Financial Accounting Table of Contents

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
1

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
2

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.
3

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
4

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
5

B. Ledger Accounts
Purchase ledger
6