Accounting Concepts and Principles

This assignment provides a comprehensive analysis of various accounting concepts and principles, including journal and ledger maintenance, preparation of trial balance, and rectification of accounting entries. It also discusses the difference between suspense and clearing accounts, highlighting their unique features and significance in accounting. The report concludes by emphasizing the importance of these concepts and principles in presenting a fair view of performance to stakeholders.

Financial Accounting
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TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
1. Defining financial accounting............................................................................................3
2. Presenting key regulations which are associated with financial accounting......................4
3. Stating concept of accounting rules and principles............................................................4
4. Explaining concept and convention of consistency and materiality..................................5
CLIENT 1...................................................................................................................................5
a. Journal entries.....................................................................................................................5
b. Ledgers account.................................................................................................................7
c. Trial balance.....................................................................................................................15
CLIENT 2.................................................................................................................................15
a. Income statement..............................................................................................................15
b. Balance sheet....................................................................................................................16
CLIENT 3.................................................................................................................................18
a. Profitability statement of Raintree Ltd.............................................................................18
b. Presenting statement of financial position for Raintree Ltd.............................................19
c. Stating prudence and consistency concept of accounting................................................19
d. Evaluating methods of depreciation.................................................................................20
CLIENT 4.................................................................................................................................21
A. Stating the purpose of bank reconciliation statement......................................................21
B. Presenting reasons due to which balance of cash and pass book varies..........................22
C. Bank reconciliation..........................................................................................................22
CLIENT 5.................................................................................................................................24
a. Preparing Henderson’s sales and purchase ledger...........................................................24
1............................................................................................................................................24
2............................................................................................................................................25
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b. Defining control account..................................................................................................25
CLIENT 6.................................................................................................................................26
a. Presenting suspense account and its features...................................................................26
b. Trial balance and usage of control accounts....................................................................27
c. Rectification of accounting entries...................................................................................28
d. Difference between suspense and clearing account.........................................................29
CONCLUSION........................................................................................................................29
REFERENCES.........................................................................................................................30
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INTRODUCTION
Financial accounting field lays high level of emphasis on summarizing, analyzing and
reporting of monetary transactions. Tools and techniques of financial accounting help in
tracking business performance over the period. Now, from sole traders to publicly listed
organizations prepare financial statement for assessing the extent to which their performance
improved over time frame. The present report is based on varied situation which will present
how journal and ledger helps in preparing trial balance and thereby final accounts. Besides
this, report will develop understanding regarding accounting concepts and principles. Further,
report also depicts how bank reconciliation assists business unit in getting information about
monetary aspects. Further, concept of suspense, clearing and control account will also be
described related to FA.
1. Defining financial accounting
In the current times, in UK, it is mandatory for business units listed on stock exchange
prepare and present financial statements at the end of accounting year. Besides this, sole
traders tend to focus on the preparation of income statement to ascertain income generate
over expenses. Hence, by recording all the business transactions business entities prepare
final account which in turn considered as financial accounting. Specifically, there are mainly
three types of statements which are prepared by business organization such as:
 Income statement: In this statement, manager records revenue and expenses related to
financial year. The main motive behind the preparation of such statement to identify
income generated over expenses. Income aspects of profitability statement include
sales revenue, dividend and interest received (Warren and Jones, 2018). On the other
side, expenditures side of income statement includes both direct and indirect.
Material, labour and overhead are recognized as direct expenses. In contrast to this,
selling and distribution, administration etc are depicted as indirect expenses. Hence,
by subtracting expenses from income generated one can determine net margin.
 Balance sheet: Statement of financial position furnishes information about the level
of assets, liability and shareholder’s equity. Hence, by making evaluation of balance
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sheet firm and its stakeholders can assess the extent to which liquidity and solvency
position of company is good.
 Cash flow statement: This statement entails position of cash inflows under three
different categories such as operating, investing and financing activities. By
undertaking such statement, firm can assess its cash position at the end of accounting
period.
Hence, by undertaking accounting concept, principles, rules and regulations al the above
depicted are prepared by business unit.
2. Presenting key regulations which are associated with financial accounting
In UK, majority of the companies prepare financial statements by complying with
rules of GAAP related to such country. In addition to this, there are several companies that
perform activities and functions internationally. Hence, now companies that have global
operations lay focus on undertaking IASB and FRS for recording as well as presenting
business transactions (Larson, Lewis and Spilker, 2017). Hence, by preparing final accounts
on the basis of such globalized rules firm can satisfy information need of stakeholders to a
great extent.
3. Stating concept of accounting rules and principles
 Accounting year concept: On the basis of such concept business unit should prepare
statements for the specific time frame such as quarterly, half yearly and annually.
 Going concern concept: It may be served as a fundamental principle of accounting
which believes that firm will continue its operations for longer time frame (Going
Concern Concept, 2017).
 Accrual concept: In financial accounting, accrual concept presents that expenses and
income needs to be recorded in the concerned period they occur irrespective of cash
aspect. Hence, such approach helps in presenting fair view of financial aspects by
reflecting all expenses associated with revenue with respect to specified time frame.
 Money measurement concept: Such accounting concept presents that only
information which can be presented in monetary form included under final accounts
(Narayanaswamy, 2017). Hence, non-financial information such as customer base,
employee’s capabilities are not considered as part of final accounts due to its
qualitative nature.
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 Dual aspect concept: According to such concept, each business transaction has dual
effect under financial statements in terms of debit and credit. For instance: Sales
worth of £2000 made in against to cash. In this, two accounts will be affected such as
sales (credit) and cash (debit) with related figures.
Assets: Liabilities + owner’s equity
4. Explaining concept and convention of consistency and materiality
 Consistency principle: As per such concept, firm should focus on following similar
rules in each accounting year that leads comparability. Further, such concept relies on
the aspect that firm needs to mention reason behind making changes in specific
method and its impact on financial outcomes (Maynard, 2017).
 Materiality concept: This concept or principle entails that business unit should reflect
all material information in its financial statements and notes that may have an impact
on the decision making aspect of stakeholders.
CLIENT 1
a. Journal entries
Journal of Alex Study’s for the period of 2017 is as follows:
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b. Ledgers account
Day books
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10

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Sales ledger
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13

Nominal Ledgers account
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Real Ledger
JOURNAL ENTRIES
ASSETS debit £ credit £
premises 340000
VAN 51250
FIXTURES 8100
INVESTMENTS 63900
RECEIVABLES:
P MULLEN 1400
F LANE 3100
CASH AT BANK 62400
CASH IN HAND 5600
LIABILITIES
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PAYABLES
S HOOD 2150
J BROWN 4600
CAPITAL( (balancing figure) 529000
535750 535750
c. Trial balance
CLIENT 2
a. Income statement
Particulars
Amount (in
£)
Sales 1215000
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Inventory at the end of accounting
year 101640
1316640
Less:
Beginning stock 82200
Purchase 778800
Wages and salaries 177500
Add: Outstanding W&S 1220 178720
1039720
GP 276920
Less: Indirect expenditure
Motor expenses 87400
Adm. expenses 17650
Heating and lighting 4950
Advertising expenditure 13280
Less: prepaid expenditure 8470 4810
Depreciation (premises) 5400
Depreciation (equipment) 17250
Depreciation (motor vehicle) 2800
Total indirect expenses 140260
Net margin 136660
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b. Balance sheet
Particulars Amount (in £)
Current assets
Ending stock 101640
Prepaid advertising 8470
Trade receivables or debtors 106960
Cash 2440
TCA (Total current assets) 219510
Fixed assets
Freehold premises 270000
Less depreciation 42900 227100
Equipment 172500
Less: Depreciation 114750 57750
Motor Vehicles 28000
Less: Depreciation 16800 11200
TFA (Total fixed assets) 296050
Total assets 515560
Liabilities or obligations
Current liabilities
Trade payables or creditors 76910
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Outstanding salaries 1220
Overdraft 11290
Total current liabilities 89420
Owner’s capital 332120
Add: NP 136660
Less: Drawing 42640 426140
Total liabilities 515560
CLIENT 3
a. Profitability statement of Raintree Ltd
Particulars Amount (in £)
Revenue 107000
Less: Sales return 2000 105000
COGS (Refer working note 1) 31000
GP 74000
Depreciation (land & building) 1000
Depreciation (P&M) 10000
Adm. Expense 28000
Distribution expenses 22000
Less: Prepaid rent 3000
Add: Outstanding salaries 2000 21000
Corporation tax 4000
64000
Net margin 10000
Working note 1:
Particulars Figure (in £)
Closing stock 18000
Opening inventory 17000
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Purchases 32000
Cost of goods sold (op. Stock + purchase – cl. Stock)
b. Presenting statement of financial position for Raintree Ltd
Particulars Amount (in £)
Current assets
Debtors 24000
Prepaid rent 3000
Ending stock 18000
45000
Fixed assets
L&B 60000
Less: Depreciation 8000 52000
P&M 65000
Less: Depreciation @ 20% 25000 40000
92000
Total assets 137000
Liabilities
Current liabilities
Creditors 14000
Outstanding salaries 2000
BO 15000
Corporation tax 4000
Total current liabilities 35000
Owners’ s fund 50000
share premium 20000
Retained earnings 22000
NP 10000
Total shareholders’ equity 102000
Total liabilities 137000
c. Stating prudence and consistency concept of accounting
Consistency concept: Such accounting concept lays more focus on following or
adopting similar accounting method. Consistency concept entails that once business unit has
followed specific method then same needs to be followed in future periods. On the basis of
such concept, firm should make changes in accounting principles only when the same make
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improvement in financial results (Brandau and et.al., 2017). Further, as per such concept,
firm should fully document changing method and its effect in the notes section of financial
statements. Consistency principle of accounting is highly significant which in turn provides
assistance to investors and other users of final accounts in doing comparison of performance.
It ensures the feature or characteristics of financial reporting such as comparability that
makes monetary information more reliable. For instance: If firms uses diminishing value
method for charging depreciation then the same needs to be considered each year. Hence, in
case, if firm moves on another depreciation method then firms should disclose information
regarding this in notes section.
Prudence concept: This concept of accounting believes that aspects of uncertainty
are associated with accounting transactions and other events. In such uncertain environment,
for presenting the fair view of financial aspects business unit or an accountant does not
overestimate the amount of revenue. Along with this, it focuses on the underestimation of
expenses while recording figures in final accounts (Williams, 2014). Hence, according to
prudence concept, business unit should record assets and revenue when they are certain.
Further, when expenses or liability is probable then the same must be recorded in financial
statements.
d. Evaluating methods of depreciation
There are mainly two methods that are usually undertaken by business for calculating
the figure of depreciation such as:
 Straight line method: In accordance with such method similar value of depreciation is
charged every year rather than on remaining assets figure. When rate of depreciation
is not given under such method then following formula considered by an accountant:
Depreciation: Cost of asset - scrap value / life of assets
Further, when rate is given then assessed value of depreciation is considered each year.
For instance: cost of land and building is £150000, whereas rate of depreciation such as 10%
is charged for 10 years period. In accordance with such depreciation method each year
£15000 will be charged as depreciation.
Advantages Disadvantages
 Easy to compute  Such technique is not found to be
effective when firm is making efforts
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 If business entity has an asset with 10
years schedule then straight line
method of depreciation will offer
deduction benefits.
to lowering its taxes (Hoskin, Fizzell
and Cherry, 2014).
 It does not offer clear indication about
the manner in which assets are
depreciating.
 Written down value or diminishing method: On the basis of such method, by
subtracting accumulated depreciation or amortization from the original value of an
asset. This method presents that value of an asset decreases each year by a
predetermined percentage (Macve, 2015). Such method is also known as reducing
method because in this depreciation is charged on the remaining balance or value of
an asset. For instance: Company will charge 10% depreciation on Machinery worth of
£100000 for the period of 3 years. In this, depreciation schedule will be:
Year Assets value (in £) Depreciation (in £)
Assets balances (in
£)
1 100000 10000 90000
2 90000 9000 81000
3 81000 8100 72900
Advantages Disadvantages
 It helps in recognizing risk of
obsolescence because in this major
part of depreciation is charged
during early years.
 WDV facilitates better cash flows
through the means of tax deferral
 Such method does not consider
interest on capital invested in assets.
 Determination of appropriate tax
rate is a complex task because it
requires elaborate book-keeping.
CLIENT 4
A. Stating the purpose of bank reconciliation statement
BRS may be served as report which lays emphasis on reconciling bank balance
according to company’s record with balance mentioned in pass book. On the basis of cited
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case situation, Kendal wishes to get information about the need of preparing BRS on monthly
basis. Hence, the main purposes of preparing BRS are enumerated below:
 BRS is prepared with the motive to ascertain the level of differences which take place
between two sets of records such as cash and pass book. Hence, BRS helps in tracking
cash position and enables business entity to adjust own records (Pratt, 2016). If
business entity will avoid such differences then it may result into high variation
between the actual and assumed cash position.
 BRS also furnishes information about the customers whose checks have bounced. It
also helps in assessing cheques issues were altered or stolen without any knowledge
of owner. In this, by preparing BRS on monthly basis business entity can easily detect
fraudulent activities.
B. Presenting reasons due to which balance of cash and pass book varies
By doing evaluations, it has assessed that there are some reasons due to which balance
of cash and pas book differs:
 In the current times bank provides customers with high level of convenience such as
making payment to insurance company and other creditors. In against to offering such
services banking unit charges some fees with which sometimes owner is unaware.
Hence, it is recognized as one of the main causes due to which variations take place in
cash and passbook.
 Further, sometimes debtors directly deposit due amount in the bank account of firm
without giving prior information (Warren and Jones, 2018). It is recognized as another
major cause of variations in the balances of such two different books.
 Check dishonour is also considered as cause of variances identified in cash and pass
book. The rationale behind this, sometimes check deposited by other entities, such as
debtors, is rejected by banks on the identification of insufficient amount.
C. Bank reconciliation statement and updated cash book
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Updated cash book
Dates Receipts Figures (in
£)
Dates Payments Figures (in
£)
31st December
2017
To Balance b/d 19973 31st
December
2017
Error
adjusted
1
Error adjusted 9 Bank
charges
47
Standing
order
137
Direct debit 297
Balance c/d 19500
19982 19982
1st January
2018
To Balance b/d 19500
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CLIENT 5
a. Preparing Henderson’s sales and purchase ledger
1.
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2.
b. Defining control account
Control account is one of the main parts of general ledger that reflects balances of
subsidiary ledgers such as trade receivables and payables. Through creating such account
accuracy of monetary transaction recorded in subsidiary ledgers can easily be evaluated or
cross checked. In addition to this, control account is highly beneficial for large sized
organization which in turn assists it in measuring the accuracy of subsidiary edger accounts
(Control account, 2017). Moreover, small sized firms maintain record in general ledger
account because they do not have wide transactions. Due to this, small sized firms do not
prepare subsidiary ledgers and related control account.
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CLIENT 6
a. Presenting suspense account and its features
Under financial accounting, suspense account refers to the one in which errors are
recorded temporarily. It is used because at the time of recording transaction proper account is
not determined. On the identification of related account, figure of suspense account is
transferred into the same. In other words, it can be depicted that in suspense account,
unclassified debit and credit of firm is recorded (Suspense account, 2018). Hence, such
account helps in recording monetary transaction regarding enough information is not
available. In this way, by adjusting balances firm can prepare final accounts.
Features and significance of suspense account
 It provides high level of assistance to business unit in assessing errors take place in
the recording of accounting transactions.
 Suspense account helps in matching balance and thereby assists in preparing further
statements such as profitability, cash flow and balance sheet.
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b. Trial balance and usage of control accounts
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c. Rectification of accounting entries
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d. Difference between suspense and clearing account
There are some aspects, which in turn differentiate suspense account from clearing
such as follows:
 Suspense account is created for adjusting difference that take place in either debit or
credit side under trail balance. On the other side, clearing account contains
information on temporary basis until its permanent account is not assessed.
 Further, suspense account is prepared with the motive to balance accounting error
detected in trial balance. In contrast to this, clearing account is created with an
objective to transfer balance in permanent accounts.
 Along with this, suspense account reflects probable error in accounts, whereas
clearing account does not exhibit error in final accounts.
CONCLUSION
From the above report, it has been concluded that journal and ledgers are the main
sources that assists in preparing trial as well as evaluating the accuracy of transactions
recorded. Along with this, it can be summarized from the report that accounting concepts as
well as principles like consistency and prudence helps in presenting fair view of performance
in front of stakeholders. It can be seen in the report, by preparing BRS owner of the firm can
identify actual cash position over estimation. Further, it can be stated that diminishing
method of depreciation is highly appropriate over others as per AASB & IFRS. It can be
inferred from evaluation that significant difference takes place between clearing and suspense
account.
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REFERENCES
Books and Journals
Brandau, M., Endenich, C., Luther, R. and Trapp, R., 2017. Separation–integration–and
now…? A historical perspective on the relationship between German management
accounting and financial accounting. Accounting History. 22(1). pp.67-91.
Hoskin, R. E., Fizzell, M. R. and Cherry, D. C., 2014. Financial Accounting: a user
perspective. Wiley Global Education.
Larson, M. P., Lewis, T. K. and Spilker, B. C., 2017. A Case Integrating Financial and Tax
Accounting Using the Balance Sheet Approach to Account for Income Taxes. Issues in
Accounting Education. 32(4). pp.41-49.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning
Pvt. Ltd..
Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.
Warren, C. S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.
Online
Control account. 2017. [Online]. Available through:
<https://www.accountingcoach.com/blog/accounts-receivable-control-account-subsidiary-
ledger>.
Going Concern Concept. 2017. [Online]. Available through:
<https://www.myaccountingcourse.com/accounting-principles/going-concern-concept>.
Suspense account. 2018. [Online]. Available through:
<https://www.accountingcoach.com/blog/suspense-account>.
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