Financial Accounting: Functions, Transactions, Principles, Statements

FINANCIAL ACCOUNTING

INTRODUCTION
Financial accounting is one of the major functions of the business wherein the financial
managers of the company shall be recording, summarizing, classifying the accounting
transactions of the business and with the help of that they shall be preparing the financial
statements of the business. It shall be depicting the financial health and prosperity of the
organization through which the major decision-making will take place regarding the budgeting,
future operational capacity and potential revenues and the expenditures of the business. In the
current project report the complete process of the financial accounting shall be depicted through
the various theoretical and the practical problems. It shall be highlighting from the recording of
the transaction, to the preparation of the financial statements to the reconciliation of the errors in
such accounts.
SCENARIO- 1
QUESTION- 1
Different types of business transactions
There are a variety of the business transactions that take place in the routine operations of
the business like the sale and purchase of the goods, payment of the liabilities, borrowing the
funds, earning the income and meeting of the expenses etc. These business transactions have
been classified into the various categories like based on the institutional relationship the external
and the internal transactions (Lee, 2020). The external is one that are carried out outside the
premises between the two individuals or the organization like sale of the goods to the customers.
Whereas internal are within the organization like payment of salary. The other classification can
be based on the exchange of cash it can either be cash, non-cash or credit transactions. If the
transactions are settled in cash on the spot, then it is cash and if it is agreed to be settled at a
future date then it is credit. Apart the objective is also a way of division like whether the
transaction is undertaken for the business purpose or to serve the personal motive. The
transactions for the business purpose are ones that are executed in the process of providing the
business operations and the conduct of the routine business activities. The business transactions
can be of a wide variety as they are conducted for the purpose of attaining profitability in the
companies.
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Single entry and double entry book-keeping
The single entry system is the method of book-keeping wherein the single entry is made
in the books of accounts. In this the cash book is maintained and all the entries related are
recorded from the initial balance to any changes made further. On the contrary the double entry
system of book-keeping which is most prevalent these days and is used by all the businesses
involves recording both the aspects of the transaction which is the debit and the credit. This shall
be ensuring the arithmetic accuracy by matching of the trial balance and the balance sheet. In the
double entry system of accounting both the effects of the transaction are recorded and
accordingly for every transaction two or more accounts shall be affected. This shall only satisfy
the balance sheet equation which is Assets= Liabilities + Capital and that is the reason the
balance sheet of the company always matches proving the accuracy of the accounting.
Trial balance and its importance
The trial balance is the financial tool that is used by the company to verify the arithmetic
accuracy of the books of accounts that are drafted by the financial accountants in the company. It
shall be recording all the closing balances of the accounts that are there in the general ledger in
terms of the debit and credit balances depending on the nature of the accounts (Rieg, Zarzycka
and Dobroszek, 2021). It is prepared at the end of the year and if both the debit and the credit
side of the trial balance shall be matching then in that case the accounts of the company are
arithmetically correct and in case they don't match then there are errors in the recording or
posting of the transactions. The trial balance of the company is important as it shall be assisting
in the preparation of the financial statements, rectification of the errors and shall be helping in
making the necessary adjustments and in the budgetary decision-making. The other major
importance of preparing the trial balance as part of the financial accounting is that it shall also be
assisting in the comparative analysis of the various account balances as compared to the past
year of the company showing the efficiency in terms of the income and the expenses of the
company. The other major significance lies in the fact that it shall be supporting in the
preparation of the audit reports in the company for the verification of the various account
balances and locating the entries in the books of accounts. So it shall be effectively ensuring the
following of the corporate governance policies in the business.
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QUESTION- 2
1. Recording transactions in the books of Kate
Enclosed in appendix 1.
2. Ledger Accounts
Enclosed in appendix 2.
3. Trial Balance
PARTICULARS DEBIT(in £) CREDIT (in £)
Cash 76070
Capital 65000
Purchase 18000
Trade payables / Creditors 14000
Sales 26000
Bank 4325
Insurance 75
Trade receivables / Debtors 12000
Computer equipment 3000
Rent 150
Stationary 30
Total 109325 109325
Since the trial balance of the company is matching and both the debit and the credit sides
of the trial balance are equivalent at 109325, so it can be ensured that there is arithmetic accuracy
of the accounts and the recording and posting of the various transactions of the business.
QUESTION- 3
Difference between financial statements and financial reports, their need and the different users
It is the general perception that the financial reports and the financial statements both the
terms are used interchangeably in the company but are significantly different. It can be
ascertained that the financial reports have the wider scope conveying the overall financial health
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