Financial Accounting Project

This project explores key concepts and applications of financial accounting through a series of portfolios. It covers journal entries, ledger accounts, trial balance, profit and loss statements, balance sheets, and accounting misconceptions. The project also analyzes investment decisions based on ratio analysis, providing insights into financial performance and decision-making.

Financial accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
Portfolio 1....................................................................................................................................1
Portfolio 2....................................................................................................................................4
Portfolio 3....................................................................................................................................6
Portfolio 4....................................................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial accounting is a concept of preparing and analysing accounting transactions of
an organisation. It involves various processes of recording, summarising and reporting of
organisational transactions. There are various accounts and statements which are prepared in
order to develop financial accounting reporting system such as income statement, balance sheet,
bank account and many more. Main aim of this portfolio is to build an understanding about the
concept of financial accounting. In this report, four portfolio are analysed and evaluated
regarding preparation of financial books and accounts. In this report, financial decisions such as
investment and rectification is also interpreted along with financial accounts (Financial
accounting, 2018).
TASK
Portfolio 1
Portfolio is a collection of various financial documents. In this portfolio, transactions of
dashing enterprises is analysed in order to record them in double entry format (i.e., journal
entries and ledger accounts) and trial balance (Bevis, 2013).
Journal entries
Date Particulars Debit Credit
01/01/18 Bank account 100000
To capital account 100000
(commencement of business)
02/01/18 Purchases account 10000
To FM limited account 10000
(purchased goods on credit)
03/01/18 Motor van account 8000
To bank account 8000
(motor van purchased by cheque)
04/01/18 Stationary account 150
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To bank account 150
(bought stationary by cheque)
08/01/18 Inventory account 15000
To sales account 15000
(sold goods for cash)
31/01/18 Drawings account 150
To bank account 150
( owner took cash from bank for personal use)
Ledger accounts
Bank account
Date Particulars Amount Date Particulars Amount
01/01/18 To capital account 100000 03/01/18
By motor van
account 8000
04/01/18
By stationary
account 150
31/01/18
By drawings
account 150
31/01/18 By balance c/d 91700
Total 100000 Total 100000
Capital
account
Date Particulars Amount Date Particulars Amount
31/01/18 To balance c/d 100000 01/01/18 By bank account 100000
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Total 100000 Total 100000
Purchases
account
Date Particulars Amount Date Particulars Amount
02/01/18 To FM limited account 10000 31/01/18 By balance c/d 10000
Total 10000 Total 10000
FM Limited
account
Date Particulars Amount Date Particulars Amount
31/01/18 To balance c/d 10000 02/01/18
By purchases
account 10000
Total 10000 Total 10000
Motor van
account
Date Particulars Amount Date Particulars Amount
03/01/18 To bank account 8000 31/01/18 By balance c/d 8000
Total 8000 Total 8000
Stationary
account
Date Particulars Amount Date Particulars Amount
04/01/18 To bank account 150 31/01/18 By balance c/d 150
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Total 150 Total 150
Inventory
account
Date Particulars Amount Date Particulars Amount
08/01/18 To sales account 15000 31/01/18 By balance c/d 15000
Total 15000 Total 15000
Sales account
Date Particulars Amount Date Particulars Amount
31/01/18 To balance c/d 15000 08/01/18
By inventory
account 15000
Total 15000 Total 15000
Drawings
account
Date Particulars Amount Date Particulars Amount
31/01/18 To bank account 150 31/01/18 By balance c/d 150
Total 150 Total 150
Trail balance
Sr No. Particulars Debit Credit
1 Bank account 91700
2 Capital account 100000
3 Purchases account 10000
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4 FM limited account 10000
5 Motor van account 8000
6 Stationary account 150
7 Inventory account 15000
8 Sales account 15000
9 Drawings account 150
Total 125000 125000
Portfolio 2
In this portfolio, profit and loss account is prepared along with statement of financial
position from the trial balance of Dorothy's shop.
Profit and loss statement
Particulars Amount Particulars Amount
To opening stock 139000 By sales 750000
To purchases 440000 By closing stock 80000
To gross profit c/d 251000
Total 830000 Total 830000
By gross profit b/d 251000
To wages and salaries 162000 Prepaid rent 4000
Additional wages 10000
Rent and rates 54000
Printing postage and stationary 35000
Accounting fees 5000
Interest paid 4000
General expenses 39000
Depreciation on fixtures and fittings* 96000
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Depreciation on motor vehicles* 96000
Allowances for trade receivables 11000
By net loss 257000
Total 512000 Total 512000
Working Notes
Working note 1
Depreciation on fixtures and fittings*
depreciation on cost 240000 = (240000*20%) 48000
accumulated depreciation 48000 48000
total depreciation 96000
Working note 2
Depreciation on motor vehicles*
depreciation on cost 120000 (120000*20%) 24000
accumulated depreciation 72000 72000
total depreciation 96000
Balance sheet
Liabilities & shareholder's equity Amount Assets Amount
Capital: 314000 Account receivables 110000
Drawings: (12000) Bank 10000
Net loss: (257000) 45000 Fixtures & fittings 240000
Outstanding trade receivables 3000 Motor vehicles 120000
Long term loan 100000 Prepaid rent 4000
Trade payables 62000
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Acc. Deprecation* 164000
Total 374000 Total 374000
Working note
Accumulated depreciation on f & f 48000
Accumulated depreciation on motor vehicle 72000
Accumulated depreciation on f & f (past year) 24000
Accumulated depreciation on motor vehicle (past year) 20000
Total accumulated depreciation 164000
Portfolio 3
Accounting misconception:
Accounting misconception is the myth which cause trouble for businesses and keep non
financial managers spotting potential areas of risk. These accounting misconceptions occurred
due to overlapping of financial systems and principles. There are various types of accounting
misconceptions such as a debit transaction is a loss to business firm, there is a specified
terminology set of accounting, there is a perfect debt ratio and many more. This myths are
disadvantageous for companies as they can arise misconceptions in the minds of investors due to
which performance of a company can get affected. For example: Venus Limited has low retained
earnings due to which their prospect investors made an accounting misconception that they are
not able to distribute relevant returns. But the true scenario of that company stated that they
invested all their retained earnings in profitable projects in order to ensure reliable returns to
their investors (Chiang, Nouri and Samanta, 2014).
Above profit and loss statement of Dorothy's shop reflects that their bank account balance
and business net profit is not same. This scenario issue is the case of accounting misconception.
It is an accounting misconception that bank balance of a company and net profit should be same.
There are various key reasons due to which bank balance and net profit are not same and these
elements are not a result of inefficiency of a business, they are a part of operational expenses.
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Reasons due to which bank balance of a business and net profit of a business are not same are
mentioned below:
Accrual principle – This principle of financial accounting states that incomes and
revenues should be recorded whenever they are received or realised by the business. When an
amount is received it directly reflects in bank account but due to no intimation of such payment
received, it is not included in net profit by the accountant of a business firm. For example:
Dorothy's has received amount of 10000 dollars against credit sales but there is no intimation
about this payment due to which this value is not yet included in net profit (Edmonds, 2013).
Bad debts – When an amount is not received by creditor, it is recorded in bas debt or
deducted from provision of bad debts. Sometimes, a situation arises in business organisation in
which some account receivables are transferred into bas debts account as they were not realised.
But after few months, those account receivables pay their due amount due to which variation in
bank balance and net profit appears.
Cash conversion cycle – Cash conversion cycle is the process of converting inventory
into cash by processing them and selling them. Maintaining this cycle is a crucial task to be
performed by an organisation due to which overlapping of work occurs. Time engaged in this
cycle is sometimes not intimated with bank account due to which value of bank balance and net
profit shows variation. This cash flow cycle can be best maintained by accounts receivable days,
inventory days, accounts payable days and cash conversion days (Hahn, Fairchild and Dowis,
2013).
Variation in cash flow activities – Cash flow is a statement which is prepared at the end
of accounting year in order to record all cash inflows and outflows. Activities of cash flow
includes operating, investing and financing. Cash inflow and outflow are recorded by the
business firm which are included in net profit of a company but these values does not effect bank
account.
By analysing above reasons due to which bank balance of a company and net profit doses
not match, it has been observed that it is not necessary of these balances to be matched. It is an
accounting misconception (James, 2011).
Generally, it has seen that investor think that net profit and bank balance must be similar
but it is an accounting misconception. Net profit which is also referred as net earnings are
calculated by adding the total expenses and subtract it from the revenues which are available in
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the company. It can help the organisation to analyse that it is in loss making position or the profit
making position. It can be calculated for one month, quarter, half yearly or yearly basis.
Organisation shows its net profits in the financial statement. Where as bank balance is that
amount of money which can be shown in bank statement or bank account. If an organisation has
sufficient bank balance then it does not need to take large amount of loan for the investment
purpose. Bank balance is maintained by the banks on daily basis. Net profit is calculated by the
company itself where as calculation of bank balance is the primary responsibility of banks. It
shows that how much money available with the hands of organisation and it can be increase or
decrease on daily basis. Where as net profit is not evaluated by a business entity on daily basis.
These are the main difference and misconception of accounting.(Renz, 2016).
Portfolio 4
a) Calculating ratios for Venus and Mars company
Ratios Formula Venus Mars
Return on capital employed
operating profit / ( total assets –
current liabilities )
0.38940809
97
0.21201413
43
Gross profit margin Gross profit / sales
0.83333333
33 0.6
Current ratio
Current assets / current
liabilities 2.4 7.6
Trade receivable collection
period Debtors / sales * 365
48.6666666
667 91.25
Trade payable payment period Creditors / cost of sales * 365 219 45.625
Inventory holding period
365 / ( cost of sales / average
stock ) 73 91.25
Gearing ratio
long term liabilities / ( total
assets – current liabilities )
0.15576323
99
0.35335689
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b) Advice on Investment decision
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Investment decision is a crucial decision to take, in order to make an effective decision it
is important for an investor like Dorothy to analyse overall performance of considered company.
From the above ratio analysis, it has been ascertained that Venus company is more profitable and
investing in this company can help Dorothy to earn reliable returns. To provided evidence to
above statement, few justifications are mentioned as follows:
 It has been evaluated that Venus is more capable of earning high returns against the
capital which is invested (Khan, 2015).
 Ideal current ratio is considered to be 2:1, current ratio of Venus limited is near this ideal
ratio. Whereas current ratio of Mars limited is way to high which reflects that this
company is not utilising their funds properly.
 Gross profit of Venus limited is higher than Mrs limited that is 0.8 and 0.6.
 It has been analysed that Venus limited has an uniformity in receiving and providing
goods on credit. Whereas Mars limited has longer receivable period and shorter payment
period (Mulford and Comiskey, 2011).
From the above justifications, it has ascertained that Dorothy should invest in Venus
Limited.
CONCLUSION
In the above project report, various portfolios are developed in order to answer relevant
questions. It has been ascertained that journal entries are the base to develop ledger accounts,
trial balance, profit and loss account and balance sheet of an organisation. By developing
portfolio number 3, understanding about accounting misconception is gained from which it has
been ascertained that it is not compulsory for bank balance and net profit to be matched it is only
an accounting misconception. Investment decision can be reliably taken from calculating ratios
of companies and analysing them. From this portfolio it has concluded that Dorothy should
invest in Venus limited and not in Mrs limited.
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