Financial Accounting of sole trader and the limited companies

Financial Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
a. Explaining the meaning and the purpose of financial accounting...........................................2
Difference in between financial accounting and management accounting ................................3
b. Two internal stakeholder and four external stakeholders important in the organisation. ......4
Client 1.............................................................................................................................................6
I. Recording and classification of the journal entries..................................................................6
........................................................................................................................................................11
........................................................................................................................................................12
ii. Preparation of the trial balance.............................................................................................15
Client 2...........................................................................................................................................16
a. Preparation of the income statement.....................................................................................16
b. Statement of balance sheet....................................................................................................17
c. Explaining the consistency and the prudence concept..........................................................18
d. Describing purpose of the depreciation and its methods .....................................................18
e. Evaluating the difference in between the financial statements of the sole trader and the
limited companies.....................................................................................................................19
Client 3...........................................................................................................................................19
a. Explaining the meaning and the purpose of the bank reconciliation statement ...................19
b. Listing down the areas where bank records can vary from the cash statement....................20
c. Explaining the imprest under the system of petty cash.........................................................20
d. Preparation of bank reconciliation statement........................................................................21
Client 4...........................................................................................................................................22
a. Preparing sales and the purchase ledger account..................................................................22
...................................................................................................................................................22
b. Explaining the meaning of the control account.....................................................................22
Client 5...........................................................................................................................................23
a. Explaining the meaning of suspense account and its features...............................................23
b. Drafting a trial balance .........................................................................................................23

c. Rectification of errors ...........................................................................................................24
CONCLUSION..............................................................................................................................24
REFERENCES..............................................................................................................................25

INTRODUCTION
FA is a process which is used by company to keep a day to day record of company financial
activities. In this transaction are recorded, summarized and stipulated to examined the stability of
the company and also enhances the position to take risk in the business for some new projects
(Schaltegger and Burritt, 2017). The main purpose to prepared financial accounting is that to
helps company to take effective decision and also prepare the financial report which is to be
presented at the time when it is demanded by the stakeholders. Usually the financial statement
reflect the income and expenditure of an enterprise to maintain the b/s of the company in
summarized way. To prepared the financial accounting proper department is established to
analyse their financial transaction and also prepare their financial report and present them in
effective manner.
This report will incudes the meaning of FA and analysis of all the stakeholders within
the company. It includes the formulation of final accounts in respect of proprietors, partnership
and the limited liability organizations in context of its various principles, convention and
standards. It further includes the descriptive of bank reconciliation statement which ensure the
company and bank records. The report concludes with the matter to reconcile accounts which is
to be shifted in recorded transaction to establish the right accounts in the company.
1

Financial accounting
It is the main branch categorised as of accounting in which, financial accounting assists
traces the financial transactions of a company. There are standard guidelines which are used in
recording, presenting and summarizing in a financial report which includes balance sheet or
income statements (Männasoo, Maripuu and Hazak, 2018). This accounting serves for interest of
stakeholders, owners, creditors, etc. Companies generally issue financial statements on a daily
basis for providing regular data and other related information to the interested people.
The standard format of financial accounting relates to double entry book keeping in
which the transaction are recorded under credit and debit side. Along with it, the accrual basis of
account concept is followed under financial accounting. This concept represents that the revenue
are recorded only when it has earned even amount is not received. The financial accounting
reports is prepared under the guidelines of GAAP. The financial reports comprise income
statements, cash flow & retained earning statements. These statements are framed under GAAP
and IFRS guidelines.
a. Explaining the meaning and the purpose of financial accounting
Purpose of financial accounting
Provide information to interested individuals - The main purpose for which financial
accounting is prepared under business is to gather financial report and offer important and
relevant information about the action taken by the firm to parties like creditors, taxation
authority, investors, etc. Also, these reports of financial accounting is helpful to ascertain cash
flows within a business (Persson, Radcliffe, and Stein, 2018.). The reports are prepared for the
purpose of providing guidelines for future investment for reaching to decision making and
increase the profitability of a business organisation.
Determining cash flows for future investments - It is the main purpose of financial
accounting for assisting the detail of cash flows under which cash inflows and cash outflows are
determined. Every statements of financial accounting is different from each other and contain
different information as well in relation to business operations. The purpose satisfies by
developing financial reports for the use of critical business decisions by owners or stock holders
of a company.
Act as an evidence in case of dispute - It is also prepared for the purpose for the use of
an evidence in which these records are taken as legal evidence in case of any dispute arises in the

company (Coyne, Coyne and Walker, 2018). Along with it, this also lay an appropriate financial
information which can facilitate company to avail facility of credit from lenders as good
financial records create goodwill of the company among creditors.
Profit comparison for determining actual position - At last, the financial statements are
developed for the purpose of comparison of profit which are well analysed by the maintained
records of current year with the previous year. This company is able to measure their
performance from the past year statements with that of current year statements. Theses figures
enables the company in ascertaining their positions.
Difference in between financial accounting and management accounting
Financial accounting Management accounting
It refers to the accounting system that
emphasize on the formulation of the financial
statements in order to provide the financial
information to the users or the interested
parties.
It means the accounting system that provides
the relevant information to mangers in making
the policies, procedures and in developing the
strategies for the purpose of running the
business effectively and efficiently (Difference
Between Financial Accounting and
Management Accounting, 2019).
Financial accounting provides for only the
monetary information and does not accounts
for the non-monetary information.
It facilitates both monetary as well as the non-
monetary information.
It is compulsory for all the organization. It is not compulsory for each and every
organization to opt for management
accounting.
The main objective of the financial accounting
is to facilitate the financial information to the
outsiders.
The primary objective of MA to help the
management within the organization in respect
of planning and making suitable decisions by
facilitating the information on the several

matters.
Format of the financial accounting is been
specified by the appropriate authorities that is
IFRS and GAAP.
There is no any specified format under the
management accounting.
Under financial accounting, the financial
reports are been framed at year end of an
accounting period that is one year.
Under the MA, reports relating to the
management are been prepared according to
the requirements of an enterprise.
Main users of the FA are the internal and an
external users such as investors, creditors,
mangers, employees, government etc.
Internal management is considered as the main
user under the management accounting.
Financial accounting summarizes the reports
by stating the financial position of an entity.
However, management accounting provides for
the complete and the detailed report in relation
to the various information.
The final reports under the financial
accounting needed to be published and requires
the auditing by the statutory auditors.
The management reports formulated under the
management accounting neither required to be
published nor needed to be audited by the
statutory auditors.
b. Two internal stakeholder and four external stakeholders important in the organisation.
Internal stakeholders refers to such person who manages the company internal affairs are
also responsible to carry various activities (Pijper, 2016). External stakeholders are important ass
due to their inspection in company it reflects the stability of the company and also they manage
the company affairs effectively.
Internal stakeholders Employees - They Handel the internal working
of the company and also enhanced the stability
in the market at large scale (Duff, 2018). They
are important as due to their dedication and
work experiences they increase the sale in the
company.

Managers – They are the persons who
manages the overall activity of an entity and
also handle employees and assigned them day
to day actively which is to be completed within
the stipulated time. The manager's role are
important in internal management of the
company.
External stakeholders Consumers- They purchase goods from the
company. Thus, if the company position is
stable, they can attract more consumers
towards their business (Clatworthy and Peel,
2016).
Investors - They are also major stakeholders in
the company as they invest money in the
project to get good return. They can also verify
build trust in the company and can also
demand their financial report. So to maintain
the reputation in the market company had to
present the appropriate report so that there is
continuous cash flow in the company.
Government - Government imposed taxes to
company regarding their transaction and also
their dealing in goods from import to export
(Ullah and et.al., 2018). Thus, government also
sometimes invests money in the company and
they can examine the financial report of the
company at any time. Thus, it is the duty of the
company to keep an up-to-date report so that it
can be presentable at any time.
Supplier - these are those persons who

supplies goods to the company and also they
are important. As company manage their
transaction by viewing the supply of raw
material and resources in the company. Thus,
supplier provides finished goods to company at
bargain rates if company had good terms with
them (Weetman, 2019).
Client 1
I. Recording of the journal entries
Journal entries in the books of Alexandra for January 2019 are as follows
Date particulars Debit Credit
1st jan 2019 Storage exp.A/c Dr 450
To bank A/c
2nd jan 2019 Purchase A/c Dr 6080
To S. hood A/c 1450
To D main A/c 2060
To W Tone A/c 960
To R foot A/c 1610
3rd jan 2019 J Wilson A/c Dr 1200
T . Cole A/c dr 1650
F. Syme A/c Dr 2100
J . Allen A/c Dr 1020
P. white A/c Dr F. Lane A/c Dr 2520
F. lane A/c Dr 980
To sales A/c 9470
4th jan 2019 Motor Exp. A/c Dr 470

To cash A/c 470
7th jan 2019 Drawing A/c Dr 1500
To cash A/c 1500
9th jan 2019 T. cole A/c Dr 680
J. Fox A/c Dr 1310
To sales A/c 1990
11th jan 2019 Sales return A/c Dr 680
To J. wilson 270
F.syme 410
16th jan 2019 Cash A/c Dr 7020
To P. Mullen A/c 1400
To F. Lane A/c 3100
To J. Wilson 850
To F. Shyme 1670
19th jan 2019 R. foot A/c Dr 50
To Purchase return A/c 50
22st 2019 Purchase A/c Dr 3740
To L.Mole A/C 1830
To W. Wright 1910
24th jan 2019 S. Hood A/c DR 3600
J. Brown A/c Dr 4600
R. Foot A/c Dr 1400
To Bank A/c 9600

27th jan 2019 Salary A/c Dr 4800
To bank A/c 4800
30th jan 2019 Business rates A/c Dr 1320
To bank A/c 1320

ii. Preparation of the trial balance
Trial balance for the month ended on 31st January 2019
Particular Debit Amount (in £) Credit Amount (in £)
S. Hood 10000
J. Brown 12000
D. Main 2060
R. foot 160
W. Tone 960
L. Mole 1830
W. Wright 1910
J whilson 80
F. syme 20
T.cole 2330
J. Allen 1020
P white 2520
F.lane 3980
J.fox 1310
P.mullen 3000
Sales revenue 11460
Purchase 9820
Return outward 50
Return inward 680

Cost of storage 450
Motor expense 470
salary 4800
drawings 1500
Rates of business 1320
capital 389000
premise 240000
van 51250
Fixtures 8100
inventory 23900
Cash 13630
Cash at bank 59250
Total 429430 429430
Client 2
a. Preparation of the P&L Account
Income statement of the Munteanu Limited for the year ended 31st December 2018
Particulars Amount (in £)
Amount (in
£) Amount (in £)
Sales 138000
Less: sales return 3000 135000
COGS (W.N.1) 54500
GP 80500
Depreciation on the land & building 800

Depreciation on the plant & machinery 8000
Administrative Expenses 30000
Distribution expenses 35000
Less: Prepaid rent -3000
Add: OS 2000
Finance Cost 1500 74300
Corporation tax 2000
Total 76300
Net profit 4200
COGS (working.note. 1)
Particulars Amount (in £)
Opening Inventory 15000
+Purchases 61000
-Closing Inventory -20000
-purchase return -1500
54500
b. Statement of the balance sheet
Balance sheet of the Munteanu Limited for the year ended 31st December 2018
Particulars Amount (in £)
Amount (in
£) Amount (in £)
Current assets
bills receivable 26000
Prepaid rent 3000
Closing stock 20000

49000
FA:
Land & Building 60000
Less: Accumulated Depreciation on L&B 10800 49200
Plant & Machinery 60000
Less: Depreciation @ 20% 28000 32000
81200
Total assets 130200
Liabilities
CL
bills payable 22000
OS 2000
Bank overdraft 18000
Corporation tax 2000
Total current liabilities 44000
Shareholders fund 40000
share premium 20000
Retained earnings 22000
Net profit 4200
Total owners equity 86200
Total liabilities 130200
c. Meaning of consistency and the prudence concept
Consistency- It refers to the accounting convention which indicates that once the
company adopted the accounting method or the concept is required to follow the same in the
future accounting periods on a consistent basis (Keune, Keune and Quick, 2017). This means
that the methods, procedures and the principles that are once adopted by the enterprise cannot

change in the future. It could change the accounting principle only in case of the introduction of
the new version which results in the improvement of the financial results. The information in
relation to the change is to be involved in the financial reports or the documentation. For
example- An organization is using FIFO method in making valuation of its inventory and in
identifying the COGS. However, because of the increasing material cost, it has concluded that
the LIFO will be considered as the better indicator as it states true profitability (Xu and Doupnik,
2016). Thus, it can change the method by making the appropriate disclosure relating to the break
in the consistency.
Prudence- An accounting principle which says that do not estimate for the sum of
revenues but provide for all the possible losses. In other words it means not overestimating the
recognized revenue amounts or underestimating amount of the expenses. It means that recording
the revenue transaction and the asset at the time it gets certain, however, entering transaction
relating to expense or the liability at the time it gets probable. For example- Provision of bad
debts, recording the inventory at its realizable value rather than on the expected sales price.
d. Describing the objectives of the depreciation and its techniques
Depreciation refers to the decline in value of fixed asset because of any obsolescence or
tear over4 the useful its useful life. It referred as the accounting method in allocating tangible
asset cost entire useful life span of an asset and is been used to account for the decline in value.
The objective of depreciation is achieving the matching principle of accounting that is an entity
charges the depreciation in order to match with historical cost of an productive asset with that of
the earning revenues with the use of that asset (Bailey and Sawers, 2018). Mainly the two
methods which is been utilise by an organization for computing the depreciation that are straight
line method and the written down value method.
SLM- It refers to the method of depreciation which is utilized for recognizing carrying of
the fixed asset over the asset life. This method is applied where there does not present any
specific pattern in a way the asset could be utilized (Küpper and Pedell, 2016). It is the highly
recommended method as it is counted as the easiest method in calculating the depreciation
amount with very less errors.
Written down value method- It is also known as reducing value method which is used in
determining the worth of previously purchased asset and is bee computed by reducing the
accumulated depreciation from the real value of an asset.

e. Evaluating the difference in between the financial statements of the sole trader and the limited
companies.
Sole trader Limited company
Owner's equity under sole trader contains only
single item which is an sole trader's equity
account.
However, the shareholders fund of the limited
company includes share capital, retained
earnings, other revenue, capital reserves etc.
Taxes are deducted from the owner's income
and the sole trader.
The tax is been imposed as it is considered as
the separate legal enterprise.
Sole proprietor is not been subjected to any of
the accounting standards or the GAAP, then
the owner could decide whether the financial
statement required to prepare or not (Del
Giudice, Manganelli and De Paola, 2016). The
decision regarding the form of financial reports
also depends upon an owner.
Limited company require to follow all the
appropriate accounting concepts, rules,
principles and the regulatory framework as
provided by IFRS and GAAP.
The financial statements of the sole trader are
not subjected to any audit.
It is compulsory for the limited company to get
auditing of its financial statements from the
statutory auditor in compliance with the
concepts and the regulatory guidelines.
Client 3
a. Explaining the meaning and the objectives of bank reconciliation statement
BRS is a document which represents the summary of the bank records and activities of
business as it reconciles bank account of an enterprise with its financial records. It is a statement
that highlights the deposits, other activities and the withdrawals that impacts bank account for
the specific period (Sunarya, Nurhaeni and Haris, 2017). This statement is useful for the
company in exercising internal control so that fraud is any could be detected. The main purpose
of BRS statement is to compare records of bank with the cash statement and if there any
differences occurs could be resolved with the preparation of this statement. It helps in verifying
integrity of the data in between the bank records and financial records of the company.

b. Listing down the areas where bank records can vary from the cash statement
Unpresented cheques- When the cheque is been issued by enterprise for making the payment, it
is been entered towards the credit side of the bank column but if the person who received the
cheque has not presented the cheque on that date then this results in the variation in between the
bank and the cash records.
Unrealized cheques- the cheques that are been deposited by firm is been immediately debited
and balance of their bank statement increases however the bank credits the account of the firm at
the time when the cheques are realized (Ahmed, 2016). This causes the difference till the
cheques get cleared.
Dishonour of the cheques- An enterprise credited its account at the time when it deposits the
cheque within bank. On the other hand, if the information relating to the dishonour of the cheque
is been received later to company (Abuhamdeh,Csikszentmihalyi and Jalal, 2015). This leads to
the difference till it is been debited back into the account.
Errors in entering the transaction- when recording the transactions in cash book, an entity may
make errors such as missing the sales entry, wrong balancing. This results to the differences in
between the cash and bank balance.
c. Meaning of imprest under the system of petty cash
Imprest system refers to the system of accounting which is been designed in tracing the
ways in which the cash is been spend. It is the method that accounts for the petty cash through
maintaining the balance into a fund which equates the receipts of the petty cash with the
additional cash into the fund (Jeppson, Ruddy and Salerno, 2016). It is important for every
organization to maintain the imprest system as it helps in managing the spending of the cash in
order to protect money from getting stolen. It is the accounting control system that protect the
organization from facing theft or the misuse of funds.
d. Preparation of bank reconciliation statement

Client 4
a. Preparing sales and the purchase ledger account
b. Describing the meaning of the control account
It is also known as controlling account which is considered as the general ledger accounts
results in summarizing the and combination of the other subsidiary accounts for spcific type. In
other words, it is called as the summary accounts which is equals to the sum of the subsidiary
accounts and is been used for simplifying and organizing general ledger (Hoffman and et.al.,
2018). This account classifies all the financial transaction under one head so that the balances of
each account could be assessed clearly.

Client 5
a. Explaining the meaning of suspense account and its characteristics
Suspense account means the ledger accounts within which the amounts are been
temporarily recorded. This account is been used as the balances of the general ledger accounts
does not determines the recording of the transactions appropriately (Vohs and et.al., 2018). It is
that section of an entity's book which records the unclassified debits and the credits.
b. trial balance
c. ROE

CONCLUSION
The above study concludes that FA plays critical role in reporting the financial health in
terms of analysing the profitability and the position of an organization. It enables the internal and
the external parties in making the best possible decisions regarding their investment or for
checking out the compliance of the accounting concepts and the principles are been made or not.
It also enables the management in developing the effective strategies which in turn helps the
organization in attaining the competitive position throughout the market.

REFERENCES
Books and Journals