Accounting: Types of Business Transactions, Bookkeeping Systems, Trial Balance, Financial Statements

This document provides an overview of accounting, including types of business transactions, single and double entry bookkeeping systems, the importance of trial balance, and financial statements. It covers topics such as recording business transactions, preparing final accounts, bank reconciliation, control and suspense accounts, and more. The document is suitable for students studying accounting or related courses.

Accounting

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
SCENARIO 1..................................................................................................................................1
QUESTION 1..............................................................................................................................1
QUESTION 2..............................................................................................................................3
QUESTION 3..............................................................................................................................7
QUESTION 4..............................................................................................................................9
QUESTION 5..............................................................................................................................9
SCENARIO 2................................................................................................................................10
QUESTION 1............................................................................................................................10
QUESTION 2............................................................................................................................11
QUESTION 3............................................................................................................................12
QUESTION 4............................................................................................................................13
QUESTION 5............................................................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Accounting is a structured method for defining, documenting, evaluating, classifying,
checking, analysing, interpreting and sharing financial information(Barron, Chung and Yong,
2016). It discloses the revenue or loss over a period and the value of the property of the assets,
liabilities and equity of the business. Accounting is the practice of reporting business transactions
related to a company. The financial reporting process involves summarizing, evaluating and
monitoring these transfers to supervisory agencies, regulatory agencies and tax collectors. This
report cover the several topics such as record business transactions by using single and double
entry book keeping system, prepare final accounts by using appropriate accounting principles
and perform bank reconciliation. In addition, it covers the control and suspense account and why
it is required for drafting.
MAIN BODY
SCENARIO 1
QUESTION 1
Different types of business transactions:
There are numerous types of business transactions which are used to record in the books
of accounts and further classify the amount of the basis of it. Some of them are as follow:
 Sales transactions are under which the goods are sold to the buyer in exchange of cash or
on credit basis. Selling proceeds are reported in the sales accounts a debit to cash or
receivable accounts and a credit to the selling account.
 Purchases are the transfers which are needed by a company to purchase the goods or
services necessary to achieve the objectives of the organization (Edwards, Schwab and
Shevlin, 2015). Purchases of goods made in cash result in an inventory account debit and
a cash credit. If goods purchased on credit basis then credit the account, the debit would
still be put into the inventory account and the refund would be inserted into the accounts
payable.
 Receivables are receipts that relate to the company being charged for the delivery of
goods to some other firm. The invoice transaction occurs in the vendor's journal as a cash
debit and a credit to the receivable.
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 Payments are exchanges that attribute to a company that receives money for just a good
or service. Individuals are recorded in the company's accounting journal allowed to issue
the payment as a cash credit and a debit to the trade payables.
Define single entry book keeping:
It is an accounting system that used to keep every business transaction of a business.
There has been one entry for every money transfer and most of the entries register either inbound
or outbound funds. Exchanges are reported in the "cash book"—a report of columns that include
financial transactions such as the time, explanation and whether it is a cost or revenue.
Define double entry book keeping:
It is premised on the reality that each transaction seems to have two aspects and therefore
will have an impact on two accounting books (Chan, 2015). Each activity includes a debit entry
into one account and a credit entry into another account. It ensures that any transaction will be
reported in two accounts; one party will be debited since it collects value and the other party will
be credited since it has value.
Explain trial balance and its importance:
The trial balance is a workbook wherein the balances of all ledgers are combined into the
sums of the debit and credit side and balance the amount with each other (Jiang, Wang and Xie,
2015). The business used to prepare trial balance periodically, generally at the end of each
accounting period. Importances of trial balance are as follow:
Checking accuracy: This indicates that now the trial balance is being used to check the
exact sum deposited on the right side of the new account when transferring data from different
records such as buy records, selling books, cash books, etc. Trial Balance apart from account in
the general ledger, it is often helpful to determine the validity of specific purpose accounting
records.
Helps in preparing financial statements: The income statement, the balance sheet and
the cash flows must be prepared at the end of each financial reporting year. The balance of all the
accounts used to compile the financial reports is also accessible in the trial ledger, making it easy
to plan and interpret the financial information.
Rectifying errors: The total debit of both the trial balance shall be equivalent to the
combined credit of the trial balance. The whole checks the integer accuracy of the booklets. If
that's not the situation, the bookkeeper will find and correct the mistake. Accounting
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professionals consequently feel glad when the totals of the debit balance and the totals of the
credit balance are matched.
Help in adjustment: Adaptation accounts, such as prepaid costs, accrued obligations,
closing shares, etc., must be adjusted during the planning of the jury balance. This helps to make
adjustments that are only important in the current accounting year (Drexler, Fischer and Schoar,
2014). Businesses usually file the change reports at the close of the financial year. There really is
no limitation on the opening of alteration accounts as individuals occur.
QUESTION 2
Journal entries for each transaction:
Date particulars Dr. Cr.
01-06-20 Cash account 65,000
To capital account 65,000
02-06-20 Purchase account 8,000
To creditor account 8,000
07-06-20 Cash account 4,000
To sales account 4,000
08-06-20 Creditor account 4000
To bank account 4000
14-06-20 Insurance account 75
To bank account 75
15/06/2020 Debtor account 12,000
To sales account 12,000
16-06-20 Purchase account 10,000
To creditor account 10,000
18-06-20 Computer equipment account 3,000
To cash account 3,000
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20-06-20 Rent account 150
To bank account 150
21-06-20 Cash account 10,000
To sales account 10,000
25-06-20 Cash account 100
To bank account 100
30-06-20 Stationary account 30
To cash account 30
Ledger accounts:
Sales account
Date Particulars Amount Date Particulars Amount
30-06-20 To balance
c/d
26,000 07-06-20 By cash a/c 4,000
15-06-20 By debtor a/c 12,000
21-06-20 By cash a/c 10,000
26,000 26,000
Purchase account
Date Particulars Amount Date Particulars Amount
2-06-20 To creditor
a/c
8,000 30-06-20 By balance c/d 18,000
16-06-20 To creditor
a/c
10,000
18,000 18,000
Computer equipment account
Date Particulars Amount Date Particulars Amount
18-06-20 To cash a/c 3,000 30-06-20 By balance c/d 3,000
3,000 3,000
Capital account
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Date Particulars Amount Date Particulars Amount
30-06-20 To balance
c/d
65,000 01-06-20 By cash a/c 65,000
65,000 65,000
Insurance account
Date Particulars Amount Date Particulars Amount
14-06-20 To bank a/c 75 30-06-20 By balance c/d 75
75 75
Creditor account
Date Particulars Amount Date Particulars Amount
8-06-20 To bank a/c 4,000 2-06-20 By purchase a/c 8,000
30-06-20 To balance
c/d
14,000 16-06-20 By purchase a/c 10,000
18,000 18,000
Cash account
Date Particulars Amount Date Particulars Amount
1-06-20 To capital
a/c
65,000 18-06-20 By computer equipment
a/c
3,000
7-06-20 To sales a/c 4,000 30-06-20 By stationary a/c 30
21-06-20 To sales a/c 10,000 30-06-20 By balance c/d 76,070
25-06-20 To bank a/c 100
79,100 79,100
Bank account
Date Particulars Amount Date Particulars Amount
30-06-20 To balance
c/d
4325 8-06-20 By creditor a/c 4000
14-06-20 By insurance a/c 75
20-06-20 By rent a/c 150
25-06-20 By cash a/c 100
4,325 4,325
Stationary account
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Date Particulars Amount Date Particulars Amount
30-06-20 To cash a/c 30 30-06-20 By balance c/d 30
30 30
Debtor account
Date Particulars Amount Date Particulars Amount
15-06-20 To sales a/c 12,000 30-06-20 By balance c/d 12,000
12,000 12,000
Purchase account
Date Particulars Amount Date Particulars Amount
2-06-20 To creditor
a/c
8000 30-06-20 By balance c/d 18000
16-06-20 To creditor
a/c
10000
18,000 18,000
Rent account
Date Particulars Amount Date Particulars Amount
20-06-20 To bank a/c 150 30-06-20 By balance c/d 150
150 150
Trial balance:
Trial balance
Particulars Dr. Cr.
Capital account 65,000
Stationary 30
Debtor 12,000
Bank overdraft 4,325
Computer equipment 3,000
Rent 150
Creditors 14,000
Insurance 75
Sales 26,000
Purchase account 18,000
Cash account 76,070
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109,325 109,325
QUESTION 3
Difference between financial statement and financial report:
Financial statement: The aim of the financial statements is to offer overview of the
financial situation, cash flows and performance of operational activities (Kaplan and Atkinson,
2015). This knowledge allows the users to decide things on the distribution of capital.
There are three very famous financial statements which are income statement, balance sheet and
the statement of cash flows.
 The Income statement which declare the revenue and expenses of the corporation to earn
income and shows the amount of revenues and the essence of the specific expenditures. It
may be used for the study of patterns.
 The balance sheet shall is being used to disclose on the existing position of the
organization as of the date of the balance sheet. It is used to predict such issues as
leverage, debt status, and financing.
 The cash flow statement is being used to consider the nature of cash receipts and
payments. Because cash balances do not necessarily suit the income and spending
displayed in the statement of cash flows, it is an extremely valuable financial statement.
As a whole, financial statements could be used for making several decisions such as credit
decisions, investment decisions, tax decisions and understanding customer decisions.
Financial reports: Financial reports collect relevant financial data for dissemination to the
public. Financial data is realised for all the public to start generating their interest in investing.
Quarterly earnings are distributed through news articles, video conference, or web sites.
Annual audits reports with regulatory bodies such as the Securities and Exchange
Commission. This is extremely critical that the annual records are reliable and timely. The above
allows the company to make informed business decisions and help them to keep compliance and
good reputation. A good financial reporting system should be simple, convenient to use it and
often reliable.
Financial reporting system can be integrated with the existing general ledger, providing with
strong and contemporary embedded analytics without the high cost of upgrading their GL or
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ERP. When the company has developed the right enduring relationship, owners see
the improvement in productivity (Kim and Zhang, 2016). The production, packaging and
distribution reports can be carried out with accuracy and control, even though data sources,
locations and exchange rates are consolidated. The technology to perform reports means that
reports are beautifully configured for the needs of either the committee or the SEC.
Requirement of financial reports and its users:
As per the GAAPs (Generally Accepted Accounting Principles) companies are
responsible for reporting on their cash flows, profit-making operations and overall monetary
policies. Under the GAAP, the following three main financial statements are required such
as Revenue statement, balance sheet and cash flow statement.
The declaration of earnings shall represent the profits received by the company over the
reporting period, along with the associated expenditures. It covers profits from operational and
non-operating operations, enabling creditors and borrowers to determine profitability. This is
often referred to as the statement of income and loss (P&L). Similarly, value of assets and
liabilities mentioned in the balance sheet and overall flow of cash represent in cash flow
statement. This information is used for the company’s stakeholders who have different interest in
the company’s financial performance. All are mentioned below:
Management: The management committee wants to consider the competitiveness,
liquidity and working capital of the enterprise monthly because it can make operating and
financial decisions more about product.
Competitors: Entities negotiating against a company may try to obtain access to their
financial records in order to identify their financial situation (Lara, Osma and Penalva, 2016).
Expertise that they acquire could change their strategic strategies.
Customers: While deciding which manufacturer to use for a big contract, the consumer
first wants to re-evaluate their financial statement to determine the financial capacity of the
manufacturer to stay in operation long enough to deliver the products or services required by the
contract.
Employees: A corporation may choose to start providing employees with its financial
statements, together with a thorough description of what the documents contain. This could be
used to boost the amount of employee participation in and understanding of the company.
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Governments: A state from whose jurisdiction the corporation is based shall submit a
financial statement to decide if the company has paid the right amount of tax or not.
Creditors: They are likely to demand the presentation of financial statements because they
are the shareholders of the company and want to appreciate the success of their money.
QUESTION 4
Different fundamental principle of accounting:
There are several accounting principles which are adopted by the organization at the time
of recording their business transactions and prepare accounts. Those are discussed below:
Accrual principle: It is the principle which financial records should be documented in the
financial period because once they actually occur, rather than in the periods when cash flows are
aligned with them (Mussari, 2014). This would be the foundation of the income statement for
accounting. It is essential for the development of financial performance of the company what
actually happened during the accounting period, instead of being artificial means delayed or sped
up by the affiliated cash flows.
Conservatism Principle: It is also the principle which wil allow the report to
record obligations as soon as possible, but only record sales and profits if they are confident they
will exist. This idea appears to promote the reporting of expenses early rather than later. This
idea can be pushed too far, if a company insistently mischaracterizes the outcomes to be lower
than is actually the case.
Principle of full disclosure: This is the principle that company should include in or along
with the annual reports of the companies all information that could have an effect on the user's
understanding of such statements. The accounting rules have greatly enhanced this concept by
defining an overwhelming amount of interactive disclosures.
QUESTION 5
Profit and loss account for the year ended 31st December 2017:
Profit and loss account
Particulars Amount Particulars amount
Opening stock 9,500 Sales 125,000
Purchase 75000 Less: Return (1000) 124,000
Less: Return (1500) 73,500 Closing stock 1,000
Wages and salaries 13,200
Gross profit 28,800
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125,000 125,000
Rent and rates 1500 Gross profit 28,800
Add: Out. Rates 340 1,160 Interest received 1,000
Postage 900 Rent received - 4850
Insurance - 7500 Less: Advance rent -
490
4,360
Less: Prepaid insurance -
411
7,089
Bad debt write off 650
Net profit 24,361
34,160 34,160
Balance sheet:
Balance sheet
Liabilities amount Assets Amount
Capital – 120,800 Bank 10,594
Less: Drawings
5,150
Cash 340
Add: Net profit -
24361
140,011 Prepaid insurance 411
Provision for bad
debts
934 Advance rent 490
Debtor - 12500
Creditor 3,900 Less: Bad debt write off -
934
11,850
Outstanding rates 340 Motor van at WDV - 19600
Less: Dep - 5000 14,600
Loan 100,000
Closing stock 1,000
145,185 145,185
SCENARIO 2
QUESTION 1
Meaning of bank reconciliation:
It is a declaration that individuals are prepared to identify, explain and recognize any
variations in between balance as per the bank statement and balance as per the accounting
records. All exchanges between the issuer and the bank are decided to enter independently in
their documents by both party leaders. Such documents can be unhappy for a number of reasons
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which indicate different balances. The aim of presenting bank reconciliation is to determine and
explain the causes for this disparity in the balance of accounts.
Why bank reconciliation is required and how to achieve it:
Requirements for bank reconciliation are performed periodically in order to validate the
company's financial documents separately (Raiborn and Sivitanides, 2015). The financial
analysis demonstrates the difference between the value of the 'Cash at Bank' and the value in the
bank statement. Company and the bank maintain financial records of the same amount of cash
involved in bank transactions. Certain variations come from the fact that often cash purchases
reported by the other side are uninformed on the collection of documents. Cash received also that
business transactions which may have noted, but has not yet been recorded in bank statements, or
bank charges that the bank has paid from the savings account of the company but has not yet
notified the company.
Another justification for making bank reconciliation is to approve the sum of capital that
the organization effectively has at its hands. The amount of cash reported on the bank statement
may not actually reflect the money available for the company to invest. This would be
attributable to the reality that the bank does not understand the verifications which have been
paid but have still not been described to the bank.
Bank reconciliation is being achieved by a review of their own financial records which has
to be matched against their weekly bank statement in order to settle their balances. Review each
transaction individually, ensure that the amount fits exactly and consider any discrepancies that
need further examination. The process may be as formal or relaxed as they wish, and some
businesses make a bank reconciliation statement to demonstrate the regularly reconcile balances.
If the organization can not complete the cycle on a regular basis, this can do this on a daily basis,
on a yearly basis or every other way it likes. It is important to define and verify the equilibrium
and to determine whether it is the same or not. If people find a discrepancy, they need to provide
a rationale for it or consider a cause for it.
QUESTION 2
Explain control accounts:
Control account is also defined to be a managing account in a general ledger account and
defines and incorporates all subordinate financial accounts of a specific type (Trotman and
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Carson, 2018). In other words, it is a summery account that is similar to the complete
subordinate account that used simplifies the general ledger that manages it.
Role of control accounts in financial management:
Control accounts perform a multitude of roles in financial management that are immediately
helpful to the company and which are described below:
 Creates a mechanism for initial correction of defects and fraud.
 Remove the unstructured information from the general ledger.
 Large companies will set up separate accounting departments for specific places.
 Trial balance estimation provides a summary of the average instead of the actual
accounts.
 Reduces the risk of fraud even though the management account papers and the
subordinate ledger are managed by separate staff independently.
QUESTION 3
Explain suspense account:
Suspense account is known as general ledger account in which the business keeps record
their unclear entries which still necessitate further analysis to ascertain the strategy of execution
or the location of each individual. Suspense account is a type where the shareholder lounges
their money for a period of time until such time as that cash can be used up to capital
expenditure.
Reasons of drafting suspense account:
 This account may also be drawn up in which the correct payment could not be registered
or measured at the time the exchanges are originally registered (Watson, 2015). A few
examples of it will be whether such a client receives a partial bill, even if they are unsure
which bill individuals pay. When the settlement uncertainty is settled with the customer,
the balance due will be moved from the anticipation account to the correct account.
 If the corporation's trial balance is still out of control, the disparity will remain in the
anticipation fund till the other discrepancy has been fixed. The expectation account will
show on the balance of the trial under the heading "Other collateral assets." If the
business has realized and rectified the reason of the imbalance, the expectation balance
will be tied; however the trial balance would no longer be participated.
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QUESTION 4
Updated cash book as at 28th February 2017:
Revised cash Book
Particulars Dr. Particular Cr.
Balance b/d 1,760 D.Park 270
Insurance against fire 170 Mr. Akram 105
Monthly bill 56 Bank Collection 325
Arif Paid 186
Bank Charges 25 Balance c/f 1497
2,197 2,197
Bank reconciliation statement as on 28th February 2017:
Particular Amount
Balance as per Bank 3,093
Add:
Bank Charges 25
Arif Paid 186
Monthly bill 56
Fire insurance 170
Less:
D.Park 270
Mr. Akram 105
Bank collection 325
Balance as per cash book 2,830
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Explain the following terms:
 Direct debit: It's the fastest, cheapest and maybe most effective way to make daily or
occasional payments; that's why it's included in items like council tax and utility charges.
Direct Debit permits somebody to accept loans from the accounts until they are due. By
uploading a direct debit mandate form, those who give the permission; it may be a file form
or an internet browser that submits online.
 Standing order: The Standing Order in any corporation may be defined as a storage server
portion size by an employment contract which affects its employees (Weetman, 2019).
A trade union with the aim of achieving homogeneity in the requirements of workers in the
workplace as laid down in the statutory legislation and obvious reasons by the respective
authority.
 Bank charges: It includes all expenses and fees charged by the bank from its clients. o In
common terms, it usually refers to fees in the respect of individual current accounts or
authorised accounts and they charge on quarterly basis.
 Dishonoured cheque: Banks offer the sum to the payer, the transaction is said to have been
made. Transaction is said to have been dishonoured if the bank fails to pay the payee the
sum. In many other words, check dishonour is a scenario wherein the bank failed to pay the
verifying amount to the payer.
QUESTION 5
Journal entries:
S. No Particulars Dr. Cr.
1 Goods purchase account 2000
To suspense 2000
2 Bank Account 670
To suspense 670
3 Sales 650
To G. Tahir 650
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4 Electricity Bill 790
To Cash account 790
5 Expense account 500
To Motor vehicle 500
6 Sales accounts 270
To sales day book 270
7 L Samantha 190
To Discount receivable 190
Discount allowed 190
To L Samantha 190
8 D. Jones 384
To account receivable 384
Suspense account:
Suspense account
Particulars Amount Particulars Amount
By balance 1,612
By goods purchase 2,000
To balance (b.f) 4,282 By bank 670
4,282 4,282
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CONCLUSION
From the overall analysis it has been observed that financial accounting essential for
organizations to maintain their accounts through recording each business transactions in well
manner. Effective use of accounting principles helps in developing financial statements and
reports for its internal as well as external parties who used to consider it for the purpose of
making strategic financial decisions.
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REFERENCES
Books & Journals
Barron, O. E., Chung, S. G. and Yong, K. O., 2016. The effect of Statement of Financial
Accounting Standards No. 157 Fair Value Measurements on analysts’ information
environment. Journal of accounting and public policy. 35(4). pp.395-416.
Chan, J. L., 2015. New development: China promotes government financial accounting and
management accounting. Public Money & Management. 35(6). pp.451-454.
Jiang, J., Wang, I. Y. and Xie, Y., 2015. Does it matter who serves on the Financial Accounting
Standards Board? Bob Herz’s resignation and fair value accounting for loans. Review of
Accounting Studies. 20(1). pp.371-394.
Drexler, A., Fischer, G. and Schoar, A., 2014. Keeping it simple: Financial literacy and rules of
thumb. American Economic Journal: Applied Economics. 6(2). pp.1-31.
Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings. The
Accounting Review. 91(3). pp.859-881.
Lara, J. M. G., Osma, B. G. and Penalva, F., 2016. Accounting conservatism and firm investment
efficiency. Journal of Accounting and Economics. 61(1). pp.221-238.
Mussari, R., 2014. EPSAS and the unification of public sector accounting across
Europe. Accounting, Economics and Law. 4(3). pp.299-312.
Raiborn, C. and Sivitanides, M., 2015. Accounting issues related to Bitcoins. Journal of
Corporate Accounting & Finance. 26(2). pp.25-34.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Kim, J. B. and Zhang, L., 2016. Accounting conservatism and stock price crash risk: Firm‐level
evidence. Contemporary Accounting Research. 33(1). pp.412-441.
Trotman, K. and Carson, E., 2018. Financial accounting: an integrated approach. Cengage AU.
Watson, L., 2015. Corporate social responsibility research in accounting. Journal of Accounting
Literature. 34. pp.1-16.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
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