not charged on the remaining
value of assets. It states that after certain time period, value of assets become NIL.
When value of assets and scrap value is given then formula for calculating
depreciation is enumerated below:
Depreciation: Cost – scrap / life of the asset
When rate of depreciation is given: For instance, business unit will charge 10%
depreciation on land & building costing of £250000 respectively.
Calculation of depreciation:
Year Value of machinery Depreciation Net value of
machinery (in £)
1 250000 25000 225000
2 225000 25000 200000
3 200000 25000 175000
4 175000 25000 150000
5 150000 25000 125000
Total 125000
Written down value (WDV) / Diminishing value method:
Under diminishing method, depreciation is charged by business entity considering a
fixed rate similarly in the case of straight line. However, in this, depreciation value is
calculated by considering the net book value of assets rather than cost.
Computation of depreciation

Year Value of machinery Depreciation Net value of
machinery (in £)
1 250000 25000 225000
2 225000 22500 202500
3 202500 20250 182250
4 182250 18225 164025
5 164025 16402.5 147623
Total 102378
Comparison and suitability of methods: Out of both such two methods, diminishing
value method of depreciation is highly effective which in turn helps in determining the
appropriate value of asset. In the case of straight line method, at the end of the life of assets
value becomes zero. On the other side, a diminishing value method present that at the end of
life asset has some specific value rather than zero (Reducing Balance Method of
Depreciation, 2017). Thus, it is recommended to the business organizations to make focus on
undertaking diminishing value method which is highly realistic over others.
CLIENT 4
(A). Bank Reconciliation Statement
BRS, as name itself, is a statement that compares and matches the results of cash book
and pass book and make necessary adjustments to match both of their balances to avoid any
error and mistakes. Banks prepared these statements periodically, in which, pass book
balance is compared with the three column cash book to clearly presents the causes or
reasons behind distinguish results (Elliott, 2017). The prime objective of such statement is to
assure that presents payments to the banks has been successfully proceeded. Similarly, by
this, bank assures that cheque or cash deposited into the banks by various modes like online
or on the branch is properly deposited to the client account and accordingly, entry has been
made in the pass book. Such statements ultimately matches both the balances.
(B). Reasons for differences in pass book and three column cash book
Although, there are number of reasons due to which, both the books can represent
different results, still, some of the most frequently occurring transactions which may differ
such results are presented below:

 In many cases, client forgot to present cheques to the bank timey for obtaining
payments, however, cash book is credited by these amount caused differences.
Similarly, in some situations, customer present cheque at the beginning of following
month, thus, pass book is debited by the same amount in next month. However, cash
book is already credited in the last month and resultant differences (Zimmerman and
Yahya-Zadeh, 2011).
 Just like payments, many-times, cheque are deposited and cash book is debited
immediately, however, if bank collects the money in next month then, bank do not
pass any entry till the month end caused distinguish results.
 On some facilities like direct payments and others bank charges some interest and
fees which they deduct periodically by the client account. Bank is not obliged to
inform customer for the same, thus, cash book is not adjusted accordingly and caused
differences.
(C). (i) Opening bank reconciliations statement
BRS for the period ended on 31st December 2017

(C). (ii) Closing bank reconciliation statement
(C). (iv). Corrected cash book
Dates Receipts Figures (in £) Dates Payments Figures (in £)
31st December
2017
Balance b/d 19973 31st December
2017
Error adjusted 1
Error adjusted 9 Bank charges 47
Standing order 137
Direct debit 297
Balance c/d 19500
19982 19982

CLIENT 5
A. (i). Sales Ledger control account
A. (ii). Purchase Ledger Control account

B. Control account
Control accounts gives summarized information about the subsidiary ledger. It is
different from the ledger because they provides comprehensive details about a specific
elements or item however, it contains summarized information only.
 Control accounts for trade receivable present summary results including total credit
sales for the year, cash collection from debtors, allowances or discount allowed and
the net outstanding balance due and still needs to be received at the end of the year. It
is of crucial importance for the credit collection department to make informed credit
decisions with the key target of managing robust cash management (Elliott, 2017).
 Just like payable control account represents details covering total credit purchase,
payments made in the year, discount received by suppliers and the net deferral
payments that are still unpaid. It helps in knowing net balances and liability of the
enterprise towards creditors.

CLIENT 6
(A). Suspense account
Account which record some transactions temporarily or for some time as they are
doubtful, is known as suspense account (Kaplan and Atkinson, 2015). Every company
prepares trial balance before preparation of their final accounts to know arithmetic accuracy,
if in case, when both the debit and credit total shows different results by few amount, then, in
such circumstances, companies often open a suspense account with necessary amount to
match trial account balance.
Significance of suspense account
 Assist company to know total errors in the accounts
 Type of account which is manipulated by workers like cash, inventory and others
 Helps in constructing final accounts free from any material error or mistakes
(B). Trial balance

(C) Journal entries
(D). Difference between Suspense and clearing account
 One-side either debit or credit side error recognized in trial balance is a reason for
opening suspense account. Unlike this, clearing holds financial information
temporarily till the time, when their actual permanent account is not found.
 Clearing account is open with the view to shift or transfer entire balance after
recognizing their permanent account(Zimmerman and Yahya-Zadeh, 2011). Suspense
account, on the other side, is prepared when trial balance detects any error in balance
matching of their debit and credit sides.
 Suspense account is a clear indication of some error in accounts, however, it is not so
with the clearing account as it does not show any omission or error in accounts.
 Suspense account represents uncertainties whilst clearing accounts do not reflects any
uncertainty as they are shifted after some time.
CONCLUSION
Findings of the report clear that all the accounts are prepared by the company
complying with the legislations i.e. IAS, IFRS, GAAPs and audited also to present accurate
results and thereby assist external stakeholders, more importantly, shareholders in informed
decisions. Besides this, the report found that in order to match cash book and pass book

balance, banks prepare BRS with necessary adjustments. In addition, depreciation accounting
recognized two methods, SLM which charges fixed depreciation every year, while, WDV
method charges declined depreciation every year. Lastly, suspense and clearing account had
differentiated stating that former is the results of one-sided discrepancy in accounting till the
formation of trial balance whereas later is opened for few time, till, they cannot be transferred
to permanent account.