Financial Accounting Table of Contents

The main purpose of these |regulations is to provide uniformity |in accounting |principles which are required to follow |business |standards which are generally accepted |by the International Accounting Standards Board |Council |which is responsible for these |accounting |principles which are required to follow |business |standards which are generally accepted |by the International Accounting Standards Board |Council |which is responsible for these |accounting |principles which are required to follow |business |standards

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
Financial Accounting.......................................................................................................................1
INTRODUCTION...........................................................................................................................1
1. Defining financial accounting and its purpose........................................................................1
2. Stating regulations relating to financial accounting...............................................................2
3. Accounting rules and principles that governs the presentation and preparation of the
financial statements.....................................................................................................................2
4. Conventions and concepts relating to consistency and material disclosure............................3
CLIENT 1........................................................................................................................................4
A. Journal entries........................................................................................................................5
B. Ledger Accounts.....................................................................................................................5
C. Trial balance.........................................................................................................................20
CLIENT 2 .....................................................................................................................................21
A. Drafting of income statement...............................................................................................21
B. Financial statement preparation............................................................................................21
CLIENT 3......................................................................................................................................22
A. Preparation of income Statement ........................................................................................22
B. Preparation of statement of financial position......................................................................23
C. Accounting concepts- Prudency and Consistency................................................................23
D Describing purpose of depreciation and explaining its methods...........................................24
CLIENT 4......................................................................................................................................24
A. Purpose of bank reconciliation statement ............................................................................24
B Reasons for variation between business records and bank records......................................25
C. Preparation of cash book and BRS......................................................................................26
........................................................................................................................................................27
CLIENT 5......................................................................................................................................28
A. Preparation of sales ledger..................................................................................................28
Purchase ledger.........................................................................................................................28
B. Reasons for preparation of control account.........................................................................28
CLIENT 6......................................................................................................................................29
A. Suspense account and its main features...............................................................................29
B-C. Preparation of trial balance and necessary corrections.....................................................30
D. Difference between suspense and clearing accounts............................................................30
CONCLUSION..............................................................................................................................31
REFERENCES..............................................................................................................................32

INTRODUCTION
A process or recording, summarizing and reporting of financial transaction of a business
for a specific time period is defined as financial accounting. The process of financial accounting
starts from maintaining and preparation of financial statements. This includes income statement,
balance sheet, statements of cash flow and shareholder's equity.
Financial data of an organisation is recorded in accordance with regulations, principles
and standards set for this purpose. These accounting standards are set to provide uniformity in
accounting procedure by rendering consistent information to investors, regulators, creditors and
tax authorities.
In the present report, financial accounting and its purpose is discussed. The regulations
related with it are defined and principles and standards are also described. The financial data of
six different clients have been presented in different forms of financial statements. Along with
presentation of financial information, their interpretation is also done.
To: Line Manager
From: Junior accountant
Subject: Presentation of accountancy rules, regulations, principles and conventions.
Sir,
The facts are addressed that proper financial disclosures through preparation of various
financial statements aid in decision making for operational and financial activities of the
business. With this preparation and presentation of data, significant profitable changes can be
made in order to achieve better profitability (Beatty and Liao, 2014). The formulation of these
statements are done with a Uniformity with rules and regulations provided for accountancy
with application of prescribed standards. A Consistency in following all these will provide a
uniformity in data presentation over a period which will be helpful in present and future
management decision making.
1. Defining financial accounting and its purpose
The main purpose of accounting is to provide which is required for making significant
economic decisions. Financial accounting provides information to external parties such as
investors, creditors, tax authorities etc. Under this, all the financial data of a business is
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gathered and then presented it in a particular format which is done in accordance of generally
accepted accounting principle and accounting standards. The main purpose of preparation of
financial accounts is determination of all monetary transactions which took place in business
operation on a period. With preparation of this, an organisation can determine its expenses and
income and profits that generated from business activities.
2. Stating regulations relating to financial accounting
The accounting regulations are laid down by accounting standard committee for
providing a nationwide uniformity information of financial statements. Uniformity is necessary
as without any specifies regulations everyone will follow a financial rules which are suitable to
them. So, in order to have a nationwide uniformity, these accounting regulations are formed.
All the businesses need to abide by these regulations as these are mandatory to follow as
recommended by the government.
The following are certain regulations which a business organisation needs to follow in
preparation of its financial statements:
IFRS: International Financial Reporting System
IFRS are general regulations and principles that are set out by IASB. These are
developed for set a criteria which is required to be followed in preparation of financial reports
for an organisation. The financial reports are profit and loss account, balance sheet and other
statements.
IASB: International Accounting Standard Board
This is an independent private sector body which is responsible for formation and
approval of all international financial reporting standards. This body operates for IFRS
foundation and development. This is the main body which is responsible for regulation of IFRS.
The mission of this body is to develop standards which bring in transparency, accountability
and efficiency to financial markets around the globe.
FRC: Financial Reporting Council
This is the main body responsible for overseeing an effectiveness of financial reporting
framework in the country (Barth, 2015). The key tasks of this body is to oversee applicability
of accounting and auditing standards in public and private sector.
GAAP: Generally Accepted Accounting Principles
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This is responsible for ensuring application of uniform accounting practice. These are
the standard rules and principles which are required to be followed in preparation of financial
statements of a business transaction. GAAP provides guidelines for presentation of monetary
data and treatment of various income and expenses such as depreciation, mortgages interest etc.
3. Accounting rules and principles that govern the presentation and preparation of financial
statements
1. Separate legal entity: A business is separated from its owner. It is formed with law and
can be ended with the procedure of law only. No personal transaction of an owner or
member shall be recorded in business transaction.
2. Going Concern: A business operates as perpetual succession. This means people will
come and go but the business will continue to operate. Even, death of all members in a
company do not put an end to its operations.
3. Monetary unit: All financial transactions recorded, shall be in monitory units that is
dollar, pound or euro. The transaction which cannot be determined in monitory value
shall not be recorded in financial reports.
4. Historical Cost: All resources with a business shall be valued on the cost at which they
were acquired not with present market value or future value. The only exception to this
rule is in process of closure and liquidation.
5. Matching principle: all revenue records in an accounting period shall have equivalent
expense record. This principle helps in determination of profit of organisation.
6. Accounting period: A business must complete accounting process over a specific
operating time. An accounting period may be monthly, quarterly or annually.
7. Consistency: This principle states that a business must follow the same accounting
standards and rules year by year, changes shall be made only if it is necessary.
8. Conservatism: In this principle, the business must record all its business transactions at
a lower value rather than at higher value.
9. Materiality: material and important business transactions are those which affect
decision of a user, so they must be recorded properly (Muda and et.al., 2017).
Immaterial and transaction with small amount discrepancy for which any mistake or
error has been occurred need not be rectified or corrected.
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10. Accrual basis: The revenue shall be recorded for period in which they are earned not a
time when they are actually received. Same is with expenses, record expenses when
they are incurred not when actual payment is done.
4. Conventions and concepts relating to consistency and material disclosure
Consistency: this principle states that once an accounting principle or method is
adopted, it must be continuously followed in future period with a consistency. To follow this
principle is necessary to carry out a comparison of reports from period to period. This principle
is generally ignored by managers of a business in order to increase the profits of business but
auditors are rigid in changing the accounting method.
Material disclosure: All transaction recorded in financial reports shall be material and
relevant. They shall be able to be proved to their authenticity.. This means that while preparing
financial report all financial transaction recorded shall be true. With this, it is also required that
origin of data is mentioned in order to establish their authenticity.
CLIENT 1
Sole trader: It means the business is carried out by a single person and that individual is
an exclusive owner of business. He /she is entitled to complete profits earned and liable for any
loss. He/she is fully responsible for expenses incurred and revenue generated. The person is said
to be self-employed (Khan, 2015).
For registration of a sole proprietorship, the requirements are the following:
 when profits earned from a business for a financial year exceeds 1000 pounds.
 Person is required to prove that he/she self-employed for claim cretin exemptions such as
tax free childcare.
 A person wants to make a voluntary class 2 national insurance payments for making
oneself qualify for certain benefits.
 Trader is required to get registered under VAT and with HMRC.
 The individual is required to maintain all records of business.
 trader must self-assess the tax and file a return every year.
Capital: for a business capital can be defined as funds which are raised to a support the
business operation. . This is accumulated wealth of the entity which is represented as assets
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minus liabilities. These can also be referred as stock ad ownership of an organisation. This is a
term used for financial assets or value along with tangible factors responsible for production. As
money is used for purchase of materials and production of goods capital is more durable and
with its investment, wealth will be generated. There are different types of capital in a business
namely:
Debt capital: This capital is raised through acquisition of money from outside sources.
This includes short term and long term borrowings. Eg. Loan from any financial institution,
borrowings from friends, family etc. involves repayment of debt borrowings along with interest.
Equity capital: This is an investment based capital and it need not required to be repaid.
sources of this capital are private investments and contribution from sales of stock.
Working Capital: this can be defined as differences between current assets and current-
liabilities (Christine and Martiano, 2015). The capital is amount a business requires for carrying
out its business operations.
Trading capital: Amount allotted for buying and selling of different securities is referred
as trading capital. This is different from investment capital as it is reserved for riskier projects.
A. Journal entries
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B. Ledger Accounts
Purchase ledger
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Sales ledger
1

2

3

4

5

6

7

8

9

10

11

12

13

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C. Trial balance
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CLIENT 2
A. Drafting of income statement
B. Financial statement preparation
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CLIENT 3
A. Preparation of income Statement
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B. Preparation of statement of financial position
C. Accounting concepts- Prudency and Consistency
Prudency concept: This is also called as Conservatism Principle of Accounting. This
requires that as soon as expenses and liabilities are incurred they shall be recoded but revenue
and income shall be recorded as when they are realised and actually generated. This follows the
conservative method in which revenues are not overestimated and expenses are not
underestimated (Barron, Chung and Yong, 2016). The assets shall be recorded conservatively
and liabilities shall not be undervalued. This means that balance shall be maintained between
assets and liabilities and revenues and expenses.
Consistency concept: This Concept states that once a business have decided an
accounting method, it shall stick with the same in long run. It is not advisable for a business to
switch between different accounting methods as they will lead to different results. For different
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periods a business cannot ascertain its actual profitability and financial position. The method
shall be followed consistently throughout the year and accounting periods. The sole purpose of
this concept is that all transactions are recorded, by following the same method for every
accounting year, such as for recording stock LIFO method is used in starting of a business, it
shall be followed consistently for subsequent years.
D. Describing purpose of depreciation and explaining its methods
Depreciation: This can be defined as gradual transfer of cost of fixed assets from balance
sheet to profit and loss account. This is carried out through journal entries. Depreciation on a
fixed asset is charged for its wear and tear. The value of an equipment or plant and machinery
diminishes gradually so a relevant amount is charged to profit and loss account so that at the end
of useful life of assets, an amount is available with the business to replace the old ones. Another
reason for charging this is that a big amount is not required to be in written form asset at the end
of useful life of an asset.
Methods of depreciation
Straight line method: This is an easy method to calculate depreciation. In this method,
estimated scrape value is deducted from value of assets and it is divided by useful life of asset.
The amount calculated from this formula is charged to P&L account every year for a time period
equal to useful life of asset.
Written down method: In this method, depreciation is calculated on diminishing value
of asset. For first year depreciation calculated is deducted from total value of asset and then on
reaming value, next year's depreciation is calculated (Huber, 2015). This process continues till
the useful life of assert is reached. In this method, amount of depreciation changes every year
with a fall in its amount.
CLIENT 4
A. Purpose of bank reconciliation statement
This is a statement through which a business can match transactions recorded in cash
book and bank statement. A comparison between both will ensure that all business transactions
that are recorded in both cash book and bank statement. A bank reconciliation statements show
the differences between bank statement and cash book (Baker and Burlaud, 2015).
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The following are guidelines for reconciling bank statement with cash book:
 Tick off all receipts and payments appearing in both cash book and bank statement.
 Any item appearing in bank statement which is not showing in cash book shall be
recorded and accordingly amendments shall be made.
Make a list of all transactions which are recorded in cash book but not recorded in bank
statement.
 Make list of payments revived but not yet recorded
 Fill total amount from bank statement and cash book to reconciliation statement
 At the end of this, both amount shall be equal.
B Reasons for variation between business records and bank records
If there is any difference, the reasons can be as follows:
 Payment that made were not recorded in cash book
 Cash payment revived recorded in cash book not in bank statement.
 Cash withdrawn not recorded in cash book
 A cheque payments made, not yet cleared, but recorded in cash book.
 A payment through bank not recorded in cash book.
 A cheque received from client recovered in cash books but not yet deposited in bank.
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C. Preparation of cash book and BRS
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BRS
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CLIENT 5
A. Preparation of sales ledger
Purchase ledger
B. Reasons for preparation of control account
This is an account prepared under financial statements of an organisation; in this
account, debit and credit totals of all the other accounts are posted on respective sides. This is a
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summary account where entries are made from total of different transactions of a period. The
sum of all balances from account of all consumers, makes the balances for control account. This
is a general ledger for which a corresponding subsidiary ledger is created, which allows tracking
down of transactions within controlling account (Wang, 2014). For every major business
transaction, a different controlling account is prepared such as for cash, credit sales and all
account receivables, a sale control account is prepared.
The different types of control accounts are as follows:
 Purchase control account
 Receivable control account
 sales control account
 payable control account
The main purpose behind preparation of this account is that a reconciliation between all
transactions related with a specific activity can be done. Moreover, all the payments made on
purchase and amount due for payments can be determined at one place only. In common use,
under ideal circumstances balance of a control account is Zero. The discrepancies if any occurs,
the reason for the same shall be found out in order to reach balance of control account at zero.
CLIENT 6
A. Suspense account and its main features
This is an account of General Ledger where an amount are recorded temporarily. This
account is prepared in case of a proper account cannot be identified at the time when that
transaction was recorded. Upon determination of proper account, the amount related with that
account will be moved to that. This account is generally used when both sides of a trial balance
do not reconcile or match. The error occurs when a discrepancy in recording of transaction
arises.
In such a case, the difference amount is recorded as suspense account for closing the books
of accounts of a business. With the end of financing year, the books are scrutinised and then
difference is identifies in n recoding of transaction, with a proper identification of a
transaction's location, it is moved from suspense account and recorded in its relevant account. In
this manner, the balance of suspense account is nullified and trial balance for a period is
reconciled.
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B-C. Preparation of trial balance and necessary corrections
D. Difference between suspense and clearing accounts
Suspense account: As the name suggests, the transactions of which an origin cannot be
identified are recorder in this account for a small time period. Upon recognition of their relevant
account, the transactions are moved to their respective accounts. This account is generally
prepared to handle uncertainties for recording unidentified and confusing transactions.
Clearing account: This is an account in which transactions are recorded temporarily
until right times comes to record those transactions in their actual account (Accounting
standards, 2018). This means a transaction which is certain and whose origin is known but to
avoid certain ambiguity are recorded in clearing account.
Comparison of both accounts: Both are temporary accounts and upon recognition of
them ,they are transferred to relevant account. Clearing account is used to record transaction for
later use or transfer ensuring that accounting information is recorded accuracy. Whereas,
suspense account is used when there is an accounting problem for that time and which is
resolved on a later date. The balance of both these accounts are required to be zero.
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Clearing account is used for clearing different clearing purposes and its balance is either
zeroed at end or is explained out. In case of suspense account, the transactions with ambiguity
are recorded and later on zeroed with identification and recertification of problem.
CONCLUSION
From the above report, it can be concluded that for a business, the regulations such as
IFRS, GAAP, FRC are mandatory to adhere in order to bring transparency in accounting system
along with a nationwide uniformity in adaption of same regulations. An organisation must be
always required to follow certain accounting principles so that for keeping its financial records
follows a single method in order to bring regularity. With preparation of various financial
reports such as balance sheets, ledger accounts, bank reconciliation statement, certain terms
related with 6 different clients have been explained Preparation of all those statements, assist
their respective business to fetch important financial information for making relevant decision
operations.
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REFERENCES
Books and Journals
Baker, C. R. and Burlaud, A., 2015. The historical evolution from accounting theory to
conceptual framework in financial standards setting. pp 211.
Barron, O. E., Chung, S. G. and Yong, K. O., 2016. The effect of Statement of Financial
Accounting Standards No. 157 Fair Value Measurements on analysts’ information
environment. Journal of Accounting and Public Policy. 35(4). pp.395-416.
Barth, M. E., 2015. Financial accounting research, practice, and financial
accountability. Abacus/ 51(4). pp.499-510.
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economic. 58(2-3). pp.339-383.
Christine, D. and Martiano, F., 2015. Review of the revenue recognition in accordance with
statement of financial accounting standard (PSAK) no. 23/2010 at Damri
Corporation. International Journal of Scientific & Technology Research, 4(8), pp.373-
379.
Huber, D., 2015. ON THE HEGEMONY OF FINANCIAL ACCOUNTING RESEARCH: A
SURVEY OF ACCOUNTING RESEARCH SEEN FROM A GLOBAL
PERSPECTIVE. Journal of Theoretical Accounting Research. 11(1).
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set. (pp. 1-6). Routledge.
Muda, I and et.al., 2017. THE INFLUENCE OF HUMAN RESOURCES COMPETENCY AND
THE USE OF INFORMATION TECHNOLOGY ON THE QUALITY OF LOCAL
GOVERNMENT FINANCIAL REPORT WITH REGIONAL ACCOUNTING
SYSTEM AS AN INTERVENING. Journal of Theoretical & Applied Information
Technology. 95(20).
Wang, C., 2014. Accounting standards harmonization and financial statement comparability:
Evidence from transnational information transfer. Journal of Accounting Research. 52(4).
pp.955-992.
Online
Accounting standards. 2018. [Online]. Available
through:<https://www.icaew.com/library/subject-gateways/accounting-standards/
knowledge-guide-to-uk-accounting-standards>.
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