Financial Accounting: Types of Business Transactions, Journal Entries, Bank Reconciliation

This document provides an introduction to financial accounting and covers topics such as types of business transactions, journal entries, bank reconciliation, difference between financial report and statement, and fundamental principles of accounting. It also includes a presentation of profit and loss account and balance sheet.

Financial Accounting
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Contents
INTRODUCTION...........................................................................................................................3
SCENARIO 1..................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................5
Question 3. Difference between financial report and statement................................................10
Question 4. Description of the fundamental principles of accounting......................................12
Question 5..................................................................................................................................13
SCENARIO 2................................................................................................................................15
Question 1. Description about bank reconciliation....................................................................15
Question 2. Description about control accounts........................................................................16
Question 3. Description about suspense account.......................................................................16
Question 4..................................................................................................................................17
Question 5..................................................................................................................................19
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................22
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INTRODUCTION
Financial accounting refers to the procedures or process of preparing financial statements
that an organisation uses with purpose to show their financial position and performance to
outsider of company such as creditors, investors, customers and suppliers. In simple word, it is a
particular branch of accounting that includes different process such as recording, summarizing
and reporting results of transactions from business operations over a specific time period (Al-
Sulaiti, Ousama and Hamammi, 2018).
This report is divided into two sections and each section has different questions. For
completing section first, there is need of following some questions such as types of business
transactions that includes single entry and double entry book keeping, and trial balance and its
importance. In this section, second question is based on Journal entries for each transaction,
Ledger accounts, and Trial balance. Difference between financial statement and financial report,
Fundamental principles of accounting and Profit and loss account are also a main part of this
section. Section second is based on bank reconciliation, control accounts, suspense account,
journal entries and many other aspects.
SCENARIO 1
Question 1
Types of business transaction
Business transactions introduces as an event that has happened within an economic enterprise
which can be precise in terms of money. Business transaction has financial or direct impact on
the company. There are several forms of business transactions and within this, all these are
divided into internal as well as external transactions. This will be described as below:
 Internal business transactions: In this transaction, involvements of external parties are
not allowed. Such type of transactions has direct impact over financial performance of
company because it not includes any exchange of values with external parties. For
example: internal business transactions include recording depreciation of fixed assets as
well as realizing the defeat of assets reasoned by fire etc.
 External business transactions: Within this transactions, an organisation exchange
money with external parties. These are basic transactions that are performed by company
on daily basis. For example: external transactions include sale of goods to customers,
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purchase of goods from suppliers, electricity or water bills payment of gas, payment of
salary to employees etc.
Single entry and double entry book keeping
Single entry book keeping refers as a straightforward and single method of
bookkeeping. In which each and every business transaction are recorded at the same time as a
single-entry in journal. Single entry book keeping is a cash-based bookkeeping technique that
tracks incoming as well as outgoing value in a journal (Biddle, Ma and Song, 2020).
Date Description Transaction value Balance
XX-XX-XXXX £000.00 £000.00
Double entry book keeping is another method or technique of recording transactions of
business where for each transaction; an entry is recorded within at least 2 accounts which are
credit or debit. In a double-entry system, the amount of capital is recorded as debits should be
equal to the amounts of capital recorded as credits. The double-entry bookkeeping system works
according to the accounting equation, such as Assets= Liabilities + Owner’s capital. Structure of
Double entry book keeping will be shown as below:
Date Description L.F Debit Credit
XX-XX-XXXX £000.00
£000.00
Trial balance and its importance
Trial balance introduces as an accounting or booking report that includes lists of balance
within each of business’s general ledger accounts. Debit balance amounts are scheduled in a
column with appropriate heading "Debit balances" as well as the credit balance amounts are
scheduled in an additional column with the accurate heading "Credit balances." The sum of each
of these 2 columns must be identical (Dutta and Patatoukas, 2017). There are number of
importance and significance of Trial balance that helps an organisation in its business
transactions. Some main importance of trail balance will be explained as below:
 Trial balance is an effective tool because it supports company in checking of arithmetical
accurateness of their accounts by make Suring the equal balance of trail balance for both
sides.
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 Trial balance shows the credit and debit balance of the business transactions. If the debit
balance does not match with the credit balance, it indicates that there are few errors
within the record. Therefore, trail balance helps an organisation in locating of errors.
 Trail balance help company in preparing of final accounts. It keeps the record of account
balance that supports an organisation to prepare final account. At the end of financial
year, final account will be prepared by knowing financial position, operating results and
performance of a business.
Format of trial balance
Account name Debit (£000) Credit (£000)
Question 2
This includes the presentation of journal entries, ledger accounts and trial balance.
Journal entries in relation to each transaction
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Ledger accounts
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Trail balance
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Question 3. Difference between financial report and statement
Financial report understands as the document that provides the information related to the
all monetary transactions of an organisation. The main reason behind development of this report
is to record every financial transaction of a company to determine the impact of same over
organisational functioning. There is no fixed time period in respect to the formulation of report.
However, financial statement is different from the financial report that defined above. Financial
statement is the mandatory documents which is needed to prepare by every organisation for
presentation of their profit and loss to their stakeholders. The another difference which is clearly
visible in both i.e. every financial statement is a report but all financial report is not a financial
statement (Garbowski and et al., 2019).
The detailed level of different in between these is presented below with the aid of different
points;
Origin of variance Financial report Financial statement
Content This includes all the monetary
transactions related to an
This includes only those
transactions and information which
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organisation. are prioritized by the governance
authority
Governance The whole process related to
financial report is governed by
IASB. This is known as
international accounting standards
board.
Here, the process of formulating
financial statements is governed by
the standards which were developed
by IASB.
Scope The scope of financial report is
wide as compared to the financial
statement. This will understood on
two basis, first all financial
transaction are presenting under
this and second all the financial
statements are report but not all
the financial reports and financial
statements (Kimmel, Weygandt
and Kieso, 2018).
The scope of financial statements is
narrow as compared to the financial
reports. This is because only limited
transaction are recording under
same.
Examples There are numerous number of
examples are present that can be
presented as example of financial
report includes bank statement,
accounts receivable report, bad
debts report, debtor analysis report
etc.
In actual there are no examples are
existing in respect to the financial
statements. But, this of four types
such as income statement, balance
sheet, statement of cash flows and
stamen of changes in equity.
Requirement These reports are required to see
by business managers because
through which they get the
information that how much
expenses and purchases were done
by an organisation so they can
build effective budget for the
Financial statements used in the
organisations but only for the
certain purposes. These are
basically studied by the
stakeholders for an organisation in
relation to the ascertainment of
financial performance, position,
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future period of time. The usage
scope of these reports is higher as
compared to another because this
will provide all information related
to an organisation. Further, these
reports also used by management
in development of financial
strategy through which they able
to attain large number of profits
along with reduction in amount of
expenses.
availability of cash and market
position of a company. Further,
these reports are also used by the
external investors in relation to the
decision making about investment
in organisation or not.
Users The different number of users
which are commonly uses these
reports include business managers,
board members and all other users
of financial statements as these are
also the part of financial reports.
The users who uses financial
statements commonly includes
investors, suppliers, creditors,
clients, public, government, debtors
and many other.
Question 4. Description of the fundamental principles of accounting
Crucial bookkeeping standards are the rules which confines and constrains the business
associations while creating budget summaries and detailing money related information. There are
different essential standards which oversee the business association. These standards depend on
the measures given by "for the most part acknowledged bookkeeping gauges" and "worldwide
budgetary revealing principles". A portion of the significant crucial standards of bookkeeping
include:
Monetary substance presumption: According to this rule, a business association must be
given its own character and name under which it can work together. The element of the business
association must be not quite the same as the element of its proprietor (Lento, 2016).
Money related unit supposition: This rule expresses that all the budgetary exchange
which have happened in a business association must be recorded utilizing an equivalent fiscal
unit with the goal that a recognition and consistency can be kept up.
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Complete honesty guideline: This monetary rule is a guideline of the whole business
association which expresses that all the business exchanges must be recorded in the association's
fiscal reports so a valid and reasonable judgment can be passed on the money related execution
and position of that organization.
Going concern standard: According to this guideline, a business association must keep
on existing in any case to the occasion of proprietor's demise. Except if, a business association is
broken down, it thought to be existed (Muda, 2016).
Materiality guideline: This standard expresses that lone money related exchange can be
recorded in the fiscal summaries of business substance and those exchanges must be recorded
when they happen so a financial worth is gotten or paid by the association.
Income acknowledgment standard: Amount can be just perceived or recorded by the
association when it is earned and not when it is gotten by the association.
Coordinating standard: According to this rule which goes about as a rule to business
associations, the aggregate of charge and credit sides of the fiscal reports must be equivalent or
coordinated. Costs caused by a substance should consistently be coordinated from the income
produced by that association (Mullinova, 2016).
Standard of Conservatism: This is one of the most basic rule for business association
which state business associations must be moderate naturally and ought to be set up for the most
noticeably terrible. As indicated by this standard, expected inflow of cash in the association
should consistently be recorded in the association when it is really gotten yet the normal
outpouring of cash ought to be recorded when there is uncertainty of that surge. This rule helps
in an association for future money related emergencies.
Question 5
This includes the presentation of profit and loss account along with balance sheet.
Profit and Loss Account
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Balance Sheet
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SCENARIO 2
Question 1. Description about bank reconciliation
Bank Reconciliation is the method that provide an opportunity to organisation that matches
their accounting records with the balance of data ascertained from their bank statement. This
includes the comparison of the two books such cash book of an organisation and bank statement
provided by bank in respect to the same organisation depicting it’s all transactions.
This is important to conduct from the side of an organisation as this will help to determine the
difference between the balance of two books. This provide an opportunity to organisation that
understand the errors and made corrections for tallying the amount in both books. All the
information which is presented under the bank statement is provided by bank that includes the
record of all transactions that have direct influence over the bank account of an organisation.
There some reasons due to which the balance between the two books not matched and in relation
to getting the difference there is need to perform the exercise of bank reconciliation. The main
and common reasons behind the formulation of bank reconciliation includes outstanding check,
NSF and deposit in transit. This is so because whenever the amount deposited in account not
directly depicted into the pass book because it takes time and this is the cause that different
creates in the balance of two books (Narayanaswamy, 2017).
There are some other reasons due to which necessary to prepare BRS i.e. outstanding
cheque. In this case, when party received the payment in cheque then made the entry in of credit
without depositing the same in bank. This become the cause due to which due to which
difference creates in both books and needed to take the help of BRS method through which able
to determine that where error exists and what needed to mention for correction in amounts. On
the other hand, NFS check is also the reason for variation in amount. NFS means non-sufficient
amount. There are some cases where receive the payment in cheque and deposit the same in
account but dis honoured and amount not deposit in account because another party not having
the sufficient amount of balance in account. In this case, receiving party made entry in cash book
but no amount is deposited in bank. This was the reason that different in amount of both boos is
visible. The same is also needed to rectify with the aid of BRS (No, 2018).
So, preparation of BRS is important from the point of removing any kind of variation in
amount of both books along with maintaining the proper records that does not depicting the error
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in any manner. This further help the management of an organisation to made the effective
decisions in future from where they able to perform business functions more effectively.
Question 2. Description about control accounts
Control account is a money related record which is created to be remembered for general
record. This record summarizes the equalizations in auxiliary records so as to introduce a
summed up perspective on accounts which have enormous number of exchanges. The most
widely recognized records of which adjusts are added by control accounts will be money due and
creditor liabilities. Both of these records are archives which for the most part have high number
of exchanges and it request to dissect them it is critical to sum up them utilizing a control
account. As per the money related bookkeeping process the equalizations of such records are
recorded into auxiliary level record account as opposed to recording into general record (Robson,
Young and Power, 2017).
Control accounts simultaneously have the important role in financial management with an
organisation. The aspects that help in same are presented below;
 The main role of control account in direction of financial management that it keeps the
general ledger free from the details so not confusing to understand the information in
future.
 Control account has the role regarding providence of correct balance amount through
which able to develop effective financial statements from where able to attain the aspect
of financial management.
 The control helps in providence of summarised information along with detailed
information in subsidiary account from where possible to understand the all information
without any confusion that can be further used for the purpose of auditing and developing
cost accounts.
Question 3. Description about suspense account
A suspense account is a general record account in which worth is recorded for a brief
period so as to recognize from where that worth is being gotten and in which account it ought to
be recorded. This account is created when a business element is has left with an obscure financial
worth which has no goal to be recorded in, at that point a tension record is opened to record that
esteem in this record yet for just a transitory period so association can make sense of that in
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which account that worth ought to be recorded and what is its right goal (Schroeder, Clark and
Cathey, 2019).
Suspense account is prepared by the financial accountant of an organisation for the
fulfilment of many aspects along with justifying many reasons. Some of these are defined below;
 The main reason behind the building of suspense account is to understand the reason due
to which the credit and debit side of trial balance did not match. It is clear that without
development of trail balance with equal sides not possible to further build the financial
statements. So, in respect to the development of financial statement, there is need of
opening of suspense account in trail balance.
 The another reason behind the drafting of the suspense account is that when an
organisation receives the payment but does not have information that were it recorded.
So, in respect to the development of financial statement on the determined period of time
suspense account is opened with the same amount receive by an organisation to
effectively formulate the financial statement of an organisation.
 The another reason when an organisation needed to open the suspense account is when
fixed assets were purchased but get the delivery with invoice number. So, in this case
finance manager opens the suspense account for a temporary period of time for preparing
financial statement and afterwards receiving the invoice transfers the amount to its same
appropriate account.
Question 4
This includes the presentation of the updated cash book, bank reconciliation statement and
the difference between many aspects such as bank charges, standing order, dis-honour cheque
and direct debit (Suryanto and Ridwansyah, 2016).
Updated bank reconciliation and cash book as on 28th February 2010
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Difference between standing order, direct debit, dis-honour cheque and bank charges
Direct debit Standing order Bank charges Dis-honour
Cheque
Meaning It is a flair which is
given to the
customers of banks.
In this facility,
customer can give an
immediate request to
their bank for
charging a sum from
their ledger at an
ordinary span. This
capability is a
sheltered assistance
given by banks to
their clients.
This facility is like
the immediate
charge however if
there should arise
an occurrence of
standing request,
clients are just
permitted to
arrange their bank
to make an
instalment for their
benefit when the
instalment is of a
specific worth pre
expressed by client
at a standard
stretch.
A bank charge is
an expense
which is paid by
the client to their
banks against
the offices
utilized by them.
These offices
can incorporate
direct charge
and standing
requests
expressed
previously. This
expense is a
compulsory
charge to the
This is a
punishment
which is charge
by the bank from
their client when
their check is
held as
disrespected. It
is a punishment
which is
mandatory to be
paid by the
client.
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client.
Illustration A client can arrange
their bank to take
care of their general
utility tabs like
power, gas and so
forth at an ordinary
stretch as these bills
got because of a
specific span. It must
consider that clients
can likewise request
to pay a sum at
whatever point it gets
due in a customary
span like a month or
quarter.
A client can give a
standing request to
the bank to make
an instalment for
their portion of
credit, EMI and so
on as these
instalments are of
fixed esteem and
acquire at a normal
stretch. This office
can likewise be
utilized for exercise
centre enrolment or
a club house
participation.
A client needs to
pay charges for
the ATM
offices,
overdraft offices
and in any event,
for an additional
check book
demand.
A check is held
as disrespected if
the customer's
record doesn't
have adequate
parity or if there
are not many
deformities in
the check, for
example,
overwriting.
Question 5
This includes the presentation of journal entries and suspense account.
Journal entries
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Suspense account
CONCLUSION
From the above report, it has been discovered that monetary bookkeeping isn't just an idea
yet is a procedure which is embraced by each association to record their business exchanges and
afterward create fiscal summaries from those records. The above report is the summarisation of
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different monetary ideas and records from which it has been inferred that fiscal statements and
reports are not quite the same as one another however of these are created by utilizing the rules
and standards of budgetary bookkeeping. The area of the above report likewise causes in coming
to the resolution that there are accounts like anticipation and control account which helps in
legitimate working of budgetary administration process.
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REFERENCES
Books and Journals
Al-Sulaiti, J., Ousama, A. A. and Hamammi, H., 2018. The compliance of disclosure with
AAOIFI financial accounting standards. Journal of Islamic Accounting and Business
Research.
Biddle, G. C., Ma, M. L. and Song, F. M., 2020. Accounting conservatism and bankruptcy
risk. Journal of Accounting, Auditing and Finance, Forthcoming.
Dutta, S. and Patatoukas, P. N., 2017. Identifying conditional conservatism in financial
accounting data: theory and evidence. The Accounting Review. 92(4). pp.191-216.
Garbowski, M. and et al., 2019. Financial accounting of E-business enterprises. Academy of
Accounting and Financial Studies Journal. 23. pp.1-5.
Kimmel, P. D., Weygandt, J. J. and Kieso, D. E., 2018. Financial accounting: Tools for business
decision making. John Wiley & Sons.
Lento, C., 2016. Promoting active learning in introductory financial accounting through the
flipped classroom design. Journal of Applied Research in Higher Education.
Muda, I., 2016. The Skills and Understangding of Rural Enterprise Management of the
Preparation of Financial Statements Using Financial Accounting Standards (IFRS)
Finacial Statement on the Entities Without Public Accountability (ETAP) Framework on
the Implementation of Village Administration Law.
Mullinova, S., 2016. Use of the principles of IFRS (IAS) 39" Financial instruments: recognition
and assessment" for bank financial accounting. Modern European Researches, (1), pp.60-
64.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning Pvt.
Ltd.
No, A. S., 2018. Conceptual framework for financial reporting. Norwalk, CT: FASB.
Robson, K., Young, J. and Power, M., 2017. Themed section on financial accounting as social
and organizational practice: exploring the work of financial reporting. Accounting,
Organizations and Society. 56. pp.35-37.
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Suryanto, T. and Ridwansyah, R., 2016. The Shariah financial accounting standards: How they
prevent fraud in Islamic Banking.
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