Financial Accounting: Definition, Purpose, Stakeholders, and Principles

This document provides an introduction to financial accounting, including its definition and purpose. It explains the role of financial reporting in assessing the financial condition of a company. The document also discusses the stakeholders of a large organization, both internal and external. Additionally, it highlights the importance of accounting principles in accurately tracking financial transactions. The document is relevant for students studying financial accounting or anyone interested in understanding the basics of financial reporting.

Financial Accounting

INTRODUCTION............2
MAIN BODY..................................................................................................................................2
TASK 1............................................................................................................................................2
1. Define financial accounting and its purpose............................................................................2
2. Explain two internal stakeholders and four external stakeholder of a large organization.......5
TASK 2............................................................................................................................................6
CLIENT 1........................................................................................................................................6
CLIENT 2......................................................................................................................................11
CLIENT 3......................................................................................................................................15
CLIENT 4......................................................................................................................................17
CLIENT 5......................................................................................................................................18
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................21
1

INTRODUCTION
Financial accounting is a specialist accounting division whose focus is on monitoring
financial activities of the business (Baker and Burlaud, 2015). It is a standard schedule for any
company. It is a very critical field of management as merely doing trade is not enough for a
company to see whether, or not, actions are focused in the correct direction. This control over the
activities of the company and its workers is carried out by the use of financial reporting. This
involves the preparation of financial reports, such as the income statement for the assessment of
income earned by the firm in the fiscal year and also the balance sheet, which is a detailed
statement of the financial status of the company. The analysis is divided into two sections. The
first section outlines the principle of financial accounting and its purpose. It also focuses on the
stakeholders of a large organisation. The second section is focuses on practical aspect of gaining
an understanding of the dual-entry accounting system and preparation of the final accounts.
Further explanation of the bank reconciliation statement and the suspense account is given in this
report.
MAIN BODY
TASK 1
1. Define financial accounting and its purpose
It is characterised as the process of documenting, classifying, summarising, analysis and
interpreting the monetary data of a company. This method is focused on the several accounting
standards defined by the regulatory authorities. The use of financial accounting is popular among
each and every company in the world. The information used during financial accounting are
classified as revenue, expenditure, assets, liabilities and capital (or equity) under five separate
headings. There is various financial treatments for each object in compliance with defined
accounting standards and policies adopted in the organisation. The basic aim of financial
accounting is to assess the gains or losses of the stated period and to assess the financial
condition of the corporation. The following features of financial accounting could be extracted
from the description below:
 Recording: It is the basic feature of financial accounting and where financial transection
of the business recorded (Drew and Dollery, 2015). It can be calculated in monetary
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terms, shortly after they have been recorded in the books of accounts. Transactions shall
be reported in the financial report.
 Classification: It further classifies the data into related nature of the business transactions
under the same heading. Basically, with the help of ledger accounts, accountants separate
the amount of the basis of their nature such as profit, expenses etc.
 Summarizing: it presents a detailed analysis of sensitive data in a way that is beneficial
to users. This stage of financial accounting includes the financial reporting, such as profit
and loss reports, balance sheets, cash flow statements, etc.
 Interpreting: since all the functions listed above have been completed, analysing comes
into play, which implies the transmission of results to management after analysing them.
 It is an art and a science as well: Accounting is an art for financial experts because they
have to make some decisions which are based on the personal opinion of the accountant
after analysing financial results. In general, books of accounts are produced in a similar
manner on the basis of accounting standards that are practiced by any accountant.
Purpose of financial accounting:
Financial accounting plays essential role in the organization and it also has several
purposes which are defined below:
Keeping systematic records: financial accounting is carried out with the basic intention
of preserving systematic records. If accounting is not carried out, it will impose an enormous
burden on the administration head. In this situations, organization lead to a breakdown of
business processes. That is why; maintaining financial record is very essential and organization
need to focus on it at initial stage because any error or omission can lead to change the final
results. Any mistake can increase the complexity among books of accounts, so accountant need
to be more focused while recording business transections.
Protecting business resources: Financial accounting provides protections for business
resources from unreasonable usage. This is important because management keep a tab on data
such as the amount of capital invested in companies, the level of debt and credit to the company ,
different information such as the amount of fixed assets, cash, W-I-P, the number of finished
goods, the stock of raw materials, the activities that produce higher income, etc. All this
information allows managers to ensure that the resources are not held idle or under utilities.
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Determining the amount of profit or loss: It is one of the main purposes of financial
accounting is to assess the income and losses of the company. This role is carried out by having a
consistent record of revenue and expenses for a particular duration. If revenue exceeds
from expenditure then it means organization gaining and in the opposite case, company facing
loss. This work is done by preparing an income statements and this account allows management,
investors and all stakeholders to understand the profitability of a company. In the event of losses
for consecutive years, managers can take the appropriate steps to investigate the reasons for such
losses.
Financial condition: Another purpose of financial accounting is to identify the financial
position of organization in terms of total assets and total liabilities. It will be possible through
making balance sheet which serves this purpose. It is a comprehensive statement of the assets
and liabilities of the company for the fixed period of time. It serves as a leading indicator for the
financial health of the organisation. Various research tests are carried out on the basis of this
statement (Flower and Ebbers, 2018). It further contributes to the production of knowledge that
is useful for formulating the strategy. This is a vital activity to undertake, as the simple
measurement of income is not enough, as it can create an unclear image, which can only become
apparent when preparing the Balance sheet.
Promote sound decision making process: With the help of financial accounting, it will
helps accountants and other stakeholders to make effective decision as the results produced by
the final reports are being used as information for comparing company's output with other
businesses in the market. This analogy makes it easier for management to decide about the
potential course of action. If the assessment is not carried out correctly, the findings obtained
would be ambiguous and thus judgments will not be made in the proper way. These decisions
apply to issues such as depreciation strategy, disposition of obsolete assets, etc.
Information system: One of the main purposes of financial accounting is to make
people aware about their operational performances. It helps in processing and communication
of organizational information. This collected information allows the administration to make the
effective and relevant decisions. By disclosing financial information, organization and other
potential interested parties can show their interest regarding investment in business.
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2. Explain two internal stakeholders and four external stakeholder of a large organization
The primary objective of financial accounting is to provide business information to the
interested parties (users). Users of this financial accounting can be divided into two groups, i.e.
internal and external users (Keil, 2016). These consumers are also referred to as stakeholders
who are interested in the financial statements of the organisations which shows profit and loss
position and financial health of the firm.
Internal stakeholders: these are the individuals or groups who've been
working within company. This data is used for separate purposes, some of which are described
below:
 Owners: It is one main user of financial information, since they only provide funding for
the organisation's activities, so they'll have to know whether or not their funding is being
used correctly. They are keen to learn about the operational and liquidity position of the
company. As has already been addressed, the key goal of financial accounting is to create
final accounts of the company that produce the relevant results.
 Management: The key role of management should be to get work done by someone else
such as employees and to determine that the juniors are working effectively or not.
Financial accounting shall provide assistance in this subject by supplying them with
reporting of the results of employees. Management functions include planning and
monitoring. Planning is carried out with the aid of the planning of different budgets.
Controlling is carried out with the aid of estimating the variances between the real figures
and the budgeted figures (Kwan and et.al., 2016).
External stakeholders: these people are from outside of the organisation but are indirectly
involved with organisation and they are interest in financial information in detail. There are some
external stakeholders which are as follows:
 Investors: these people who invested in the company and who are interested in
examining the financial status of the organisation to know if their investment is in safe
hands or not. They are curious to know if the profits are in line with what they planned or
not. Anticipated financial decisions depend on the accounting results of financial reports
such as EPS, net profit, etc.
 Government: Both federal and state governments are concerned about accounting
information because of their own purposes. Tax documents are some of the reasons for
5

interest. They will need financial information on the basis of the collection of business-
related statistics used to compile national accounts.
 Creditors: Company owes some funds to certain parties such as suppliers who provide
raw material, money lending etc. They are concerned in accounting details on the
grounds that they'd like to maintain the financial health of the company (Mook and et.al.,
2015). If previous estimates and audits are not carried out by creditors, they which
contribute to their bad debts, as the business does not occupy the role in which it will be
sufficient to reimburse debts.
 Society: Community as a whole needs to check the company's financial details, so it
needed to understand whether or not the company fulfils its obligation towards society
for example CSR. It will be an effective tool for maintaining a good place between
society and target audience.
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TASK 2
CLIENT 1
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8

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10

CLIENT 2
Client 2
Statement of Profit or loss for Amber Limited for the year ending 31st
May 2020
£
Sales 1,600,000
less returns inwards -32,000
Turnover 1,568,000
Less cost of sales w1 -901500
Gross Profit 666,500
less administration cost -313,000
less selling and distribution costs -272,000
Operating Profit 81,500
less finance costs -25,000
Profit Before Tax 56,500
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Corporation tax note (iv) -20,000
Profit for the Year 36,500
Statement of changes in Equity for Amber Limited for the year ended 31st May
2020
Ordinary
share
capital @
£1
Share
Premium
Retained
earnings Total
£ £ £ £
Balance as per Trial Balance 450,000 250,000 240,500 940,500
Profit for the year 36,500 36,500
450,000 250,000 277,000 977,000
w1
cost of
sales administration distribution
£ £ £
Opening inventory 1 stjune 2019 180,000
add Purchases 750,000
less returns outwards -20500
less closing inventory note (i) -20000
Depreciation on Building note (ii) 12000
Balance as per Trial balance 250,000 214,000
Depreciation on P and M note (ii) 61000 61000
admin salaries accrued note (iii) 2000
rent prepaid -3000
901,500 313,000 272,000
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Statement of Financial Position for Amber Limited as at 31st May
2020
Assets £
Non-current assets
Land and Buildings w2 638,000
Plant and Machinery w2 488,000
Total Non-current Assets 1,126,000
Current Assets
Inventory note (i) 20,000
Trade receivables 320,000
Other receivables: rent prepaid note (iii) 3,000
Total Current Assets 343,000
Total ASSETS 1,469,000
Equity and Liabilities
Equity
Ordinary share capital @£1 each 450,000
Share premium 250,000
Retained Earnings 277,000
Total Equity 977,000
Current Liabilities
Trade Payables 250,000
Other payables: admin salary accrued 2,000
Tax Payable 20,000
Bank Overdraft 220,000
Total Current Liabilities 492,000
Total Equity and Liabilities 1,469,000
w2 L&Buildings P&Machinery
Cost 800,000 850000
Accumulated depreciation @ 1
june 2019 150000 240000
Depreciation provision for 31 May
2020 12000 122000
Accumulated depreciation @ 31st
May 2020 162000 362000
Carrying Value 638,000 488,000
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In the field of accurately tracking financial transactions, accounting principles play a
significant role. It can be challenging for accountants to handle the financial situation in the lack
of appropriate understanding of accounting principles. There are some accounting principles
mentioned below, which are as continues to follow:
Accounting concept of consistency- According to this accrual accounting, when an
accountant applies an accounting principle already, then consistent follow-up is beneficial in the
long run (Hyndman and Liguori, 2018). This is critical since it can be tough to distinguish
income reports when accounting professionals adjust accounting rules year after year. The
fundamental object of this accounting principle is to establish, from year to year, an equivalent
trend of all financial reports.
Prudence accounting principle- This is one of the essential accounting principles that ensures
that the sum of assets and liabilities is not overhyped. The sum of financial assets, in a wider
sense, must be cautious rather than exaggerated. The financial statements must state both the
moderate republican outcome and the extreme progressive outcome.
Therefore, these are some basic accounting principles that all sorts of entities need to adopt such
that their financial statements are becoming precise and accurate.
(d) Depreciation and its purpose- Depreciation can be described as the quantity of money that
is decreased to the zero value of property from the reported cost of any current assets. Businesses
may determine the total cost of their properties with the aid of valuation calculations. Here, it is
necessary to realise that the decline of just about any country cannot be measured (Bischof, Laux
and Leuz, 2019). There are different types of depreciation calculation methods, but all of them
are described below, including such:
Clear line method of depreciation-It can be represented as something of a depreciation
calculation method in which a certain amount of depreciation is extracted from the amount
of property. It is one of the easiest methods of depreciation calculation since a fixed amount
is paid in it before the zero amount of property every year. Together with this approach,
those assets which customer values in a similar fashion are appropriate.
Diminishing balancing method- This valuation measurement method is wholly separate from the
approach before. It is because, in this process, the depreciation expense is estimated for year
one according to the book value of properties. But at the other side, one impairment sum is
measured according to the clearly written amount of property with the exception of the
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quarter. In this process, impairment should not be paid until the value of assets is nil (Dal
Maso and et.al, 2018).
Both are therefore the primary depreciation method mentioned before, and also the two
techniques are different from one another.
(e) Critically evaluation of financial statements prepared by sole traders and limited
companies:
Basis of
difference
Financial statement prepared by
sole traders
Financial statement prepared by
limited companies
Preparation of
financial
statement
The sole financial reports of
merchants are compiled by the
proprietor or broker.
But at the other side, financial
statements are developed by
accountants in restricted businesses.
Presentation of
financial
statements
The financial reports of single
merchants are not discussed next to
various parties.
The financial reports of a limited
liability company are addressed to
different categories of various parties.
Auditing There is no auditing of their
financial statements.
It is mandatory that their financial
reports be inspected by an outside
accountant.
Accounting rules
and regulations
This is not required mostly during
preparation and presentation of
financial to comply with reporting
laws and regulations.
In the context of the preparation of
financial reports, accounting laws and
guidelines need to be followed.
Aspect of
financial
information’s
In the financial report, the field of
financial details used is much
smaller.
In addition, a broad variety of
financial data is contained in the
financial statements of businesses.
CLIENT 3
(a) Reconciliation statement: This has been described as something of a statement consisting of
comprehensive details about all kinds of banking transactions carried out by businesses. The
primary objective of preparing this document is to cross reference here between bank statement
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and the records of the business. But at the other direction, it can be hard to determine the
accuracy of money transfers in the lack of this argument. This is the key explanation why the
administrator of John's limited liability company is planning the bank statement. The basic aim
of BRS is to find and analyze certain mistakes in the documentation system of bank account
transactions and quantities. If it happens, this is achieved to expose any unlawful behaviour
(Massoudi, Koh, Hancock and Fung, 2017).
(b) Explanation for the disparity between cash book and bank statements: Due to the volume of
cash book and bank statement differing from one another, there may be different kinds of
explanations. Here, some triggers are listed below, which are as follows:
 When business deposit cheque earn bounces, however the quantity of cheque cleared
registered in the firm's cash books owing to shortage of bank contact.
 Any problem caused by an accounting may also lead to inconsistencies between the two
claims.
 Sum of interest loaned to the business by the bank but not told.
 And these are among the key factors that contribute to a disparity between corporations'
bank accounts and cash books.
(c) Imprest- This was specified as a reserves of the following message by the companies to cover
the small amount of costs. In fact, it operates to manage the company's daily expenditures. It is
necessary to recognize, therefore, that this allocated quantity is being used by businesses in a
comparable condition where there is a shortage of funds to pay small amounts of debts (Werner,
2017).
(d)
DR Updated Cash Book (bank only) CR
Date Receipts £ Date Payments £
01-Sep-19 balance b/d 51500 09-Sep-19 M Potter 25100
07-Sep-19 Cash sales 6400 10-Sep-19 C Lyons 8700
12-Sep-19 M Pointer 2600 14-Sep-19 C Hallern 8900
17-Sep-19 Cash sales 17100 20-Sep-19 C David 12200
24-Sep-19 Cash sales 10300 28-Sep-19 S Leeming 11600
30-Sep-19 Balance c/f 21400
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87900 87900
30-Sep-19 Balance B/d 21400 17-Sep-19 Rates DD 10500
30-Sep-19 Bank charges 3600
30-Sep-19 Balance c/f 7300
21400 21400
30-Sep-19 Balance B/d 7300
Bank Reconciliation Statement as at 30 September 2019
Details £
Balance as per the bank statement 39800
add Outstanding Lodgements 0
39800
Less Unpresented cheques (8700+12200+11600)
-
32500
Balance as per the corrected/ updated cash book 7300
CLIENT 4
(a) Sales ledger management account- It can be recognized as a process of management used
among businesses to track the original debt by different customer groups. Furthermore, this
balance is also useful for verifying the overall number used in the financial statements and the
income reports. Below, according to the provided details, the sales ledger account underneath is
classified as follows.
(b) Purchase ledger control account- This control account is opposed to the sales ledger system
below. It is so that an individual owes its distributors below that number. Furthermore, it is used
to calculate the amount of credit owed to be charged by businesses to their distributors. A
purchase ledger control account is constructed below from the basis of number information:
(c) Control account description- This may be described as a form of account that, with no
explanation, keeps journal entries clean. The primary objective, therefore, is primarily to keep
the balance sheet precise and clear. This report tracks balances, in a general sense, according to
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the subordinate statements. In addition, in order to control the account balances, business
administrators use this balance (Lahouel and et.al, 2019).
DR (Receivables) Sales ledger Control Account CR
Date Details £ Date Details £
01-Jun-
20 Balance b/d 24,800 Bad debts W/o 2800
Credit sales 304350 Discount allowed 2560
Sales returns 8620
Receipts from
customers 245610
Contra entry 1040
30-Jun-20 Balance c/f 68,520
329,150 329,150
30-Jun-
20 Balance b/d 68520
DR (Payables) Purchases ledger Control Account CR
Date Details £ Date Details £
Discount received 2050 01-Jun-20 Balance B/d 22060
Purchases returns 6310 credit purchases 266500
Payments to suppliers 169010 Refund received 800
Contra Entry 1040
30-Jun-
20 Balance c/f 110950
289360 289360
30-Jun-20 Balance B/d 110950
CLIENT 5
(a) Suspense account- This can be described as a form of account being planned for the purpose
of seeking a distinction between the two sides of the trial balance. Moreover, it is crucial to
understand that the amount applied to this balance is reported on a short term basis. That's so
because the sum of those payments that are questionable is entered in it and regardless of which
the trial balance becomes weak (Putra, 2019).
Suspense account functionality:
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1. This account is correlated with the description in the financial reports of the incorrect
amount entered.
2. This account states that the data submitted in the financial reports is correct with no
mistake.
3. Amounts are registered on a short term basis in this system too though and these are the
key characteristics of Suspense account
Trial Balance
1 Debit Credit
£ £
Purchases 14000
Sales 22000
Rent paid 5000
Cash at Bank 16800
Travel expenses 3200
Receivables 6400
Payables 7000
Opening Inventory 4400
Capital 14200
Suspense account 6600
49800 49800
Journal entries for error correction
2 Debit Credit
£ £
(i) Simon account 4400
Smith account 4400
Error of commission now corrected
(ii) Jones account 8400
Suspense account 8400
An error of single entry, one credit, now corrected
(iii) Suspense account 15000
White Account 15000
An error of single entry, one Debit, now corrected
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3
DR Suspense account CR
White account 15000 Balance b/d 6600
Jones account 8400
15000 15000
closed
Corrected Trial Balance
4 Debit Credit
£ £
Purchases 14000
Sales 22000
Rent paid 5000
Cash at Bank 16800
Travel expenses 3200
Receivables (6400+ 4400-4400+8400) 14800
Payables (7000+15000) 22000
Opening Inventory 4400
Capital 14200
58200 58200
CONCLUSION
On the basis of the project report referred to above, it has been concluded that financial
accounting is an essential accounting process. It is so because this accounting is related to the
quality enterprise governance. The object of this reporting is inferred in a general sense in the
project report. Customers are differentiated and also internal departments such as staff, managers
and various customers including such distributors. Different types of calculation are carried out
in the greater purpose of the project document according to decoding process and some relevant
theories are also listed including such suspense account, control account, imprest, etc.
20

REFERENCES
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Drew, J. and Dollery, B., 2015. Inconsistent depreciation practice and public policymaking:
Local government reform in New South Wales. Australian Accounting Review. 25(1).
pp.28-37
Flower, J. and Ebbers, G., 2018. Global financial reporting. Macmillan International Higher
Education
Keil, J., 2016. Depreciated Depreciation Methods? Alternatives to Sraffa’s Take on Fixed
Capital. Review of Political Economy. 28(4). pp.566-589.
Kwan, C. Y. and et.al., 2016. Organization and reporting of public financial accounts: insights
and policy implications from the Singapore budget. Australian Journal of Public
Administration. 75(4). pp.409-423.
Mook, L. and et.al., 2015. Turning social return on investment on its head: The stakeholder
impact statement. Nonprofit Management and Leadership. 26(2). pp.229-246.
Putra, Y. M., 2019. Analysis of Factors Affecting the Interests of SMEs Using Accounting
Applications. Journal of Economics and Business. 2(3).
Lahouel, B. B. and et.al, 2019. Accounting for endogeneity and the dynamics of corporate
social–corporate financial performance relationship. Journal of cleaner production. 230.
pp.352-364.
Werner, M., 2017. Financial process mining-Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems. 25. pp.57-80.
Bischof, J., Laux, C. and Leuz, C., 2019. Accounting for financial stability: Lessons from the
financial crisis and future challenges.
Hyndman, N. and Liguori, M., 2018. Achieving radical change: A comparative study of public-
sector accounting in Westminster and Scotland. Accounting, Auditing & Accountability
Journal. 31(2). pp.428-455.
Massoudi, D., Koh, S., Hancock, P. J. and Fung, L., 2017. The effectiveness of usage of online
multiple choice questions on student performance in introductory accounting. Issues in
Accounting Education. 32(4). pp.1-17.
Dal Maso, L. And et.al, 2018. The influence of accounting enforcement on earnings quality of
banks: Implications of bank regulation and the global financial crisis. Journal of
Accounting and Public Policy. 37(5). pp.402-419.
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