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Financial Accounting Principal - Assignment

Added on - 23 Nov 2020

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FINANCIALACCOUNTINGPRINCIPAL
TABLE OF CONTENTINTRODUCTION...........................................................................................................................4Report...............................................................................................................................................4Financial accounting and its purpose..........................................................................................4Importance of financial information to internal and external stakeholders................................5CLIENT 1........................................................................................................................................8a. Journal entries and books of accounts.....................................................................................8b. Ledger...................................................................................................................................11........................................................................................................................................................14c. Trial balance..........................................................................................................................21...................................................................................................................................................21CLIENT 2......................................................................................................................................22a. Statement of profit and loss...................................................................................................22b. Balance sheet of firm............................................................................................................23c. Consistency and prudence concept........................................................................................24d. Purpose of depreciation and its methods...............................................................................24e. Difference between financial statement prepared by sole trader and limited company........24CLIENT 3......................................................................................................................................25a. Purpose of bank reconciliation statement.............................................................................25b. Areas which may cause record vary from bank statement....................................................25c. Term 'imprest' in petty cash book..........................................................................................25d. Bank reconcilliation statement............................................................................................25CLIENT 4......................................................................................................................................26a. Sales ledger account and purchase ledger account................................................................26b. Need of control account.......................................................................................................27CLIENT 5......................................................................................................................................28a. Suspense account and its features.........................................................................................28b. Suspense account calculation................................................................................................28CONCLUSION..............................................................................................................................28REFERENCES..............................................................................................................................30
INTRODUCTIONFinancial accounting is a part of accounting that deals with financial transactions ofthe company. Its purpose is to provide financial information to external users of the company.Financial accounting has some generally accepted principles which allow financial manger towork based on these rules. The report consists of purpose of financial accounting and its users.It includes business transactions, final accounts for various types of traders along with bankreconciliation statement and control accounts along with suspense account.ReportFinancial accounting and its purposeIt is the branch of accounting which records revenue of organisation, receipts, and alsoexpense of the company and measure them and prepare a report in the form of balance sheetor income statement. Financial accounting helps in providing information to external as wellas internal users which includes owner, creditors, government, investors and other agencies. Itis known as the language of the business.The basic structure of preparing financial accounts is identifying financial transactionsthen measuring them in terms of money, recording them according the date of transactions,classifying them in ledger and summarising them in balance sheet, cash flow or incomestatement and then analysing them for interpretation and finally communicating them to theusers who wants information (Warren, 2018).This also allows owner of business to analyses the financial condition of the companyand helps to allocate resources efficiently. Most companies uses GAAP for creating financialstatements but it is not a compulsion for private companies. Companies issues thesestatements on regular basis so that external users can be aware about the position of thecompany.Financial accounting system is based on accrual basis as well as double entry systemof accounting. Double entry reflects that each transaction of the company have effect on twoaccounts at least. Its advantage is that to have equal balance on both the sides of assets andliabilities and balance is maintained at any point of time which lead to smooth operations ofthe company.
The other trait is accrual basis which reflects the idea of considering revenue whenthey are actually earned by the company and not when money is received, and considerexpenses when they actually occur and not when they are paid (Hermanson, 2016). This helpscompany to keep check on its profitability and assets and liabilities held by the company.Purpose of financial accountingThe purpose offinancial accounting is to provide information and statistics to internaland external users about financial position of the company, cash inflow and outflow of thecompany, and operational results of the company. The information helps the company toallocate its resources efficiently where they are required ad help outsiders to decide whether toinvest in the company or not.It helps investors to find out future perspective and prospectus of business. It alsohelps employees to know that whether they are associated with profitable company or not andhelp customers to know the condition of business. Financial reports help business to takesound decisions that can lead to efficient working operations.The financial statement is consists of 3 statements which offers different purposes. Theincome statement of the companyallow investors and others to know about the capability ofcompany to generate profits and it reveals sales turnover of the company as well ashelp inanalysing the trend of the company. The other statement isbalance sheetwhich discloses thefinancial position of the company and helps in estimating assets, liabilities and liquidityposition of the company to its users and company itself (Basioudis, 2019). At last comes thestatement of cash flowswhich helps in analysing nature of cash in the company by estimatingcash inflows and outflows.The other purposes of financial accounting is to help company in taking creditdecisions, decisions related to investment and taxation decisions.Importance of financial information to internal and external stakeholdersFinancial accounting provides financial data to various individual and agencies. Eachof them is interested in different type of financial information. These are divided into internaland external users of information which are creditors, investors, management, owner,employees etc.Internal users –These are individuals who are responsible to runs, operates andmanages day to day operations and activities of the company internally. It helps them to
analyse profitability of company's products and operational units. It helps company andmanagement to decide need of cash flows to support and increase the efficient working ofoperations.It helps management to decide buy or sell a particular business segment and it helpsorganisation to decide to expand new product line or to build new production facilities. Theuser of international information are -Management of the company –The most important user of information is themanagement of the company because unless and until the management is not aware ofcompany's financial position decisions to improve the position cannot be made. Managementneed accounting information to plan, implement and assess business decision. It helpsmanagement to allocate its human as well as financial resources through creating specificbudgetary plans.It helps in comparing past performance of the company with current performance andanalyse the competitive advantage and disadvantage and benchmarks of industry. It helpsmanagement to take decisions regarding investment, pricing and financing. To have a betterunderstanding of financial information cash flows, balance sheets, income statements needs tobe updated and analyse by the management on regular basis.Employees –Employees are the core part of organisation and each and everyemployee needs information related to financial performance of the company. Firstlyemployees engage in finance department needs to know the information for preparing variousreports as it is the part of their job (Brown, 2017.). Rest of the employees want to know thefinancial position of the company because they work their and that can directly impact ontheir income, salary, bonus and job security.The other reason for employees to know the financial information is to have a betterunderstanding of the company's business that is it profitable or not. In addition to all this thereare also employees who are seeking to join the business needs information about the companythat it is worth joining or not.External users –These are the users of information who presents outside theorganisation. These users can be investors, creditors, suppliers, government etc. The externalusers need information to buy and sell shares of the company in case of profit and loss, toprovide loan to the entity in case of it have good financial position, To impose taxes on profits
by government and at last to have sales and purchase transactions with the company. Theexternal users are -Government-Government needs financial information in order to see that companyhas discloses its accounting information according to the accounting standards set by thegovernment in order to protect shareholders interest. It needs information to see that companyis working legally on fair basis and not conducting misdeeds. At last government needs toknow financial position of the company to impose tax on the net profit of the company.Lenders– They need information to see credit worthiness of the company and abilityto pay back the loan. Lenders are important to business as they provide loan and financialsupport to the company but after getting information on financial position of the company(Narayanaswamy, 2017).When company has high profitability, ability to pay liability and secured assets anylender would give financial support to the company. On the contrary when company has poorliquidity, lack of assets and no ability to pay back the liability it shows poor financial health ofthe company.Investors- The other most important user of external information are investors thatwant to invest in the company or has already invested. They want to know how much returnthey are getting on their investment and how well the company is performing. To know all thedetails about their investment, to assess profitability, risk and return investors needsinformation about financial statements.It also helps existing investors to take decision on increase or decrease their investment basedon the performance of the company (Libby, 2017). It helps new investors to take a decision onbuying shares of the company based on its income statement and balance sheet.Investment analysts –They require detail information on company's financesespecially those who are trading on stock exchange. They need information to analyseperformance of the competitors in the same business. They also gather information fromcompany's key person interviews and briefings. They help investors to compare theinvestment and returns of different companies and projects their past trends and future trendsto show which company would more likely to generates high returns.
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