Financial Accounting: Types of Business Transactions, Financial Statements vs Financial Reports, Users of Financial Reporting

This document provides an introduction to financial accounting, covering topics such as types of business transactions, the difference between financial statements and financial reports, and the users of financial reporting. It includes explanations, examples, and ledger accounts for better understanding. The subject is Financial Accounting, and the course code is not mentioned. The document type is an assignment, and the assignment type is not mentioned. The college/university is not mentioned.

Financial Accounting

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Scenario 1........................................................................................................................................1
Question 1....................................................................................................................................1
What are the different types of business transaction...................................................................1
Question 2....................................................................................................................................3
Question 3....................................................................................................................................7
Explain the difference between financial statement and financial report, why these reports are
required and who are the different users......................................................................................7
Question 4....................................................................................................................................8
Explain different fundamental principles of accounting.............................................................8
Question 5....................................................................................................................................9
Scenario 2......................................................................................................................................10
Question 1..................................................................................................................................10
What is meant by bank reconciliation and why is it required? How is this achieved? Why is
this necessary.............................................................................................................................10
Question 2..................................................................................................................................11
What are control accounts? Explain the role of control accounts in financial management.....11
Question 3..................................................................................................................................12
Suspense account and the reasons for drafting suspense accounts............................................12
Question 4..................................................................................................................................12
(a) Required to prepare updated cash book and bank reconciliation statement.........................12
(b) Explain the following terms.................................................................................................13
Question 5..................................................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Financial accounting is a specialist accounting division that maintains records of cash
activities within a business (Chan, 2015). The transactions are recorded, summarized, and
statement of revenue or financial statement, such as a statement of cash flows or a balance sheet,
utilizing standardized guidance. For the better understanding of financial accounts, Brightstar
Financial Company selected which is UK based small accountancy firm. This report is
determined by different task of recording business transactions in terms of journals, ledger, trial
balance and producing final accounts with different business types. Additionally, this report
needed a bank reconciliation to recognise whether or not bank statements are correct.
MAIN BODY
Scenario 1
Question 1
What are the different types of business transaction
There are several types of business transactions which applied in single and double entry
bookkeeping. Basically it has four major types which are as follow:
Sales: This sale is performed by business in which they sell their products & services to
some other entity and give the money back to the customer or may buy items on credit. Both
selling transactions reported in account books and then further it is analyzed for reporting
purposes to render journals and other records. Purchasers will debit in this transaction, and sales
accounts will be credited.
Purchase: Where any items are bought by an agency or person, this activity falls under
transactions (Drexler, Fischer and Schoar, 2014). If the company buys something and the
payment will be documented as the purchase account debit and the individual or creditor to
whom people purchased would be credited. Such practice is often performed in cash or on the
basis of credit. Further this transaction recorded in the books of accounts for reporting purpose.
Receipts: When a company is paying for providing goods or services to another entity,
these fees apply to other companies or persons. Further such sales are registered in newspapers
where dealers are charged to trade receivables as debit and cash or credit payment.
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Payments: This contains business activities where organizations have to spend on other
parties in credit or cash terms. These would be recorded in accounting records and are further
prepared for reporting purposes by journals. Expenditures are debit and earnings paid to another
group.
Single-entry book keeping: If the company is very short and simple with little operational
activities. This truly is like having that own personal chequebook. Company is using single-entry
bookkeeping in order to maintain a list of purchases such as currency, tax-deductible
expenditures and taxable income. Single-entry bookkeeping, as in the check ledger, is defined by
the fact that only one record is made on each activity. Entries are reported in one column as
either a positive or a negative number. They should simply maintain a two-column register in
single-entry book keeping, one column for income and one for expenditures. It is still considered
single-entry, even though for each transaction, there is only one line.
Double-entry book keeping: Many corporations, including the bulk of small firms, use
dual-entry bookkeeping for the financial requirements (Jiang, Wang and Xie, 2015). Two
features of book keeping with double entry where each account has two columns and that each
sale is in two books. With each sale, two transactions are rendered as a deduction in one account
and a add-up in another. If the business needs to spend on creditor, one example of a double-
entry transaction would be. The volume the company owes the creditor would cut the
cash account balance where debit the cash account. Instead, the double-entry eliminates the
money that the company actually charges to the borrower account because it has earned the
amount of credit that the company is expanding and account will be credited.
Trial balance and its importance:
A Ledger will be formed by multiple entries in different accounts. It is Trial Balance to
take all the ledger balances and show them in a single worksheet as on a given date. Group
reviews its transactions at the month-end and classifies them into separate groups. They are now
making a sheet and splitting the groups into effective / non effective.
The importance of a trial balance is to ensure adequate accounting of all transactions
recorded into the ledger accounts of a company. Within every general ledger account a trial
balance reports the starting balance. The actual number of the debit and credit balances in each
accounting entry should match with each other.
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Question 2
Journal entries:
Date particulars Dr. Cr.
01/06/2020 Cash account….. 65000
To capital account….. 65000
02/06/2020 Purchase account…. 8000
To creditor account…. 8000
07/06/2020 Cash account…. 4000
To sales account…. 4000
08/06/2020 Creditor account… 4000
To bank account….. 4000
14/06/2020 Insurance account…. 75
To bank account… 75
15/06/2020 Debtor account… 12000
To sales account… 12000
16/06/2020 Purchase account… 10000
To creditor account… 10000
18/06/2020 Computer equipment account… 3000
To cash a/c 3000
20/06/2020 Rent account… 150
To bank account… 150
21/06/2020 Cash account… 10000
To sales account… 10000
25/06/2020 Cash account… 100
To bank account… 100
30/06/2020 Stationary account 30
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To cash account… 30
Ledger Accounts:
Purchase account
Date Particulars Amount Date Particulars Amount
2/06/2020 To creditor
a/c
8000 30/06/2020 By balance c/d 18000
16/06/2020 To creditor
a/c
10000
18000 18000
Sales account
Date Particulars Amount Date Particulars Amount
30/06/2020 To balance
c/d
26000 07/06/2020 By cash a/c 4000
15/06/2020 By debtor a/c 12000
21/06/2020 By cash a/c 10000
26000 26000
Capital account
Date Particulars Amount Date Particulars Amount
30/06/2020 To balance
c/d
65000 01/06/2020 By cash a/c 65000
65000 65000
Computer equipment account
Date Particulars Amount Date Particulars Amount
18/06/2020 To cash a/c 3,000 30/06/2020 By balance c/d 3,000
3,000 3,000
Insurance account
Date Particulars Amount Date Particulars Amount
14/06/2020 To bank a/c 75 30/06/2020 By balance c/d 75
75 75
4

Cash account
Date Particulars Amount Date Particulars Amount
1/06/2020 To capital
a/c
65000 18/06/2020 By computer equipment
a/c
3000
7/06/2020 To sales a/c 4000 30/06/2020 By stationary a/c 30
21/06/2020 To sales a/c 10000 30/06/2020 By balance c/d 76070
25/06/2020 To bank a/c 100
79100 79100
Cash account
Date Particulars Amount Date Particulars Amount
1/06/2020 To capital
a/c
65000 18/06/2020 By computer equipment
a/c
3000
7/06/2020 To sales a/c 4000 30/06/2020 By stationary a/c 30
21/06/2020 To sales a/c 10000 30/06/2020 By balance c/d 76070
25/06/2020 To bank a/c 100
79100 79100
Creditor account
Date Particulars Amount Date Particulars Amount
8/06/2020 To bank a/c 4000 2/06/2020 By purchase a/c 8000
30/06/2020 To balance
c/d
14000 16/06/2020 By purchase a/c 10000
18000 18000
Stationary account
Date Particulars Amount Date Particulars Amount
30/06/2020 To cash a/c 30 30/06/2020 By balance c/d 30
30 30
Bank account
Date Particulars Amount Date Particulars Amount
30/06/2020 To balance
c/d
4325 8/06/2020 By creditor a/c 4000
14/06/2020 By insurance a/c 75
20/06/2020 By rent a/c 150
25/06/2020 By cash a/c 100
4325 4325
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Debtor account
Date Particulars Amount Date Particulars Amount
15/06/2020 To sales a/c 12000 30/06/2020 By balance c/d 12000
12000 12000
Rent account
Date Particulars Amount Date Particulars Amount
20/06/2020 To bank a/c 150 30/06/2020 By balance c/d 150
150 150
Purchase account
Date Particulars Amount Date Particulars Amount
2/06/2020 To creditor
a/c
8000 30/06/2020 By balance c/d 18000
16/06/2020 To creditor
a/c
10000
18000 18000
Trial balance:
Trial balance
Particulars Dr. Cr.
Capital account 65,000
Cash account 76,070
Purchase account 18,000
Creditors 14,000
Sales 26,000
Bank overdraft 4,325
Insurance 75
Rent 150
Stationary 30
Debtor 12,000
Computer equipment 3,000
109,325 109,325
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Question 3
Explain the difference between financial statement and financial report, why these reports are
required and who are the different users
Financial statements and the reports are also used as interchangeably. But there are some
variations in financial statement and reports and the annual statements (Kaplan and Atkinson,
2015). Reporting is being used to support the decision-making information. Financial reporting is
more structured. They also use disclosures to express the financial health to third party agencies.
For each fiscal cycle, file the annual statements. In the financial reporting includes the ratios
analysis which are used to identify the company’s financial performance in terms of profitability,
liquidity and efficiency. In contrast, financial statement includes the balance sheet, profit and
loss account, cash flow, fund flow statement etc.
The financial reporting is required to give organizations some in-depth analysis to
evaluate performance of the business. The reports help in valuing businesses, trying to predict
cash flows and planning investments. The accounts in the records demonstrate the financial
implications of the decisions made by the company. These records are for internal use, and some
are used by external parties. The financial reports of the company are also looked at by creditors,
lenders and government officials (Barron, Chung and Yong, 2016). To order to ensure
consistency, they can need to enforce compliance restrictions on financial reporting to other
agencies. Use a systematic approach for each report they preparing. This way, data from
several reports can be easily compared.
There are several users of financial reporting in context of Brightstar Financial Company
and those are discussed below:
Owner: shareholders and owners require financial knowledge to assist them determine
what to do with their assets such as retain, purchase, or sell more.
Management: Management can involve owners and managers. However, in
small companies strategy is typically composed of hired professionals who have been given the
responsibility of managing the organization or a side of the economy. They act as closed source
agents.
Employees: These people are keen on the sustainability and survival of the business. They
are all about the company can pay salaries as well as provide benefits for employees. They could
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also be involved in the financial status and results to determine opportunities for business growth
and job advancement.
Customers: When there has been a long-term participation or agreement between the firm
and its customers, consumers become involved in the company's ability to precede its presence
and retain operational stability (Edwards, Schwab and Shevlin, 2015). This need is also increased
in cases where even the clients rely on the entity.
Investors: Potential investors require financial reporting to assess the performance and
profitability possibility of the enterprise. Similarly, small business owners need monetary
information in order to determine if the project is worth and whether it should continue, enhance
or drop.
Above discussed users of financial reporting is limited, there are more left who required
such information to made their decisions. They can be internal as well as external users of
financial information. Similarly, Brightstar company prepare financial reporting for the use of its
users.
Question 4
Explain different fundamental principles of accounting
There are several fundamental principles which are very essential to followed by the
financial firms to maintain their accounts and record transactions according to the principles.
Some of them are as follow:
Monetary transactions: Accounting wants to monitor all the values in terms of the actual
monetary unit (Kim and Zhang, 2016). This is impossible to provide for such products as the
barter scheme. Consequently, assigning meanings to objects and products is an problem because
it is arbitrary. Accounting has however recommended rules for dealing with about the same.
Going concern: This concept means that the firm would continue doing its life as normal
until the give up of the next accounting cycle and that the opposite is not reported. Regardless of
the concept of going concern, companies may run on credit, account for payments payable and
receivable they expect to earn or reimburse in the lifetime, and incur depreciation if the system is
being used for generations to follow.
Principle of conservatism: Professionals are shown to be inherently very progressive.
They would like to stay positive, and prepare themselves for the worst. This is seen in the rules
which they generated for their career. Another of the central aspects of accounting is the
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consistency theory. Due to this theory, where the quantity of planned outflows and inflows is in
doubt, the company must claim the least possible income and the maximum possible expense.
Cost principle: Cost principle is directly relevant to the conservatism principle (Lara,
Osma and Penalva, 2016). The cost theory suggests that individuals should report anything at
cost price on the financial reports. Appreciate typically properties such as land and houses,
money, etc. Nevertheless, the accounting professionals do not require the company's financial
statements to show this recognition until it is understood. Accountants assume that something is
just an belief about the market value. They could not pay on the level of views, since all of those
exist. But someone has compensated for it, the selling price of something that is a reality, but the
same could be authenticated. Accounting thus operates on the theory of expense, and hence on
facts.
Question 5
Profit and loss a/c
Particulars Amount Particulars amount
Opening stock 9,500 Sales – 125,000
Purchase - 75000 Less: Return - 1000 124,000
Less: Return - 1500 73,500 Closing stock 1,000
Wages and salaries 13,200
Gross profit 28,800
125,000 125,000
Rent and rates - 1500 Gross profit 28,800
Add: Outstanding rates -
340
1,160 Interest received 1,000
Postage 900 Rent received - 4850
Insurance - 7500 Less: Advance rent -
490
4,360
Less: Prepaid insurance -
411
7,089
Bad debt write off 650
Net profit 24361
34,160 34,160
Balance sheet
Liabilities amount Assets Amount
Capital – 120,800 Bank 10,594
Less: Drawings – 5,150 Cash 340
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Add: Net profit -
24361
140,011 Prepaid insurance 411
Provision for bad
debts
934 Advance rent 490
Debtor - 12500
Creditor 3,900 Less: Bad debt write off -
934
11,850
Outstanding rates 340 Motor van at WDV - 19600
Less: Dep - 5000 14,600
Loan 100,000
Closing stock 1,000
145,185 145,185
Scenario 2
Question 1
What is meant by bank reconciliation and why is it required? How is this achieved? Why is this
necessary
Bank reconciliation statements facilitate the processing of transfers and depositing cash
deposits into the accounts (Mussari, 2014). In order to accept appropriate changes or
clarifications, the reconciliation statement allows finding variations between the bank account
balance and the book balance. It is a method of comparing the balances for a cash account in an
organization's financial documents to the related facts on a bank statement. A financial audit with
all bank accounts will be performed at regular intervals, to ensure that the cash records of a
business are accurate.
Bank reconciliation is required to compare company's records with the bank's records, and
if there are the certain differences for cash transactions among these two record sets. The closing
balance of the cash report edition is recognized as the book balance, although the bank's portion
is referred to as the money balance. Contrast between the three balances sheets are extremely
common, which company should chase down and modify in their own records. When these
dissimilarities were to be ignored, there would ultimately be significant differences between the
quantity of funds users think people have and the quantity that the bank says they actually have
in an account. Overdrawn bank account, cash inflows and outflows, and overdraft fees might be
the result. For certain instances, the bank can also chose to cut off your bank account.
10

Bank reconciliation can be achieved through comparing their internal account information
and needs to balance to their monthly bank statement to resolve their accounts (Raiborn and
Sivitanides, 2015). Check each transaction separately, make sure that now the quantities match
perfectly, and recognize any differences that require further investigation. The procedure can be
as structured or casual as you wish, and some companies are making a declaration of bank
reconciliation to show that they periodically reconcile accounts. If company don't finish the
process on a monthly basis, they can do so regularly, on a quarterly basis or on every other time
they choose. It is necessary to identify to check the balance and evaluate that it is same or not. If
they find any difference, so they need to give justification for it or find out the reason.
Question 2
What are control accounts? Explain the role of control accounts in financial management
Control account is often considered a controlling account which is a general ledger account
that describes all the subsidiary account balances for a particular type and integrates them
together (Trotman and Carson, 2018). In other words, it is a descriptive account that is equivalent
to the subordinate account total which is used to ease the general ledger that coordinates it.
Control accounts plays several roles in financial management which is automatically
beneficial for the organization and those are mentioned below:
 Provides a check-up system for early detection of mistakes and fraud.
 Eliminate shapeless information from general ledger.
 Large businesses may establish accounting departments for particular places.
 Trial balance figures, instead of individual accounts give a summary of total.
 Reduce the likelihood of forgery even though control account documents and subsidiary
ledger are maintained individually by different personnel.
Question 3
Suspense account and the reasons for drafting suspense accounts
Suspense recorded in the general section in which company records unclear entries which
still require for further analysis to determine everyone’s implementation strategies or destination.
Throughout the investment context, a suspense account is a account in which a shareholder parks
his money temporarily till they can implement that money to until capital spending.
Reasons of preparing suspense accounts:
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If company's trial balance is already out of balance, after that the difference is kept in a
suspense account until another imbalance is rectified. The anticipation account will appear on the
trial balance under the heading "Other Assets." If company have discovered and corrected the
cause of the disparity, the anticipation balance will be locked, but will no longer participate of
the trial balance.
Suspense account can also be drafted where a correct payment cannot be recorded
or calculated at the time the transactions are initially registered (Watson, 2015). Several
examples of this will be whether a client gets a partial bill, even whether they are uncertain
which bill they pay off. When the transaction ambiguity is resolved with the client, it is able to
pass the amount owed out from the suspense account and then into the appropriate account.
Question 4
(a) Required to prepare updated cash book and bank reconciliation statement
Updated cash book as at 28th February 2017:
Revised cash Book
Particulars Dr. Particular Cr.
Balance b/d 1760 D.Park 270
Insurance against fire 170 Mr. Akram 105
Monthly bill 56 Bank Collection 325
Arif Paid 186
Bank Charges 25 Balance c/f 1497
2197 2197
Bank reconciliation statement as on 28th February 2017::
Particular Amount
Balance as per Bank 3093
Add:
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Bank Charges 25
Arif Paid 186
Monthly bill 56
Fire insurance 170
Less:
D.Park 270
Mr. Akram 105
Bank collection 325
Balance as per cash book 2830
(b) Explain the following terms
Direct debit: It is the easiest, quickest and perhaps most comfortable way of making
regular or periodic payments; this is why it's used during stuff such as council tax and service
charges. Direct Debit authorizes someone to accept debts from their account when they're due.
By submitting a direct debit mandate form, they give which permission; this can be a document
form or a web browser that submit online.
Standing orders: Standing Order in any company may be identified as a regular written
practice as developed by employer affecting its employees, a trade union with the intention of
introducing uniformity to workplace needs of people as provided for in the statutory law,
properly authorized by the relevant government.
Bank charges: It covers all the charges and fees which are made by the bank to its
customers (Weetman, 2019). In common terms, the term usually refers to charges in case of
personal current accounts or a verification account, quarterly charges in regard of an account,
charges in relation to specific exchanges of transaction etc.
Dishonour cheque: If the banks offer the payee the amount, a payment is said to be
honoured. Payment is said to be dishonoured if the financial institution refuses to pay the payee
the number. In other words, cheque dishonour is a situation in which bank failed to pay the payee
the verification amount.
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Question 5
(a) Journal entry:
S. No particulars Dr. Cr.
1 Goods purchase account… 2000
To suspense 2000
2 Bank Account 670
To suspense 670
3 Sales 650
To G. Tahir 650
4 Electricity Bill 790
To Cash account 790
5 Expense account 500
To Motor vehicle 500
6 Sales accounts 270
To sales day book 270
7 L Samantha 190
To Dis recie. 190
Discount allowed 190
To L Samantha 190
8 D. Jones 384
To account receivable 384
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(b) Suspense account:
Suspense account
Particulars Amount particulars Amount
By balance 1612
By goods purchase 2000
To balance (b.f) 4282 By bank 670
4282 4282
CONCLUSION
From the above discussion, it was concluded that financial accounting helps to correctly
interpret the financial information about the business by analyzing the essentials of the single
and double-entry book keeping accounting and the trial balance. Proper development of financial
reporting through trial balance helps to form other successful accounts such as profit and loss
and the financial situation of the firm. The concept of bank reconciliation describes the cash
control in an appropriate manner with categorized information. Finally, the conciliation process
has also been explained by the preparation of the control accounts and the suspense account.
15

REFERENCES
Books & Journals
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thumb. American Economic Journal: Applied Economics. 6(2). pp.1-31.
Jiang, J., Wang, I. Y. and Xie, Y., 2015. Does it matter who serves on the Financial Accounting
Standards Board? Bob Herz’s resignation and fair value accounting for loans. Review of
Accounting Studies. 20(1). pp.371-394.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
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.
Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings. The
Accounting Review. 91(3). pp.859-881.
Kim, J. B. and Zhang, L., 2016. Accounting conservatism and stock price crash risk: Firm‐level
evidence. Contemporary Accounting Research. 33(1). pp.412-441.
Lara, J. M. G., Osma, B. G. and Penalva, F., 2016. Accounting conservatism and firm investment
efficiency. Journal of Accounting and Economics. 61(1). pp.221-238.
Mussari, R., 2014. EPSAS and the unification of public sector accounting across
Europe. Accounting, Economics and Law. 4(3). pp.299-312.
Raiborn, C. and Sivitanides, M., 2015. Accounting issues related to Bitcoins. Journal of
Corporate Accounting & Finance. 26(2). pp.25-34.
Trotman, K. and Carson, E., 2018. Financial accounting: an integrated approach. Cengage AU.
Watson, L., 2015. Corporate social responsibility research in accounting. Journal of Accounting
Literature. 34. pp.1-16.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
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