Financial Accounting: Concepts and Principles

This document provides an introduction to financial accounting, covering essential concepts and principles such as accounting principles, bank reconciliation statement, financial statements, control & suspense account, and more. It includes case studies and calculations to help you understand the subject better.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION........................................................................................................... 3
SCENARIO 1................................................................................................................. 3
Question 1.................................................................................................................. 3
Question 2.................................................................................................................. 4
Question 3................................................................................................................ 11
Question 4................................................................................................................ 13
Question 5................................................................................................................ 14
Question 6................................................................................................................ 15
Question 7................................................................................................................ 17
SCENARIO 2............................................................................................................... 18
Question 1................................................................................................................ 18
Question 2................................................................................................................ 19
Question 3................................................................................................................ 20
Question 4................................................................................................................ 21
Question 5................................................................................................................ 22
CONCLUSION............................................................................................................. 25
REFERENCES............................................................................................................. 26

INTRODUCTION
Financial accounting is the process of recording, analyzing and controlling monetary
information. In current scenario it is essential to implement financial accounting process to drive
important data for decision making. The present report will present various types of essential
concepts like accounting principles, bank reconciliation statement, financial statements, control
& suspense account, etc. It will comprises the calculations like journal entries, ledger account,
trial balance, suspense, bank reconciliation statement, etc to get deeper understanding of mention
concepts. Current case study will involve deep knowledge regarding financial accounting.
SCENARIO 1
Question 1
Business Transactions (BT) are those activities which affect financial position of
organization. There are various types of BT which play crucial role in influencing company
processes. It comprises cash, credit, internal, external which can broadly classified as purchasing
goods, material, services, noncurrent assets, raising funds and paying wages, taxes, interest &
salaries, etc. It becomes essential for company to pay attention on all types of transactions so that
estimation of accurate financial position can be exerted.
Single entry provides one sided view of organizational transaction. In double entry
booking both the aspects of transactions are recorded which provides ability to capture accurate
financial position (Pesci and Girardi, 2021). It makes possible to implement method for error
detection which is not offered by single entry booking. In double entry transaction are recorded
in form of debits and credits.
Trial Balance (TB) is accounting report formulated at the end of financial period so that other
statements can be prepared. Purpose behind creating TB is to permit organization to identify
errors & mistakes so that essential changes through making adjustments can be done. It is
important to prepare as it assist company in decision making regarding budgets, formulating
auditing reports, comparative analysis through identifying mistakes and making adjustments for
rectifying so that arithmetical accuracy can be obtained. Management of firm can balance debt &
credit item by referring the TB. It becomes possible to prepare financial statements by having air
information through trial balance in order to determine actual monetary condition of company.

Question 2
In the books of Kate:
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
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
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
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
It has been seen that the financial report and the financial statements are same only and
are also most of the time used interchangeably but in real it is not the same. The financial report

accounts for the term which incorporates various types of reports while the financial statements
are considered as one of the reports which falls under the roof of financial report. In simple
terms, the financial statements are basically the financial reports but it is important to understand
that all financial reports are not financial statements. The financial reports collect the relevant
financial information for the purpose of distributing it in public while the financial statements
offer information pertaining to the financial position and the outcomes of the operations
(Difference Between Financial Reporting and Financial Statements. 2017). There is a need of
financial report which provides information on the working or the operations of the business as it
involves reports like the income statement, balance sheet, cash flow statement, equity report, and
other reports as per the business requirement. These reports are essential as it helps in
determining the financial position and performance of the company. Based upon this, various
business-related decisions are being undertaken which helps in bringing benefits to the business.
There are number of users of financial statements which are bifurcated into internal and
external users. The management team uses the financial statements in order understand the
profitability and liquidity position of the company so that they can undertake operational and
financial decisions. The competitors also use such statements in order to gain competitive insight
about its rival so that it can formulate better and effective competitive strategies. Government is
also interested in looking at the financial statements of the company with the objective of
identifying whether the organization has paid the right amount of tax or not. Investors are also
interested into the financial statements as it helps in determining whether the company is
performing well or not and the trend pertaining to the return it is generating. This helps in taking
decision whether the investor should make an investment or not (Users of financial statements.
2021). The suppliers of the company will also require it as it assists in determining the extend to
which the credit can be provided to the firm. this is very important for the suppliers in order to
avoid the chances of bad debts from supplier’s perspective. Banks and the other financial
institutions are also interested as they in-depth analyse the financial statements which helps in
knowing the credibility and the capability of the company in terms of making repayment of the
loan amount along with the interest. Investment analyst is also interested in knowing the
performance and the position of the firm as they provide recommendation in regard to the
financial securities in which the company should make an investment into. Therefore, these are

the key users of the financial statements of the company and plays an important role in the
growth and the progress of the company.
Question 4
Fundamental principles of accounting are crucial and universally applicable which
provides road map to business organization in order to move towards success. These are
mentioned as following
Matching principle -
This allows to achieve aim to match expenses with association revenue for te particular
span of time. It states that firm's earning statement present not only revenue for that duration but
also cost associated with it (McCallig, Robb and Rohde, 2019). This is core of accrual basis of
accounting for adjusting entries.
Accrual principle
It is concerned with recording transactions in effective manner in time when it has
actually occur. With respect to this, it is one of the important principle which play crucial role in
recording & analyzing business transaction in fair manner to determine business actual financial
health.
Going concern
It is related with assumption that entity will continue for longer duration in future . it
helps company to prepare its financial planning in effective manner with keeping in mind
regarding its sustainability so that accomplishment of business objectives can become possible.
This is mostly concerned with having ability to have liquidity in order to avoid insolvency
situations. It allows firm to utilize organizational assets in wise manner so that longer stability in
industry can be attained.
Full disclosure principle
Important information in relevant and fair pattern should be provided by company
through accurate formed financial statements. It is essential for financial analysis and modeling
as these requires fair data in order to make proper decisions, In addition to this, without full
disclosing company any be indulged into legal obligations therefore it becomes essential for

company to have proper method for sharing it’s all information that can assist all parties to take
strategic decisions.
Revenue Recognition Principle
This helps company to get guidance in how and when revenue can be recognized. It is
using the accrual principle for making recognition of when and how cash is received (Schroeder,
Clark and Cathey, 2019). Revenue recognition principle with matching concept and the reason
behind following is to keep transaction aligned by ensuring accurate profit and loss margin
regarding particular span of time.
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 (CFS) is responsible for summarizing cash & equivalent information for
providing details through segregating statements into three parts. It comprises operating,
investing and financing activities of firm so that net change in cash can be determined. In
addition to this (Warren, Jonick and Schneider, 2020). Various types of organization irrespective
of their scale of operating use it to get the accurate information about cash position. This
provides assistance in making strategic decisions through enabling company to have sufficient
information of all operating, investing and financing practices.
Draft of the cash flow statement of BBVA

SCENARIO 2
Question 1
Bank Reconciliation (BR) is the statement that is prepared on periodical basis for
assessing company's accuracy in recording bank related transactions in cash book's respective
column. In addition to this, exact balance on particular date can be determined with help of BRS
as it provides opportunities to identify errors. The reason behind having it in organizational
process is to make changes to overcome mistakes in order to derive relevant information for
taking important decisions (Bank Reconciliation, 2021). Having an ability to avoid unnecessary
situation that can hamper both credibility and trustworthiness of company is obtained through
implementing bank reconciliation statement into procedure. Additional subtraction, duplication

of payments, etc errors can be found with help of BRS in turn rectifying at right time can be
done. Periodically bank reconciliation statement provides assistance in checking interest, fees
and other charges imposed by concerned authority on account so that adding & subtracting in
respective book. Fraudulent transactions conducted by employees in business can be identified
by having BRS into the organizational process. In addition to this, such detection enable firm to
save its money from getting misused in order to move towards success. This particular statement
prevents firm to build good relationship with stakeholders through recognizing its due payments
on time. Effective liquidity through evaluating all receivable helps in managing business
activities.
This is basically a process of identifying transactions individually and managing it to
match with bank statement such as closing balance of concerned authority in book is similar with
the mentioned official statement. In addition to this, comparing opening balance, credit side with
debit, making evaluation for omitted items, rectifying mistakes, checking revised figure with
calculated, updating cash book with new amounts, making addition and subtraction of cheques,
creating adjustments for errors. The accuracy of it can be attained by comparing the balance
with bank statement. BRS is prepared by all firms to get mentioned benefits in turn better
effectiveness with respect to concerned area can be derived. Having efficient BRS can provide
opportunity to avoid potential errors through implementing its process in systematic manner.
Question 2
Control Account (CA) is summary of general ledger which is also known as adjustment account
that’s detail will found in corresponding subsidiary ledger. It comprises the details of correct
balances used for formulation of financial statements. With help of subsidiary ledger, control
account becomes able to track transaction. The basic purpose of control account to summarize
the details of account receivable and payables as they comprises various essential information.
Individual transactions appear both in subsidiary & control account but the CA contains only
closing balances. The ending balance of these both accounts should be match in order to provide
accurate information.
Role of CA in financial management
 Control account play crucial role in financial management as it helps organization in
many ways. The most important role of control account is to identify errors of subsidiary
statement so that fair information can be derived. In addition to this, it play important role

in assessing mistakes through emphasizing on company's transaction. It provides
opportunities to prepare trial balance in significant manner.
 This contributes majorly in speeding the process of management accounts. In addition to
this, its balance can be used to without individual reconciled accounts (Gardi, 2021). It is
used as preventing measure for fraud which gives deeper insights about processes.
 In policy formation control account play essential role as it aids organization to save time
by avoiding irrelevant information through referring summarized data. Strategic policy
creation become possible that is biggest advantage of CA.
 Making effective division of work for getting specialization in accounting process is
another responsibility of control account. Prompt preparation of profit & loss account,
balance sheet provides assistance in managing financial resources of organization in
effectual manner.
 Internal checks with greater accuracy become possible by executing control accounting
the organizational practices. In financial management the role of CA is to keep clean
records of all ledgers to have details of correct information. Basis for preparing financial
accounts is obtained with help of CA.
Question 3
Suspense Account (SA) is utilized to carry doubtful entries in order to get clarification of
general ledgers. Uncertainties or discrepancies type of business entries are recorded in suspense
account to fulfill the purpose of making trail balance in balanced manner. SA are cleared out
once the confusion ahs removed by shifting funds to their designated accounts. This is usually
prepared on temporary or permanent basis that requires further analysis before permanent
conclusion has been drawn (What is suspense account? 2021). There are number of reasons for
which a suspense account is prepared. The main purpose behind formulation of SA is to hold
subcategory transactions. This is holding account in general ledger that is widely prepared for
getting effective trail balance, financial statements while purchasing fixed assets until it has not
received, inability to classify transactions etc. it helps in locating the errors with the amount of
suspense account by finding errors of past (Garbowski and et.al., 2019). The most crucial reason
for implementing SA is to judge nature of mistake so that proper designated account can be
found and located. One sided errors rectifying becomes possible by having the suspense account

in general ledger. There are variety of other reasons for drafting suspense account in accounting
process. The most crucial are mentioned to derive significant knowledge in effective manner.
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
presented for payment
270
Transfer to bank directly 1070
Dividend received by 325

Abbey bank
Drawings not recorded 105
Balance as per Cash book 1760
Direct Debit
It is related with withdrawing funds by one person from another’s individual bank
account (Malik and et.al., 2021). This is largely taken into consideration for recurring payments
such as utility bills, credit cards, etc.
Standing Orders
It is kind of instruction provided to bank by an account holder to pay some sum of money
according to intervals in payee’s account.
Bank Charges
This comprises all the charges imposed by bank on their customer’s current account. It is
maintenance fees paid by account holder to bank in respect to specific transaction
Dishonor cheque
It occurs when there is lack of sufficient funds, a signature mismatch, etc due to these
reasons banker deny to conduct transaction against payee.
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 concluded that financial accounting is one of the
important part of business that provides insights about monetary transactions. The current report
has given emphasis on types of business transactions, trial balance, single & double entry. It has
involved journal entries, ledger and trial balance for getting required information. Present report
has compared financial statements & reports and described fundamental accounting principles.
Profit & loss, balance sheet and draft of cash flow ha been presented in case study. BRS
importance, role of control account in financial management, reason for drafting suspense
account has comprised in report. Journal entries, bank reconciliation, suspense account
calculations has been shown in present case study.

REFERENCES
Books and Journals
Garbowski, M. and et.al., 2019. Financial accounting of E-business enterprises. Academy of
Accounting and Financial Studies Journal. 23. pp.1-5.
Gardi, B., 2021. Investigating the effects of Financial Accounting Reports on Managerial
Decision Making in Small and Medium-sized Enterprises. Available at
SSRN 3838226.
Malik, A. and et.al., 2021. Managing sustainability using financial accounting data: The value of
input-output analysis. Journal of Cleaner Production. 293. p.126128.s
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.
Pesci, C. and Girardi, A., 2021. At the intersection of financial and non-financial accounting
impact measurements. In A Research Agenda for Social Finance. Edward
Elgar Publishing.
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.
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https://www.accountingtools.com/articles/2017/5/17/bank-reconciliation–
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financial-reporting-and-vs-financial-statements/>.
Users of financial statements. 2021. [Online]. Available
Through:<https://www.accountingtools.com/articles/users-of-financial-
statements.html>.
What is suspense account? 2021. [Online]. Available through: <
https://www.patriotsoftware.com/blog/accounting/what-is-suspense-
account-journal-entry-example/#:~:text=A%20suspense%20account%20is
%20a,payments%20related%20to%20accounts%20receivable.>