Understanding Accounting Concepts and Principles

This assignment provides an in-depth examination of fundamental accounting concepts and principles. It covers topics such as journal entries, ledgers, trial balances, and suspense accounts, highlighting their significance in preparing financial statements. The assignment also delves into key principles like consistency and prudence, emphasizing the importance of adhering to IASB and IFRS standards in ensuring standardization.

Financial Accounting
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TABLE OF CONTENTS
INTRODUCTION......................................................................................................................4
1. Describing financial accounting.........................................................................................4
2. Assessing key rules and regulations related to financial accounting.................................5
3. Defining accounting principles..........................................................................................5
4. Stating consistency and materiality convention of accounting..........................................6
CLIENT 1...................................................................................................................................6
a. Recording transactions in Journal......................................................................................6
b. Posting transactions in the ledger accounts........................................................................9
c. Drafting trial balance........................................................................................................16
CLIENT 2.................................................................................................................................17
a. Income statement for Peter Piper for 31st December 2017...............................................17
b. Balance sheet of Peter Piper for the concerned period....................................................18
CLIENT 3.................................................................................................................................20
A Preparing profitability statement of Raintree Ltd for the year ended on 30th September
2017......................................................................................................................................20
B Stating statement of financial position of Raintree Ltd....................................................20
C Explaining consistency and prudence concept of accounting..........................................21
D. Describing the purpose of depreciation while drafting statements along with the
methods................................................................................................................................22
CLIENT 4.................................................................................................................................23
a. Presenting purposes take place behind the preparation of bank reconciliation statement23
b. Explaining reasons due to which cash records vary from the bank statement.................23
C. Bank reconciliation..........................................................................................................24
CLIENT 5.................................................................................................................................25
a. Sales and purchase ledger account...................................................................................25
1............................................................................................................................................25
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2............................................................................................................................................26
b. Describing control account..............................................................................................26
CLIENT 6.................................................................................................................................27
a. Defining suspense account along with its features...........................................................27
b. Presenting trial balance and use of control account as per financial accounting system. 27
c. Rectifying accounting entries...........................................................................................29
d. Differentiating suspense and clearing account.................................................................30
CONCLUSION........................................................................................................................30
REFERENCES.........................................................................................................................31
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INTRODUCTION
Financial accounting field of finance is highly concerned with the preparation and
analysis of final accounts at the end of an accounting year. In the recent times, all business
units whether large or small lay focus on undertaking financial accounting tool & techniques
with the motive to ascertain monetary position. Along with this, with the motive to satisfy the
informational needs of stakeholders and evolve satisfaction among them companies use the
concepts, principles and conventions. The present report is based on varied case situations
which provide deeper insight about the manner in which different principles and conventions
help in dealing with as well as recording monetary transactions. Further, report will also shed
light on the importance of preparing bank reconciliation statement on a monthly basis. It also
entails reasons due to which company charges depreciation on fixed assets. It will also
develop understanding about the concept of suspense, clearing and control account.
1. Describing financial accounting
In UK, all the companies which are listed on London Stock Exchange prepare final
accounts for assessing financial position and providing stakeholders with suitable information
for decision making. Now, as per rules, it becomes mandatory for the companies to prepare
and publish financial statements at the end of accounting period. Basically, four main
accounts which company prepares to assess and evaluate its financial position such as:
 Profitability or income statement: This statement of final account contains
information about income & expenditure. Companies prepare such account for
assessing profit generated over the expense. In the context of business unit, income is
generated from varied sources such as sales, dividend and interest received. On the
other side, expenditures include both direct (material, labour etc) and indirect (selling
& distribution etc). On the basis of accounting rules by subtracting expenses from
income profitability can be assessed easily.
 Statement of financial position: Balance sheet helps in getting information about
several aspects such as liquidity, efficiency and solvency. Business unit records
information about assets, liabilities and shareholder’s equity in the statement of
financial position (Schaltegger and Burritt, 2017). Hence, by making assessment of
company’s position on the basis of such aspects business entity can take suitable
decision for performance improvement and enhancement.
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 Cash flow statement: In this, transactions are recorded under different categories such
as operating, investing and financing. Company prepares such statement for assessing
the position of cash inflow and outflow pertaining to the specific time frame. The
main motive of company behind the preparation of such account is to determine cash
position and take decision for future investments as well as other aspects.
 Statement of changes in equity: Under this, firm records information about its equity
position and reserves. Considering this, firm can evaluate its capital structure as well
as solvency position and thereby would become able to take suitable decisions for the
upcoming time period.
2. Assessing key rules and regulations related to financial accounting
There are several rules and regulations with which business units need to adhere while
preparing final accounts. Companies which are operating on a global basis need to undertake
IASB and IFRS at the time of recording transactions in the relative or concerned statement.
IASB presents the manner in which tangibles and intangibles should be treated in financial
statements (Warren and Jones, 2018). Further, IFRS presents the way of reporting
transactions and other information in final accounts. In UK, few of the companies are
following GAAP at the time of preparing financial statements. Hence, companies which are
carrying out activities at international level recommended following IASB and IFRS. This in
turn facilitates standardization and assists in comparing performance with past years as well
as over the rival firms.
3. Defining accounting principles
Accounting principles present the manner in which transactions should be recorded in
the final accounts. Main principles which are associated with the field of financial accounting
enumerated below:
Double entry system or concept: On the basis of such concept, transactions should be
recorded under two categories such as debit and credit. In other words, for every debit there
must be a credit in relation to the transaction made (Robson, Young and Power, 2017). For
instance: Furniture worth of £10000 is purchased in against to cash. In this, Furniture will be
debited and cash is recorded in the credit side.
Furniture a/c Dr £10000
To cash a/c £10000
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Assets = Liabilities + shareholder’s equity
Money measurement concept: In the final accounts, only transactions which can be
presented in monetary terms are recorded (Ryan, 2017). In other words, non-financial
measures such as employee satisfaction, customer base etc is not included in the final
accounts of firm.
Going concern concept: As per such principle, business entity assumes that firm will
carry out its operations for the longer or infinite time period.
Accounting period concept:
Such concept presents that final accounts should be prepared or drafted on the basis of
quarterly, half yearly and annual basis.
Accrual concept:
It lays emphasis on recording transactions pertaining to revenue and expenses in the
period of occurrence. By doing this, company can reflect the clear and precise view of
monetary transactions.
4. Stating consistency and materiality convention of accounting
Consistency principle: This principle states that focus should be placed on
undertaking common principles and rules every year. In other words, company should
consider similar rules for recording and presenting transactions (Scott, 2015). Along with
this, emphasis should also be placed on specifying reason behind making changes in the
existing rules. By following the rule of consistency firm would become able to do
comparison of performance over the years more effectually.
Materiality concept: Such accounting concept makes improvement in the disclosure
of monetary information prominently. On the basis of such concept business unit should
disclose all the material information which influences or having an impact on the decision
making aspects of suppliers, shareholders etc.
CLIENT 1
a. Recording transactions in Journal
Journal of Alex Study’s for the period of 2017 is as follows:
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b. Posting transactions in the ledger accounts
Day books
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Sales ledger
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Nominal Ledgers account
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Real Ledger
c. Drafting trial balance
JOURNAL ENTRIES
ASSETS debit £ credit £
premises 340000
VAN 51250
FIXTURES 8100
INVESTMENTS 63900
RECEIVABLES:
P MULLEN 1400
F LANE 3100
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CASH AT BANK 62400
CASH IN HAND 5600
LIABILITIES
PAYABLES
S HOOD 2150
J BROWN 4600
CAPITAL( (balancing figure) 529000
535750 535750
CLIENT 2
a. Income statement for Peter Piper for 31st December 2017
Particulars Amount (in £)
Turnover 1215000
Ending Inventory 101640
1316640
Less:
Opening stock 82200
Purchase 778800
Wages and salaries 177500
Add: Outstanding W&S 1220 178720
1039720
Gross Profit (GP) 276920
Less: Indirect expenditures
Motor expenditure 87400
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Administration expenses 17650
Heating and lighting 4950
Advertising 13280
Less: prepaid advertisements 8470 4810
Depreciation on premises 5400
Depreciation on equipments 17250
Depreciation on motor vehicle 2800
Total indirect expenditure 140260
Net Profit 136660
b. Balance sheet of Peter Piper for the concerned period
Balance sheet
Particulars Amount (in £)
Current assets
Inventory 101640
Prepaid advertisement 8470
Trade receivables or debtors 106960
Cash 2440
Total current assets) 219510
Non-current assets
Freehold premises 270000
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Less depreciation 42900 227100
Equipment 172500
Less: Depreciation 114750 57750
Motor Vehicles 28000
Less: Depreciation 16800 11200
Total non-current assets 296050
Total assets (Current + non-
current) 515560
Liabilities or obligations
Current liabilities
Trade payables or creditors 76910
Outstanding salaries 1220
Overdraft 11290
Total current liabilities 89420
Owner’s capital 332120
Add: Net profit 136660
Less: Drawing 42640 426140
Total liabilities 515560
CLIENT 3
A Preparing profitability statement of Raintree Ltd for the year ended on 30th September 2017
Profitability statement
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Particulars Amount (in £)
Sales revenue 107000
Less: Return inward 2000 105000
Cost of goods sold (W.N.1) 31000
Gross Profit 74000
Depreciation charged on land & building 1000
Depreciation on plant & machinery 10000
Administrative Expenditure 28000
Distribution expenses 22000
Less: Prepaid rent 3000
Add: Outstanding salaries 2000 21000
Corporation tax 4000
Total 64000
Net margin 10000
B Stating statement of financial position of Raintree Ltd
Particulars Amount (in £)
Current assets
Debtors or bills receivable 24000
Prepaid rent 3000
Closing stock 18000
45000
Fixed assets
Land & Building 60000
Less: Depreciation charged on L&B 8000 52000
Plant & Machinery 65000
Less: Depreciation @ 20% 25000 40000
92000
Total assets 137000
Liabilities
Current liabilities
Creditors or bills payable 14000
Outstanding salaries 2000
BO 15000
Corporation tax 4000
Total current liabilities 35000
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Owners’ s fund 50000
share premium 20000
Retained profit 22000
Net profit 10000
Total shareholders’ equity 102000
Total liabilities 137000
C Explaining consistency and prudence concept of accounting
 Consistency concept: On the basis of such accounting concept emphasis should be
placed on undertaking and applying similar methods every time. Moreover, when
company follows similar methods each time for treating or dealing with transactions
then it facilitates comparability. In the case of such concept, firm would become able
to compare current year’s performance from past (Consistency Concept, 2018).
Further, at the time of time of making changes in the existing accounting principles
and rules business entity should include information about the same in annual report.
For instance: Owner of Raintree Ltd undertakes straight line method for charging and
recording transaction. As per this, firm should charge depreciation in accordance with
straight line method. Hence, now if firm employs diminishing method for treating
depreciation then the same information should be recorded in annual report.
 Prudence concept: This concept of accounting is highly prominent which helps in
dealing with uncertain events. Prudence concept entails that under uncertainty
accountant should not overestimate the figure of income or revenue (Prudence
Concept, 2018). In addition to this, amount pertaining to expenses should not be
underestimated as per prudence concept of accounting concept. Assets and revenue
should be recorded in the accounts when they are certain. In addition to this, business
entity should include expenses in the final accounts when they are probable.
D. Describing the purpose of depreciation while drafting statements along with the methods
Depreciation implies for the reduction in value of assets over time due to wear and
tear. There are mainly two types or methods which can be used for charging depreciation
namely straight line and diminishing method. In other words, depreciation may be defined as
a reduction of recorded cost of fixed assets prominently until the value becomes zero or
negligible.
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Straight line basis: It may be presented as a default method which is turn gradually
reduces the carrying amount of fixed assets over its useful life. In this, value of depreciation
is same until the useful life of assets (Robson, Young and Power, 2017). By dividing assets
value from estimated life one can arrive at depreciation value.
Depreciation value: Cost – scrap value / useful life of assets
Advantages Disadvantages
 Simplest method of providing or
charging depreciation
 Fixed assets can be written-off
completely
 Suitable for small firms
 Undue pressure on final years
 In this, there is no provision for
replacement
 Loss of interest
 Illogical method as per IFRS
For example:
Computation of depreciation
Particulars Figures
Cost 200000
Scrap value 20000
Estimated life of assets 10
Depreciation (Cost – scarp value / life of
assets)
(200000 – 20000) / 10 = £18000
Year Original cost Depreciation figure Balancing amount of
assets
1 200000 18000 182000
2 182000 18000 164000
3 164000 18000 146000
4 146000 18000 128000
5 128000 18000 110000
Written down value method:
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In this method, rate of depreciation is same over the years but it charged on the
balancing figure of assets. Under, written down method value of assets will never be zero.
Advantages Disadvantages
 Realistic way of charging
depreciation
 Simple to use
 Amount charged to P&L will remain
less uniform after year
 Loss of interest due to large capital
investment
 Value of assets cannot be brought
down to zero
Year Original cost Depreciation figure Balancing amount of
assets
1 200000 30000 170000
2 170000 25500 144500
3 144500 21675 122825
4 122825 18423.75 104401.3
5 104401.3 15660.19 88741.06
CLIENT 4
a. Presenting purposes take place behind the preparation of bank reconciliation statement
Bank reconciliation statement implies for the report under which balances as per cash
and pass book are reconciled. Given case scenario presents that Kendal wants to know the
reasons take place behind the preparation of BRS on a monthly basis. Thus, main reasons due
to which firm prefers to prepare bank reconciliation statement are as follows:
 By preparing BRS on a monthly basis firm can easily assess the difference take place
in the two reports namely cash and pass book. Through preparing BRS business unit
can track cash position effectually and thereby become able to adjust own records
(Henderson and et.al., 2015). Thus, BRS offers opportunity in relation to settle down
or avoid deviations take place between assumed and actual cash position aspects.
 In addition to this, BRS enables business entity to get information about the
customers whose checks are bounced. Hence, referring such aspect firm can make
changes in the existing credit policies more effectually.
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 Further, fraudulent activities can also be detected through preparing BRS on a
monthly basis. Moreover, reconciliation statement clearly exhibits cheques which are
submitted and not deposited in bank.
b. Explaining reasons due to which cash records vary from the bank statement
There are several reasons due to which balances of cash and pass book varies such as:
 Now, banking units provide customers with several services such as direct
insurance, medical and other bills payment etc. In against to offering such services
bank charges some fees. Hence, on a periodical basis bank deducts some amount
from bank balance in against to the services offered. Hence, sometimes business
unit is unaware from the fees charged (Beatty and Liao, 2014). Thus, this is one of
the main reasons due to which deviations take place in cash and pass book.
 Further, sometimes some customers or debtors directly deposit money in the
company’s account. Hence, due to not having information about the same
balances of cash statement varies from pass book.
 Dishonour of cheque may be served as another main cause behind the deficiencies
take place in the records of cash and pass book. Due to unaware from the aspect of
check dishonouring balances under cash and pass book differs.
C. Bank reconciliation statement and preparation of updated cash book
Updated cash book
Dates Receipts Figures (in
£)
Dates Payments Figures (in
£)
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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. Sales and purchase ledger account
1.
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2.
b. Describing control account
Control account may be served as an essential parts or elements of general ledger
account. It clearly exhibits the balances trade receivable or debtors and payables or creditors
account. Control account is prepared with the motive to assess or evaluate the accuracy of
financial transactions. Using control account, accounting personnel can assess and recheck
the balances of subsidiary ledgers account (Macve, 2015). In the context of large sized
business organizations, control account proves to be highly suitable over others. The rationale
behind this lower level of transactions is involved in small sized firms over the large one.
Thus, it can be presented that large group of companies can present clear view of financial
information by preparing control account.
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CLIENT 6
a. Defining suspense account along with its features
As per financial accounting, suspense account is created for recording the amount of
unclassified debit and credit. Under such account, errors are recorded on a temporary basis
and then the same is transferred into the related account on identification. Suspense account
helps in recording information about transaction about which enough information is not
available (Schaltegger and Burritt, 2017). Thus, by creating suspense account and completing
trial balance accounting personnel would become able to prepare final accounts in the best
possible way.
Suspense account features
 Help in identifying and recording accounting errors take place in journals and ledgers
 Suspense account helps in matching balance of trial balance’s debit & credit side and
thereby assist in preparing final accounts
b. Presenting trial balance and use of control account as per financial accounting system
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c. Rectifying accounting entries
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d. Differentiating suspense and clearing account
Suspense and clearing account differs from each other on the basis of following
aspects:
Basis of difference Suspense account Clearing account
Purpose It is prepared for matching
differences take place in the
debit and credit side of trial
balance.
Under this, differences are
recorded temporarily until the
related account not identified.
Adjustments For balancing errors identified
in trial balance, suspense
account is created (Robson,
Young and Power, 2017).
For transferring amount. related
to accounting error, into
permanent clearing account is
prepared.
Reflects Such account presents probable
error takes place in the
accounts.
Unlike suspense, clearing
account does not present any
error in final accounts. Thus,
clearing account helps in
preparing error-free financial
statements.
CONCLUSION
From the above report, it has been concluded that journal, ledger and trial balance are
the main sources which help in drafting financial statements. It can be seen in the report that
profitability statement and balance sheet helps company in evaluating its performance.
Along with this, it has been articulated that adherence with IASB and IFRS facilitates
standardization to the significant level. It can be summarized from the evaluation that
accounting concept and principles should be followed to a great extent while preparing
financial statements. Besides this, it can be inferred that diminishing method of depreciation
is highly effectual over others. It can be presented from the evaluation that by preparing bank
reconciliation statement firm can assess actual cash position and thereby become able to take
decision about future. In addition to this, it can be entailed from the evaluation that suspense
account helps in matching deficiencies and helps in preparing further statements.
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REFERENCES
Books and Journals
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.
Henderson, S. and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
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.
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.
Ryan, S., 2017. Is Banks’ Current Regulatory Capital Adequacy the Mechanism by which
their Accounting Requirements Affect Financial Stability?. Annual Review of Financial
Economics. 9. pp.1-20.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues,
concepts and practice. Routledge.
Scott, W. R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Warren, C. S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.
Online
Consistency Concept. 2018. [Online]. Available through:
<https://www.accountingtools.com/articles/2017/5/15/the-consistency-principle>.
Prudence Concept. 2018. [Online]. Available through:
<https://accountingexplained.com/financial/principles/prudence>.
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