Financial Accounting Report

This report provides a detailed analysis of financial accounting principles, roles, and conventions. It examines the purpose of financial accounting, identifies key stakeholders, and includes client case studies demonstrating the application of accounting concepts. The report covers topics such as profit and loss statements, balance sheets, bank reconciliation statements, depreciation methods, and suspense accounts. It also highlights the differences between financial statements prepared for sole traders and limited companies.

Financial Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
REPORT TO LINE MANAGERS..................................................................................................1
1. Financial accounting and its purpose......................................................................................1
2. Internal and external stockholders of the company.................................................................3
CLIENT 1........................................................................................................................................6
Recording transactions in the books of Alexender.....................................................................6
CLIENT 2........................................................................................................................................6
A) preparation of profit and loss statement of Munteanu Ltd.....................................................6
B) statement of financial position of the Manuteanu Ltd...........................................................8
C) Explanation of the accounting concepts ................................................................................8
D) Purpose of depreciation and its methods in formulation of accounting statements...............9
E) Difference between financial statements prepared by Sole trader and a limited company..11
CLIENT 3......................................................................................................................................11
A) Purpose of bank reconciliation statements...........................................................................11
B) Areas that may cause he variation in bank records and company's records.........................12
C) Imprest system.....................................................................................................................12
D) Preparation of Bank reconciliation statement of Burcu Ltd................................................12
CLIENT 4.....................................................................................................................................13
A) Preparation of Sales and purchase ledger control account of Hilly.....................................13
B) Control account....................................................................................................................14
CLIENT 5......................................................................................................................................14
A) Suspense accounts and its main features.............................................................................14
B) preparation of Trail balance.................................................................................................15
C) Preparation of trial balance from suspense account.............................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Financial accounting is a system of accounting that includes all the financial informations
of the a company. It a process of recording all the financial transactions and preparing financial
reports by summarizing all the financial details for the purpose of showing financial condition of
the company during a specific time period. PH Accountancy company is professional service
provider company that was establisheds in the year 1987. Ttoday the company is ranked as the
big four service provider company in the world. The present study shows a report of junior
accountant of the PH Accountancy company to be submitted to its line manager. The report
includes a brief introduction about the meaning and purpose of the financial accounting. It also
shows a detailed discussion about internal and external stakeholder of the company that have
interest in the financial informations of the company. The assignment shows preparation of
financial statements of the sole trader, partnership and limited companies. Further, the present
report also shows preparation of bank reconciliation statement for the purpose of ensuring both
bank and company's records are providing same and accurate results.
REPORT TO LINE MANAGERS
PH Accountancy LTD.
To,
The Line manager,
From, Junior accountant
Subject: for showing principles, roles and conventions of accountnacyaccountancy
1. Financial accounting and its purpose
“Financial accounting system is a branch of accounting system which concerns with
recording and summarizing each financial transaction made by a company during the financial
period or during a specific time.”
Financial accounting includes preparation of income statement, balance sheet and bank
reconciliation statements, etc. that helps the business in showing its actual financial position
(Henderson, 2015). While preparing these statements, the accountant uses specific guidelines,
methods and process of the financial accounting system.
PH Accountancy needs to prepare the financial statements of the company so that it can
provide all the relevant informations to the interested parties of the company. Further,
preparation of financial reports can also help its managers and board members in determining
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the actual position and performance of the company so that they can easily make the appropriate
policies and strategies for its betterment.
Purpose of financial accounting
The main purpose of the whole financial accounting system in PH Accountancy is to
show the actual financial position of it. Further, other objectives of the financial accounting
systems are as follows:
 Summarize the financial informations: It is also one of the major objective of the
financial accounting system. In financial accounting system, all the transactions made
by the company during specific time are summarized so that they could be available in a
single set of reports (Macve, 2015). It helps the managers, board of directors and other
interested parties in collecting all the relevant informations of the business that can
affect their interest.
 Investment decisions: Shareholders and other investors of the company wants to know
the actual position of the company for the sake of estimating their returns from the
investment made in the company and risk involved with the investment. Financial
accounting reports provides all the relevant informations to the investors to help them in
their decision making.
 Existing shareholders: As, the existing shareholders are the real owners of the
company, they need to know each information about the company (Narayanaswamy,
2017). Therefore, providing relevant information to the existing shareholders of the
company is also a main purpose of preparation of financial statements of the company.
 Taxation decisions: Financial accounting reports also provides all information to the
Government agencies for the purpose of calculating the amount of taxation tpto be
imposed of the company. They can determine the income earned by the company, assets
and liabilities held by the company, all the investments made by it, etc.
 Keeping records: The financial accounting reports are also prepared for the purpose of
recording all the incomes and expenditure of the business. It helps the organisation in
tracking each area where the company is spending its funds. It also provides help to the
managers in observing the financial behaviour of the company.
 Ensuring earning: Further, financial reports of the company also helps in determining
the actual income earned by the firm. It shows each income and expenditure made by
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the firm. With the help of these informations, managers and directors can ensure the
actual earning of the firm. In this regard, the financial reports of the firm are also
prepared for the purpose of ensuring the earnings of the business organisation.
 Credit decisions: Preparation of financial statements also have a purpose of taking
decision regarding providing credit to the company (Nudurupati, 2015). It helps in
determining the condition of the company for repaying the debts of the company by
observing its balance sheet.
 Determination of actual debts and assets: PH accountancy also should prepare each
statements of the financial accounting system as it can help the company in determining
the actual amount of assets and debts held by the company as to determine the actual
position of the business organisation.
 Determination of liquidity: It is also a major purpose of the preparation of financial
statements as to determine the liquidity of the firm. It shows the amount of assets held
by the company over the debts.
In this regard, there are several purposes and objectives of preparing financial
accounting reports by a business organisation.
2. Internal and external stockholders of the company
Stakeholders can be defined as the individuals or group of individuals that have interest
in the company. Each action of the company may affect the interest of the stakeholders. From
the above analysis it can be evaluated that there are many individuals and firms that have
interest in the business of PH accountancywhich can be termed as the stakeholders of company
(Kieso, Weygandt and Warfield, 2016). The stakeholders can be divided into two parts i.e.
internal stakeholders and external stakeholders. List of internal and external stakeholders is as
under:
Internal stakeholders:
Internal stakeholders can be defined as the group of individuals that serves the company.
They performs several activities for the company as board members. For example: Owner: Owners are those individuals that have invested the capital amount in the
business. They are the internal stakeholders of the company. In terms of a limited
company, the shareholders can be defined as the true owners of it. They have interest in
the financial informations of the company as they have invested a sum of amount in the
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company (Barker, 2015). They can also take decision regarding making the further
investment in the : PH accountancy. They takes the decision about investing their fund
in the company by analysing its financial position and evaluating the chances of growth
in the future. Further, the profitability of the company affects their return on the
investment and risk of investment as well.
 Management: Management can be defined as a group of professionals appointed by the
PH Accountancy in the firm for making strategies and plans and help the company in
attaining rapid growth in the near future. Managers perform their task in the business to
enhance the efficiency of its operations. The performance of the business shows the
efficiency of overall business in performing the business operations. There fore,
management also have interest in the financial statements of the company as with the
help of it managers can determine the efficiency and effectiveness of working of the
business organisation.
External shareholders:
External stakeholders are those individuals that have not invested their money in
the company, but they have some sort of interest in the business. For example: Customers: Customers do not invest their money into the business. But, their interest in
the product of a specific brand get affected by the financial performance of the
company (Oulasvirta, 2016). if a company is suffering loss frequently, it may loose its
customers due it. Suppliers: Suppliers are those individuals or organisations who supplies raw material to
the company. A business organisation purchases a large amount of raw materials or
goods for the purpose of further sale. Suppliers needs financial records of the company
as to determine the risk involved in providing further credits to the company. Creditors: Creditors can be bank, individuals, financial institutions which have provided
credit to the firm. Creditors needs to determine the actual financial position of the
company for the purpose of taking decisions regarding providing credit to the company
by evaluating the risk involved in the decision and condition of the company for the
repayment.
 Government: Government agencies are also interested in the financial informations of
the company for many reasons. For example, for the purpose of determining the amount
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to be collected from company as corporate tax, for taking decisions regarding providing
grants to the company, for determining compliance of regulations while preparing
financial position of the company, etc.
In this order, it can be analysed that, both internal and external stakeholders of a large
business have interest in the financial informations of the company.
CLIENT 1
Recording transactions in the books of Alexender
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6

7

8

9

10

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CLIENT 2
A) preparation of profit and loss statement of Munteanu Ltd.
Statement of profit and loss account of Munteanu Ltd. For the year ending January 2019
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B) statement of financial position of the Manuteanu Ltd.
C) Explanation of the accounting concepts
Accounting concept:
Accounting concept can be defined as the guidelines and principles on which the whole
accounting concept is based (Qian, 2016). There are range of accounting concept that provide a
foundation to the firm about the development of accounting works. Some main accounting
concepts are as under:
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Consistency:
There are several methods and principles on the basis of which a business can prepare its
financial statements. Preparation of financial statements by different methods ay provide
different results to the company. Therefore, as per this concept, a firm needsneed to prepare the
financial statements using single method only. The company should not change the adoption of
methods frequently. Frequent change in the adoption of methods of the accounting system will
result in providing inappropriate result to the company.
Further, statements prepared through different methods, can not be used for the
comparison as to determine the enhancement of efficiency of the firm (Del Giudice, Manganelli
and De Paola, 2016). In this regard, a company need to comply with this concept for the purpose
of determining actual results from the financial statements of the it.
Prudence:
Prudence concept can also be termed as the conservatism concept of the company. As per
this concept, the company should record the liabilities and expenses should be recorded by the
business organisation as soon as they occur. On the other hand, revenues of the firm should be
recorded in the books of accounts after getting the certainty of the revenues and incomes to be
realized in future.
As per prudence concept, recording of revenues and income like sales, profits, discount
received, etc. should be done after getting a level of probability of earning the incomes. This
concept helps the company in determining actual position of the company.
Prudence concept ensures that the company shall not undervalue any liability or
overalueovervalue any income of the business. In this regard, adoption of this concept can help
the company in determination of actual profit.
D) Purpose of depreciation and its methods in formulation of accounting statements
Depreciation
Depreciation is a decline in the value of assets on the basis of its usage and passing of
time. It is a method of accounting in which a firm allocates the overall cost of the assets in the
useful life of the assets (Liapis and Kantianis, 2015)). In this method, tThe value of the assets are
declined by the firm so that it could become zero at the time of converting the assets into a scrap.
In other words, it can be stated that the depreciation is a decline in the value of assets due
to its wear and tear use and passage
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Purpose of depreciation
The main purposes of charging the depreciation over the assets are:
 To match the actual cost of the productive assets of the company with the revenues
generated by it.
 To estimate the scrap value of the assets (The purpose of financial statement, 2018).
 To make the value of assets zero or equivalent to the scrap value of it at the time of its
sale.
 To determine the true results of the business operations in terms of profit or loss.
 To determine the actual value of the assets in the market.
 In this order, the company charges the depreciation on its fixed assets over the time.
Methods of depreciation
There are numerous methods by which a business can calculate the amount of
depreciation to be charged over its fixed assets (Elliott, Lee and Hussainy, 2016). The company
needs to select the most appropriate method that suits with the business conditions and the nature
of assets held by it.
Some main methods of the depreciation are as under:
 Straight line method: It is the simplest method of determining the amount of
depreciation. In this method, the depreciation is allocated over the assets on the basis of
life of the assets. The amount of depreciation is charges at same level in all years. The
amount of depreciation is calculated by subtracting the scrap value of assets and dividing
it with useful life of the assets.
The straight line method is useful for those fixed assets that are being used by the organisation
same manner. There is no particular manner or pattern for using the assets. This method is also
appropriate for those assets that provides same revenues to the company over the year.
 Units of production method: In this method of depreciation, the depreciation is charged
over the assets on the basis of unit produced through the assets during the year (Agyei-
Mensah, 2016). Unit of production method of depreciation is used by those organisations
that manufactures the goods for the purpose of further sales.
This method is useful for the manufacturing businesses. They apply this method of depreciation
over the assets like plans, machinery, etc. that are used by the business for the purpose of
producing the goods.
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In this regard, it can be evaluated that there are some methods of depreciation that can be
used by a business organisation for the purpose of charging depreciation over its fixed assets.
Each method is useful for different purposes. Therefore, a company should choose the method of
depreciation on the basis of the nature and use of the assets.
E) Difference between financial statements prepared by Sole trader and a limited company
Basis Sole trader Limited company
Capital account Capital account of the sole trader
includes only owner's equity.
Capital account of a limited
company is inclusion of share
capital, retained earningearnings
and capital reserve.
Tax The tax is calculated on the income
of the sole trader.
Tax of limited company is
calculated on the income of the
company due to the principle of
separate legal entity.
Auditing These financial statements are not
required to be audited.
Financial statements of the limited
company needs to be audited after
a certain time (Miller and Hadley,
2016).
Application of
principles
Sole trader does not required to
prepare their financial statements
on the basis of any principle, rule
or accounting standards.
Limited company need to comply
with the accounting standards,
principles and rules applicable on
it.
CLIENT 3
A) Purpose of bank reconciliation statements
Bank reconciliation statements are prepared for matching the records of bank and
company's records of bank transactions. While preparing the financial statements, in case the
bank statement of Burcu does not comply with the transactions recorded in its books, it would
need to prepare this statement as to determine the area that are causing the difference to eliminate
it as well.
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B) Areas that may cause he variation in bank records and company's records
There are many areas due to which the bank statement may vary from the company's
records. The main reasons behind it are:
 Any cheque given by the company but not presented in the bank (Reasons for Preparing
Bank Reconciliation Statement, 2019).
 Any cheque dishonoured but not known to company.
 Any fee charged by bank but not recorded by business, etc.
C) Imprest system
It is the system in which a fixed amount is reserved by company which is remain inactive
at a fixed amount (Lehne and Koelsch, 2015). When the amount of petty cash is spent, the same
amount is again added to the petty cash in this system.
D) Preparation of Bank reconciliation statement of Burcu Ltd.
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CLIENT 4
A) Preparation of Sales and purchase ledger control account of Hilly
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B) Control account
Control account is a general ledger account that contains the summary details of all the
transactions. It helps the business in preparing financial accounts free from any summarized
details. These are prepared by large level of businesses that make large amount of transactions in
a specific period.
CLIENT 5
A) Suspense accounts and its main features
Suspense account is that account which is prepared by a business organisation on a
temporary basis. Organisation records those transactions that are not identifieds by the company
and are also affecting the preparation of financial statements of the company. For example, if
the business has purchased any assets and failed to record in anywhere in the books, the
transaction is quite difficult to be identified (Jayaram, Abidi and Mandell, 2018). In this case, the
business can prepare the suspense account to match the difference in the financial statements
arisen due to this failure.
Features:
 Suspense account is a general ledger account and kept by the company on a temporary
basis.
 It is recorded in the books under the head current assets.
 Commonly the suspense account is prepared for the account receivables and payables.
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 It helps in eliminating the variation in the trial balance of the company.
B) preparation of Trail balance
C) Preparation of trial balance from suspense account
Journal entries showing correlation for all the items of suspense account
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CONCLUSION
From the above analysis, it can be evaluated that, preparation of the financial statements
is necessary for the business. It helps in determining the actual financial performance and
position of the company. There are various stakeholders that uses the financial statements for
taking several decisions. While preparing the financial statements, the business need to company
with some accounting concepts that helps the company in preparing more accurate financial
statements. In case, the trial balance of the company does not match, the firm can prepare
suspense account on temporary basis. Further, there are numerous methods of depreciation to be
charged over the assets of the company. A firm should analyse carefully each method and adopt
the best suitable method for calculating depreciation amount of the assets. Each business whether
sole proprietor or limited company, prepares their own financial statements. But, there are some
difference in their preparation.
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REFERENCES
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Finance. 5(2). pp.95-112.
Barker, R., 2015. Conservatism, prudence and the IASB's conceptual framework. Accounting
and Business Research, 45(4), pp.514-538.
Del Giudice, V., Manganelli, B. and De Paola, P., 2016, July. Depreciation methods for firm’s
assets. In International Conference on Computational Science and Its Applications(pp.
214-227). Springer, Cham.
Elliott, R. A., Lee, C. Y. and Hussainy, S. Y., 2016. Evaluation of a hybrid paper–electronic
medication management system at a residential aged care facility. Australian Health
Review. 40(3). pp.244-250.
Henderson, S. and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Jayaram, A., Abidi, M. T. and Mandell, D. C., Baton Systems Inc, 2018. Time stamping systems
and methods. U.S. Patent Application 15/957,871.
Kieso, D. E., Weygandt, J. J. and Warfield, T. D., 2016. Intermediate Accounting, Binder Ready
Version. John Wiley & Sons.
Lehne, M. and Koelsch, S., 2015. Toward a general psychological model of tension and
suspense. Frontiers in Psychology. 6. p.79.
Liapis, K. J. and Kantianis, D. D., 2015. Depreciation methods and life-cycle costing (LCC)
methodology. Procedia Economics and Finance. 19. pp.314-324.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Miller, M. and Hadley, S., 2016. Cash management in cash-constrained environments.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning Pvt.
Ltd..
Nudurupati, S.S. and et.al., 2015. Strategic sourcing with multi-stakeholders through value co-
creation: An evidence from global health care company. International Journal of
Production Economics. 166. pp.248-257.
Oulasvirta, L., 2016. Accounting Principles. Global Encyclopedia of Public Administration,
Public Policy, and Governance, pp.1-9.
Qian, C. and et.al., 2016. An accelerated test method of luminous flux depreciation for LED
luminaires and lamps. Reliability Engineering & System Safety. 147. pp.84-92.
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The purpose of financial statements. 2018. [Online] Available Through:
<https://www.accountingtools.com/articles/what-is-the-purpose-of-financial-
statements.html>
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Reasons for Preparing Bank Reconciliation Statement. 2019. [Online] Available Through:
<http://aristotleconsultancy.com/blog/reasons-preparing-bank-reconciliation-statement/>
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