FINANCIAL ACCOUNTING INTRODUCTION

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FINANCIAL ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
QUESTION 1A)..............................................................................................................................3
a. Trading account for the year ended 30 April 2020..................................................................3
b. Profit and loss account for the year ended 30 April 2020.......................................................3
c. Statement of financial position as at 30 April 2020.................................................................4
QUESTION 1B)..............................................................................................................................4
Features of information with the context of financial statement:................................................4
QUESTION 2 A).............................................................................................................................7
Calculation of different types of the ratios..................................................................................7
QUESTION 2B)..............................................................................................................................8
a. Bank account at the end of every month..................................................................................8
b. Other accounts and balancing them.........................................................................................9
c. Extraction of the trial balance as at 30 April 2020................................................................12
QUESTION 2C)............................................................................................................................12
i) Straight line method @ 12.5% per annum.............................................................................12
ii) Reducing balance method @ 15% per annum......................................................................13
iii) Meaning and significance accounting concept....................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES................................................................................................................................1

INTRODUCTION
Financial accounting is one of the essential parts of accounting and accounting department.
As per this accounting financial statement with regard to the company’s financial position is
being prepared followed by its analysis so that the company and its concerned stakeholders can
take the adequate and appropriate decision (Warren, Jonick and Schneider, 2020). This report
will discuss about the various aspect of financial accounting and the preparation of financial
accounts. Here in this report a section of ratio analysis is also included along with the detailed
explanation of depreciation accounts and the concept of accounting concepts.
QUESTION 1A)
a. Trading account for the year ended 30 April 2020
Particular Amount Amount
Sales 30000
OP stock 4700
Add:
Purchases 15700
Less: CL
stock 4400
COGS 16000
Gross profit 14000
With the above calculation it is evaluated that the gross profit of the company is 14000.
The reason underlying this fact is that in trading account only the direct expenses are being
deducted from the total revenue (Garbowski and et.al., 2019). Hence, from the total sales the cost
of goods sold is being deducted. Thus, the total gross profit of the company is 14000.
b. Profit and loss account for the year ended 30 April 2020
Particular Amount
Gross profit as per trading
account 14000
Less;
Expenses
shop wages 4420
light and heat 260
rent 4500
insurance 120 9300
Net profit 4700

Further after the calculation of the trading account the profit and loss is being made under
which all the other indirect expenses are being deducted from the gross profit. Hence, after this
deduction the total net profit which is attributable to the company is 4700.
c. Statement of financial position as at 30 April 2020
Balance sheet
Particular Amount
Assets
Shop fitting 13000
bank 610
cash 100
debtors 120
CL stock 4400
Total assets 18230
Liabilities
creditors 2030
Capital 15000
Less: Drawing 3500
Add: net profit 4700 16200
Total liabilities and
equity 18230
Further after making the profit and loss account the statement of financial position is being made.
Under this all the asset and liabilities of the company are being listed and evaluated.
QUESTION 1B)
Features of information with the context of financial statement:
Reliability:
It is one of the main features associated with the financial statement. This is because as
the financial statements are the depiction of the company’s actual financial position and due to
that they are counted as most reliable source of information with respect to the company. As the
financial statements enable the reliable and valid information with regard to the company so the
users including the investors can make their investment decision in regard to the company
(Herath and Albarqi, 2017).

However, on a critical note it is to be noted that as every company wants that its financial
information and the statement will depict the best profitable situation and image so it would be
wrong to said that the financial information are 100% reliable because there are many chances
that the companies can make changes and display the wrong information. Hence, taking of
decision on the basis of financial statement are said to be not adequately appropriate.
Comparability:
It is also an important feature of the financial information that is being predicted from
financial statements. This is because it enables the user to have a detailed analysis of the
financial position on the basis of making comparison of the financial statements of the past year.
This means that by having a comparative analysis of the financial details of the company with
the past year the user can determine that whether the company is efficiently operating its
business operations and not. Thus, it is important for the user because on the basis of
comparison, they can take financial and investment decision.
However, critically it can be said that the analysis of performance of the company on the
basis of the comparison of the past year financial statement is not correct. This is because there
are many chances that the company is moving and raising its business of operation, which may
include moving and headed towards the direction of success. So taking of decision of the basis of
the past performance would be not be an appropriate base of decision making.
Understandability:
It is also a major and main feature of the financial information that is being displayed
through financial statements. As the financial statements bears every single information about
the company’s financial position right from the debts to equity, liabilities to assets, profits to loss
and various others. So it would not be wrong to said that the financial statements enable the user
to have a clear and detailed understanding of the financial statement and the information (Birt,
Muthusamy and Bir, 2017). This is an important feature because it makes a user aware about the
real situation and performance of the company.
However, on a critical note, it is to be noted that the information which is displayed and
presented by the company may be wring and vague and it may also lead to the creation of wrong
understanding about the company and its position. This may also lead to have a taking of wrong
decision too.
Relevance:

It is to be noted that the information that is being provided and displayed by the financial
statement of the company are most relevant to the user. This means that the information which is
concerned with the financial statement are most relevant information with respect to the users
because it will act as a base for their perspective and decision making with regard to the
company (Moskalenko, Vasyukova and Chestnykh, 2020). Likewise, the relevant factor itself
becomes an important feature of the financial statement because only the useful information is
the part of them.
On the other hand, it is to be considering that the information is relevant but any small
error and mis-information may lead to reduce the entire authenticity and relevancy of the
financial statement. Thus, considering the financial statements as base is right but looking at non-
financial information including the company’s way of operation is also very important to know.
Verifiability:
This is also an important feature of the financial information which is enabled by the
company. as per this feature the financial information is verified with some other alternative
methods too. This can be understood as if the company depict some information and if the user
want to verify it against some other alternative then, it is possible with respect to the financial
information.
However, it is to be considered that the verifiability of the statement requires time an in
case if the information that is verified come different from the depicted financial information
then it will not only affect the user but the company’s image will also be affected.
Timeliness:
It is also an important feature associated with the financial statement. This is because if
the time taken by the company in order to display its financial information is short then there are
chances that the less relevant and useful information will be depicted. However, if the company
takes more time say publishing financial statements after the completion of the accounting year
then it becomes difficult for the user to determine the actual position of the company. Thus,
regular publishing of the financial statements on adequate time will lead to the easy
determination of the company’s performance (Ramadhan and Sugandi, 2020).
However, critically it is to be noted that the publishing of financial information on regular
interval may also lead to the occurrence of wrong depiction and publication.

QUESTION 2 A)
Calculation of different types of the ratios
Ratios Formula Calculation Year 1 Calculation Year 2
Gross profit
margin
Revenue-COGS/Revenue*100 =4940-
3020/4940*100
= 38.86%
=6850-
4650/6850*100
=32.11%
Return on capital
employed
Earnings before interest and
tax/capital employed
=460/3810*100
=12.07%
=350/4760*100
=7.35%
Current ratio Current assets/Current
liabilities
=1770/560
=3.16
=2390/840
=2.84
Trade payable
period
Accounts payable/COGS*365 =560/3020*365
=69 days
=840/4650*365
=66 days
Trade receivable
period
Accounts
receivable/Revenue(sales)*365
=820/4940*365
=61 days
=1230/6850*365
=65 days
Notes:
COGS: Beginning inventory+ Purchase- Closing inventory
COGS for Year 1:
=630+3320-930
= £3020
COGS for Year 2:
=930+4870-1150
=£4650
Capital employed: Total assets- current liabilities
Capital employed for Year 1:
=4370-560
= £3810
Capital employed for Year 2:
=5600-840

=£4760
Interpretation:
Gross profit margin:
It refers to the percentage of the sales revenue that the company has earned and keeps
after covering its overall cost of operation. from the above analysis it can be interpreted that the
ratio is declining from 38 to 32%. This means that the amount of revenue with respect to the
company is running low and declining along with raising the percentage of cost.
Return on capital employed:
This ratio shows the percentage of return that the company has earned over its capital. It
means the percentage of return over the utilization of capital by the company (Das and Swain,
2018). While comparing ratio of 2 year it can be analysed that percentage is declining from 12.07
to 7.35 from 1st to 2nd year. This means that the company’s efficiency with respect to deploying
of capital is reducing.
Current ratio:
It is the ratio concerning with the liquidity position of the company. This ratio shows that
how readily company can pay off its short term obligations. While comparing the ratio of 1st and
2nd tear it is found that the ratio is reducing from 3.16 to 2.84. This clearly interprets the low and
declining liquidity position.
Trade payable period:
This ratio shows the number of days the company requires in order to pay off its debts
and debtors. In the analysis of the above calculation it is analysed that the period is declining
from 69 to 66 days. This means that the company’s policy with regard to making of payment of
its debtors is raising.
Trade receivable period:
This ratio shows the number of days the company requires collecting the debts from the
market. In case of analysis of the above figures it is found that the period is rising from 61 to 65
days. This means that the company’s efficiency with respect to the collection of debts or its
credit policy is not good enough.

QUESTION 2B)
a. Bank account at the end of every month
Bank account for the month of March
Date Particular Amount Date Particular Amount
1-Mar to capital 500 1-Mar by purchase 150
10-Mar to business taking 290 5-Mar by rent 50
27-Mar to business taking 240 22-Mar by advertising 25
26-Mar by drawing 100
31-Mar by bal. c/d 705
1030 1030
Bank account for the month of April
Date Particular Amount Date Particular Amount
1-Apr To bal b/d 705 2-Apr by purchase 100
14-Apr to L Lock 450 5-Apr by rent 50
16-Apr to business taking 330 23-Apr by drawings 75
26-Apr to business taking 180 29-Apr advertising leaflet 30
30-Apr By bal c/d 1410
1665 1665
With the above calculation it can be seen that the bank account balance is 1410. This states that
the companies having the balance of 1410 within the bank account. Thus the balance which will
be shifted in trial balance will be 1410 on the debit side of the trial balance because this is an
asset of the company (Schroeder, Clark and Cathey, 2019).
b. Other accounts and balancing them
Capital a/c
Date Particular Amount Date Particular Amount
1-Mar by bank 500
31-Mar to bal c/d 500
500 500
Date Particular Amount Date Particular Amount
1-Apr by bal b/d 500
30-Apr to bal c/d 500
500 500

Purchase a/c
Date Particular Amount Date Particular Amount
1-Mar to bank a/c 150
31-Mar by bal c/d 150
150 150
Date Particular Amount Date Particular Amount
1-Apr to bal b/d 150
2-Apr to bank 100
30-Apr by bal c/d 250
250 250
Business taking
Date Particular Amount Date Particular Amount
10-Mar by bank a/c 290
27-Mar by bank a/c 240
31-Mar to bal c/d 530
530 530
Date Particular Amount Date Particular Amount
1-Apr by bal b/d 530
16-Apr by bank a/c 330
26-Apr by bank a/c 180
30-Apr to bal b/d 1040
1040 1040
Rent a/c
Date Particular Amount Date Particular Amount
5-Mar to bank a/c 50
31-Mar by bal c/d 50
50 50
Date Particular Amount Date Particular Amount
1-Apr to bal b/d 50
5-Apr to bank a/c 50
30-Apr by bal c/d 100
100 100

Advertising a/c
Date Particular Amount Date Particular Amount
22-Mar to bank 25
31-Mar By bal c/d 25
25 25
Drawing a/c
Date Particular Amount Date Particular Amount
26-Mar to bank a/c 100
31-Mar by bal c/d 100
100 100
Date Particular Amount Date Particular Amount
1-Apr to bal b/d 100
23-Apr to bank a/c 75
30-Apr by bal c/d 175
175 175
L Lock a/c
Date Particular Amount Date Particular Amount
14-Apr by bank 450
30-Apr to bal c/d 450
450 450
Advertisement leaflet a/c
Date Particular Amount Date Particular Amount
29-Apr to bank 30
30-Apr by bal c/d 30
30 30
The above ledger accounts reflect all the different transactions which have been undertaken
within the accounts of company. This involves all the different types of accounts which are
involved in each and every transaction of the business like an advertisement rent loan drawings
and all the other ledger accounts (Weygandt, Kimmel and Kieso, 2018). For the for making the
financial statements all the balance of these ledger accounts are being transferred in the trial
balance and for the end profit and loss and balance sheet.

c. Extraction of the trial balance as at 30 April 2020
Particular Debit Credit
Bank 1410
Capital 500
Purchase 250
Business taking 1040
Rent 100
advertising 25
Drawings 175
L Lock 450
Advertising leaflet 30
Total 1990 1990
After making all the ledger account in next step is to prepare the trial balance. the reason
underlying this part is that with help of the trial balance for the balances of the ledger accounts
are being transferred to give relevant please like within the profit and loss account and the
balance sheet. All this balance is a transferred by company in making effective financial
statements of the company (McCallig, Robb and Rohde, 2019).
QUESTION 2C)
i) Straight line method @ 12.5% per annum
Provision for depreciation of machinery account
Date Particular Amount Date Particular Amount
31-Dec-18 By Depreciation expense 2000
31-Dec-18 to bal c/d 2000
2000 2000
1-Jan-19 By bal b/f 2000
31-Dec-19 By depreciation expense 2000
31-Dec-19 to bl c/d 4000
4000 4000
1-Jan-20 by bal b/f 4000
31-Dec-20 by depreciation expense 2000
31-Dec-20 to bal c/d 6000
6000 6000

The above machinery account is based on the straight line method of charging depreciation. This
is a method under which same amount of depreciation is being charged within the depreciating
of the machinery. The reason underlying this fact is that when the machinery is being used then
some value of the machine is being depreciated (Wild, 2019). With the calculation of the
depreciation with straight line method with the rate of 12.5% the depreciation of 6000 per year.
Hence for the complete life of the machinery depreciation is been charged at 2000 every year.
ii) Reducing balance method @ 15% per annum
Provision for depreciation of machinery account
Date Particular Amount Date Particular Amount
31-Dec-18 Depreciation expense 2400
31-Dec-18 to bal c/d 2400
2400 2400
1-Jan-19 By bal b/f 2400
31-Dec-19 By depreciation expense 2040
31-Dec-19 to bl c/d 4440
4440 4440
1-Jan-20 by bal b/f 4440
31-Dec-20 by depreciation expense 1734
31-Dec-20 to bal c/d 6174
6174 6174
Further with help of the above calculation it was clear that the reducing balance method
was used in order to charge depreciation for stop under this method the percentage is charged
over the book value of the machinery. First year depreciation expense was 2400. Further in the
second year the depreciation expense was 2040. At the end the next year that is 2023
depreciation was 1734. With the help of the above the calculation it is clear that under the WDV
or the reducing balance method the amount of depreciation is being reducing continuously.
iii) Meaning and significance accounting concept
Going concern- the going concern is an accounting principle which states that the
company has the resources and uses it optimally in order to continue their operating efficiency.
The going concern concept is significant to the business because it implies that business entity
will continue its operation within the future and will not liquidate. The reason underlying this
part is that if a business starts then it will operate for a longer period of time.

Materiality- The materiality concept of the accounting principle states that all the material
and relevant information relating to the business and its operation must be provider to the
intended users through the financial statements (Kimmel, Weygandt and Kieso, 2018). The
reason underline this part is that all the material information must be communicated with the
required parties. When the required parties will have the necessary information then this will
assist and proper business decision taking and will result in success of the company.
Business entity concept- The business entity concept is a type of concept the accounting
principle which states that the transaction is associated with the business should be separately
recorded from the owner of the business page through the reason underlying these factors that
both the business and the owner are different entities. All the assets and liabilities belong to the
business and the profits are also being undertaken by the business itself. Both the business and
the owner are different and hence all the liabilities and assets are of business and not of the
owner.
CONCLUSION
From the above report it can be concluded that an analysis of the financial statement is act as
a base for taking decision with regard to the company. It will also enable the investor to analyse
the financial performance of the company. It is also understood that the financial statement are
the depiction of the company’s financial position and capability. An understanding regarding the
preparation of financial statement and the interpretation with the help of important ratio
including gross profit, ROCE and various others is also created within this report. Likewise,
importance and concepts of accounting principles like going concern, materiality and business
entity is also created in this report.

REFERENCES
Books and journals
Birt, J.L., Muthusamy, K. and Bir, P., 2017. XBRL and the qualitative characteristics of useful
financial information. Accounting Research Journal.
Das, C.P. and Swain, R.K., 2018. INFLUENCE OF CAPITAL STRUCTURE ON FINANCIAL
PERFORMANCE. Parikalpana: KIIT Journal of Management. 14(1).
Garbowski, M., and et.al., 2019. Financial accounting of E-business enterprises. Academy of
Accounting and Financial Studies Journal, 23, pp.1-5.
Herath, S.K. and Albarqi, N., 2017. Financial reporting quality: A literature review. International
Journal of Business Management and Commerce. 2(2). pp.1-14.
Kimmel, P.D., Weygandt, J.J. and Kieso, D.E., 2018. Financial accounting: Tools for business
decision making. John Wiley & Sons.
McCallig, J., Robb, A. and Rohde, F., 2019. Establishing the representational faithfulness of
financial accounting information using multiparty security, network analysis and a
blockchain. International Journal of Accounting Information Systems, 33, pp.47-58.
Moskalenko, N.V., Vasyukova, E.S. and Chestnykh, D.O., 2020. Features of the reflection of
inventories in the financial statements. Entrepreneur’ s Guide.
Ramadhan, Y. and Sugandi, G., 2020. Prudence in Quality of Financial Statements. Talent
Development & Excellence. 12(1).
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and analysis:
text and cases. John Wiley & Sons.
Warren, C.S., Jonick, C. and Schneider, J., 2020. Financial accounting. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2018. Financial Accounting with International
Financial Reporting Standards. John Wiley & Sons.
Wild, J., 2019. Financial Accounting: Information for Decisions, 9e.
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