Financial Accounting: Concepts and Application

This guide provides an overview of financial accounting, including the concepts and application of the double entry system, trial balance, and allocation of accounts to financial statements. It covers topics such as recording business transactions, analysing financial statements using ratio analysis, and reconciling bank and cash balances.

Financial Accounting

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1................................................................................................................................................1
1.2................................................................................................................................................2
1.3..............................................................................................................................................11
TASK 2..........................................................................................................................................12
2.1..............................................................................................................................................12
2.2..............................................................................................................................................13
2.3..............................................................................................................................................14
2.4..............................................................................................................................................16
TASK 3..........................................................................................................................................17
3.1..............................................................................................................................................17
3.2..............................................................................................................................................18
3.3..............................................................................................................................................19
3.4..............................................................................................................................................19
TASK 4..........................................................................................................................................21
4.1..............................................................................................................................................21
4.2..............................................................................................................................................21
4.3..............................................................................................................................................22
4.4..............................................................................................................................................23
CONCLUSIONS...........................................................................................................................24
REFERENCES..............................................................................................................................25

INTRODUCTION
Financial accounting is the process that is used by the company for managing its business
operations effectively and appropriately. Financial accounting refers to the specialised
accounting branch that is used for keeping track over the financial transactions. It uses
specialised accounting guidelines and standards for recording summarising and presenting the
financial report or the financial statements like income statement, balance sheet (Schroeder,
Clark and Cathey, 2019). Present report will provide about the concepts of financial accounting
and their application for recording the business transactions. It will be providing about the
different ratios used for analysing the financial statements of company using ratio analysis
stating the financial health and position. It will provide understanding of reconciling bank and
cash balances. Report will provide how transactions are recorded, posted and balanced using trial
balance.
TASK 1
1.1
Trial Balance as on 31st March
Trial Balance at 31/3/2020
Account Debit Credit
Premises 340000
Van 51250
Fixtures 8100
Inventory 63900
P Mullen 1400
F Lane 3100
Cash at bank 62400
Cash in Hand 5600
S. Hood 2150
J. Brown 4600
Capital Account 529000
Total 535750 535750
1

1.2
i) Application of double entry system to record business transactions.
Journal Entries
Date Particulars Debit Credit
01-Apr Storage Expense 400
To Bank 400
02-Apr Purchases 5000
To S. Hood 1400
To D. Main 2000
To R. Foot 1600
03-Apr T. Cole 1650
F. Syme 2000
J. Allen 900
F. Lane 750
To Sales 5300
04-Apr Motor Expenses 470
To Cash 470
07-Apr Drawings 1500
To Cash 1500
09-Apr T. Cole 650
J. Allen 1300
To Sales 1950
14-Apr Van 28500
To Abel Motors 28500
16-Apr Bank Ac 6500
To P. Mullen 1400
To F. Lane 3100
To F. Syme 2000
2

22-Apr Purchases 1800
To D. Main 1800
24-Apr S. Hood 2150
J. Brown 4600
R. Foot 1400
To Bank 8150
27-Apr Salaries 4800
To Bank 4800
30-Apr Business Rates 1320
To Bank 1320
30-Apr Abel Motors 28500
To Bank 28500
Total 94190 94190
LEDGER ACCOUNTS
Bank a/c
Date Particulars DR(£) Date Particulars CR(£)
01-04-2020 To bal b/d 62400 01-04-2020 Storage 400
16-04-2020 P. Mullen 1400 24-04-2020 S. Hood 2150
16-04-2020 F. Lane 3100 24-04-2020 J. Brown 4600
16-04-2020 F. Syme 2000 24-04-2020 R. Foot 1400
27-04-2020 Salaries 4800
30-04-2020
Business
Rates 1320
30-04-2020
Abel
Motors 28500
30-04-2020 By Bal c/d 25730
68900 68900
3

Cash a/c
Date Particulars DR(£) Date Particulars CR(£)
01-04-2020 To bal b/d 5600 04-04-2020
Motor
Expenses 470
07-04-2020 Drawings 1500
30-04-2020 By Bal c/d 3630
5600 5600
Van a/c
Date Particulars DR(£) Date Particulars CR(£)
01-04-2020 To bal b/d 51250
14-04-2020 To Abel Motors 28500
30-04-2020 By Bal c/d 79750
79750 79750
Fixtures
Date Particulars DR(£) Date Particulars CR(£)
01-04-2020 To bal b/d 8100
30-04-2020 By Bal c/d 8100
8100 8100
Capital a/c
Date Particulars DR(£) Date Particulars CR(£)
01-04-2020 To bal b/d 529000
4

30-04-2020 By Bal c/d 529000
529000 529000
Purchase a/c
Date Particulars DR(£) Date Particulars CR(£)
02-04-2020 To S. Hood 1400
To D Main 2000
To R. Foot 1600
To D. Main 1800
30-04-2020 By Bal c/d 6800
6800 6800
P. Mullen
Date Particulars DR(£) Date Particulars CR(£)
01-04-2020 To bal b/d 1400 16-04-2020 To bank 1400
30-04-2020 By Bal c/d 0
1400 1400
Sales a/c
Date Particulars DR(£) Date Particulars CR(£)
03-04-2020 T. Cole 1650
03-04-2020 F. Syme 2000
03-04-2020 J. Allen 900
03-04-2020 F. Lane 750
09-04-2020 T. Cole 650
5

30-04-2020 To bal c/d 7250 09-04-2020 J. Allen 1300
7250 7250
F. Lane
Date Particulars DR(£) Date Particulars CR(£)
01-04-2020 To bal b/d 3100 16-04-2020 Bank 3100
30-04-2020 By Bal c/d 0
3100 3100
S. Hood
Date Particulars DR(£) Date Particulars CR(£)
24-04-2020 To bank 2150 01-04-2020 Bal b/d 2150
02-04-2020 Purchases 1400
30-04-2020 To bal c/d 1400
3550 3550
J. Brown
Date Particulars DR(£) Date Particulars CR(£)
24-04-2020 To bank 4600 01-04-2020 Bal b/d 4600
4600 4600
D. Main
Date Particulars DR(£) Date Particulars CR(£)
6

02-04-2020 To Purchases 2000
30-04-2020 By Bal c/d 2000
2000 2000
R. Foot
Date Particulars DR(£) Date Particulars CR(£)
24-04-2020 To Bank 1400 02-04-2020 Purchases 1600
30-04-2020 To Bal c/d 200
1600 1600
Storage
Date Particulars DR(£) Date Particulars CR(£)
01-04-2020 To bank 400
30-04-2020 By Bal c/d 400
400 400
Salaries
Date Particulars DR(£) Date Particulars CR(£)
27-04-2020 To bank 4800
30-04-2020 By Bal c/d 4800
4800 4800
Motor Expenses
Date Particulars DR(£) Date Particulars CR(£)
04-04-2020 To Cash 470
30-04-2020 By Bal c/d 470
7

470 470
Business Rates
Date Particulars DR(£) Date Particulars CR(£)
30-04-2020 To Bank 1320
30-04-2020 By Bal c/d 1320
1320 1320
T, Cole
Date Particulars DR(£) Date Particulars CR(£)
03-04-2020 To Sales 1650
09-04-2020 To Sales 650
30-04-2020 By Bal c/d 2300
2300 2300
J. Allen
Date Particulars DR(£) Date Particulars CR(£)
03-04-2020 To Sales 900
09-04-2020 To Sales 1300
30-04-2020 By Bal c/d 2200
2200 2200
F. Syme
Date Particulars DR(£) Date Particulars CR(£)
03-04-2020 To Sales 2000 16-04-2020 To bank 2000
2000 2000
Drawings
8

Date Particulars DR(£) Date Particulars CR(£)
07-04-2020 To Cash 1500
30-04-2020 By Bal c/d 1500
1500 1500
Abel Motors
Date Particulars DR(£) Date Particulars CR(£)
30-04-2020 To Bank 28500 14-04-2020 Van 28500
28500 28500
Premises
Date Particulars DR(£) Date Particulars CR(£)
30-04-2020 To bal b/d 340000
30-04-2020 By Bal c/d 340000
340000 340000
ii) Trial Balance as on April 30th, 2020.
Trial balance as at 31/4/2020
Accounts Debit Credit
Premises 340000
Van 79750
Fixtures 8100
Inventory 63900
Cash at Bank 25730
Cash in hand 3630
9

Receivables
D. Main 2000
T. Cole 2300
J. Allen 2200
Payables
S. Hood 1400
R. Foot 200
Purchases 6800
Sales 7250
Storage 400
Business Rates 1320
Motor Expenses 470
Salaries 4800
Drawings 1500
Capital 529000
Suspense account 5050
Total 542900 542900
iii) Analysing transactions showing progression in trial balance.
Companies are required to record the transactions as per double entry book keeping
system. Progression in trial balance are seen when the transactions are carried out further by the
firm. Companies carry out different types of transactions during the month that are used for
preparing general ledger accounts and preparing trial balances. Transactions of income,
expenditures, sales and purchases made during the year (No, 2018). Payments related to the
accounts payables and collection from the accounts receivables are also recorded in the trial
balances. Financial statements are prepared on the basis of trial balance prepared by the
company.
1.3
Allocation of trial balance accounts to respective financial statements.
10

Trial balance as at 31/4/2020
Accounts Debit Credit
Financial
Statements
Premises 340000 Balance Sheet
Van 79750 Balance Sheet
Fixtures 8100 Balance Sheet
Inventory 63900 Balance Sheet
Cash at Bank 25730 Balance Sheet
Cash in hand 3630 Balance Sheet
Receivables Balance Sheet
D. Main 2000
T. Cole 2300
J. Allen 2200
Payables Balance Sheet
S. Hood 1400
R. Foot 200
Purchases 6800 Income Statement
Sales 7250 Income Statement
Storage 400 Income Statement
Business Rates 1320 Income Statement
Motor Expenses 470 Income Statement
Salaries 4800 Income Statement
Drawings 1500 Balance Sheet
Capital 529000 Balance Sheet
Suspense account 5050 Balance Sheet
Total 542900 542900
TASK 2
2.1
Different types of financial accounting statements
11

Financial statements are the statements in a summarised form containing all the
information regarding the transactions and events carried out by the business during the year.
Financial statements are prepared by the organisations as per the accounting standards and the
reporting requirements of the accounting bodies and authorities. Financial statements are
prepared after a following a defined process of recording journals, ledgers and trial balance.
Financial statements are prepared for giving the information to the public about the financial
position of company (Pratt, 2016). Mainly three types of financial transactions are prepared by
the companies which are income statement, statement of financial position and the cash flow
statement. Each of the financial statements has different purpose and present different
information respectively.
Income Statement Balance Sheet Cash Flow Statement
Purpose This is prepared for
analysing the profit
earned or losses
suffered by the business
during the given period.
Aim of every company
is to earn the reasonable
profits for the year.
Purpose of the balance
sheet is of revealing
financial position of
company at the given
point of time. This
statement provides is
prepared for presenting
all the assets and
liabilities of the
organisation and the
amount of equity
involved in the business
(Narayanaswamy,
2017). It is used by
analysts for assessing the
wealth an entity.
Cash Flow statement
contains the
information regarding
all the cash transaction
carried out during the
year. This helps in
analysing the liquidity
position of the entity
and cash availability at
the end of the year.
Structure Income statement is
structures in a defined
format given under IAS
This balance sheet is
prepared as per the
structure given under the
Cash flow statements
are also prepared by the
entities as per the
12

Presentation of
Financial Statement.
prescribed schedule of
IAS.
reporting requirements
of the accounting
boards (Warren and
Jones, 2018).
Content Income statement
contains the details
regarding all the
incomes earned and the
expenditures incurred
during the year. This
states all the
transactions that are
carried out during the
year (Cascino And
et.al., 2019). It contains
all the cash and non
cash expenses of the
company during the
year.
Balance sheet contains
assets that are sub
divided in current and
noncurrent assets.
Liabilities stating the
obligations of company
divided into current and
noncurrent liabilities.
Equity that contains the
equity capital and
retained earnings of the
company.
Cash flow statement
contains all the cash
inflows and outflows of
the entity for the given
time period. It provides
the cash flows from
operating activities,
investing and financing
activities. It contains
detailed information
about the cash flows of
the company.
2.2
Profit or Loss
statement in
accordance with IAS
for Italian Wines as on
March 31, 2020
13
Income Statement on the March 2020
Particulars Amount Amount
Continuing Operations
Revenue from operations 198000
Cost of good sold 100000
Gross Profits 98000
Distribution Cost 14000
Administrative Cost 24500
Salaries and Wages (2000+5500) 7500
Impairment
Property 6000
Motor Vehicle 1000 53000
Operating Profit 45000
Finance Cost 1500
Share of Net profits of joint ventures &
associates 0 1500
Profit Before Income Tax 43500
Income Tax Expense 9000
Net Income for Year 34500
Earnings per share 0.345

2.3
Statement of Financial position of Italian Wines as on March 31, 2020.
Statement of Financial Position as at 31st December 2013
ASSETS
Non-current assets
Property, plant & equipment 300000
Accumulated Depreciation 9000 291000
14

Motor Vehicle 10800
Accumulated Depreciation 1800 9000
Intangible assets 0
300000
Current assets
Inventories 14000
Trade receivables 24000
Cash and cash equivalents 22500
60500
TOTAL ASSETS 360500
EQUITY AND LIABILITIES
Equity
Share capital 100000
Retained earnings
(78500-
1000)[phone]
Securities Premiums 50000
Revaluation reserve 50000
Total equity 312000
Non-current liabilities
10% Loan Redeemable 2025 15000
Current liabilities
Trade and other payables 21000
Salaries and Wages outstanding 2000
Interest on loan outstanding 1500
Current Tax payable 9000
Total current liabilities 33500
15

Total liabilities 48500
TOTAL EQUITY AND LIABILITIES 360500
2.4
Ratio Analysis
RATIO ANALYSIS
Employed Capital 327000
Net operating profit 45000
Return on capital employed 13.76%
Net operating profit/Employed Capital
Cost of Sales 100000
Sales 198000
Gross Margin 49.49%
Total Sales – COGS/Total Sales
Net profit Margin 34500
Sales 198000
Net profit margin ratio 17.42%
Net Income/ Net Sales
Receivables 24000
Revenue 198000
Receivable days 44
Receivable /Revenues * 365
Debt 15000
Equity 312000
Debt equity ratio 4.81%
16

Debt/ Equity
TASK 3
3.1
Bank Reconciliation Statement
Purpose of Bank Reconciliation Statement
Bank Reconciliation statements refers to the summary of the banking as well as business
activity which reconciles the bank account of the entity with financial records. Reconciliation
statements outline withdrawals, deposits and other transaction affecting the bank account for the
specific period. Reconciliation statement is an internal control also used by the management in
indentifying frauds or errors carried out in the business regarding handling of cash. It is used by
business for correcting the mistakes of cash books by reconciling them with bank pass book. It
ensures that all the cash of the business is deposited on a timely manner in the banks and
payments made directly through banks are recorded in the book maintained by company (Biddle,
Ma. and Song, 2019). It helps the business to match the balances of company with that of bank
pass book. All fees that are charged by bank should be recorded in the cash book.
How this is achieved ?
This is achieved by preparing the reconciliation statement at respective intervals.
Management ensures that all the payments are processed at time and cash collection are also
deposited at time with the bank. The balances of the debit side of cash book are reconciled with
credit side of the pass book. The balance not appearing on the credit side of the pas book are
deducted back from the cash book. Similarly the credit side of the cash book is reconciled with
the debit side of cash book. Balances that are not appearing in the debit side are added back to
the cash book. Making adjustments for interest and bank charges not recorded in the cash books
of company. at the end of the reconciliation balance as per cash book should be same as per that
of the bank pass book.
Parties interested in the bank reconciliation statements.
Bank reconciliation is prepared for matching the balances as per bank pas book and cash
book so that the effect of every transaction is not left unrecorded or is having double effect.
Reconciliation provides evidence to the accuracy of financial figures to be stated in the financial
17

statements (Mullinova, 2016). Reconciliation of bank statements is required by the accounting
professional and management. Accounting professional are interested that the balance of both the
accounting is matching after making adjustments for all the unrecorded transactions.
Managements is interested in reconciliation statement for ensuring that the cash is deposited
timely in bank and no fraud is committed in handling the cash of entity.
3.2
Cash book showing correct balances.
CASH BOOK
Date Particulars DR(£) Date Particulars CR(£)
01/04/20 To bal b/d 5000
02/04/20 Green 5500 02/04/20 Rent – Miller 5000
05/04/20 Spencer Ltd 2500 08/04/20
Interest on
Debenture 2500
09/04/20 Cash 1500 15/04/20 PC World 6000
14/04/20 Capital – Jack 5000 20/04/20 Electricity 1800
20/04/20
Insurance
Claim 15000 21/04/20
Loan
Repayment 9200
25/04/20 Cash 8000 23/04/20 Legal Fees 4100
28/04/20 North Wings 5000 29/04/20 Salary :
30/04/20 Legal Fees 100 Amber 2000
Oshun 2500
Baker 2800
30/04/20 Bank Charges 100
30/04/20
Green (Cheque
Dishonoured ) 5500
30/04/20 Bal c/d 6100
47600 47600
18

3.3
Preparation of Bank Reconciliation Statements for Texas Traders as on 30th April.
Bank Reconciliation Statement
Particulars Amount
Balance as per cash book 6100
Add :
Cheques issued not cleared
Amber 2000
Baker 2800 4800
Less :
Direct debit for gas 250
Cheques deposited not cleared 5000 5250
Balance as per bank book 5650
3.4
Demonstration of the use of
a) Deposit in transit
This is defined as the amount which has already been received and recorded by the entity,
but the same is not yet recorded in bank pass book. Deposits in transit is included under the cash
balance of company and making of adjustments in the company records is not required. DIT are
not recorded by the bank in bank pass book (Kamla and Haque, 2019). These amounts are listed
over the reconciliation statements as increase in bank balance for reporting the actual cash
balance. DIT is also recognised as outstanding deposits, which means the deposits that are not
reflected correctly in the bank statements over the reconciliation date. This is the due to the
difference in time of cheque deposited by the company in bank account and the time when it is
given on credit by bank. Increase in bank balances is recorded at the earliest by the entity as and
when balances are recorded by the bank as and when cheques and cash balance is deposited.
19

Bank balance as per the statement will be low with that of cash balances unless the deposit is
processed in the bank.
b) Outstanding Cheques
This refers to the cheque that are written an recorded in cash book but not yet cleared
from the bank side. It generally refers to the cheques written at the end of the month including
some old outstanding cheques. Each cheque which is written by the firm are recorded at the same
time in cash book of the enterprise, as it is not required to make adjustments for the outstanding
cheques. The outstanding cheques are not yet recorded by the bank as they have not yet reached
to bank. Because of this, outstanding cheques in the reconciliation statement are shown as
decrease in the balance of bank statement (Carlon And et.al., 2019). Outstanding cheques will be
liability of the payer unless the time cheques are presented by the payee for payment eliminating
liability. In events where the cheques are not presented at all by payee for making payments, it
could be marked by the payer as void in accounting system, which marks them as unpaid
accounts payable. Firm will be increasing balance of cash book by the amount of cheques
outstand and are now void.
c) Not having sufficient fund check at application of reconciliation process.
Not Sufficient Funds (NFS) refers to the term used to describe the cheques returned by the
banks on whom it was drawn because of the balance in account being less than the amount
required for clearing cheques. Cheques recorded as insufficient funds or NSF are also called
cheque returned, bounced cheques, return items and rubber cheque as is bounced back by the
banks to payee on whom cheque is drawn. Generally cheques which are returned by bank due to
insufficient funds result in bank charges for both payee & the person who had written cheque.
Returned cheques marked as NSF reflects the financial condition of the cheque maker that itg is
declined. It could be looked by the enterprise as indication of whether the credits should be
provided to such customers or not.
TASK 4
4.1
Total Debtors Balances
Journal Entries
20

Suspense account 9000
To Customer 9000
Customer 250
To Delivery payment 250
Sales Day Book 1600
To Suspense 1600
Debtor Control Account 6800
To Suspense 6800
Sales ledger control account 8200
To Purchases ledger control
account 8200
4.2
Statements of Reconciliation of Sales with the balances in the Debtors Control Account.
Debtors Control account
Date Particulars DR(£) Date Particulars CR(£)
01/04/20 Balance b/d 276800
30/04/20
Debtors
(SDB) 9000
Bank 6800 Sales 1600
30/04/20
By balance
b/d 273000
283600 283600
21

Reconciliation statement.
Reconciliation of Sales Ledger with Debtor Control Account
Balances of sales 176800
Adjustment of errors 3800
Revised Total agreeing with control account 173000
4.3
Redrafting Trial Balance creating a suspense account.
Trial Balance
Accounts Debit Credit
Capital 6000
Sales 25300
Salaries 3500
Purchases 12500
Discount Received 250
Discount allowed 700
Computer 3000
Returns Inward 300
Rent & Rates 900
Stock 4000
Bank Overdraft 1600
General Expenses 1500
Fittings 2500
Provision of Bad debts 200
Accumulated deprecation 250
Debtors 2500
Creditors 1500
Suspense account 3700
Total 35100 35100
22

4.4
Rectification of Journal Entries & reconciliation accounts.
Journal Entries
Particulars Debit Credit
Discount allowed 200
To Suspense 200
James 1500
To Suspense 1500
John Steels 1000
To Suspense 1000
Capital 1000
To Suspense 1000
Suspense account has been created for the reconciliation of errors and omissions.
Suspense account
Date Particulars DR(£) Date Particulars CR(£)
30/04/20
Discount
allowed 200
30/04/20
Difference in
books 3700 30/04/20 James 1500
30/04/20 John Steels 1000
30/04/20 Capital Account 1000
3700 3700
Control accounts are prepared by the companies for keeping their general ledgers clean
and nice without many details. Both general and control accounts are prepared by the entities.
They contain correct balances which are required to be used in preparation of financial
23

statements. Control accounts are prepared for more accuracy of the financial transactions carried
out by the business enterprise. It helps the accountants in finding out errors and mistakes in the
balances and accounts by making comparison with purchase or sales ledger on periodic basis. It
is also used for keeping internal check over the transactions of entities. Using control accounts
debtors and creditor balance could be more easily identified for preparation of trial balances and
balance sheet (Warren, Jonick and Schneider, 2020). Control accounts enable the accountants in
preparing the accounts required under double entry system. Companies using these accounts are
more accurately making adjustments in the different records and accounts. Under the control
accounts different types of accounts are prepared such as purchase ledger, sales ledger, debtor
control account and many more.
CONCLUSIONS
It could be concluded from the above report that financial accounting refers to the core
branch of accounting giving base to the enterprise and its accounting transactions. Financial
accounting helps the business enterprise in recording all the business transactions accurately and
as per required accounting standard and reporting frameworks. Transactions are recorded under
the financial accounting as per the double entry system of book keeping. It ensures the company
to follow universally acceptable accounting principles. This gives the procedure of recording
business transaction from journal entries to the preparation of financial statements. It has also
provided the understanding about the preparation of bank reconciliation statements and different
control accounts.
24

REFERENCES
Books and Journals
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Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning Pvt.
Ltd..
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Cascino, S. And et.al., 2019. The usefulness of financial accounting information: Evidence from
the field. Available at SSRN 3008083.
Kimmel, P.D., Weygandt, J.J. and Kieso, D.E., 2018. Financial accounting: tools for business
decision making. John Wiley & Sons.
Biddle, G.C., Ma, M.L. and Song, F.M., 2019. Accounting conservatism and bankruptcy
risk. Available at SSRN 1621272.
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64.
Kamla, R. and Haque, F., 2019. Islamic accounting, neo-imperialism and identity staging: The
Accounting and Auditing Organization for Islamic Financial Institutions. Critical
Perspectives on Accounting. 63.p.102000.
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Warren, C., Jonick, C. and Schneider, J., 2020. Financial accounting. Cengage Learning.
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