Importance of Accounting Standards for Organisations

The assignment highlights the significance of following accounting standards for an organisation's effective recording of financial transactions. It emphasizes the preparation of accurate annual reports, including balance sheets, income statements, and cash flow statements. The document also touches on the importance of value-added tax (VAT) and its role in taxation. Additionally, it explores the concept of financial statement comparability and its implications for organisations.

Introduction to
Financial Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1) Accounting records & financial statements for Conga............................................................1
2) Prudence concept and accruals (matching) concept..............................................................10
3) Value Added Tax ..................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES .............................................................................................................................13

INTRODUCTION
For an organisation it is important to make financial accounts in each financial year. It is
the process of recording, summarizing & reporting the financial transactions of the business
which are related to a specific period of time. It involves income statement, cash flow, financial
position of accounts and financial statements. To better understand this concept Conga has been
selected which is a sole trader toy retailer of UK. In this report, there are following topics are
covered such as: to prepare the accounting records & financial statements, trail balance concepts
of prudence and accruals & its applications in the company. Apart from this it also discuss about
the Value Added Tax to the sales.
MAIN BODY
1) Accounting records & financial statements for Conga
Accounting records are beneficial to record the financial records in the books of accounts
of company. An accountant is responsible to manage the accounts and record the activities. For
Conga, it is necessary to prepare the financial statements over a specific period of time. It
provides the financial information in context to the corporation. Financial statements are the
reports which are made by management of firm. It includes income statements, balance sheet,
cash flow & statement of owner's equity (Sunder, 2016). Outsiders such as: customers,
shareholders, creditors, investors get information from the financial statements and take
important decisions associated to the investment. It is require to be prepare in structured manner
for the purpose to provide true and fair information related to the financial position of
corporation. As the financial statements of Conga, provide the appropriate information about the
wealth and current position of organisation. On the basis of this management can take important
decisions for the future expansion of business so that it can maximize its market share and
increase the profits. So it is necessary for the corporation to prepare accounting records and
financial statements (Wang, 2014).
Income statement: It shows the financial results of a firm related to a specific period of
time. This statement shows the income which is generated by the organisation from its business.
It is also known as statement of earning and basically 3 financial statements used to assess a
corporation performance which involves cash flow statement, balance sheet and income
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statement. Conga use this statement to record expenditure and income, which is earned by
organisation, related to a specific period.
Balance sheet: This specific statement shows the financial position of organisation that
states liabilities, owner's equity, and assets over a particular period. It is helpful to analyse the net
worth of Conga.
Trial balance: In this statement the balance of all ledgers are compiled into credit &
debit column totals are equal. It can be prepare periodically, normally at the end of the reporting
period. The main purpose is to sure that entries in bookkeeping system are mathematically
appropriate (Shi and Goo, 2014).
Journal entries in the books of Conga
S.NO. PARTICULARS DEBIT CREDIT
1 Purchase a/c 900
To Roman account 900
2 Purchase a/c 2200
To Dean account 2200
3 Purchase a/c 1000
To Seth account 1000
4 Purchase a/c 7200
To Nick account 7200
5 Purchase a/c 2700
To Ziegler account 2700
6 Rent a/c 2300
Cash account 2300
7 Electricity a/c 2000
Cash account 2000
8 Wages a/c 3600
Cash account 3600
9 Roman a/c 2000
To Return outwards a/c 2000
10 Dean a/c 3200
To Return outwards a/c 3200
11 Accounts payable
a/c 2200
To cash account 2200
12 Accounts payable
a/c 900
2

To cash account 900
13 Arron a/c 1200
To sales a/c 1200
14 Ross a/c 1300
To sales a/c 1300
15 David a/c 5000
to sales a/c 5000
16 Maxwell a/c 4000
to sales a/c 4000
17 Robin a/c 2200
to sales a/c 2200
18 Cash a/c 3100
To sales a/c 3100
19 Cash a/c 4000
To sales a/c 4000
20 Cash a/c 1400
To sales a/c 1400
21 Return inward a/c 2200
To Arron a/c 2200
22 Return inward a/c 2300
To Ross a/c 2300
23 Cash a/c 2200
To account receivables
a/c 2200
24 Cash a/c 1800
To account receivables
a/c 1800
25 Cash a/c 2800
Discount allowed
a/c 200
To Arron a/c 3000
26 John a/c 3000
To discount received
a/c 500
To cash a/c 2500
27 Cash a/c 2000
To capital a/c 2000
28 loan a/c 7200
interest a/c 400
To bank a/c 7600
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29 Wages a/c 220
To wages payable a/c 220
30 Depreciation a/c 2200
To accumulated dep.
A/c 2200
31 Bad debts a/c 200
To allowance for
doubtful debts a/c 200
Ledger in the books of Conga
Journal ledger
Date
PARTICUL
ARS Dr date particulars Cr
Purchase account
2018 2018
01/12/0
1 To Roman a/c 900 By balance c/d 14000
02/12/0
1 To Dean a/c 2200
03/12/0
1 To Seth a/c 1000
04/12/0
1 To Nick a/c 7200
05/12/0
1 To Ziegler a/c 2700
14000 14000
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Sales account
2018 2018
To balance
c/d 22200 01/12/02 By Arron a/c 1200
02/12/02 By Ross a/c 1300
03/12/02 By David a/c 5000
04/12/02
By Maxwell
a/c 4000
05/12/02 By Robin a/c 2200
06/12/02 By cash a/c 3100
07/12/02 By cash a/c 4000
08/12/02 By cash a/c 1400
22200 22200
Cash a/c
To sales 3100 By rent 2300
To sales 4000 By electricity 2000
To sales 1400 By wages 3600
To a/c
receivables 2200 By a/c payables 2200
To a/c
receivables 1800 By a/c payables 900
To Arron a/c 1200 By John a/c 3000
To capital 2000
By balance c/d 1700
15700 15700
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Return outwards a/c
To balance c/d 3100 By Roman a/c 900
By Dean a/c 2200
3100 3100
Return inwards a/c
To Arron a/c 1200 By balance c/d 2500
To Ross a/c 1300
2500 2500
Rent a/c
To cash a/c 2300 By balance c/d 2300
Electricity a/c
By balance c/d 2000
To cash a/c 2000
Wages a/c
To cash a/c 3600 By balance c/d 3820
To wages payables
a/c 220
Discount allowed a/c
To Arron a/c 1200 By balance c/d 1200
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Sunder, S., 2016. Discount received a/c
By balance c/d 3000 To John a/c 3000
Capital a/c
To balance c/d 2000 By a/c payables 2000
Depreciation a/c
To accumulated
dep 2200 By balance c/d 2200
Bad debts a/c
To allowance for
bad debts 200 By balance c/d 200
Account receivables
To balance c/d By cash a/c 2200
By cash a/c 1800
Account payables
To cash a/c 2200
To cash a/c 900 By balance c/d
Purchase book
Date Customer Invoice no Amount
01/12/01 Roman 900
02/12/01 Dean 2200
7

03/12/01 Seth 1000
04/12/01 Nick 7200
05/12/01 Ziegler 2700
14000
8

Sales book
Date Customer Invoice no Amount
01/12/01 Arron 1200
02/12/01 Ross 1300
03/12/01 David 5000
04/12/01 Maxwell 4000
05/12/01 Robin 2200
13700
Return out wards book
Date customer Invoice no Amount
01/12/01 Roman 900
02/12/01 Dean 2200
3100
Return inwards book
Date Customer Invoice no Amount
01/12/01 Arron 1200
02/12/01 Ross 1300
2500
In the books of Conga
Trial Balance
S no. Ledger a/c Dr Cr
1 Capital a/c 2000
2 Purchase a/c 14000
3 Sales a/c 22200
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4 Cash a/c 15700
5 Return inward a/c 2500
6 Return outwards a/c 3100
7 Rent a/c 2300
8 Wages a/c 3820
9 Electricity a/c 2000
10 Discount allowed a/c 1200
11 Discount received a/c 3000
12 Depreciation a/c 2200
13 Dad debts a/c 200
14 Accounts receivables 4000
15 Accounts payable a/c 3100
Suspense a/c 12320
Total 46820 46820
Profit and loss account
PARTICULARS AMOUNT
I revenue from operations:
sales a/c 249000
ii other incomes
iii total revenue (i+ii) 249000
iv expenses:
cost of material used
depreciation 50000
puchase of stock in trade 60000
rent a/c 25000
electricity a/c 22000
wages a/c 45000
total exp. 202000
v profit before exceptional
and extra ordinary items(iii-iv) 47000
vi exceptional items
vii
profit before extra ordinary
items 47000
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viii extra ordinary items
ix profit before tax 47000
2) Prudence concept and accruals (matching) concept
In the accounts there are various concepts which are needed to be follow so that
transactions can be recorded effectively in the books of accounts (Sharma and Panigrahi, 2013).
It is the duty of accountant to follow the prudence and accrual concept by preparing annual
reports for the year. Concepts are mention below:
Prudence concept: This concept is also known as conservation principle of accounting
which ensure that income & assets does not exaggerated & provision is made for all known
expenditures & losses. It denotes that do not evaluate profits but provide for all possible losses.
This concept focuses that accountants are cautions persons. Effective professional command is
require while making financial statements. It also emphasis to analyse the stock at minimum
cost. As per this concept, accountant have needed to chose one, out of the realizable accounting
treatments which reflects less encouraging financial results for the firm. So it is important for the
accountant of Conga to record the revenues only when it is actually realise. While preparing the
annual report it is necessary for the organisation to consider revenues only when they are
assured. GAAP (Generally Accepted Accounting Principle) incorporates this concept in various
accounting standards and its needed that write down fixed assets when their fair values goes
down from the book values. It does not allow to write up fixed assets when the reverse occurs.
Where as IFRS allow upward revaluation of fixed assets & does not adhere quite so strictly to
this concept. Prudence concept is helpful to provide effective judgement while evaluating how &
when to record the transactions of accounting (Glover, 2014).
Accrual concept: As per this concept expenses & revenues are recorded in the books of
accounts when they are earned and not in the case when they are actually paid in cash. According
to this, the revenues are recorded in the accounting period in which they occurs rather than it has
received. The expenditures are needed to be recognized in accounting period in which they
occurred. This concept suggest that expenditures are required to be match with revenue which
has earned in an accounting period. It is almost same as matching principle. The management of
Conga use this concept while preparing annual reports and it can record the transactions when
they occur irrespective of whether a cash transfer has made. It suggest that financial reports
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shows the transactions at that point when they actually occur and not in that case when cash
changes. This concept is very important because it provides clear idea about what is going in the
business. If a firm has follow this concept than it is helpful for the readers to get information
from the financial statements related to the past and future activities associated to the business.
The entries in which adjustment is needed such as: accrued income, prepaid expenditures are
treated as per this concept and it influence financial statements like balance sheet and P&L
account of the company. Generally Accepted Accounting Principle provide the guideline that
financial statements are needed to be prepare on accrual basis. In the end of accounting year,
corporation pass adjusting journal entries to recognize the accruals as an instance accruals of
interest expenses, adjustment of prepayments etc. So these two concepts can be used by Conga
while preparing its annual reports in context to the accounting year (Bushman, 2014).
3) Value Added Tax
Value Added Tax is type of direct tax which is levied by the government of country and
it is based on the increase in value of a product or service at each stage of production as well as
distribution. It can be calculated by two methods such as: invoice based method & accounts
based method (Value Added Tax. 2018). By using credit invoice method, sales transaction are
taxed, with the consumer informed in context to value added tax on the transaction and
organisation can get credit for it which is paid on inputs material & services. This is highly
employed method and applied by all countries except Japan. Accounts based method has been
used in at the end of reporting period. The corporation calculates the amount of taxable sales
then subtracts sum of all taxable purchase & in the difference has been applied in the rate of
VAT. This method is currently used by Japan. In the world approx 160 nations are using value
added tax and it is famous in European nations. There are different rates of VAT such as: there
are standard rate is applicable which is 20 percent. The reduced rate which is 5 % and it is
applicable on energy saving measures, sanitary products & children's car seat. There are some
products on which zero tax rate is applicable such as: newspaper, books, food and clothes of
children's. Where as there are some items which are totally exempt form the tax and it involves
property transactions, postage stamp etc. In United Kingdom this tax rate has introduced in the
year 1973 by replacing purchase tax. In accounting records and reports Conga can record VAT in
those items which are purchased by it and add value for the purpose of final sale. It means this is
levied on incremental value of the products and services. An organisation who has register it self
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to pay VAT with a turnover of more than £85,000 is liable to pay it. Those companies are falling
in this category they are liable to pay tax. But those corporations whose turnover is not more
than £85,000 are can also be register in VAT but there are no need to pay tax.
For the government, Value added tax is the source of income and the funds which are
generated form it, can be use for the development and growth of country. So, Conga have to pay
VAT if it purchase an item and add some value in it so that products of company can be sale to
the consumers (Bevis, 2013).
CONCLUSION
As from the above report, it has been concluded that for an organisation it is important to
follow the standards of accounting so that financial transactions can be recorded effectively in
the books of accounts. Accounting records and financial statements are needed to be prepare as
per the requirement and it involves balance sheet, income statement, cash flow etc. It is helpful
to analyse financial position of the firm and on the basis of it important decisions can be taken
regrading investment and business expansion. The concepts of prudence and accruals are
required to be identified while preparing annual reports. Value added tax is imposed by the
government and it is a form of indirect tax.
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REFERENCES
Books and Journals
Bevis, H. W., 2013. Corporate Financial Reporting in a Competitive Economy (RLE
Accounting). Routledge.
Bushman, R. M., 2014. Thoughts on financial accounting and the banking industry. Journal of
Accounting and Economics. 58(2-3). pp.384-395.
Glover, J., 2014. Have academic accountants and financial accounting standard setters traded
places?. Accounting, Economics and Law Account. Econ. Law. 4(1). pp.17-26.
Liu, C., Yao, L. J. and Yao, M. Y., 2012. Value relevance change under international accounting
standards: an Empirical Study of Peru. Review of Pacific Basin Financial Markets and
Policies. 15(02). p.1150008.
Mancini, D., Vaassen, E. H. and Dameri, R. P., 2013. Accounting information systems for
decision making.
Modell, S., 2014. The societal relevance of management accounting: an introduction to the
special issue. Accounting and Business Research. 44(2). pp.83-103.
Sharma, A. and Panigrahi, P.K., 2013. A review of financial accounting fraud detection based on
data mining techniques. arXiv preprint arXiv:1309.3944.
Shi, L., Zhang, H. and Guo, J., 2014. International Accounting.
Socea, A. D., 2012. Managerial decision-making and financial accounting information. Procedia-
Social and Behavioral Sciences. 58, pp.47-55.
Sunder, S., 2016. Rethinking financial reporting: Standards, norms and institutions. Foundations
and Trends® in Accounting. 11(1–2). pp.1-118.
Wang, C., 2014. Accounting standards harmonization and financial statement comparability:
Evidence from transnational information transfer. Journal of Accounting Research.
52(4). pp.955-992.
Weil, R. L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Online
Value Added Tax. 2018. [Online]. Available Through:
<https://www.gov.uk/vat-rates>
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