Accounting: Business Transactions, Financial Statements, Fundamental Principles

This document provides an introduction to financial accounting and covers topics such as business transactions, financial statements, and fundamental principles in accounting. It includes scenarios with questions and answers, as well as examples of journal entries and ledger accounts. The document also includes an income statement and a statement of financial position. The subject is accounting, and the course code and college/university are not mentioned.

ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................................3
SCENARIO 1..............................................................................................................................................3
Question 1...............................................................................................................................................3
Question 2...............................................................................................................................................4
Question 3.............................................................................................................................................11
Question 4.............................................................................................................................................12
Question 5.............................................................................................................................................13
Question 6.............................................................................................................................................15
Question 7.............................................................................................................................................16
SCENARIO 2............................................................................................................................................17
Question 1.............................................................................................................................................17
Question 2.............................................................................................................................................18
Question 3.............................................................................................................................................19
Question 4.............................................................................................................................................19
Question 5.............................................................................................................................................21
CONCLUSION.........................................................................................................................................23
REFERENCES..........................................................................................................................................24

INTRODUCTION
Financial Accounting (FA) is procedure of utilizing monetary information through
making summarization of related data to gain deeper insights about firm’s liquidity position. In
present era, it is crucial for company to have efficient FA procedure to derive significant
information to get competitive advantages. The current study is based on providing important
regarding concepts like business transaction, accounting principles, journal entries, ledger, trial
balance, financial reports & statements, cash flow, bank reconciliation, control & suspense
account, etc. To get deeper insights about the same related calculations will be provided in the
systematic format .
SCENARIO 1
Question 1
 Business Transaction is related with an economic activity which is recorded in
accounting system. There are different forms of business transaction that are important to
recorded for analyzing, evaluating and controlling monetary position. In order to have
sustainability company conducts different kinds of transaction that are related to internal
and external practices. It includes, cash & credit purchase, sales, raising funds,
expenditure regarding interest, tax, salaries, etc. For having accurate estimation of
company position it becomes essential for organization to record all types of business
transactions.
 Single entry presents one sided organizational picture that is unable to track all
transactions as it records business activities partially. On the other side, double entry
system is based on fundamental accounting principle that helps company take all aspects
transactions into consideration (Siagian, 2020). It becomes difficult to identify the errors
through single entry system as compared to double. Assessing financial position with
help of double entry book keeping system it become convenient.
 Trial Balance (TB) is combined worksheet that comprises all ledgers’ balances which is
done once the reporting period. For ensuring book keeping accuracy through equalizing
debit & credit balance TB is prepared. It is utilized for various purposes such as
preparation of financial statements, identifying & rectifying errors, formulation of audit

reports, strategic decision making, comparative analysis, etc. These all provides
assistance in assessing arithmetical accuracy of organization.
Question 2
1. Journal Entries for the month of June 2016
Date Particulars L.F Debit Credit
1-Jun Cash A/C Dr. 65000
To Capital A/C 65000
(Being capital invested for
starting company)
2-Jun Purchase A/C Dr. 8000
To Trade payables A/C 8000
(Being goods purchased on
credit)
7-Jun Cash A/C Dr. 4000
To Sales A/C 4000
(Being goods sold for cash)
8-Jun
Trade payables A/C
Dr. 4000
To Bank A/C 4000
(Being cheque issued to pay
creditors)
14-Jun
Prepaid Insurance A/C
Dr. 75
To Bank A/C 75
(Being prepaid insurance
expenses paid )

15-Jun
Trade receivables A/C
Dr. 12000
To Sales A/C 12000
(Being goods sold on credit)
16-Jun Purchase A/C Dr. 10000
To Trade payables A/C 10000
(Being goods purchased on
credit)
18-Jun
Computer Equipment A/C
Dr. 300
To Cash A/C 300
(Being computer equipment
purchased by paying in
cash)
20-Jun Prepaid rent A/C Dr. 150
To Bank A/C 150
(Being prepaid rent paid )
21-Jun Cash A/C Dr. 10000
To Sales A/C 10000
(Being goods sold for cash)
25-Jun Cash A/C Dr. 100
To Bank A/C 100
(Being amount withdrawn
from bank for keeping it into
petty cash)

30-Jun Stationary A/C Dr. 30
To Cash A/C 30
(Being stationary purchased
for taking money from petty
cash)
2. Ledger accounts
Capital A/c
Date Particulars J.F. Amount Date Particulars J.F. Amount
30-Jun To balance c/d 65000 1-Jun
By Cash
A/c 65000
65000 65000
Cash A/C
Date Particulars J.F. Amount Date Particulars J.F. Amount
1-Jun To Capital A/C 65000 18-Jun
By Computer
Equipment A/C
Dr. 300
7-Jun To Sales A/C 4000
21-Jun To Sales A/C 10000 30-Jun By Stationary A/C 30
25-Jun To Bank A/C 100 30-Jun By balance c/d 78770
79100 79100

Sales A/c
Date Particulars J.F. Amount Date Particulars J.F. Amount
7-Jun
By Cash
A/c 4000
15-Jun
By trade
receivables
A/c 12000
30-Jun To balance c/d 26000 21-Jun
By Cash
A/c 10000
26000 26000
Purchase A/c
Date Particulars J.F. Amount Date Particulars J.F. Amount
2-Jun To trade payables A/c 8000
16-Jun To trade payables A/c 10000 30-Jun
By balance
c/d 18000
18000 18000
Computer Equipment A/c
Date Particulars J.F. Amount Date Particulars J.F. Amount

18-Jun To Cash A/c 300 30-Jun
By balance
c/d 300
300 300
Bank A/c
Date Particulars J.F. Amount Date Particulars J.F. Amount
8-jun
By Trade
payables
A/c 4000
14-Jun
By prepaid
insurance
A/c 75
20-Jun
By prepaid
rent A/c 150
30-Jun To balance c/d 4325 25-Jun
By Cash
A/c 100
4325 4325
Trade receivables A/C
Date Particulars J.F. Amount Date Particulars J.F. Amount
15-Jun To Sales A/c 12000 30-Jun
By balance
c/d 12000

12000 12000
Trade payables A/C
Date Particulars J.F. Amount Date Particulars J.F. Amount
8-Jun To Bank A/c 4000 2-Jun
By Purchase
A/c 8000
30-Jun To balance c/d 14000 16-Jun
By Purchase
A/c 10000
18000 18000
Prepaid Rent A/c
Date Particulars J.F. Amount Date Particulars J.F. Amount
20-Jun To Bank A/c 150 30-Jun
By balance
c/d 150
150 150
Stationary A/c

Date Particulars J.F. Amount Date Particulars J.F. Amount
30-Jun To Cash A/c 30 30-Jun
By balance
c/d 30
30 30
Prepaid insurance A/c
Date Particulars J.F. Amount Date Particulars J.F. Amount
14-Jun To Bank A/c 75 30-Jun
By balance
c/d 75
75 75
3 Trial Balance:
Particulars Debit Credit
Cash A/c 78770
Sales A/c 26000
Bank A/c 4325
Capital A/c 65000
Purchase A/c 18000
Trade payables A/c 14000
Stationary account 30
Prepaid Insurance A/c 75
Prepaid Rent A/c 150
Trade receivables A/c 12000
Computer Equipment A/c 300

Total 109325 109325
Question 3
There are various situations in which financial statements and reports are utilized
interchangeably but they are different from each other. Financial Reports (FR) are broader term
that comprises varying forms that are widely taken into consideration for providing essential
information to public. There has been significant utilization of reports by stakeholders in order to
take various important business decisions for accomplishing a particular purpose. Financial
Statements (FS) is narrow term as compared to financial reports as it is one of the reports that lie
under the umbrella. It becomes crucial for company to have accurate reports with appropriate
time based so that company can take significant decisions (Financial Statements vs. Financial
Reports – What’s the Difference? 2021). Having appropriate financial reports helps in attaining
effective performance through actual identification of business position. FS comprises income
statement, balance sheet, change in equity statement, cash flow, etc. whose purpose is to provide
information about cash flows, results of operations, etc. It aids company to get ability to generate
revenue, profits, etc to analyze the trend. Estimation of liquidity with helps of financial
positioning statement become possible to identify suitable course of actions. With help of
financial statement company becomes able to provide reliable & validate data that is significant
for several stakeholders in order to take strategic decisions. Various types of cash, credit, tax, etc.
decisions can be taken for getting desirable position in industry.
There are various parties of internal as well external business environment which utilizes
financial statements for attaining specified objective. Investment analyst uses Fs to make
appropriate decisions through analyzing each aspect related to their client’s objective of having
high return so that they can take proper decisions. Lenders are another party which comprises
financial institutions, banks, etc that provide loan to entity so having fair evaluation of
company’s liquidity, paying capacity these refer financial statements to avoid unfavorable
situation. Rating agencies can make judgment on operational and financing position of entity to
get data regarding making decisions that giving credit will be beneficial or not (Garbowski and

et.al., 2019.). Management of organization uses prepared financial statements to get information
of actual performance so that it can recognize lacking functional areas in turn improvement
actions can be taken. Employees needs mentioned financial information to make decisions
regarding their future career that firm will be able to provide them growth opportunities or not.
Employee involvement and productivity can be increased through making understanding these
critical data. Suppliers, customers, etc are other users that give emphasis on financial statements
to take important decisions.
Question 4
Accounting fundamental principles are universally applicable and provides accurate
working pattern to organization. The following mentioned are fundamental principles of
accounting:
Full disclosure principle
This is concerned with making assurance that organization should provide all essential
information to public so that full transparency can be maintained. It is basically related with
publishing all financial statements of company for making stakeholders capable of understanding
each business policy, structure, profits, performance efficiency so that it can avoid any legal
obligation.
Accrual principle
It is accounting principle requires company to record all its transaction in the time period
in which they are incurred. This is combination of two principles revenue recognition &
matching principle (Warren, Jonick and Schneider, 2020). It is utilized to make proper evaluation
of business position through estimating all related transaction with that specified period.
Matching principle
This principles is concerned with recording expenses in same period when the revenue is
earned. There should be accurate pair of expenses with revenue through executing accrual
fundamental principle of accounting. In addition to this, having fairer picture of company
becomes possible through implementing it. It helps in making evaluation how much expenses are

incurred to earn revenue. These is one of the crucial principle of accounting that need to be taken
into consideration for deriving smooth functioning.
Ongoing principle
It is an underlying assumption regarding preparation of financial statements with
intention of making operational activity for longer duration. This is crucial to implement as it
allows company to make stakeholders aware about stability of company. Continuing operations
shows the ability shows the ability of company to fulfill requirements of stakeholders.
Revenue Recognition Principle
Revenue recognition principle is stipulated with how and when revenue is to be
recognized. In addition to this, particular fundamental principle utilizes accrual accounting and
states that revenue are recognized when realized and earned not when it is received (Drake,
Quinn and Thornock, 2017). Uniform framework is obtained through executing revenue
recognition accounting principle.
Conservatism Principle
It is policy of anticipating possible future losses but not future gains for understate rather
than overstate assets & net income. It is principle for lower of cost for getting current market
value for getting guidance.
Question 5
Income Statement
Particulars Amount £ Amount £
Sales (Revenue) 900000
Opening inventory 12000
Add: Purchases 700000
Less
:
Closing inventory 14000

Cost of goods sold 698000
Gross profit 202000
Less
:
Advertising 10000
Salaries 50000
Electricity 10000
Telephone 9000
General expenses 1200
Net profit 121800
Statement of financial position
Particulars Amount £
Assets
Fixed assets
Land and Building 400000
Plant and Machinery 30000
Vehicles 22000
Current assets
Inventory 14000
Receivables 110000
Total assets 576000
Liabilities
Current liabilities
Bank overdraft 20000
Payables 80000
Shareholder's equity
Capital 354200

Profit 121800
Total liabilities 576000
Question 6
In the books of Carol Andrew
Profit and loss account for the year ended 31 December 2017
Particulars Amoun
t £
Amount
£
Sales 125000
Less: Sales return 1000 124000
Opening inventory 9500
Purchase 75000
Less: Purchase return 1500
Less: Closing inventory 1000
Less: Cost of goods sold 82000
Gross profit 42000
Less: Wages and salaries 13200
Rent and rates 1840
Postage 900
Insurance 7089
Bad debts 550
Provision for bad debts 934
Depreciation 5000
Add: Interest received 1000
Rent received 4360
Net profit 17847

Balance sheet as on the year ended 31 December 2017:
Assets
Bank 10594
Cash 340
Debtors 12500
Motor Vehicle 25000
Less: Accumulated depreciation (5000+5400) 10400
Closing Inventory 1000
Prepaid Insurance 411
Loan given 100000
Total assets 139445
Liabilities
Capital 120800
Less: Drawings 5150
Add: Profit 17847
Creditors 3900
Provision for bad debts 934
Outstanding rates 340
Advance rent received 490
Allowance for bad debts 284
Total liabilities 139445
Question 7
Cash flow statement is one of the financial statement which helps to summarize the
amount of cash & equivalent from the operating, investment and financing. Every organization
irrespective of scale of operation prepares these particular statements to derive significant
information regarding liquidity (Palepu and et.al., 2020). In addition to this, it is one of the
mandatory documents required to share by organization for providing data related with financial
health. This helps to measure how well company manages its cash position in order to pay

obligations. It provides investor deep insights about financial footing of company so that
accurate decision regarding investment can be taken. Operational efficiency is as well can be
assessed through giving emphasis on cash flow statement. It is basically obtained from three
segments operations, financing and investing that segmentation is widely utilized by stakeholders
for taking strategic decision.
Drafting Cash flow statement of Santander:

SCENARIO 2
Question 1
Bank Reconciliation is summary of banking that matches its balance of bank account
with financial records. It is basically prepared on periodically basis to determine the exact
balance. There are various purposes for which it is prepared and compared with official
statements to accomplish the objective of getting fair details. Identifying errors with help of bank
reconciliation becomes possible (Othman, Laswad and Berkahn, 2020). There are many
situations in which balances of both statement differs that represents errors and mistakes in any
of them. BRS provides assistance in recording transaction so that detecting errors can become
possible. Errors like addition, subtraction, missed payment, etc are some of type of mistakes that
can be obtained with help of bank reconciliation. Investigating interest & other fees related to
bank services utilization can be determined. In addition to this, detecting variety of frauds to
prevent organization’s fund from employees by removing situation of falsifying books &
reconciliation (Sunarya, Nurhaeni and Haris, 2017). It provides opportunity to avoid scenario
that can adversely impact success of company. The reason behind it is that there are many
circumstances in which making payments in order to sustain credibility and trustworthiness
among stakeholder becomes essential. BRS enable company to get information regarding
receivables so that unwanted awkward situations can be avoided. Having efficient organizational
process with ability to maintain significant relationship with stakeholders becomes possible by
executing BRS in company. It is not mandatory to formulate but implementing this specified
method is always beneficial.
It is systematic procedure which is widely taken into consideration to derive objective of
matching both opening balance of bank statement and specified column in cash book. Comparing
this statement enables company to identify missed entry so that necessary adjustment in it can be
made. It is concerned with providing emphasis on several areas like credit, debit side, spotting
errors, rectifying, matching balances of specified statements, etc. BRS process with focusing on
all these helps in avoiding unnecessary penalties with identifying discrepancies at initial stage
(Porter and Norton, 2017). All these steps assist in getting efficient BRS so that company can
obtain efficiency for getting desirable position.

Question 2
Control Account is summarized form in general ledger which can as well be referred as
adjustment account. The details regarding control account is found in corresponding subsidiary
ledger. It keeps clean of details but contains accurate balance for preparation of financial
statements. In further manner tracking control account with help of subsidiary ledger (What is a
Control Account? 2021). In addition to this, control account is widely taken into practice for
account receivable & payable. The ending balance of subsidiary ledger with control account
should match in order to check accuracy. It is based on daily basis which is commonly used by
large organization. Small organizations takes the general ledger account with linking in
subsidiary account. It comprises total credit of sales, for day, total collection from customers,
return, allowances and many more. It provides mechanism for checking errors & fraud at early
stage.
In financial management control account play crucial role through detecting mistakes so
that clean and detailed information can be attained through this. Providing correct data for
formulating financial statements is another important played by control account (Sutopo and
et.al., 2018). It helps in checking balance of each account before positing it into primary
statement. Control account as well speed up the process of management accounts as deeper
insights through getting balance information before positing can be derived. Avoiding irrelevant
data for effective strategy formulation through saving time by giving emphasis on crucial
information becomes possible through implementing control account in process. Specialized
work via segregating divisions also enable to prepare profit & loss account, balance sheet ,etc.
become possible. These are the contribution of control account in financial management.
Question 3
Suspense Account is utilized to record unclassified transaction that temporarily holds
entries for continuing organizational. This types of account in found in general ledger for
holding discrepancies information utile its actual account is identified. There are numerous
situations in which suspense account is formulated which includes preparation of trail balance,
company has received partial payments, unclassified transactions, etc. It is opened to carry
transaction until it is transferred to its transferred to original account. Accounting books are
made organized through accurately posting all transactions. It helps in avoiding mistakes like

recording transactions in wrong account so that organization resources can be saved to make it
rectify. There are various purposes for drafting suspense account for identifying errors so that
rectification at initial stage can be made. Omission, posting errors, reversal of entries, etc are
avoided through drafting suspense account. There is no standard account of time for cleaning the
mentioned account.
Question 4
Revised Cash book as per the bank column
Particulars J.F.
Amount
£ Particulars J.F.
Amount
£
To balance b/d 1760
By Insurance
account 170
To D. Park A/c 270
By Talk Talk
bill 56
To Mr. Patel A/c 1070
By Arif
account 186
To Abbey A/c 325
By bank
charges 25
To Drawings A/c 105 By balance c/d 3093
Bank Reconciliation Statement as on 28th February 2010:
Particulars Amount
Balance as per the pass
book
3093
Add: Insurance claim 170
Talk Talk bill 56
Cheque received but not
credited
186
Bank charges 25
Less: Cheque issued but not 270

presented for payment
Transfer to bank directly 1070
Dividend received by
Abbey bank
325
Drawings not recorded 105
Balance as per Cash book 1760
Direct Debit
It is particular procedure in which one person’s gives instruction in advance to another
for making transaction related with collecting amount directly through withdrawing from
payer’s account (Osadchy and et.al., 2018). This is utilized for recurring payments such as utility
bills, credit cards, etc. It is completely different from standing order
Standing order
This is considered with giving instruction by bank account holder to their bank to pay
money at regular basis to another’s account. It is used to make payments like rent, utility bills,
interest, etc. Standing order is useful in situations of regular payments which are to be made in
certain parties.
Bank Charges
Bank charges are fees which are charged by bank from the accountholder in respect of
utilizing its services like fund transfer, collection & clearance of cheque, etc.
Dis honor cheque
It is related with the situation where bank denies passing cheque due to low funds,
incorrect message, etc. in addition to this, it is also informed to both parties and also penalty is
charged.
Question 5
a) Journal entries

Particulars
L.F
. Debit Credit

1 Purchase A/C Dr. 2000
To A. Musa A/C 2000
(Being the goods purchased
on credit)
2 Cash A/C Dr. 1340
To Bank A/C 670
To SuspenseA/C 670
(Being the entry wrongly
entered twice in the cash
book)
3 G. Tahir A/C Dr.s 650
To Suspense A/C 650
(Being the entry not made in
the G. Tahir account)
4 Electricity bill A/C Dr. 790
To Suspense A/C 790
(Being the electricity bill
account forgotten to be
debited)
5
Motor vehicle expense A/C
Dr. 500
To Motor vehicle A/C 500

(Being the motor vehicle
expense wrongly capitalized
to the motor vehicle
account)
6 Sales A/C Dr. 270
To Suspense A/C 270
(Being the sales account
overcast by 270)
7 L. Samantha A/C Dr. 380
To Cash A/C 190
To Discount received A/C 190
(Being the entry wrongly
debited and credited, again
rectified)
8 Suspense A/C Dr. 768
To Sales A/C 768
(Being the entry wrongly
debited to the sales ledger
account)
b) Suspense account which shows the rectification of difference amount
Dat
e Particulars J.F. Amount
Da
te Particulars J.F. Amount
To Sales
A/C 768 By Cash A/C 670
To balance
c/d 1612
By G. Tahir
A/Cs 650

By Sales A/C 270
By Electricity
A/C 790
2380 2380
CONCLUSION
From the above report it can be summarized that financial accounting import to have
smooth functioning in company to derive desirable position in industry. the current report has
included information regarding business transactions, single & double entry book keeping
system, trail balance. In the books of Kate journal entries, ledger and trial balance has been
prepared. In addition to this, difference between financial reports & statement along with
different users has been included in present report. The report has comprised fundamental
accounting principles such as conservatism, matching, etc. profit & loss account, cash flow
statement as well balance sheet calculation has been included to get deeper insights. Bank
reconciliation, control, suspense account with calculations has been explained in the case study.

REFERENCES
Books and Journals
Drake, M. S., Quinn, P. J. and Thornock, J. R., 2017. Who uses financial statements? A
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Garbowski, M. and et.al., 2019. Financial accounting of E-business enterprises. Academy of
Accounting and Financial Studies Journal. 23. pp.1-5.
Osadchy, E. A. and et.al., 2018. Financial statements of a company as an information base for
decision-making in a transforming economy.
Othman, R., Laswad, F. and Berkahn, M., 2020. Financial CRIM Es in small businesses: causes
and consequences. Journal of Financial Crime.
Palepu, K.G and et.al., 2020. Business analysis and valuation: Using financial statements.
Cengage AU.
Porter, G. A. and Norton, C. L., 2017. Using financial accounting information: the alternative to
debits and credits. Cengage Learning.
Siagian, A. O., 2020. Contribution of Inventory Accounting Systems in Improving Inventory
Internal Control. Journal of Social Science. 1(2). pp.1-6.s
Sunarya, P.A., Nurhaeni, T. and Haris, H., 2017. Bank Reconciliation Process Efficiency Using
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Transactions on Management. 1(2). pp.124-129.
Sutopo, B. and et.al., 2018. Sustainability Reporting and value relevance of financial
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Warren, C. S., Jonick, C. and Schneider, J., 2020. Financial accounting. Cengage Learning.
Online
Financial Statements vs. Financial Reports – What’s the Difference? 2021. [Online]. Available
through:< https://www.fyisoft.com/financial-statements-vs-financial-
reports/>
What is a Control Account? 2021. [Online]. Available through:
<https://www.accountingtools.com/articles/2017/5/4/control-account>