Analysis of Financial Accounting Research and Practice

This assignment reviews the current state of financial accounting research, practice, and financial accountability. It covers topics such as the relevance of value-relevance literature for financial accounting standard setting, experimental research in financial accounting, and the transition to accrual accounting. The review also discusses the role of financial information in corporate governance and the analysis of financial statements.

Financial Accounting

Table of Contents
INTRODUCTION...........................................................................................................................4
BUSINESS REPORT......................................................................................................................4
1. Define financial accounting and its purpose ...........................................................................4
2. Regulations relating to financial accounting ...........................................................................5
3. Describe accounting rules and principles................................................................................5
4. Conventions and concepts relating to consistency and material disclosure............................6
CLIENT 1........................................................................................................................................8
(a) Journal Entry in the books of David Study:..........................................................................8
(b) Ledger Accounts:.................................................................................................................11
(c) Trial Balance as at 31st January, 2018:................................................................................17
CLIENT 2......................................................................................................................................18
(a) Statement of profit and loss for Peter Hampau for the year ended 31st July 2018 .............18
(b) Statement of financial position for Peter Hampau as at ended 31st July 2018 ...................18
CLIENT 3......................................................................................................................................19
(a) Profit and loss account of Bowling Limited.........................................................................19
(b) Balance Sheet of Bowling Limited......................................................................................20
(c) Accounts concepts : Consistency and Prudence:..................................................................20
(d) Purpose of depreciation in formulating accounting statements and methods of
Depreciation:..............................................................................................................................21
CLIENT 4......................................................................................................................................22
(i) Bank reconciliation statement at 1st December 2017:..........................................................22
(ii) Durrell Ltd's updated cash book for December 2017 :........................................................22
(iii) Bank Reconciliation Statement as at 31"t December 2017................................................23
CLIENT 5......................................................................................................................................24
(a) Sales Ledger Control and Purchase Ledger Control Account:.............................................24
(b) Control Account...................................................................................................................24
CLIENT 6......................................................................................................................................25
(a) Suspense Account:................................................................................................................25
(b) Preparation of Trail Balance:...............................................................................................26

(c) Journal entries in order to show necessary corrections for eliminating suspense account
balance:......................................................................................................................................26
(d) Difference between a Suspense A/c and Clearing A/c:........................................................27
CONCLUSION..............................................................................................................................27
REFERENCES .............................................................................................................................28

INTRODUCTION
Financial accounting is set of activities related to preparation of financial statements that
shows financial performance and position of an organisation to outsiders like investors, creditors,
suppliers, and customers. In present scenario financial accounting is core of business because it
is directly concerned with assessment of performance and presentation of financial statement.
Financial accounting starts with the process of recording of financial transactions and ends with
finalisation of accounts. In whole process financial accounting touches all financial aspects of
enterprise and create a framework for management of decision making (Oulasvirta, L., 2014). It
is not only limited to preparation of final accounts but also covers use of major assumptions,
conventions or practices, concepts, policies and rules in accounting process. This report exhibits
meaning of financial accounting, its purposes, regulations, rules, principles and conventions.
BUSINESS REPORT
1. Define financial accounting and its purpose
Financial accounting is branch of accounting related with summarising, analysing and
reporting of financial transactions associated with business and includes preparation of financial
statements available for shareholders, lenders, suppliers, creditors, banks, employees,
government agencies, business owners and other stakeholders (Stice and Stice, 2013). In
accounting process transactions are first recorded, posted or summarized and then presented in
financial statement such as an income statement or a balance sheet. Framing financial statements
in accordance with given guideline, standards, procedures , policies and rules, are part of
financial accounting. Financial statements prepared under financial accounting are used by
internal and external users. Internal users of financial statement are employees, management,
owner etc. whereas external users of financial statement includes creditors, government, lenders,
intermediaries etc. Financial accounting is administrated by both local and international
accounting standards. Following are the main purposes of financial accounting, as follows:
 Financial statement is prepared by using relevant information and data which assists users
of financial statement in decision making activities. Such as analysis of financial
statement helps management or owners to take important financial decisions (Bushman
and Smith, 2001).

 Financial statements prepared under financial accounting process provides accurate and
actual performance of organisation (Holthausen and Watts, 2001).
 For the purpose of identification of policies, fundamentals, culture and assumptions
followed by an organisations financial accounting play a vital role (Libby, Bloomfield
and Nelson, 2002).
 Financial accounting provides a framework for formulation of suitable strategy (Edwards,
2013).
 Financial Accounting provides comparable information which enables investors to make
decisions related to investment opportunities (White, Sondh and Fried, 2005).
 It ensures that policies and procedures adopted by organisation are constantly followed
from one year to another (Peterson, 2005).
2. Regulations relating to financial accounting
Regulation refers to rules that are developed to control and govern conduct by authority.
Government or responsible authorities for establishing control or to regulate the framework of
accounting creates regulations that provides framework for preparation of financial statements
(Tschopp and Nastanski, 2014). Following are the major regulations that have direct or indirect
impacts on financial statements:
 GAAP or Generally accepted accounting standards are framed under regulations in order
to provide guidance for preparation and presentation of final accounts.
 Along with GAAP, IFRS (International Financial Reporting Standards) are followed by
organisations to trace out particular issues related with transactions and other event,
reported in financial statements.
 Beside GAAP and IFRS there are certain accounting assumptions, concepts, methods and
policies, that are regulated by authorities which creates equality in accounting processes
adopted by different organisations (Alver and Talpas, 2013).
 Acts or rules related with different organisational structures like companies, joint
ventures, partnership firms etc. also provide some specific requirements related to
preparation of financial statement.
3. Describe accounting rules and principles
Following are the main accounting rules that are also called as The Golden Rules of
Accounting, as follows:

Debit the receiver, credit the giver: This rule is applied for personal accounts. A
Personal account is a General ledger account related to all persons like individuals, firms and
associations for example debtors account, banks account, creditors account, capital account etc.
If an individual give something to organisation it treated as inflow so personal account will be
credited and if individual receive something from the organisation than amount must be debit on
name of individual (Hale and Held, 2012).
Debit all expenses and losses, credit all incomes and gains: This rule is used in case of
nominal account. A Nominal account is a General ledger account related to all income, expenses,
losses and gains. Under this rule capital is considered as liability for business and liability shows
credit balances. Incomes and gains increases the capital so all incomes and gains are credited
whereas debit all expenses and losses because expenses or losses decreases the capital (Khan and
Mayes, 2009).
Debit what comes in, credit what goes out: This rule is used in case of real account. All
assets of a firm whether tangible or intangible are Real Accounts such as machinery account,
land and buildings account etc. There are two types of real account: Tangible real accounts and
Intangible real accounts. Tangible real accounts includes building account, machinery accounts,
stock stock account, land account, etc. Whereas Intangible real accounts refer to account related
to things that can’t be touched such as goodwill, patents, trademarks etc (Saunders, Cornett and
McGraw, 2006).
Principles:
Dual aspect concept: Dual aspect concept is purely based upon double entry system of
accounting. According to this principle every business transaction affects two accounts
simultaneously. In which credit side of one account and debit side of another always be affected
due to double entry system (Zeff, S. A., 2016). In Single entry system only one aspect of the
transaction is recorded which sometimes seems irrelevant. So in order to avoid practice of single
entry system dual aspect concept is developed.
Cost principle: According to this principle asset should always be reported on their cost..
In simple words it can be say that organisation should record their assets on value paid for the
assets (Barth, 2015).
Matching principle: As per this principle, all expenses of business should be matched
with the revenues which are generated in same accounting period.

4. Conventions and concepts relating to consistency and material disclosure
An accounting convention refers to common practices and set of rules that are used as
guidance while recording of business transactions. Accounting conventions are used for certain
things for which no accounting standards are issued yet. Conventions are followed by
organisations voluntarily to avoid any difficulties in accounting practices. Following are the
major convention, as follows:
Convention of consistency: Convention of consistency refers to an accounting practice
in which if once entity has adopted one method or policies then entity should use the same
method or policies for all subsequent years or events unless there is requirement of change in
methods or policies (Agasisti and Catalano, 2013). This convention provides a framework due to
which comparison of data from past year is possible. Frequent changes in methods or policies
results in decrease in reliability of financial statements. For example, in case an entity has
followed FIFO method for stock valuation then to maintain consistency or equality in accounting
FIFO method should be used for subsequent period.
Convention of material disclosure: According to this convention it is required to disclose
all significant information in books of accounts and final accounts in order to show all material
information clearly. Disclosure of material information is also necessary for investors, creditors
and owners to take vital decisions (Edwards, 2013).

CLIENT 1
(a) Journal Entry in the books of David Study:

(b) Ledger Accounts:

(c) Trial Balance as at 31st January, 2018:

CLIENT 2
(a) Statement of profit and loss for Peter Hampau for the year ended 31st July 2018
Particulars Amount
(in £)
Particulars Amount
(in £)
To Opening stock 4500 By Sales 120000
To Purchase 70000
To Wages and salaries:
16500
Add: Outstanding wages & salaries
1520
18020
To Gross Profit 70120 By Closing stock 42640
Total 162640 Total 162640
To Depreciation: By Gross Profit Carried
forward
70120
Freehold property
560
Equipment
1900
Motor vehicle
360
2820
To Motor expense 4580
To Admin expense 1650
To Heating and lighting expense 550
To Advertisement Expense: 1030
To Net Profit 59490
Total 232760 Total 232760

WORKING NOTE: If we take prepaid expenses of advertisement amounting to £4,470 as
given in the question, then advertisement expenses for the year ended 31st July, 2018 will
become negative that is - £3,440, so the additional information given in the problem is ignored.
(b) Statement of financial position for Peter Hampau as at ended 31st July 2018
Capital Amount
(in £)
Asset Amount
(in £)
Capital Account: Fixed Asset:
Opening Balance
24380
Freehold Premises: cost
28000
Add: Net Profit as per statement of
profit & loss
59490
Less:Accumulated
Depreciation
5010
22990
Less: Drawing
2800
81070 Equipment : cost
19000
Less:Accumulated
Depreciation
8700
10300
Current Liabilities: Motor Vehicles: cost
3000
Bank overdraft 1000 Less:Accumulated
Depreciation
1560
1440
Payable 5600
Outstanding wages and salaries 1520
Current Assets:
Inventory 42640
Receivable 11520
Cash in hand 300
Total 89190 Total 89190

CLIENT 3
(a) Profit and loss account of Bowling Limited
Consolidated Income Statement for the years ended 31st July, 2018
EUR
Sales 107000
Other income -
Total Revenue 107000
Cost of system sales 32000
Change in inventory 1000
Return inwards 2000
Total cost of sales 35,000
Gross profit on sales 72,000
Distribution cost 30000
Administrative costs 30000
Operating income 12,000
Interest income -
Interest expense -
Income before income taxes 12000
(b) Balance Sheet of Bowling Limited
Consolidated Balance Sheets for the years ended 31st July, 2018
Assets Amount in EUR
Land 10000
Building 50000
Less: Accumulated Depreciation 7000
Depreciation for the year 1000 42000

Plant and machinery 65000
Less: Depreciation 15000
Depreciation for the year 10000 40000
Total non-current assets 92,000
Inventories 18000
Current tax assets
Derivative financial instruments
Prepaid Rent 3000
Accounts receivable 24000
Total current assets 45,000
Total assets 1,37,000
Equity and liabilities
Share capital 50000
Share premium 20000
Retained Earnings including current year profit 34000
Equity 104000
Current and other tax liabilities 4000
Accrued salaries 2000
Bank Overdraft 13000
Accounts payable 14000
Total current liabilities 33,000
Total equity and liabilities 1,37,000
(c) Accounts concepts : Consistency and Prudence:
Accounts concepts incudes set of rules and assumptions that acts as foundation for
recording of accounting entries and finalisation of accounts. Consistency and prudence are major
accounting concepts used by business enterprises as a guidance.

Consistency: This accounting concept requires constant use of accounting policies and
procedures adopted by enterprise from one period to another. Change in accounting policies and
procedures made only if this change results in more appropriate way of reporting financial
statement (Alver, Alver and Talpas, 2013).
Prudence: Prudence concept is also known as conservatism concept that requires
recording expenses and liabilities as soon as they occur, but the revenues only when they are
realized or assured.
(d) Purpose of depreciation in formulating accounting statements and methods of Depreciation:
The main purpose of providing depreciation while preparing final account is to allocate
cost of fixed asset into revenue earned from such fixed asset. Following are the important
methods used by enterprises to calculate depreciation:
Straight line method: Under Straight line method value of an asset is reduced evenly
over the period until it reaches its salvage value. Straight line depreciation is popular and simple
depreciation method for allocating the cost of a capital asset (Jönsson, 2013).
Formula:
Annual depreciation expenses= Cost of assets- Residual value
Useful life of asset
Written down value method: Under this method a certain percentage is applied to book
value of asset in order to calculate depreciation and assets is shown after deducting accumulated
depreciation every year This method is most suitable with respect to those assets that have more
efficiency in the beginning and thereafter decreases year after year. This method is usually
adopted for plant and machinery, fixtures and fittings, motor vehicles, etc.. Formula for
calculation of rate of depreciation:

CLIENT 4
Purpose of bank reconciliation: Statement Bank reconciliation statement is used to compare the
records of bank to see if there are any difference between two sets of records for cash
transaction. It is prepared by the accountant to know the differences between balance in bank
statement and balance in accounting records.
Reason for variation in cash book and bank statement: Direct deposit of amount by
customers, bank charges charged by bank, cheque issued but not presented etc. are main reason
for variation in cash book and bank statements.
(i) Bank reconciliation statement at 1st December 2017:
Bank reconciliation statement at 1st December 2017
Particulars Amount
Bank Balance as per pass book 17478
Less: Suspense due to wrong carry forward 987
Actual balance as per cash book after reconciliation 16491
(ii) Durrell Ltd's updated cash book for December 2017 :
Updated Cash Book for December Month
Particulars Amount Particulars Amount
Balance B/d 16491 Alexander 857
Suspense A/c 987 Bank Charges 47
Able 962 Burgess 221
Baker 1103 Barry 511

Direct deposit by
customer
176 Cook 97
Charlie 2312 Payment 120
Delta 419 Hay 343
Instrument No. 785 106 Rent 260
Echo 327 Instrument No. 780 426
Cash Sales 529 Instrument No. 781 737
Fred 119 Instrument No. 310923 297
Instrument No. 787 260 Standing order rates 137
Balance c/f 19738
Total 23791 Total 23791
(iii) Bank Reconciliation Statement as at 31"t December 2017
Bank Reconciliation Statement
Particulars Amount
Bank Balance as per pass
book
19738
Add: Items having effects of higher balance in cash book
Cheque deposited but not yet cleared 120
Bank charges not recorded in cash book 47
Payment by bank not recorded in cash book
Instrument No.780 426
 Instrument No.781 737
 Instrument No.310923 297
Adjustment for standing order rates 137

Less: Items having effects of lower balance in cash book
Cheque issued but not yet presented for payment
Instrument No. 785 106
Instrument No.787 260 366
Direct deposit by customer 176
Bank balance as per cash book (Should be) 20960
Less: Opening Balance difference
(17478-16491)
987
Actual balance as per cash book after reconciliation 19973

CLIENT 5
In the books of Henderson for January, 2018
(a) Sales Ledger Control and Purchase Ledger Control Account:
(i) Purchase Ledger Control A/c
Purchase Ledger Control A/c
Particulars Amount
(£)
Particulars Amount
(£)
Discount Received 550 Balance b/d 10160
Purchase Return 2110 Credit Purchase 106500
Bank/ Cash (Payment to
suppliers)
111010 Bank/ Cash (Refund from
supplier)
400
Set-off (Transfer from sales
ledger)
540
Balance c/d 2850
Total 117060 Total 117060
Balance b/d 2850
(ii) Sales Ledger Control A/c
Sales Ledger Control A/c
Particulars Amount
(£)
Particulars Amount
(£)
Balance b/d 9600 Sales Return 5320
Credit Sales 142350 Bad Debts 1200
Discount Allowed 960
Bank/ Cash (Receipt from credit
customers)
150610
Balance c/d 6680 Set-off (Transfer to purchase
ledger)
540
Total 158630 Total 158630
Balance b/d 6680

(b) Control Account
Control account is ledger account which contains total of balance of individual
accounts. At the end of accounting period by passing a single entry balance of all accounts are
transferred to control account. Control accounts helps to recheck correctness of accounts before
preparation of final accounts. Balance of this accounts exhibits the aggregate balance of all
individual accounts (Barth, 2015). Following points describes the need for preparing control
account in the context of Henderson, are as follows:
 Control account used to prepare a systematic summary of various translations or various
ledgers.
 A proper classification of accounting information and data is among responsible
personnel is easy with control account.
 Control account is used by management and other responsible person as a systematic tool
for reconciliation of cost and financial statements.
 Using summary of accounts preparation of Profit and loss account and balance sheet
becomes easy for management and accountants.
 Control accounts act as internal check in order to ensure accuracy of account balances
and transactions.
CLIENT 6
(a) Suspense Account:
It is a temporary account in which transaction or balances recorded that are not identified
before finalisation of account. After identification of such transaction or balance, amount from
suspense account should be moved to proper account for preparation of final account. For
example, due to error or omission there is an amount that do not have any account label
(DRURY, 2013). In order to finalise account before certain date responsible personnel recorded
such amount in general ledger Suspense account. After ratification of such amount, move the
amount from the Suspense account to appropriate account.
Main features of suspense account:-
 Assists in preparation of trial balance: In case of any mismatch in total of balances in
trial balance suspense account is opened temporarily.

 Identification of error: By recording amount in suspense, it become easier to allocate
and identify error (Edwards, 2013).
 Exhibits possible misstatement in final accounts: If amount or balance in suspense is
remain unidentified after finalization of accounts, then it points out possibility of
misstatement in final account which can be material,
 Quick assess of one sided error: Creation of suspense account helps to identify any one
sided error or omission in account quickly.
 Helps in evaluation of errors: Unidentified amount or balance in suspense account
helps accountant to evaluate the error or omission in account is intentional or
unintentional.
 Plays major role in preparation of Final Accounts: in case of any disagreement in
amount which is remain unidentified but preparation of final accounts is urgent then
sometimes suspense account is shown in final accounts with proper disclosure
acquirement stating that there is no serious misstatement in final accounts (Fourie, 2015).
(b) Preparation of Trail Balance:
(in £)
Ledgers Debit Credit
Purchase Account 700
Sales Account 1100
Rent Paid 250
Cash in bank 840
Travel expense 160
Receivables 320
Payables 350
Opening Inventory 220
Capital Account 710
Control Account 330
Total of all balances 2490 2490

(c) Journal entries in order to show necessary corrections for eliminating suspense account
balance:
Journal Entries
(in £)
Particulars Debit Credit
Simon A/c Dr
To Smith A/c
(being sale was debited to smith instead of Simon)
220
220
Jones A/c Dr
To Suspense A/c
(being sale of £420 not entered in Jones account, now entered)
420
420
Suspense A/c Dr
To White A/c
(being purchase of £750 not entered in White account, now
entered)
750
750
Dr. Suspense Account Cr.
Particulars Amount Particulars Amount
To White A/c 750 By opening balance 330
By Jones A/c 420
Total 750 Total 750
(d) Difference between a Suspense A/c and Clearing A/c:
Suspense account is prepared in case of any error or omission in account or balance and
shows account or balance until problem is identified where as Clearing accounts are prepared in
order to record transactions for later posting and shows amount or balances are recorded
correctly and completely (Mullinova, 2016).

CONCLUSION
From above report it has been concluded that in order to enhance the performance and
adoption of best accounting practices, financial reporting is most considerable aspect (Baldwin,
Ingram and Albright, 2007). To increase the reliability and creditability of financial statements
proper financial accounting process is required to be established. Reporting under financial
accounting process build trust of users of financial statement in businesses organisation which
create potential long or short term advantages for business organisation.