Financial Accounting: A Comprehensive Guide with Practical Examples

This comprehensive guide delves into the fundamentals of financial accounting, covering key concepts, principles, and practical applications. Explore topics such as journal entries, trial balances, financial statements, bank reconciliation, and control accounts. Illustrated with real-world examples, this resource provides a clear understanding of financial accounting practices and their importance in business decision-making.

Financial Accounting
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Table of Contents
Part A..............................................................................................................................................3
Part B..............................................................................................................................................8
Client 1........................................................................................................................................8
Client 2......................................................................................................................................16
Client 3......................................................................................................................................18
Client 4......................................................................................................................................21
Client 5......................................................................................................................................23
Client 6......................................................................................................................................25
Bibliography.................................................................................................................................28
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Part A
Financial Accounting: Financial accounting is the system of accounting in which there is
inclusion of steps involving recording, summarizing, classification, analysing, interpretation and
decision making in the business concern are the part of its working. Financial accounting is
object of preparing the financial statements which include the following contents:
a) Income statement or Trading profit and loss A/C
b) Statement of financial position or balance sheet
c) Cash flow statements (as per applicability)
This system of accounting is core accounting system which is the symbol of accuracy and
appropriateness. It is most required system, without this any conclusion or report does not exist.
Financial accounting is prepare for the purpose of serving of information to the outsider and third
person of business. Not prepare for the intention to daily usage. While prepare for the year end
result. The outside user of financial information are consumers, trade suppliers, banks,
government authority, employees, business owners, and other stake holders who have interest in
companies activity for decision making activities.
This system of accounting is hold and run by both local and international Generally Accepted
Accounting Principle (GAAP). This GAAP help the accountant and financial users to create the
uniformity and equality in working, it is the basic function of GAAP.
Similarly, for the view of preparation of financial statements it does apply the International
financial reporting system (IFRS). IFRS gives the guidelines and format of financial statements
for a particular entity whether it is a small enterprises, sole trading, or a corporate. IFRS are
issued and implement by the International Accountancy Standard Board IASB. This IASB is the
international accounting body, which elaborate and sort out the issues in accounting system as a
whole. It also make and modification and alteration in the accounting principles and conventions.
This aforesaid are the function of financial accounting.
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Regulation relating to financial accounting: Financial accounting regulations refer to the steps
and guidelines which is the set of applications which assist the users quietly. There are various
standards that are being followed which are as follow:-
Financial Reporting Standards’ (FRSs), Statements of standard accounting practice’ (SSAPs),
Accounting Standards.
Regulations include the three contents which are given below:
a) Functions of accounting standard boards: The aforesaid statements already define the ASB
and its functions. There has some further functions of ASB which are:
Development of ASB- There are various roles that are being performed by the ASB such as the
advising, pronouncements and practice with respect to economic, legal and practical
applicability. The contents identification can be from various sources such as the research or
suggestion from the interested parties.
Urgent issues task force- It is important to have proper implementation of the standards which
are being solved or improvements in the standards if required which is done by the team having
15 members in it for the benefit of the stakeholders of the company such as the auditor, users etc.
International accounting standards board- The IASB is based in London having
responsibility of setting standards founded in April 2001. The rules are being set by the
committee on the basis of issue that are being faced and publish them until March 2001.
b) Function of principle issued by ASB: these principles are the basic concept and key term for
doing the task of accounting. It is the significance of uniformity and accuracy. The ASB are the
principles for financial reporting. The fundaments was created on the basis of review committee
which was headed by Sir Ron Dearing
The statement of principles does express the accounting model that is used by the ASB as the
fundaments for their work.
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The responsibility is to provide the accounting standards which are consistent and logical as per
the current scenario and take steps if required to make changes in the existing so that the issues if
any can be resolved in an effective way. The presentation of the statements must be true and fair
with the adoption of the standards established by the board.
c) Financial reporting and their applicability: The statements of principles for financial
reporting is prepared with a accumulation of more than 100 pages and it is complex documents
for thoise approaching which freshly introduce and has first experience. There are some
examples of FRS
a. Cash flow statement
Issued (sept 1991)
FRS 1 (Revised 1996)
b. Reporting financial performance
Issued (oct1992)
FRS 3
c. Goodwill intangible assets
Issued (dec1997)
FRS 10
d. Tangible Assets
Issued (feb1999)
FRS 10
e. Accounting policies
Issued (dec2000)
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FRS 18
Rules and principles of accounting: Accounting consist and based on six golden rules
which are wholly applied at entire world. This rules are as follows:
• Debit the receiver
Credit the giver
• What would be come in that is debited
What would be goes out that is credited
• All the expenditure and losses will be debited
All the income and gain will be credited
And the principles of accounting are those by which accountant can get the uniformity, accuracy
and neglect the mistake and error as well. The principles of accounting are as follows:
I. Economic concept
II. Going concern
III. Consistency
IV. Accrual
V. Conservatism
VI. Materiality
VII. Money measurement
VIII. Cost concept
IX. Full disclosure
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X. Revenue recognition
XI. Matching concept
Concept and convention of materiality and consistency:
Materiality- This concept of accounting says that discloses and shows the material information.
Consistency- This is the concept of accountancy which express the existence of entity. It
describes that business is run continuously from one period to another period. Business cannot be
shut down in the near foreseeable future. Balance sheet under the law of permanence is generally
\prepare under this assumption.
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Part B
Client 1
Calculation of Owner’s Capital
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Journal
Journal Entries
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Double Entry Accounts
Sales A/c
Purchases A/c
Cash A/c
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Bank A/c
Receivables A/c
Motor Expenses A/c
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Storage Expenses A/c
Van A/c
Payables A/c
Discount Received A/c
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Particulars Amount (Dr.) Particulars Amount (Cr.)
By Balance c/d 976 By payables 976
Total 976 Total 976
Abel motors Ltd. A/c
Particulars Amount (Dr.) Particulars Amount (Cr.)
To Bank
By Balance c/d
20500
8000
By VAN 28500
Total 28500 Total 28500
Drawings A/c
Particulars Amount (Dr.) Particulars Amount (Cr.)
To cash 1500 By Balance c/d 1500
Total 1500 Total 1500
Salary A/c
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Business rates A/c
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Trial Balance
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Client 2
a. Statement of profit or loss for Peter Pipe for the year ended 31st December 2017.
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b. Statement of Financial Position for Peter Piper as at 31st December 2017.
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Client 3
a) Statement of Profit and Loss of Raintree Ltd., for YeaR Ended 31st December 2017
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b) Statement of financial Position of Raintree Ltd., as at 31st December 2017
c) Explain concept of Consistency and Prudency
Consistency is an accounting principal which states that if the company is adopting one method
of accounting then he will follow that method in the future period also. The company can change
the accounting method if that method improves the financial results of the company (Decker &
Schlesinger, 2014). As per Prudency concept the liabilities and expenses of the company when
they occur but the company record the revenues only when they are actually realised. This
concept of accounting helps in maintaining the assets are not overvalued and liabilities are not
overstated (Decker & Schlesinger, 2014).
d) Describe the purpose of depreciation in formulating accounting statements and methods
used for calculating the same.
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There are 4 types of methods which are commonly used by the company in calculating the
depreciation.
1 Straight line method: It is most simple method of calculating the depreciation. The expense
amount every year reduces with the same amount over the assets useful life.
2 Double declining depreciation method: this method results in larger expense as comparison to
earlier years which is opposed to useful life of assets. This method states that assets are more
useful in the starting years as compared to later years (Yadav, 2014).
3 Production depreciation methods: This method depends upon the production level of an unit. It
depreciates the amount which is based on the number of hours the machine used or with the total
number of units produced over the useful life of the asset.
4 Sum of the year digits depreciation: This method is emphasis on the expense of the asset which
has occurred in the starting years is higher than the expense of the asset which is occurred in the
later years is lower (Yadav et al., 2014).
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Client 4
A) Purpose of preparing the Bank reconciliation
The bank reconciliation statement is prepared for the purpose of determining any deviation in the
statement of bank and the cash balance of the company. It is useful in determining any error if
occurred while recording of transaction and correcting them (Vitez, 2018).
B) List and explain some areas which may cause your record to vary
The areas as follows:-
Uncleared cheques not presented
Clearing of cheques even after stating it as void
Cheques returned which are deposited
C)
Bank Reconciliation statement at 1st December 2017
Bank Reconciliation statement at 31st December 2017
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Client 5
a. In Books of Henederson for January 2018
i) Sales ledger Control account
ii) Purchase ledger Control account
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b. Control Account
This term of account is basically used in summarising the accounts receivable and payable in the
general ledger. It contains a large number of transactions so there is a need in the company to
separate the subsidiary ledgers. The control account is done on daily basis by the large
organisation. This is also known as controlling or adjustment account. Controlling account is
done to ensure the accuracy of the company. This account helps in checking the associated sub
ledgers are equals to total in the general ledger (Bellman, 2015).
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Client 6
(a) Describe with an example, what you understand by the term ‘suspense account’ and
what the main feature of suspense account.
Suspense account is used to record some transactions on temporary basis. It is a ledger account
which is used in shorter side of the trial balance. If there is any difference in the amount in trial
balance and it is difficult to detect then the shorter side is considered as the Suspense Account
(Adeyemo Kingsley, 2012)
(b) Trail Balance and Journal entry
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(c) Correction entries for suspense account
d) The difference in clearing and suspense account
Clearing account holds the activities for posting later and checks whether the information is
recorded accurately and properly. Clearing account is a summary of similar transactions which is
not used for the posting purposes. Suspense account is created when there is a difference in the
amount of debit and credit side in the trial balance whereas the clearing account is used for the
reporting purposes (Adkins, 2018).
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Bibliography
Adeyemo Kingsley, A., 2012. Frauds in Nigerian banks: Nature, deep-seated causes, aftermaths
and probable remedies. Mediterranean Journal of Social Sciences, p.279.
Adkins, W., 2018. The Difference Between a Suspense Account & a Clearing Account. [Online]
Available at: http://smallbusiness.chron.com/difference-between-suspense-account-clearing-
account-81560.html [Accessed Thursday June 2018].
Bellman, R.E., 2015. Adaptive control processes: a guided tour. Princeton university.
Decker, C. & Schlesinger, H., 2014. Consistency of higher order risk preferences. Econometrica,
82(5), pp.1913-43.
Vitez, O., 2018. The Purpose of the Bank Reconciliation Process. [Online] Available at:
http://smallbusiness.chron.com/purpose-bank-reconciliation-process-3471.html [Accessed
Thursday June 2018].
Yadav, B., Kumar, A. & Bhatia, B.S., 2014. Concept of creative accounting and its different
tools. International Journal of Management and Social Sciences Research, 3(2), pp.66-74.
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