Financial Accounting Project

This project provides a comprehensive overview of financial accounting principles and practices, covering topics such as journal entries, ledger accounts, trial balance, profit and loss statements, balance sheets, depreciation methods, and accounting conventions like consistency and materiality disclosure. It includes practical examples and case studies to illustrate the application of these concepts in real-world scenarios.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Financial accounting and its purpose..........................................................................................1
Regulations relating to financial accounting...............................................................................2
Accounting principles.................................................................................................................2
Accounting Conventions Concepts of consistency and materialistic disclosure........................4
CLIENT 1........................................................................................................................................4
1. Creating journal entries for business.......................................................................................4
.....................................................................................................................................................5
2. Ledger accounts......................................................................................................................6
3. Trial balance and purpose of its preparation.........................................................................21
CLIENT 2......................................................................................................................................22
1. Statement of Profit and Loss account....................................................................................22
2. Statement of Financial Position............................................................................................23
CLIENT 3......................................................................................................................................25
1. Statement of Profit & Loss account of LMS ltd..................................................................25
2. Financial Position statement of LMS ltd...............................................................................26
3. Concepts of Consistency and Prudency................................................................................28
4. Purpose of depreciation and methods of charging depreciation...........................................29
CLIENT 4......................................................................................................................................30
1. Bank reconciliation statement...............................................................................................30
2. Causes of variation accounting records with bank statements..............................................30
3. Cash book and Bank reconciliation statement of Kendal Ltd...............................................31
CLIENT 5......................................................................................................................................33
1. Sales and purchase ledger account of Henderson Ltd...........................................................33
CLIENT 6......................................................................................................................................35
1. Suspense account and its features.........................................................................................35
2.Trial balance ..........................................................................................................................36
3. Difference between clearing account and suspense account.................................................36
CONCLUSION..............................................................................................................................37

REFERENCES..............................................................................................................................38

INTRODUCTION
TASK A
1.Financial accounting and its purpose
Accounting provides information’s related to economic position of company and assists
to take decisions accordingly. It can also be determined as the process of identifying, measuring
and keeping economic transactions recorded in books. This report is considered as a financial
report of firm. This activity helps to estimate correct financial status of business (Robson,Young,
and Power, 2017).
This basically works on the guidelines of GAAP. Financial report shows actual
performance of business enterprise to investors of company. Here revenues and all expenses of
the entity is clearly represented in terms of actual monetary figure. Correct accounting reports
shows sound financial status of the industry. Financial reports can be maintained by preparing
balance sheet, income statements, cash flow etc. and this reports can be well-kept by the process
of recording day to day monetary transactions of business. Correct estimated values of assets and
liabilities needs to be known to entity so that they prepare appropriate financial data (Beatty and
Liao, 2014).
Purpose of financial accounting
Purpose of accounting information is to collect, store and record transactions to produce
appropriate figures of monetary information. There are various kinds of statements that needs to
be prepared by firm. Purpose of preparing these accounting statements is described as below:
 Income statements
This is termed as earnings of the company. The purpose of preparing this record is to
show actual income and expenditure of business unit. It helps in identifying unnecessary
expenditure so manager can take right decisions to minimize cost (Robson,Young, and Power,
2017).
 Balance sheet
This is yearly financial status of business entity. It has a purpose of maintaining
information in fixed period. (Robson,Young and Power, 2017).
 Cash flow statements

These statements are described as inflows and outflows of the cash within a financial
year. Purpose of these reports is to obtain appropriate information about cash in company
(Beatty, and Liao, 2014).
 Statement of retained earning
This is a final statement of profits earned by the firm. This statement serves as
accumulated amount of profits in business.
2.Regulations relating to financial accounting
Some requirements are proposed to regulate functioning of financial accounting. In
simple words, we can say that these are rules and regulations of preparing accounts for entity.
There are some standards and principles developed by government. So accounting management
has to follow some rules and regulations to perform financial activities in the organization. The
financial reporting council (FRC) in UK has power to supervise and regulate these functions. In
1990, Accounting standard committee (ASC) developed principles to guide standards under
Company act of 1985 (Beatty, and Liao, 2014).
 IASB (International Accounting Standard Board)
It was introduced in April 2001, and this standard has a complete independent
international structure based on the standardized framework of economic status. IASB concept is
based on recommendations of a report produced by standard committee under guidance of Ron
Dearing CB (Chairman of committee). The board has appointed IASB members to look after
accounting practices and they also raise funds needed by organization.
 IFRS (International financial Reporting Standard)
This also has important role in providing framework to accounting practices. This
standard provides investers to extract appropriate position of the company and ease their decision
making (Beatty, and Liao, 2014). Some guidelines which are widely followed while preparing
financial accounting statements of the company known as GAAP. Generally Accepted
Accounting Principles (GAAP) are conceptual methods of applying accounting standards in
entity.

3.Accounting principles22 GAAP has provided some basic guidelines. These principles are major attempts to
maintain consistency in making yearly financial reports. An accountant can analyze
yearly statements and compare company's current revenues or losses with the previous
year reports. This helps to get exact accounting information of year (Beatty, and Liao,
2014). Some Generally Accepted Accounting Principles are described below:1. Economic Entity Assumptions:
The business accounts and transactions of the individuals needs to be differentiated from
its owner. Or keeping business records separated with the personal (Macve, 2015).
2. Monetary Unit Assumption
Management needs to record only those transactions which can be expressed only in
terms of monetary expenses.3. Time Period Assumption
Here needs to be a fixed and decided time period of reporting the financial data to the
owner of the enterprise (Macve, 2015).4. Cost Principle
Assets and Liabilities of business needs to be recorded with correct figure at which they
are bought or sold currently.5. Full Disclosure Principle
Any information related to business activities needs to be disclosed properly while
maintaining business data (Robson,Young, and Power, 2017).6. Going Concern Principle
This concept tells us about assumptions related to existence of business in the future.
This principle helps to differentiate prepaid expenses with future accounting periods (Beatty and
Liao, 2014).7. Matching Principle
Each revenue recorded required to be matched with expenses related to it, at time of its
occurrence.8. Revenue Recognition Principle
Company needs to record its revenue generating transaction at the time of their
happening (Weygandt, Kimmel and Kieso 2015).
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9. Materiality
Consideration of all the materialistic things if it is effecting the company's accounting
data (Henderson, 2015).10. Reliability Principle
This guideline tells us about deciding that which financial information is to be displayed
in the records (Macve, 2015).
4.Accounting Conventions Concepts of consistency and materialistic disclosure
It refers to avoiding fraud activities in the business enterprise. It determines high
performance of the business with low cost incurred in it. Conventions includes those traditions or
customs which influences final statements while preparing financial accounting. Preparation for
security solution of company needs to be preplanned. Book-keeping method needs to be used for
maintaining accounts in the company (Renz, 2016).
Consistency implies of keeping records timely retained. This helps to compare previously
occurred activities with current performance in the organization. Ultimately, this renders
business entities to take decisions regarding methods or guidelines to be followed further
(Henderson, 2015). For example, better technique of depreciation needs to be chosen on assets
whether it is fixed or diminished method (Macve, 2015).
Materiality disclosure refers to maintaining only that information which is necessary for
the business to be focused on. Non materialistic events required to be ignored. This principle is
applied because there is no need to overburden the accounting activities by recording
unnecessary information (Warren and Jones, 2018).
CLIENT 1
1. Creating journal entries for business
A journal entry is a method which is used to record accounting transaction of a business.
Analyzing and recording of transactions into journal entries is the foremost step in accounting
process. It is detailed record of transactions related to money. Transactions are analyzed,
recorded and summarized in order to know true position of company. Every transaction in
journal have equal debit and credit amount with time, date and description of such events.
Entries are recorded in a chronological order (Hines, 1988). The journal entries of company are:
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2. Ledger accounts
This is next step after preparation of journal entries. Ledger are books in which accounts
are maintained. They are prepared to know income and expenditure of company. It provides
information of current balance and also work as confidential book to know about any transaction
at end of accounting period (Edwards, 2013). They are principal books which helps in
preparation of trial balance, profit and loss account. Balances are taken out from ledger books to
prepare trial balance. It helps in identifying assets, liabilities, income and expenses. The purpose
is to list, record and summarize all transaction of same type in a book.
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3. Trial balance and purpose of its preparation
Trial balance is type of bookkeeping where all the balances of ledger books are compiled
in a table form to ensure that debit column matches with credit column. Balances in this book are
list of all debit and credit balance of ledger books on a given date which ensures that ledger
books are maintained under double entry system. The main purpose of preparing trial balance is
to detect mathematical errors which have occurred during accounting. If debit column matches
with credit column, then it is considered that trial balance amount is balanced and there are no
errors in accounting system of company.
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CLIENT 2
1. Statement of Profit and Loss account
Profit and loss account is also called income & expenses statement. It is a financial
statement that summarizes cost, revenue and expenses incurred during specific year. They
provide information about company's financial position and performance during a particular
year. Purpose of preparation of such statement is to measure sales and expenses made during
particular point of time. It helps to show whether a company has earned income or has incurred
expenses more.
Income statement of Sierra Laurent at 31 July 2018
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2. Statement of Financial Position
Purpose of preparing this statement is to provide information about operations and
financial position by preparation of balance sheet. They show balances of assets and liabilities at
a given point of time. It shows position of company whether they can pay their bills, its ability
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to acquire capital, machinery, assets and available cash to distribute to owners in form of
dividends. It shows assets and liabilities in accordance with owners’ equity. Balance sheet
amount can be used to calculate ratios of company. (Assets= liabilities+equity)
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CLIENT 3
1. Statement of Profit & Loss account of LMS ltd
Profit and loss account shows amount of a particular time period and helps to identify
revenues earned and expenses incurred. It shows profits and loses of an accounting period. They
are open for all as many people are interested in knowing financial position of company. It helps
to plan for future and tool for comparison with other companies. They are divided into two parts
operating and non-operating (Lee and Tweedie, 1975). Operating includes balance related
directly from business and non-operating includes which are indirect.
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2. Financial Position statement of LMS ltd
This statement is also known as Balance Sheet which shows financial position of
company at given point. Balance sheet amount helps users to see liquidity position and how
much risk company can bear. Accounting equation of balance sheet contain three main elements
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which are liability, assets and owners’ equity. It involves only those assets and liabilities which
were present at the time of preparation of statement. (Resources= obligation+ownership).
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3. Concepts of Consistency and Prudency
Accounting rules are to be followed while preparing accounts and financial statements.
There are various principles and concepts which have to be followed.
Concept of consistency: - This concept says that a company should use same principles of
accounting in an accounting cycle to following cycles, so that same standards can be applied and
easily calculate profit and loss amount. A method for calculation once adopted must be applied
in future consistently (Barth, Beaver and Landsman, 2001). For similar transactions, same
methods and techniques must be adopted. This method also states that a company does not have
to follow same techniques forever. A business can change its accounting policy only when it is
required or when law permits. Company is required to disclose any such change in financial
statement and its effect of change and justification of such change. The use of this concept is for
comparability of two financial statements which helps users like creditors and investors to
compare easily and correctly.
Concept of prudency: - This concept states record revenue when they are assured or realized but
a company is required to record expenses and liabilities as soon as they occur. Prudence means
identification of adverse events in advance. A company should not underestimate their losses,
expenses and liabilities. They should not even overestimate their assets, profits and revenue. An
accountant should use conservative method while recording revenue and record them only when
they are realized. This concept says that financial statement must present real situation of
company which further helps investors in taking decisions. A company should not show its
assets at a higher value than its expected recovered sales value.
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4. Purpose of depreciation and methods of charging depreciation
Depreciation can be defined as decline in value of asset due to its use over a period. It is a
method of accounting which is applied to determine cost of asset which has got obsolete due to
wear, tear or its use. This helps company in writing off value of asset of company. When a
company buy any asset, they cannot depreciate its value in the year of purchase but they
depreciate its value over a period. Purpose of charging depreciation is that company can match
amount of expense incurred with revenue generated from such asset. This will help in showing
true and fair position of revenue and will not under or over state any expenses. It will help
company to show correct value of an asset. An organization charges depreciation to get
deductions in tax. Higher the amount of depreciation lower will be taxable income.
Two methods of calculating depreciation are: -
Method of Straight Line
This method is simple and mostly used for charging depreciation. The amount of
depreciation remains same for every year. To calculate depreciation of an asset, it’s simple to
calculate with this method just divide the value of asset evenly with its useful life. Salvage value
is that amount of an asset at the end of its life.
FORMULA
Amount of depreciation = (Cost of asset- salvage value) / useful life of an asset
EXAMPLE: A company purchased machinery on 1st January 2010 of $20000. Expected life of
machinery is 3 years. Salvage value of machinery is $5000. What will be depreciation for next
two years?
Amount of depreciation= (cost of asset – salvage value) / life of an asset
Amount of depreciation= ($20000 - $5000) / 3
= $5000 p.a.
Method of Diminishing Value
Depreciation is charged to bring down the value of asset to its residual value. In this
method amount of depreciation for every year is fixed and it goes on decreasing every year. This
is the most commonly used method of calculating depreciation (Depreciation., 2017). In the
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initial stages company tries to write off most of its value. Depreciation amount in this method
decreases every year.
FORMULA
Amount of depreciation= (net value – salvage value) / rate of depreciation
CLIENT 4
1. Bank reconciliation statement
It is a type of financial statement which is prepared to find out the amount of difference
between cash account and bank statements. They are prepared to make comparison of both the
books which are cash and bank book. It assures that payments have been made and cash is being
deposited into bank account (Baumgartner, James, and Newbrough, 2011). They help to identify
difference in balances of cash and bank. The balance in cash book at ending is known as book
balance and when amount is left in bank then it is known as bank balance. Purpose of preparing
BRS: -
 Helps in identification of errors
 Helps to identify unusual transactions
 To check if entries are accurate or not
 To check if there is any delay in cheque collection or dishonored cheques
 Helps in monitoring amount of cash flows
 To check frauds and embezzlement
2. Causes of variation accounting records with bank statements
There are number of causes of variation in accounting records with bank statements: -
 Cheque issued by company to suppliers have not been presented for payment.
 Banker would not have collected the cheque which was received by company and
deposited.
 When deposits are made directly into bank account by customer and company has not
recorded in cash book.
 Charges such as collection charge, service charge or any amount of interest charged by
banks. These transactions are recorded in cash book only when company receives bank
statement.
 Any omission of entry in either of the books.
 Any dishonored cheque deposited into bank.
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 Any wrong entry recorded in cash book.
3. Cash book and Bank reconciliation statement of Kendal Ltd
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CLIENT 5
1. Sales and purchase ledger account of Henderson Ltd
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2. Control account
It is a summary account in general ledger. For this, a subsidiary ledger is prepared which
allows tracking of transactions in controlling account in detailed manner. Transactions are
entered in both the accounts which are subsidiary ledger and controlling account. When
preparing trial balance balances of both the accounts are checked to see that amount are accurate
or not. The main aim to prepare control account is to have correct balance in financial statement
and keep general ledger account detail free. In ideal circumstances balance of control account is
usually zero. There are number of accounts such as expenditure, income, liabilities, assets.
Management of all these accounts is too difficult task so an account called control account is
necessary which helps in analyzing accuracy and in preparation of financial statements.
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CLIENT 6
1. Suspense account and its features
It is a temporary account which is opened when there is short amount in books of trial
balance. When it becomes difficult to locate errors in books of accounts. Trial balance is
important books of accounts which will further help in preparation of final statement so it is
important that they are free from error. So anytime when balances of debit and credit does not
match a temporary account called suspense account is opened in any side where balance is short
to match the balance. They are prepared when one side error can't be identified.
Features: -
 helps in balancing and preparation of trial balance
 helps to detect errors
 helps to identify account in which error has occurred
 Since it is temporary account so if error is identified the balance of suspense account
becomes zero.
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2.Trial balance
3. Difference between clearing account and suspense account
Both are temporary accounts but functions differently. Clearing accounts are used for later
posts and it ensures that transactions are recorded completely and in correct manner. Suspense
account are prepared when there is short balance. It is opened till problem is solved. Clearing
account act as a reminder to tell that a transaction is not complete. When transaction is
completed amount is transferred to correct account and gets cleared from clearing account. In
suspense account as and when error is detected it is recorded and suspense account gets closed.
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CONCLUSION
From the above report it is concluded that it is important to prepare financial statements
of company to know true position. The report shows different accounting conventions and books
of accounts which are required to be prepared. It has covered needs to prepare suspense account
and clearing account. It has also covered importance of bank reconciliation statement and
methods of depreciation.
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REFERENCES
Books and journals
Barth, M.E., Beaver, W.H. and Landsman, W.R., 2001. The relevance of the value relevance
literature for financial accounting standard setting: another view. Journal of accounting
and economics, 31(1-3). pp.77-104.
Baumgartner, D., James, K. and Newbrough, K., First Data Corp, 2011. Financial settlement
systems and methods. U.S. Patent 7,882,021.
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics. 58(2-3). pp.339-383.
Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.
Henderson, S.and et.al, 2015. Issues in financial accounting. Pearson Higher Education AU.
Hines, R.D., 1988. Financial accounting: in communicating reality, we construct reality.
Accounting, organizations and society, 13(3), pp.251-261.
Lee, T.A. and Tweedie, D.P., 1975. Accounting information: an investigation of private
shareholder usage. Accounting and Business Research, 5(20), pp.280-291.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Robson, K., Young, J. and Power, M., 2017. Themed section on financial accounting as social
and organizational practice: exploring the work of financial reporting. Accounting,
Organizations and Society. 56. pp.35-37.
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
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Weygandt, J. J., Kimmel, P. D. and Kieso, D. E. 2015. Financial & managerial accounting. John
Wiley & Sons.
ONLINE
Depreciation., 2017. [Online] Available through:<https://investinganswers.com/financial-
dictionary/financial-statement-analysis/depreciation-1328/>
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