Financial Accounting - Assignment

Financial Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Explaining FA and purpose .......................................................................................................1
Differentiating FA and the MA ..................................................................................................1
Explaining regulatory framework and its objectives .................................................................3
Explaining conceptual framework and its usefulness in the accounting community ................3
Explaining the accounting concepts and its principle ................................................................4
Explaining qualitative characteristics and it types .....................................................................4
Explaining users of financial information ..................................................................................5
CLIENT 1........................................................................................................................................6
a. preparing journal and ledger....................................................................................................6
..........................................................................................................................................................8
ii. Ledgers....................................................................................................................................8
iii. Preparation of the trial balance............................................................................................24
........................................................................................................................................................24
CLIENT 2......................................................................................................................................24
a. P&L ACCOUNT...................................................................................................................24
b. preparing balance sheet ........................................................................................................26
c. Stating the consistency & the prudence accounting concept................................................28
d. Explaining purpose of the depreciation and its techniques...................................................29
e. Evaluating the difference in between financial statements of the sole trader and the limited
companies. ................................................................................................................................30
CLIENT 3......................................................................................................................................30
a. Explaining the bank reconciliation statement ......................................................................30
b. Explaining the reasons for the variation in the bank and the cash records...........................31
c. Explaining imprest under the system of petty cash ..............................................................32
d. Preparation BRS....................................................................................................................33
CLIENT 4......................................................................................................................................34
a. Preparing ledger accounts of purchase and sales..................................................................34

b. Explaining the control account and its need of preparation .................................................36
CLIENT 5......................................................................................................................................36
a. Describing the term called suspense account and its characteristics.....................................36
b. Drafting trial balance.............................................................................................................36
c. Rectifying entries..................................................................................................................38
CONCLUSION..............................................................................................................................38

INTRODUCTION
FA means an area of accounting which focuses on facilitating the external and the
internal users with the useful information. Financial accounting is counted as the way in which
the activities of the business are reported and such information is communicated to the people
within and outside the organization. The present study is based on various aspects of FA and
includes the contrast in between the financial and the MA. Furthermore, it includes accounting
principles that is to be followed by firm in respect of preparing its financial statements.
Explaining FA and purpose
FA is considered as the specialized branch that helps in keeping the track of an entity's
financial transactions (Barth, 2015). With the use of the appropriate guidelines, the business
transactions are been entered in the books, presented and is summarized in the financial report
like income statement and the balance sheet. The objective of the FA is facilitating sufficient
information for the users so that they can assess value of the enterprise on their own. Major
purpose of the FA is to accurately formulate final accounts & providing appropriate financial
reporting in relation to performance and position of an enterprise (Libby, 2017). This
information helps the users in reaching the decisions in relation to managing the business,
investment and the other important decisions.
Differentiating FA and the MA
Basis FA MA
Definition This system of accounting
emphasizes on the formulation
of the financial statement in
order to provide financial
information to interested
parties.
Management accounting is an
accounting system that
provides for the relevant
information to managers in
respect of making the policies,
strategies and the plans for
running business effectively
and efficiently.
Compulsion Financial accounting is Management accounting is not
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compulsory for each and every
organization.
compulsory for the enterprise
to the adopt.
Information It only provides monetary
information.
However, it facilitates
monetary as well as the non-
monetary information.
Objective The major objective of the FA
is facilitating financial
information to the internal &
the external parties.
The foremost objective of the
management accounting is
enabling management in
making decision and the
planning process with the
detailed information on several
matters (Difference Between
Financial Accounting and
Management Accounting,
2019).
Format The format under FA is
specified in the accounting
standards as provided by IFRS
and GAAP.
On the other side, management
accounting does not have to
follow any specified format.
Time frame Financial statements are been
prepared during the end of an
accounting period that is one
year.
Under this, preparation of the
reports is based on the needs
and the requirements of an
enterprise.
Users Main users of the financial
accounting information are the
internal and the external
parties.
Internal management is been
counted as the main user of the
management accounting.
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Reports Financial accounting provides
for the summarized reports
regarding the financial position
of organization.
Management accounting
provides for the complete and
the detailed report in relation
to various information.
Auditing Under this, the financial
statements are required to be
audited by the statutory
auditors.
The reports under the
management accounting need
require any auditing by the
statutory auditors.
Explaining regulatory framework and its objectives
Regulatory framework refers to the regulating authorities that has provisioned the set of
the standards for formulating & presenting financial reports (Balakrishnan, Watts and Zuo,
2016). Such standards and the regulations has been framed by IFRS based on the generally
Accepted Accounting principles (GAAP). The major and the foremost objective in introducing
the regulatory framework is as follows-
 In order to ensure that the requirements of users relating to financial statement has been
met with adequate financial information.
 For ensuring that each and every information facilitated is within the appropriate
economic arena that is it should be consistent and comparable.
 For regulating behaviour of an enterprise & directors towards an investors.
Explaining conceptual framework and its usefulness in the accounting community
Conceptual framework called as the comprehensive set of the concepts that are been
issued by IFRS for the purpose of financial reporting (Christensen, Nikolaev and Wittenberg‐
Moerman, 2016). Conceptual framework helps out the accounting community in following
ways-
 This helps the accounting community in setting out the objectives for the financial
reporting.
 In knowing the qualitative characteristics relating to the useful accounting information.
 Description relating to the reporting entity and boundary
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 Defines the accounts such as asset, income, liability, equity and the expenses.
 Provides guidance on the presentation and the disclosure requirements.
 Assist all the parties in understanding and interpreting the standards.
 Enables the preparers of the financial reports in developing the consistent policies for the
accounting transactions.
 Helps the board in developing the IFRS standards on the basis of the consistent concepts
that results in the financial information which is useful for the investors, creditors and the
lenders.
Explaining the accounting concepts and its principle
Recording in the final reports is been made on the basis of accounting principles and
assumptions. These accounting concepts act as the rules that has to considered while preparation
of the accounts and final reports (Azar, Zakaria and Sulaiman, 2019). There are various
accounting concept that are going concern, accrual concept etc.
Going concern concept- This principle states that the firm will be carrying on its
operations for an indefinite period. It means each and every business has the continuity in its life
and does not runs for dissolving in the future. For example- for computing the depreciation,
fixed asset cost will be allocated over useful life of an asset and does not considered as only for
current year.
Accrual concept- This concept of accounting is considered as the fundamental principle
that requires for recording the revenues at times when it has been earned & not at times when
the revenues is received in form of cash and also recording the expenses at time of its occurrence
and at the time of its payment (Andon, Baxter and Chua, 2015). For instance- sales made by
ram on credit amounting to 5000 on 5th July and the amount received on 15th July, the revenue
will be recorded in the books of account on 5th July, the date on which the sales is made and not
on the date when the amount is received.
Explaining qualitative characteristics and it types
Qualitative features of an accounting information involves usefulness of the accounting
information in terms of its relevancy, reliability, materiality and understandability. Mainly there
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are two types of the qualitative characteristics that includes fundamental and enhancing
characteristics.
Fundamental qualitative characteristics- It is type of the qualitative characteristics
which sates the relevance and the faithfulness of the information. It includes as follow2s-
Relevance- Financial information is said to be relevant as if it influences the decision of
the users.
Faithful representation- It means that the accounting information provided should be
complete, error free and neutral.
Enhancing qualitative characteristics- There are various kinds of the enhancing
characteristics that includes-
Comparability- Financial results should be such that the entity could be compared with
other entities over the time.
Verifiability- Information must be capable of verification as it facilitates the assurance to
users regarding its credibility and the reliability.
Understandability- An information should be such that it is understandable to the people
who wants to review it. It can be attained through appropriate presentation, classification and the
characterisation.
Timeliness- Financial information provided to the users within the timescale for purpose
of making suitable decisions.
Explaining users of financial information
Internal users- It means the parties that are working within an enterprise that are as follows-
Management- They requires the FI for planning and monitoring in order to make
appropriate business decisions (Cohen and Karatzimas, 2017). Financial information helps the
managers in assessing the performance of the business by applying appropriate performance
indicators such as bench-marking, KPI etc.
Employees- It refers to the internal party who have the keen interest in assessing the
financial state of an entity as it has the implications directly to their job security and the income.
External users- It means the parties present outside the premises of an entity.
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Suppliers- Suppliers needs the financial information for assessing credit-worthiness of a
company to which they are offering the goods and the services on credit.
Lenders- They offer the loans and the advances to the organization on analysis of the
financial state of borrowers.
Government- This party act as the reviewing authorities of the accounting information as
regarding all the disclosures are been made or not and the statements prepared are in accordance
with regulations. They monitors such information in order to protect the other stake holder's
interest.
Investors- It is the party that uses the accounting information in assessing that their
investment is going good or not and in making suitable decisions.
Customers- They need financial information for assessing the quality supplies is been
made by the suppliers for the business (Handoko, Sabrina and Hendra, 2017). They also reviews
the performance of the company in order to make comparison with the other competitors.
Public- Other people also has a interest in the financial reporting that includes journalist,
academics and the analysts for the purpose of economic developments.
CLIENT 1
a. preparing journal and ledger
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ii. Ledgers
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iii. Preparation of the trial balance
CLIENT 2
a. P&L ACCOUNT
Income statement of Munteanu Limited for 31st December 2018
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b. preparing balance sheet
Final report of Munteanu Limited for 31st December 2018
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c. Stating the consistency & the prudence accounting concept
Consistency- It is the major accounting concept which reflects that once the method of
accounting adopted by the organization has to be applied for consistent period in the future. This
indicates that an entity must refrain in modifying its policies of the business until the occurrence
of reasonable grounds (Del Giudice, Manganelli and De Paola, 2016). It is an important concept
as it provides for the comparison in between the previous years and the present financial
statements that in turn helps the users of the financial statements of an enterprise. For example-
An entity is using written down value method for evaluating the depreciation on its equipment’s.
In accordance with the consistency principle, the firm will have to use this method of the
depreciation in context of its equipment for the following accounting periods. In case if an
organization desires to change the method for charging depreciation say it has to use straight line
method, then it must have to provide for the appropriate disclosures in its financial statements
with stating the grounds for changes, effect for the change like accumulated depreciation.
Similarly, with reference to the concept if the company B is using FIFO method in valuing its
inventory then this method will be consistently applied in its following periods.
Prudence- This concept states that an enterprise does not have to overestimate its assets,
profits and the revenues, besides this it should not underestimate for its expenses, liabilities and
the losses. It is been called as the fundamental concept of the accounting as it increases
trustworthiness of figures that are been reported in financial reports of the business (Jeppson,
Ruddy and Salerno, 2016). It is the concept which advises that final accounts of an entity must
have to show caution at the time of reporting the results specifically that impacts income and the
expenses. In other words, prudence concept provides for the conservative approach at the time of
reporting the profits that is revenue and the assets must be recorded only while it get realized.
However, for reporting the losses and the liabilities, as per this concept an entity must have to
opt for proactive approach that is recording the provisions when its possibility of the occurrence
exist. Prudence concept is been developed for the purpose of presenting a realistic view of the
financial reports in relation to each possible event which might impact decisions of users. For
instance- Provision for the bad and the doubtful debts, recording value of the inventory at it net
realizable value instead of its expected selling price etc.
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d. Explaining purpose of the depreciation and its techniques
It refers to the planned or the gradual decline in recorded asset's value over a useful asset life and
charging it as the expense. It is been applied to the fixed asset of which the value declines
because of the wear and tear or obsolescence over its useful life. Depreciation is been used by an
entity with an intend to spread the recognition of the expenses over the time period when the
firm expects in earning the revenue with use of an asset. In financial statements depreciation is
debited as the expense in P&L account and deducted from the asset and the crediting to
accumulated depreciation (Küpper and Pedell, 2016). Main objective of depreciation is
allocating the cost of the fixed asset and going with the matching principle. Expense of
depreciation does not result in the cash outflows as the funds are charged to income statement,
remains in business and could be used at the time of replacing an asset. This leads to correct
evaluation of the profits and the losses for a particular accounting period.
Two methods for charging depreciation are as follows-
SLM- It indicates that the same amount of depreciation will be written off for the useful
period of an asset. So, an equal sum of the depreciation will be charged for each year throughout
the asset's life. As the useful life ends, its value resulted as nil or equated to the scrap value of the
asset. It also known as the fixed instalment technique, original cost and the fixed percentage
method (Keune, Keune and Quick, 2017). This method of depreciation is suitable for leases and
in case where the residual value & useful life of an equipment could be computed accurately.
DBM- Under this method, depreciation amount is been calculated based on the fixed
percentage of diminishing asset value in books in the beginning years in order to bring the book
value of the equipment to its scrap value or the residual value. According to this method, the
depreciation amount goes on declining each year which means that the amount of the
depreciation charged every year is not fixed but will gradually be in a decreasing state. This
method also called as the WDV. This method is suitable in case where the repair charges of the
asset increases as it gets older and older (Vohs and et.al., 2018). It is also considered as the
simplest method for computing the depreciation and it dose leads the value of an asset to zero.
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e. Evaluating the difference in between financial statements of the sole trader and the limited
companies.
Sole trader Limited company
The equity sector of the sole trader comprises
of only a single item called as the account of
owner's equity.
On the other state, the shareholders fund
section in the final reports of company includes
the sum of the retained earnings, revenues,
capital reserves and the share capital.
Final reports of sole proprietor is not been
subjected to auditing.
However, auditing of financial statements of an
limited company is subjected auditing and is
required to follow all the accounting principles,
concepts and the regulatory framework.
The decisions under the sole proprietorship lies
on the owner in relation to the preparation of
the financial statements and in what form it is
to be prepared (Sunarya, Nurhaeni and Haris,
2017). This is because sole traders are not
subjected to follow any of the accounting
standards as given by IFRS and GAAP.
Limited company requires to follow all the
regulatory framework and the formulation of
the final reports is compulsory for it which
should be in compliance with the accounting
concepts and the principles.
The taxes are levied on the income of the
owner and not on its firm.
Under this, the taxes are directly levied on the
company as it is called as the separate legal
entity which means that the ownership and the
company are considered as separate from each
other.
CLIENT 3
a. Explaining the bank reconciliation statement
BRS is refereed as the document that is prepared due to the discrepancies in cash and the
bank records. It is been used for comparing the internal records of the account checking activity
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with that of the bank statement. Main reason for the preparation of this statement is uncovering
the differences that are present in between the two information sets and in correcting the
differences. The major purpose of preparing this statement is detecting errors in between
accounting records of an enterprise and the bank because of the normal differences of timings.
Such differences are present because of the error made on part of organization and the bank.
Other main purpose of BRS is to provide for regular monitoring and reviewing of the cash flows.
It also aims for determining the errors if any present in the accounting records of company
(Hoffman and et.al., 2018). It act as the control mechanism as it helps in protecting valuable
resource by uncovering the irregularities like the unauthorized withdrawals from the bank. The
other purposes of the BRS are as follows-
 Confirming accuracy balances that are been shown within the bank records and company
books.
 Providing a check on accuracy of the entries that are made in books & the bank records.
 Detecting & rectifying the error that are been committed in the accounting records.
 Providing an indication for updating books in case the entries are not recorded.
 Checks for undue delays regarding the clearance and the collected of the cheques.
b. Explaining the reasons for the variation in the bank and the cash records
There are various reasons for the causes of the difference in between the cash and the bank
records as follows-
Recording errors- At the time of formulating the cash book, an entity might make the
errors such as missing the sales entry, wrong balancing and the recording of the transactions in
the wrong ledgers instead of recording it into the cash book. This results in the difference within
balances of the cash and the bank.
Stale cheque- Cheque that has been issued by the firm to the payee and is not presented
for the payment by payee during the six months law of the local banking called as stale.
Therefore, that amount which is been already credited in the bank column of cash records of the
payer leads to the difference.
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Credit transfer- Sometimes, debtors deposits the money directly into the company's
account without providing any notification relating to firm. In such cases, bank credits account of
the firm but is not been recorded in cash book. Thus, the discrepancy occurs.
Direct debit- This happens when the company gives the instructions to the bank in paying
the due amount directly to the account of payee on the due date (Bailey and Sawers, 2018). In
this way, the bank debits account of an entity but it forget for making an entry into the cash
book. This results in the difference between cash and bank statement.
Unrepresented cheque- At the time when the cheques are been issued by company for
making the payment, it is been recorded on credit side of bank column while if the receiving
person does not present that cheque on same date, this causes for difference in pass book and the
cash book.
Unrealized cheque- Cheque deposited in the bank is been debited by firm which in turn
increases the bank balance but the bank credits the firm's account at the time when the cheques
are been realized. Thus, the difference is present until the cheque is been cleared.
c. Explaining imprest under the system of petty cash
This system referred as an accounting system that replenishes and pays out the petty cash.
This system is been designed for providing a manual tracking method of the petty cash balances.
Under this system, Fixed amount of the cash is been allocated to the fund of petty cash, that is
been stated in the separate account within the general ledger. All the cash distributions from fund
of the petty cash are been documented with the receipts. The disbursement & receipts of petty
cash are been used as the basis for the petty cash periodic replenishments fund (Xu and Doupnik,
2016). Imprest system provides for the assessment of the variances in between the actual and the
expected balances of fund and are also reviewed on a routine basis with proper investigation.
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d. Preparation BRS
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CLIENT 4
a. Preparing ledger accounts of purchase and sales
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b. Explaining the control account and its need of preparation
This account means the summary account prepared in the form of the ledger. It contains
the sum totals of the financial transactions which have been individually stored in the subsidiary
account level. These accounts is used for summarizing the accounts receivables and the accounts
payable, as these are the major areas that contains the larger volume of the transactions & needed
to be segregated into the subsidiary ledgers rather than cluttering up the ledger in detail. The
balances in control account must match with total for relative subsidiary ledger (Ahmed, 2016).
In case if balances do not matches then it is been possible that a journal entry is to be made in
control account which also made in subsidiary ledger. The need for the formulation of this
account is to keep the ledger free from the details but is having the accurate balance for
preparing final reports of the company.
CLIENT 5
a. Describing the term called suspense account and its characteristics
It is the account that refers to an account which has been created on a temporarily basis in
which the transactions are stored whose recording is not certain as in which account they need to
be entered. Once an accounting staff clarifies objective of such transaction, it shifts the
transaction from suspense account and in the appropriate account. An entry made in the suspense
account will be either debited or credited. Preparing a suspense account is useful rather than
omitting the recording of the transaction until and unless sufficient information has been
available for creating an entry in the adequate account (Abuhamdeh, Csikszentmihalyi and Jalal,
2015). Without this account, most of the transactions remains unreported by end of the reporting
period which in turn leads to inaccurate financial results.
b. Drafting trial balance
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c. Rectifying entries
CONCLUSION
By summing up an above report it could be concluded that FA plays an essential role in
the organization because it states about its financial health and performance in an entire market.
It helps users in making best decisions for achieving goals efficiently and effectively.
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