Financial Accounting: Types of Business Transactions, Journal Entries, and Fundamental Principles

This document provides an introduction to financial accounting and managerial accounting. It covers topics such as types of business transactions, journal entries, trial balance, and fundamental principles of accounting. It also explains the difference between financial statements and financial reports. Suitable for students studying financial accounting or anyone interested in understanding the basics of accounting.

FINANCIAL
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
SCENARIO 1...................................................................................................................................1
Question 1 ...................................................................................................................................1
Question 2....................................................................................................................................3
Question 3....................................................................................................................................7
Question 4....................................................................................................................................8
Question 5....................................................................................................................................9
SCENARIO 2.................................................................................................................................11
Question 1..................................................................................................................................11
Question 2..................................................................................................................................12
Question 3..................................................................................................................................12
Question 4..................................................................................................................................13
Question 5..................................................................................................................................15
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18

INTRODUCTION
Financial accounting refers to the specialised accounting branch which involves the
process to record, summarise and report myriad of the transactions that result from the business
operations in a specific time period. The transactions of the business are summarised for
preparing the financial statements which records the operating performance of the company over
specific period. Financial accounting uses various established principles of accounting. Selection
of the accounting principles for use in course of the financial accounting is dependent on the
nature of business. The accounting principles are framed for providing consistent information to
the creditors, investors, tax authorities and regulators. Managerial accounting is in contrast with
the financial accounting as management accounting is used for internal processes and does not
follow any standards and set procedure. Managerial reports are prepared for the internal
processes. Present report is based over the concepts of financial accounting and managerial
accounting. Report will be providing an understanding of double entry system of book keeping.
It will include journals, ledger accounts, trial balance, income statement, balance sheet and bank
reconciliation statement.
SCENARIO 1
Question 1
Different Types of Business transactions
Business transaction refers to the event which is measurable in monetary terms and is
having an impact over financial position of business. There are two types of business
transactions
1. Credit and Cash Transactions
2. External and Internal transactions
Cash & Credit Transactions
Cash transaction is the one where cash is received or paid immediately at time when the
transactions occur. They are not restricted to currency coins and notes to make or receive
payments but extends to all the transactions made using credit or debit cards.
Credit Transaction do not change hands immediately when the transaction is occurring.
Cash in such transactions is paid or received at the future date (Sangster, 2016). Credit
transactions are generally related to the purchase and sales of goods and materials.
Internal & External transactions
1

Internal transactions are the transactions where external parties are not involved.
Transaction does not involve exchange of value between the parties but transaction for the event
is measurable in terms of money and has impact over the financial positions such as depreciation.
External transaction refers to transaction where value is exchanged with the external
parties. All transactions which are not internal are the external transactions. The external
transactions are performed by the business on regular basis. Majority of the transactions are
external in the business.
Single entry and double entry book keeping
Single entry book-keeping refers to the simple & straightforward method of the book
keeping where every transaction is recorded in as single entry in the journal. The book keeping
method is cash based which records in the inflow and outflow of the cash in journal.
Double entry system refers to the method in which every transaction of the business is
recorded and entry is affecting at least two accounts one as debit and other as credit. In double
entry book keeping amount recorded in debit must equal to amount recorded as credit.
Trial balance and its importance.
Transaction recoded in double entry book keeping has credit for each debit. When the
accounts are debited they should be credited with the equal amount. It is therefore evident that
total of the debit balance will equal to total of credit balance. Trial balance is the statement
prepared with one debit side and one credit side. It is the list of balances standing over ledger
accounts & cash book of the concern.
Trial balance is prepared for ensuring that the total of debit side is equal to the total of
credit side. Discrepancy in total signals that there is presence of the mathematical error in
accounting transactions or their posting to the ledger accounts. It is used for compiling the
financial statements that reveals the financial performance and position of the company. The two
statements prepared from the trial balance are income statement and balance sheet (Maynard,
2017). This is used by the management for making sound business decisions. Seeing the trial
balance they could get the idea over the income and expenses of the enterprise for the period.
Auditors use the trial balance for examining the physical assets for determining the material
discrepancies.
2

Question 2
Journal Entries
Date Particulars Debit Credit
01/06/20 Bank 65000
To Capital 65000
02/06/20 Purchases 8000
To Creditors 8000
07/06/20 Cash 4000
To Sales 4000
08/06/20 Creditors 4000
To Bank 4000
14/06/20 Insurance 75
To Bank 75
15/06/20 Debtors 12000
To Sales 12000
16/06/20 Purchases 10000
To Creditors 10000
18/06/20 Computer Equipment 3000
To Cash 3000
20/06/20 Rent 150
To Bank 150
21/06/20 Cash 10000
To Sales 10000
25/06/20 Petty Cash 100
To Bank 100
30/06/20 Stationary 30
To Petty Cash 30
LEDGER ACCOUNTS
3

Account
Name Bank A/c No. 1
Date Particulars Amount Date Particulars Amount
01/06/20 To Capital 65000 08/06/20 Creditors 4000
14/06/20 Insurance 75
20/06/20 Rent 150
25/06/20 Petty Cash 100
30/06/20 Bal c/d 60675
65000 65000
Account
Name Cash A/c No. 2
Date Particulars Amount Date Particulars Amount
07/06/20 To Sales 4000 18/06/20 Computer Equipment 3000
21/06/20 To Sales 10000
30/06/20 Bal c/d 11000
14000 14000
Account
Name Petty Cash A/c No. 3
Date Particulars Amount Date Particulars Amount
25/06/20 To Bank 100 30/06/20 Stationary 30
30/06/20 Bal c/d 70
100 100
Account
Name Purchases A/c No. 4
Date Particulars Amount Date Particulars Amount
02/06/20 To Creditors 8000
16/06/20 To Creditors 10000 30/06/20 Bal c/d 18000
4

18000 18000
Account
Name Sales A/c No. 5
Date Particulars Amount Date Particulars Amount
07/06/20 Cash 4000
15/06/20 Debtors 12000
30/06/20 Bal c/d 26000 21/06/20 Cash 10000
26000 26000
Account
Name Creditors A/c No. 6
Date Particulars Amount Date Particulars Amount
08/06/20 To Bank 4000 02/06/20 Purchases 8000
16/06/20 Purchases 10000
30/06/20 bal c/d 14000
18000 18000
Account
Name Debtors A/c No. 7
Date Particulars Amount Date Particulars Amount
15/06/20 To Sales 12000
30/06/20 Bal c/d 12000
12000 12000
Account
Name
Computer
Equipment A/c No. 8
Date Particulars Amount Date Particulars Amount
18/06/20 To Cash 3000
30/06/20 Bal c/d 3000
3000 3000
5

Account
Name Rent A/c No. 9
Date Particulars Amount Date Particulars Amount
20/06/20 To Bank 150
30/06/20 Bal c/d 150
150 150
Account
Name Stationary A/c No. 10
Date Particulars Amount Date Particulars Amount
30/06/20 To Petty Cash 30
30/06/20 Bal c/d 30
30 30
Account
Name Insurance A/c No. 11
Date Particulars Amount Date Particulars Amount
14/06/20 To Bank 75
30/06/20 Bal c/d 75
75 75
Account
Name Capital Account A/c No. 12
Date Particulars Amount Date Particulars Amount
01/06/20 Bank 65000
30/06/20 Bal c/d 65000
65000 65000
Trial Balance
Ac no Particulars Debit Credit
6

1 Bank 60675
2 Cash 11000
3 Petty Cash 70
4 Purchases 18000
5 Sales 26000
6 Creditors 14000
7 Debtors 12000
8
Computer
Equipment 3000
9 Rent 150
10 Stationary 30
11 Insurance 75
12 Capital Account 65000
Total 105000 105000
Question 3
Difference between financial statements and the financial report.
Financial statements and the financial reports are used often interchangeably but both are
different.
Financial Report
Financial report is also known as the annual report or financial reporting is big collective
document which summarises financial spendings and the earnings of given company during a
year. The financial report combines earnings of income statement and provides outlook of net
worth that shows spendings and expenses in the great detail. It provides instructions from senior
officers or owners for increasing the profits or to increase net worth. Financial reports collects
important and essential financial information for public distribution. It is essentially important
for the financial reports to be accurate & producing in timely fashion (Andreica, 2016). It helps
the management in making informed business decisions and helps in complying with all the rules
and regulations of the statute and maintaining reputation in industry. Financial reporting
solutions should be easy o use, fast and accurate.
Financial statements
7

These are the short documents which presents information on income for the business at
the given time. Financial information shows current balance in terms of the income changes in
overall worth of company based over its income and cash flow statement which shows sources of
funds. Financial statements do not include information over the expenses of the purchases.
Financial statement relates to providing the information over financial position, results of
the operations and cash flows (Lorson, 2017). The information in financial statements helps
users of the financial statement in making decision for allocation of the resources. There are
three main financial statements that are income statement which informs about ability of
company in generating profit, balance sheet reporting current position of the business and cash
flow statement shows inflows and outflows of cash.
Use of the above reports and the user of these reports.
Financial reports have the information about the business workings and operations. It
contains the information that is used for making financial decisions. These help the organisation
in framing the corporate strategies for increasing the profits are making the existing processes
easier. It ensures that business is operating in the defined manner. The financial reports are made
for internal use of management and not for external parties (Kaya, 2019). Management user
these reports for taking decisions for increasing the operating effectiveness, increasing profits
and to maximise wealth of the shareholders.
Financial statements on the other contains the information regarding the income of the
company that is presented in the income statement. It provides the details over income and
expenses of the entity during the period. Balance sheet provides about the assets and liabilities of
company and cash flow statement provides information about the cash inflows and outflows.
Financial statements are used by the external parties that are shareholders, government,
suppliers, customers and other parties for assessing the financial performance and position of the
firm.
Question 4
Fundamental principles of accounting
There are different fundamental principles of accounting.
Monetary unit
8

It requires to record the values in term of the single monetary units. It could not be
accounted for the goods like barter system. It is difficult to assign values to the goods & items as
this is subjective.
Going concern
Accounting is based over the concepts that business is established for doing business for
an indefinite period. Due to the principle of going concern organisations could function on the
credit, it accounts for the accounts receivables & payables that intends to pay or receive in future
and for charging depreciation.
Principle of Conservatism
Central tenet is principle of conservatism. As per the principle when doubt is there about
amount of the expected inflows & ouflows. Company is required to state lowest possible
revenues and highest possible expenses and costs (Kristýna, 2018). Inventory is valued at lower
of the cost or market prices. The principle helps the business in preparing about the forthcoming
financial crises.
Cost principle
It is related closely to the conservatism principle. It advocates that it should lists
everything on financial statements at cost price. Assets like gold, plant, machinery etc
appreciate. The appreciation in financial statements is not reflected unless realized by the
company. Assets could not be recorded over market value as they are only estimates.
Accounting works over the cost principle that is over facts.
Question 5
Profit and loss statement and the balance sheet for the year ended 31 December 2017.
Profit or Loss Statement for the year ended 31 December, 2017.
Particulars Amount Amount Amount
Sales 124000
(125000-1000)
COGS 82000
Opening stock 9500
Purchases 73500
(75000-1500)
-Closing stock -1000
9

Gross Profits 42000
interest received 1000
Rent received 4850
Less: Unearned rent -490 4360 5360
Operating Expenses
Wages & Salaries 13200
Rent and Rates 1500
add: Outstanding business rates 340 1840
Postage 900
Depreciation on motor van 5000
Insurance 7500
Less: prepaid insurance 411 7089
Bad debts 1200
less: 650 550 28579
Net Profit 18781
Balance Sheet for the year ended 31 December, 2017.
Amount Amount Amount
ASSETS
Current assets :
Bank 10594
cash 340
Debtors 12500
add: bad debts 650
Less: provision for bad and doubtful
debts 934 12216
Closing stock 1000
Prepaid insurance 411
Total current assets 24561
Motor van at Cost 25000
Less: Accumulated depreciation 5400
Less: depreciation 5000 14600
Loan given @ 10% 100000
10

Total fixed assets 114600
Total assets 139161
LIABILITIES
Current liabilities
Creditors 3900
Business rates outstanding 340
Unearned rent 490
Total current liabilities 4730
Owners’ equity
Capital 120800
Less: drawing -5150
Add : net profit 18781
Total Shareholders’ equity 134431
Total Equity & Liabilities 139161
SCENARIO 2
Question 1
Bank Reconciliation
It refers to process of matching balances in accounting records of the entity for cash
account to corresponding information of the bank statement. Goal of the process is of
ascertaining differences between two and booking changes to accounting record as appropriate.
It is process of matching balances in accounting records for the cash account to corresponding
information over the bank statement.
Purpose of bank reconciliation statements and this is achieved.
Information on bank statement is record of bank of all the transaction impacting bank
account during previous period. Bank reconciliation requires to be done at the regular intervals
for bank account. It could be found that cash records of the company are correct. Else it could be
found that the cash balances are lower than the expected that results in overdraft fees or the
bounced cheques (Wuwungan, 2016). Bank reconciliation detects frauds and errors and this
information is used afterwards for designing controls over receipts and payment of the cash.
11

This is achieved by adding the figures that are not present in cash book and present in
bank statement and the deducting items that are not present in bank statement but present in cash
book. Banks reconciliation is essential for identifying the errors and frauds existing in cash. It is
prepared for matching the balance as bank statement and balance as per cash book. Bank
reconciliation statement is prepared at regular intervals for matching the balance of cash book
with the bank statements.
Question 2
Control Accounts
Control account is the account in general ledger which sums up the balances of subsidiary
accounts. General ledger could hold number of sub accounts and accounts. Adding all the
accounts in general ledger makes it complex therefore control accounts are prepared. It is
summary account in general ledger. It contains the aggregate total for the transactions that are
stored in the subsidiary level of ledger accounts.
Role of the control accounts in the financial management
Control account speed up process of producing the managerial accounting information as
balance of control account could be used and not waiting for individual balances to extract and
reconcile. It reduces details required in general ledger (ANGELINA, 2018). These are commonly
used for summarising the accounts payables and accounts receivables as it contains large number
of transactions which are required to be segregated into different control accounts.
Question 3
Suspense Accounts
Suspense accounts is a section of the ledger in which all the different organization
records or the different entries which are still requires the further analysis in context of the
proper finding out of the correct destination and classification of the records and entries.
Suspense account is generally classified as a current assets accounts reason behind the same may
be because these is currently used in the organization to record the different payment which is
related to different accounts receivable. It is also possible to have a liability suspense accounts as
well. That sort of suspense account contains the different information in regards of disposition
who's disposition is still not clear in the organization.
Reason behind opening of trial balance
Suspense account is generally opened in the organization at the time the trial balance of
12

the company is out of the balance or there are any sort of the unidentified transaction, as
suspense account is the type of the suspense account in the ledger which used to hold up until
any sort of the error is being derived or any unknown transaction has been find out. Suspense
account is generally opened in the organization once the final account is prepared in the
organization. In simple words it can be understand that at the time of trial balance credit are
larger than the debits of the suspense accounts it generally means that difference in the records
has been generally find out at the same time the suspense account is opened in the assets at the
same time if the credit in the organization is more than the debit in the organization (Owolabi
and et.al., 2016). In term of the suspense account at the time of customer invoice, it has been find
out that whenever the company is not able to find out the invoice of the customer transaction
than transaction used to go into the suspense account of the company. In context of closing of the
suspense account in the trial whenever the organisation used to find out the reason behind
occurring of these sort of the issue, the suspense account of the company is being removed from
the trial balance of the company in the future (Suspense account, 2018).
Question 4
Updated Cash book and bank reconciliation statement.
Cash Book
Dr.
Revised cash book (as per bank column )
Cr.
Date Particulars Amount Date Particulars Amount
1 To bal b/d 1760 2
By direct
transfer to
Petal 1070
6 To dividend 325 3
By
insurance
premium 170
8
By bank
charges 25
9 By bal c/d 820
2085 2085
Bank Reconciliation Statement
Bank reconciliation statement for the month of February
13

Particulars Amount
Total
amount
Balance as per cash book 1760
add: Direct transfers 1070
Add: Withdrawal 105
add: cheques not presented 270
Add: Dividend collected by bank 325
less: Bank charges 25
less: Insurance Expenses 170
Less: bill paid 56
less: cheques received but not recorded 186
Balance as per bank statement (Cr.) 3093
Difference between direct debit & standing order, bank charges and dishonoured cheques.
Direct Debit
It refers to automatic payment system where the payee has the authority by payer for
withdrawing money from the payer's account. Payee has the legal right for drawing amount due
from payer's account over certain period. Holder of bank account gives instructions to the bank
on timings and withdrawal amounts to particular payee.
Standing Order
It is the standing instructions or the bank order. In the standing order payer could instruct
bank for transferring specific amount from the account at the regular intervals. In such order
instructions are already given to bank by payer for transfer of specific amount to payee account
over regular intervals.
Bank charges
It is various fees that the account holders for maintaining the accounts along with the
other charges which are incurred for the specific transactions. It is charged directly over the
account of customers by reducing bank balances shown in bank statement (Nugrahanti, 2016).
Charges are not recorded by business until bank provides bank statement at month end.
Dishonoured Cheque
Non payment of the cheque is known as dishonour of the cheque. It is generally caused
due to the two main reasons that are technical default in cheque like signature mismatch,
14

disparity in amounts in words and figures etc. or due to the insufficient funds in account of
drawer.
Question 5
a) Journal entries for correction of the errors
Journal entries for rectification of errors
Right
entry Debit Credit
Wrong
entry Debit Credit
Rectified
entry Debit Credit
Purchase
A/c Dr. £2,000.00
Purchase
A/c Dr. £2,000.00
To Musa
A/c £2,000.00
Entry
omitted
To Musa
A/c £2,000.00
Van A/c
Dr. £670.00
Van A/c
Dr. £670.00
Cash A/c
Dr. £1,340.00
To bank
a/c £670.00
To Cash
A/c £1,340.00
To Bank
a/c £670.00
G Tahir
A/c Dr. £650.00
Not
entered in
G Tahir
A/c
G Tahir
A/c Dr. £650.00
To Sales
A/c £650.00
To sales
A/c £650.00
To
Suspense
A/c £650.00
Electricity
bill A/c
Dr. £790.00
Suspense
A/c Dr. £790.00
Electricit
y bill A/c
Dr. £790.00
To cash
A/c £790.00
To Cash
A/c £790.00
To
Suspense
A/c £790.00
Motor
vehicle
Expense
A/c Dr. £500.00
Motor
Vehicle
A/c Dr. £500.00
Motor
vehicle
Expense
A/c Dr. £500.00
To cash
A/c £500.00
To Cash
A/c £500.00
To Motor
Vehicle
A/c £500.00
Sales
Balance £1,030.00
Sales
Balance £1,300.00
Sales A/c
Dr. £270.00
To £270.00
15

Suspense
A/c
L
Samantha
A/c Dr. £190.00
Discount
Allowed
A/c Dr. £190.00
L
Samantha
A/c Dr. £190.00
To
Discount
Received
A/c £190.00
To L
Samantha
A/c £190.00
Suspense
A/c Dr. £190.00
To
Discount
received
A/c £190.00
To
Discount
Allowed
A/c £190.00
Bank A/c
Dr. £384.00
Sales A/c
Dr. £384.00
Bank A/c
Dr. £384.00
To D
Jones A/c £384.00
To
suspense
A/c £384.00
To sales
A/c £384.00
b) Suspense accounts showing rectification of the difference
Dr. Suspense A/c Cr.
Particulars Amount Particulars Amount
To Discount
received A/c 190
By G. Tahir
A/c 650
To Bal. C/d 1520
By
electricity
bill A/c 790
By sales 270
1710 1710
16

CONCLUSION
The above report concludes the different type of business transaction and also definition
of single entry system and double entry book keeping. After that the report concludes the
difference between the financial statement and the financial report in the organization also user
of the same in the organization. After that report concludes the different fundamental principles
in regards of the accounting in the organization. After that report goes on to concludes the bank
recognition and explanation in regards of control accounts, also meaning of suspense account
and reason for opening the same in the organization. In the end report summarized difference
between direct debit and standing order, Bank charges, Dis-Houner Cheque and net profit for
Milky as well.
17

REFERENCES
Books and Journals
Andreica, I., 2016. Double entry bookkeeping vs single entry bookkeeping. Bulletin of
University of Agricultural Sciences and Veterinary Medicine Cluj-Napoca. Horticulture.
73(2). pp.282-290.
ANGELINA, J., 2018. PENGARUH PENTAGON FRAUD TERHADAP INDIKASI FINANCIAL
STATEMENT FRAUD(Doctoral dissertation, Universitas Negeri Jakarta).
Kaya, E., 2019. THE HIsTORICAL AssEssMENT OF FINANCIAL sCANDALs. RECENT
ECONOMIC APPROACHES & FINANCIAL CORPORATE POLICY, p.121.
Kristýna, N., 2018. Financial health assesment from the accounting perspective in the case of
agriculture. Economics Working Papers. 2(1). pp.7-52.
Lorson, P.C., 2017. Globally harmonized public sector accounting standards–also suitable for the
EU?.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Nugrahanti, Y.W., 2016. PERANGKAP KAPITALISME DALAM ADOPSI
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS). Dinamika
Akuntansi Keuangan dan Perbankan. 5(1).
Owolabi, F., and et.al., 2016. Assessment of sustainability reporting in Nigerian industrial goods
sector.
Sangster, A., 2016. The genesis of double entry bookkeeping. The Accounting Review. 91(1).
pp.299-315.
Wuwungan, J.Y., 2016. Analisis penerapan standar akuntansi keuangan entitas tanpa
akuntabilitas publik atas persediaan pada apotik uno medika. Jurnal EMBA: Jurnal Riset
Ekonomi, Manajemen, Bisnis dan Akuntansi, 3(4).
Online
Suspense account. 2018 [ONLINE] Available Through
<https://smallbusiness.chron.com/suspense-account-opened-closed-75116.html>.
18