FINANCIAL ACCOUNTING PRINCIPLE INTROUCTION 1 PART A1 Business Report

FINANCIAL
ACCOUNTING
PRINCIPLE

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
BUSINESS REPORT......................................................................................................................1
Financial accounting and its purposes....................................................................................1
The regulations relating to financial accounting....................................................................2
Describe accounting rules and principles...............................................................................3
Explain the convections and concepts relating to consistency and material disclosure.........5
PART B............................................................................................................................................6
CLIENT 1........................................................................................................................................6
P1 Apply the double entry book keeping system of debits and credit and record sales and
purchases transactions in a general ledger..............................................................................6
M1 Analyse the transactions to show the progression from a previous trial balance to the next
one using double entry book keeping...................................................................................21
D1 Apply trial balance figures to show which statement of financial accounts they will end up
..............................................................................................................................................22
CLIENT 2......................................................................................................................................22
P3 Financial accounts from given trial balance figures adjusting, depreciation and preparation
..............................................................................................................................................22
P4 Financial accounts subject to sole traders, partnerships or limited companies...............23
M2 Evaluation of profit and loss account, balance sheet and cash flow statement..............24
D2 Compare the essential features of each financial statement to analyse the differences
between them in terms purpose, structure and content.........................................................24
CLIENT 3......................................................................................................................................26
a) Profit and loss statement of Ltd. For the year ended 31st July 2018..............................26
(b) Statement of financial statement of Bowling Ltd...........................................................26
(c) Accounting Concepts:.....................................................................................................27
(d) Purpose of Depreciation in formulating Accounting statements and the methods used for
calculation of Depreciation:.................................................................................................28
CLIENT 4......................................................................................................................................28

P5 Apply the bank reconciliation process to make a number of a reconciliation................28
(a) Need and Importance of Bank Reconciliation Statements:............................................28
M3 Apply the reconciliation process demonstrating the use of deposit in transit................29
D3 Accurate bank reconciliation statement..........................................................................29
CLIENT 5......................................................................................................................................30
(a) Control account...............................................................................................................30
(b) Ledger control accounts..................................................................................................30
CLIENT 6......................................................................................................................................31
P6 Process to be taken to reconcile control accounts and clear suspense account...............31
M4 Understanding of the type of accounts and how and why these accounts need to
reconciled.............................................................................................................................31
CONCLUSION..............................................................................................................................32
REFERENCES..............................................................................................................................33

INTRODUCTION
Financial accounting is the process of recording, summarizing and reporting the
transaction in final report or statement such as cash flow, income statement and balance sheet
(Tassadaq and Malik, 2015). The final reports are prepared through accounting standards that are
followed by every organisation. These standards help to prepare financial statement in
appropriate format and show performance of the company in front of creditors, suppliers and
customers. Purpose of financial accounting is to provide accurate information about company to
existing and potential stakeholders regarding investment decisions. Oktra, a small organization
which based on UK has been chosen for this project.
This project report focused on double entry book keeping system and extract a trial
balance. There is statement of financial accounts according to sole traders, partnership and
limited companies. Creating a bank reconciliation statement, use of suspense account and way in
which it can help to ignore errors in trial balance.
PART A
BUSINESS REPORT
Financial accounting and its purposes
Financial accounting is a specialized branch of accounting that is used by several
companies to record, analyse, monitor and control various transaction of business. With the help
of this the company can track all records and create a detailed summary related to its financial
transactions. In the company when accounts are produced and displayed of financial information
in reports and presented in front of customers, creditor, suppliers of an organisation. Financial
accounting consists of different statements such as trading account to ascertain gross profit/loss,
Income statement account for net profit/net loss, cash flow to know different activities of
business relating to investment, operation and financial and balance sheet for present
performance of company (Maskell, Baggaley and Grasso, 2016). Oktra can attract more
investors by providing them reliable financial information of their organisational operational
activities. It is very essential for Oktra since it provides all the necessary information that is
needed by public for investment purposes. With the help of these statements the investors know
about financial strength of the business and an analysis of weak points that need to be contained.
It provides help to Oktra's top management to take effective and appropriate decisions regarding
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company in order to achieve their set objectives and goals. Different types of financial
statements are prepared that are important for a business, they are as follows -
Profit and loss statement - The statement of profit and loss is one of the company's core
financial statements that present their profit and loss for a specific time period. There is
calculated net profit and loss after determination of all revenues, incomes and other operating
and non-operating activities. It is an essential part of one of three statements that is used by Oktra
to present their performance. On an income statement, Revenues – Expenses = Net income. The
statement is prepared according to time period and follow operations of company. It is very
important for a business to keep a detailed information of its revenues to pay different expenses
such as taxes, interest, commission etc. (Francis, and et. Al, 2015).
Balance sheet – A balance sheet is a statement of the financial status of a company
which refers to the assets, liabilities and owners’ equity at a specific time. In additional way, it
represents the net worth of a business. With the help of balance sheet the financial position of
Oktra can be provided to its shareholders, customers, suppliers, investors and other external
activities. On a balance sheet, Assets = Liabilities + Stockholders' equity. It is divided into two
sections, left side of the balance sheet outlines all assets and in right side outlines all liabilities
and shareholders' equity.
Cash flow statement – It is a statement which is used to measure all transactions related
to cash that are done by business in a particular financial year. Cash flow statement is divided
into three categories– cash flow from operating activities, cash flow from investing activities and
cash flow from financing activities. It is important to know that cash flow is not the same as net
income because it does not involve actual transfer of money (Collins, Pasewark and Riley, 2012)
.
Purpose of financial accounting -
 It is providing financial information about the performance, cash flows and financial
position of the company.
 This financial information helps to take investment, credit and taxation decisions
regarding to company.
The regulations relating to financial accounting
For better understanding, different types rules, regulations and principles have been
developed for proper formulation of organization's financial statements. These regulations are
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help to maintain their financial account in an accurate way. All companies including Oktra
follow particular rules and regulations of financial accounting applicable to it. These regulations
provide guidance to investor for analysis of income statements, balance sheet and cash flow
statement. These regulations are introduced by regulatory authority of a country for recording
information in financial statement in appropriate way (Watrin, Pott and Ullmann, 2012). It is
possible to get reliable information from various statement. There are following reliable
regulations -
IFRS – International financial reporting standard was introduced a set of world wide
language. The businesses are using standards for their accounts and mangers apply them to
expand their business globally. There is continuous application of different accounting standards
according to different transactions.
IASB – International accounting standard board is a regularity authority who is liable to
introduce and develop several international financial accounting standards. It has been
introduced by IFRS that are formulated to guide organisations while preparing financial
accounts. At time when organisations are recording transactions in books they follow their rules
and regulations.
IFRS 9 – It is applied in financial accounting instruments for different financial
statements. With the help of this regulation the company can easily measure and identify their
financial assets.
IFRS 10 – It provides a guideline to combined businesses who formulate their financial
statements in consolidated form. It is mainly developed for parent entity which is responsible for
their subsidiaries.
Describe accounting rules and principles
Accounting principles are a set of rules and guidelines followed by companies while
preparing a financial report. The principles of accounting define particular criteria under which
all companies have to maintain their economic transactions in accounting books. There are
following accounting principles -
Business entity concept –
The business entity concept defines that entity of a business are presented as separate
legal entity distinct from its members (Lobo and Zhao, 2013). It means Oktra has a personal
identification on the basis of which it can carry out transactions in its own name, sue or be sued
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and open account in bank. If all members leave the company there will be no impact seen on the
existence of Oktra, it will exist regardless.
Dual aspect concept –
According to this concept most of the companies follow this principle to show accurate
amount of particular transaction by recording it twice. If Oktra selects a single entry system it
would lead to irrelevant information since only one aspect of every transaction would be
recorded in its books. Therefore, to avoid this problem, financial accounting assure that every
single transaction has two aspects- debit side and credit side.
Money measurement concept –
The principle of money measurement is based on money value, it means only those
transactions shall be recorded in the books of Oktra that can be measured in money.
Cost principle –
From an accounting point of view, the term cost refers to the amount expended to
acquire an asset for business purposes. According to this principle, amounts are recorded at their
acquisition cost at the time of its purchase or acquisition in a financial year with an appropriation
for depreciation thereafter (Brief and Peasnell, 2013).
Going concern concept –
In this principle of accounting the business has expected to continue for long time as an
entity. This concept does not concern members of the company since it is a separate identity
expected to continue business perpetually.
Financial accounting year –
According to this principle, each business follows a particular financial year to prepare
their accounting books for quarterly, monthly or yearly basis. Generally, accounting period
adopted by companies is 1 April to 31 march as financial year.
Matching principle -
According to this principle, all expenses must be matched with their related revenues
generated in same accounting period. It means expenses and revenues are recorded in books of
same accounting year.
Accounting rules -
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For recording transaction in accounting books, we follow 'Three Golden Rules'. Double
entry system is followed to show dual effect of each transaction. The Three Golden Rules relate
to personal account, real account and nominal account. Basic rules are as follows -
1. Debit the receiver and credit the giver : This rule is applicable on Personal Account,
which is related to any individual, company or firm. Since in eyes of law, companies and
firms are legal entities considered as legal person (Nilsson and Stockenstrand, 2015).
This rule means, a person who receives something on behalf of Oktra is called Receiver
and amount is posted in debit column of their account, and same as if any person paid
something on behalf of Oktra is called Giver and amount will be posted in credit column
of their account.
2. Debit what comes in and credit what goes out : This principle is used for Real Account,
which includes all assets of organisation like machinery, building , land etc. And those
assets which come in business through purchase they will be debited in it's account and
anything going from business through sales will be credited in it's account.
3. Debit all expenses and credit all incomes : This principle is used for Nominal Account, it
includes all expenses and all incomes and gains of organisation. In this rule, we debit all
expenses and credit all incomes and gains incurred/received in organisation at the time of
production or sale respectively.
Explain the convections and concepts relating to consistency and material disclosure
Consistency convections – This convection of accounting states that it is used to
maintain a record with the same concept that was followed in previous years. Oktra will continue
to use it in same sequence in financial periods. To show effects in accounting results appropriate
methods should be adopted in case changes are made in accounting policies. Hence, the concept
of consistency assures that policies, method and practices of preparing the financial statements
remains same (Kirsch, 2012). This will help to easily analyse financial information from past
years. For investment decisions, internal and external shareholders analyse financial information
from past activities. Business consistency needs to be maintained for smooth auditing processes.
This concept helps in effortless comparison of financial performance from one period to another.
Material disclosure convention - The Convection of full material disclosure requires
revelation of all information, both favourable and non-favourable regarding to a business
enterprise. These material value are fully disclosed in annual report regarding to debtors and
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