FINANCIAL ACCOUNTING PRINCIPLES TABLE OF CONTENTS

These regulations and guidelines |are issued by an international |committee |which is responsible for formation of those rules, | |applicable in accounting of business.These reports present all| |regulations and bodies responsible for formation of those rules, | |applicable in accounting of business. These reports present all| |regulations and bodies responsible for formation of those rules, | |applicable in accounting of business.

FINANCIAL ACCOUNTING
PRINCIPLES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
REPORT..........................................................................................................................................1
1. Defining financial accounting and its purpose...................................................................2
2. Regulations relating to financial accounting......................................................................2
3. Accounting rules and principles.........................................................................................3
4 Convention and concepts of financial accounting...............................................................5
CLIENT 1........................................................................................................................................6
A. Journals entries..................................................................................................................6
B. Ledger Account..................................................................................................................8
Cash Book............................................................................................................................14
C. Trial balance ...................................................................................................................16
CLIENT 2......................................................................................................................................17
A. Laurent's income statement.............................................................................................17
B. Financial statements of Laurent.......................................................................................17
CLIENT 3......................................................................................................................................18
A. Preparation of profit and loss account.............................................................................18
B. Preparation of statement of financial position ................................................................18
C. Accounting concept of prudency and consistency...........................................................19
D. Purpose of depreciation in formulation of accounting statements..................................20
CLIENT 4......................................................................................................................................21
A. Purpose of preparation of Bank reconciliation statement...............................................21
B. Reasons for occurrence of variation between cash book and bank records.....................21
C. I) Cash book.....................................................................................................................22
C. II) Bank reconciliation statement ....................................................................................23
CLIENT 5......................................................................................................................................23
A. Preparation of Ledger accounts ......................................................................................23
B. Control accounts and its importance................................................................................24
CLIENT 6......................................................................................................................................24
A. Suspense accounts and its main features.........................................................................24

B and C. Preparation of Trial Balance making correction ..................................................25
D. Differentiation between clearing and suspense account .................................................26
CONCLUSION..............................................................................................................................26
REFERENCES..............................................................................................................................27

INTRODUCTION
In an organisation accounting is integral part as it is the process through which all
monetary transactions related with business operations are summarized and reported to draw an
interpretation about flow of organization finance and its performance in an accounting year. All
material financial transactions are identified and with following relevant accounting principles
and standards they are recorded in books of accounts. In the present report accounting standards
and regulations which a business must comply are mentioned along with their relevance and
importance. Apart from this various accounting terms and statements are prepared in an entity
for reconciliation and closing of books of accounts are also explained with purpose they serve.
REPORT
1

To
Line Manager
From: Junior Accountant
Subject: Presentation and application of accounting principles, standards and regulation in
business accounting and reporting which is helpful in evaluation of operational efficiency.
Sir,
The present report is prepared to explain and define knowledge acquaintance of
financial accounting for all personnel in organisation. This report will define that how
accounting principles and regulation are applied to different financial transactions. The
treatment of revenue and capital expenses/incomes is determined by various accounting
standards laid down for this purpose. These reports present all regulations and bodies
responsible for formation of those rules, applicable in accounting of business.
1. Defining financial accounting and its purpose
Financial accounting means to present all monetary transactions of a business for a
particular fiscal period in a definite format. The information is laid down by following all
accounting regulations and standards by regulating bodies and authorities formed by
government. This is mainly concerned with collection al financial information of a business,
analysing and reporting them. This process determines income generated, expenses incurred
and profits earned by business. This information presented through preparation of financial
reports provide significant info to related people outside the business. These people can be
stakeholders, creditors, banks, government, business owners, investors etc. The financial reports
prepared under this are profit and loss account, balance sheet, statement of cash flow and
shareholders equity's statement (Miller-Nobles, Mattison and Matsumura, 2016). These
statements all together reveals relevant information related with a business such as net worth,
profits earned, financial growth of firm, market valuation, cash inflows and outflows along with
assets with and liability that company needs to meet.
2. Regulations relating to financial accounting
Financial accounting regulations are important laws and generalisation for preparation
of fiscal statements of a business. These are formed and regulated by authoritative bodies made
by monitoring board. Regulations are formed for both domestic and international business.
Domestic regulation is formed by institute of charted accountants in England and Wales.
2

International regulations are developed by the accounting standard committee. They issue
global accounting standards which are applicable to all business organisation involved in
foreign trade and commerce. After this IASC was updated as IAS was updated and issued as
IFRS (international financial reporting standards).
IFRS: These are regulations formed by international accounting committee. And are an updated
version of those standards. The regulations provide guidelines for preparation of financial
statements.
IAS: Foreign accounting standards were originally developed by international institute
of charted account in England and Wales (Henderson and et.al., 2015). These were basic
principles and guidelines which a business must adhere while preparing financial statements.
GAAP: These rules and regulations are generally accepted by all business in their
accounting practices and are given a legal format by relevant authorities. A legal establishment
is given to bring uniformity in accounting policy by each and every business of nation.
SORP's: Statement of recommended practice- these are developed by accounting
standard committee and are formed specially for particular sector or industries. Guidelines are
provided by these industries or sector that are to be applied in their accounting practice.
3. Accounting rules and principles
1. Separate legal entity: this principle states that a business is totally separate from its
owner but an entrepreneur and business activities can be related. Owner of business invests
capital that belong solely to that firm only, members do not have any right over it. Similarly, no
personal expense of a director/member or owner can be recorded in books of organisation as
business expenditure. This principle defines that a business holds a legal separate identity of its
own, it does not require anyone's identity for its recognition. It has a right to sue and to be sued.
2. Value in monetary units: all business proceedings must be recorded in a domination
of particular currency this means that a single monetary system unit shall be kept to record all
financial transactions. Even two monetary units cannot be used by an organisation to record all
transactions. In case of international transactions, other currency monetary category shall be
converted into organisation’s denomination and then is shall be recorded.
3. Going Concern: a business is created by law and can be ended by it only. This
principle states that people may come and go this will not affect an organisation's legal stability.
In case all members of a firm dies, business will continue to go on in its name until an end to it
3

is put by following procedure of law that is dissolution or liquidation.
4. Historical cost: this means assets of a business must be valued on its acquisition cost
not at prevailing market rate, as it does not provide actual value of assets as it fluctuates with
inflation and deflation of economy (Beatty and Liao, 2014). So this principle makes action that
all assets are recorded in balance sheet as its original cost, which will present true and actual net
worth and financial position of business.
5. Accrual basis: record transaction pertaining to a business as and when they occur
irrespective of the fact of actual cash flow. This means a revenue when earned shall be booked
in books of business though amount related with it will be received on a later date or is received
in advance, same is case with expenses. Book a transaction as when it happens though cash is
received or paid in the future.
6. Matching principle: this principle states that a dual accounting system has to be
followed by a business. This means for every income there shall be an expense and vice a versa.
This means for expenses incurred income generation shall be showed.
7. Accounting period: Accounting period means a particular time period for which
financial accounts of an organisation are prepared. This preparation can be monthly, quarterly
or annually. Generally, time frame which is followed is annual. All statements reflecting
financial position of business are for a year which can start from either January, March or
September.
8. Relevance and reliability: all data and information recorded in books of accounts
must be relevant and reliable. Relevancy can be determined as all financial transaction books
must belong to that particular year and involves cash flow. Reliability of a transaction can be
checked to prove its authenticity all documentary evidences are available.
9. Conservatism: sometimes accounting transactions and other events are uncertain
and for maintaining relevancy they have to be reported in time. Estimation are made for
making judgement to deal with such uncertainty.
10. Comparability: this is a key quality which must be possessed by accounting
information. A comparison of such data can be carried out when accounting-standards and
polices are applied consistently from one period to other.
4 Convention and concepts of financial accounting
Consistency: once a method is adopted for recording financial transaction it must be
4

applied in future consistently. Same methods techniques for calculations, presentation and
evaluation shall be followed every year (Warren and Jones, 2018). This principle refrains a
business from shuffling from one accounting policy to another. It is mandatory for a firm to
stick to one policy until there is valid and relevant reason to change accounting policy. Reasons
and intention behind such change must be disclosed along with a nature on such change and its
impact of financial reporting.
Material disclosure: according to this principle all material information shall be
disclosed in financial statements either on face or in notes. Material information means all those
information which can reasonably effect decision of user of these statements. All such related
information are inserted in financial records which are considerable after judgements. Some of
them are easily known as sales, purchase, plant and machinery etc. for some reasonable
consideration is required.
CLIENT 1
Sole trader: A business carried on by an individual is termed as sole proprietorship and
that person is called a sole trader. That person is fully liable for carrying out all business
operations. With this capital is invested by him/her solely and have a complete control over
revenue and right on profits earned. Sole trader is responsible for meeting all liabilities and
expenses of business. This type of entrepreneurship is considered as easiest structure for setting
up a new business.
Capital: The sum which is required in establishing and running a new or existing
business. The sum is generated from public, owners or partners. Then this raised amount is also
further invested in order to generate more income (Jaggi, 2015). It can be defined as net worth of
a business organisation. Calculation of net worth is carried out as total liabilities are deducted
from overall assets. Various forms of capital present in organisation are- equity, debt, trading and
working capital.
A. Journals entries
5

6

B. Ledger Account
Purchase ledger
7

8

Sales ledger
9

10

Nominal Ledger
11

12

Cash Book
13

Day book
14

C. Trial balance
15

CLIENT 2
A. Laurent's income statement
B. Financial statements of Laurent
16

CLIENT 3
A. Preparation of profit and loss account
B. Preparation of statement of financial position
17

C. Accounting concept of prudency and consistency
Consistency concept
This concept states that if in a year any accounting principle is adopted then that method
and principles will be carried on in future periods of accounting. Any method once adopted will
continuously apply in all the similar transactions. A business can alter their accounting policies
only when the law requires or if there is any valid reason for such change. Organizations are
required to disclose any such alteration of accounting concepts and principles, reason for change
and effects of such alteration (Dutta and Patatoukas, 2016). It is an important concept which is
used for comparison of past year transaction with current period. This is beneficial for people
who have interest in our company like investors and financial users.
Prudency concept
This concept states that an organisation must never overestimate their profits, revenues
and assets. It also states that an entity should never underestimate their losses, expenses and
liabilities. Revenues and profits are established only when they are definite whereas losses and
18

expenses are to be determined when they are probable. This principle helps in comparison. It
helps to minimize loss and reduce financial risk. It is an important accounting principle which
ensures that assets and liabilities are overstated and understated respectively. It shows a true and
fair position of company and their financial statements.
D. Purpose of depreciation in formulation of accounting statements
Depreciation in fall in value of asset over a time period. The value of an asset falls due
obsolescence or wear or tear. The decrease in value is measured by method of depreciation. The
purpose of charging depreciation is to match the useful life of an asset with revenue generated
from that asset (Depreciation Expense, 2018). It is a process of allocation of fixed asset by
finding their current value which is to be recorded in books. The two methods are: -
Straight line method: This is most common and simplest method for charging
depreciation and reduces the value of asset till it become zero. A same amount is depreciated
from value and life of asset over the years. To calculate depreciation formula is:
Depreciation= (Cost of an asset-salvage value)/ useful life of asset
Example- A ltd purchases a machinery on 2nd February 2013, costing $60,000. Salvage value of
machinery is $10,000 and life of asset is 5 years. Calculate depreciation.
Cost of asset=$60,000
Salvage cost=$10,000
life of asset=5 year
Depreciation=$60,000 - $10,000/5
=$50,000/5
=$10,000 annual depreciation.
Diminishing method: Depreciation is charged on fix percentage basis. An amount of
depreciation is charged which decreases with decrease in value of asset. Every year the amount
of depreciation goes on decreasing and it does not let the asset value to be zero.
Formula:
Depreciation= (Net value of Asset-Salvage value)/ depreciation rate
Example- A company purchased a fixed asset of $40,000 on 1st January 2013 and sold same for
$5000 on 31st December 2017. The company charged depreciation of 20%. Calculate the amount
of depreciation of 2014 and 2015.
19

Depreciation for the year 2014 = $40,000 - $5000/10
= $3500
Depreciation for the year 2015 = $36500 - $5000/10
= $3150
CLIENT 4
A. Purpose of preparation of Bank reconciliation statement
A statement prepared to reconcile all transactions of cash book of a business with its
bank. With preparation of these reconciliation statement discrepancies arising between bank and
cash records are determined and helps in posting of a transaction with dual effect in both books
so that no transaction is left unnoticed with end of year (Zeff, 2016). A business transaction with
monetary value must be posted in both bank and cash books. BRS identifies any differences in
posting of transaction between both books.
Reasons for preparation of BRS:
 To determine transactions not entered in cash book.
 To check that all entries in cash book are complete.
 Discovering errors in bank statement.
 To identify dishonoured checks.
 Detection of fraud and embezzlements.
B. Reasons for occurrence of variation between cash book and bank records
Need for prepararing reconciliation statement arises when there is a difference between bank and
cash book recordings, the main reasons for these differences are stated below:
 Time gap between writing a cheque and payment from bank i.e. cheque recorded in cash
book but not yet presented for clearance in bank.
 Time gap between amount deposited in bank and not recorded in cash book.
 Direct payment from bank, not recorded in cash book.
 Bank charges such as interest and transaction charges not recorded in cash book.
 Errors such as transposition or casting error in account or cash book.
 Error on hand of bank personnel in statement.
20

C. I) Cash book
21

C. II) Bank reconciliation statement
CLIENT 5
A. Preparation of Ledger accounts
Purchase ledger
Sales ledger
22

B. Control accounts and its importance
Control account is prepared for recording balances of all ledger accounts. An account
which is used to record balances of number of subsidiary accounts to keep a cross check on
them. This is a single account in which balances related with one transaction are posted such as
balances of all accounts related with sales are recorded in sales control account, in this both cash
and credit balances are taken (Hatfield, 2014). This is also called as summary account which
provides a synopsis of related transaction at one place.
The main purpose of control account is to keep general ledger free of details and presents
correct balance for financial statements. The various types on control accounts are:
 Bills receivables control accounts
 Bills payables control account
 Sales control accounts
 Purchase control account
CLIENT 6
A. Suspense accounts and its main features
This is an account in which transactions are recorded on temporary basis. These are the
transactions for which a proper account cannot be identified. On identification of its proper place
that transaction is moved from suspense account. This is prepared when trial balance is out of
balance or there are unidentified transactions. This account is a general ledger which act as
holding account till error is discovered and unknown transaction is identified (Khan, 2015).
23

While preparing trial balance, suspense account is opened to hold all discrepancies to match both
sides of statement. All these suspense accounts has to be cleared before preparation of all final
books.
Different types of suspense accounts are: -
 Trial balance suspense account
 Received payments suspense account
 Accounts payable suspense account
 Suspense account journal entries
Main features of Suspense account:
 this is a temporary account
 unidentified transactions are recorded in this account.
 At the end of financial year the amount of this account is balanced zero.
 Prepared to fix ambiguity and discrepancy arising at time of closing of accounting
books.
B and C. Preparation of Trial Balance making correction
24

D. Differentiation between clearing and suspense account
Suspense account: all unidentified transactions are recorded in this account. On
recognition of proper place for a transaction recorded in suspense account are transferred to its
relevant books (Macve, 2015). It is generally prepared to close accounting books of a business,
all discrepancies are solved after words and relevant accounts of transactions are recognised and
recorded which makes balance of this account nil.
Clearing account: in this account transactions are recorded for a short time and when
actual period to record a transaction in its right accounts is reached it is recorded in same.
Transactions, in this account are those whose actual place is known to hold revenues and
expenses till they are transferred to retained earnings.
Featuring comparison between both:
1. both are temporary in nature.
2. Suspense account is prepared to record unidentified transactions while clearing account is
prepared to hold revenues and expenses.
3. At end it is certain that balance of clearing account will be balanced as zero as actual
place of transaction is known. But in case of suspense account it is not certain.
4. Suspense account serves the purpose of recording of unidentified transactions while
clearing accounts for holding transaction.
CONCLUSION
From the above report it can be concluded that a business and fiscal accounting are
inseparable. Financial books serves the main purpose of a business by evaluation of its financial
performance in an accounting period and profits earned by it. This can also be stated that for an
organisation financial reporting is very important as it presents summary of monetary
transactions carried out by firm. While preparation of financial statements of an entity for an
accountancy period, the enterprise is required to follow all rules and standards to bring
uniformity in its accounting statements for different periods. Along with this, a business is
needed to comply with accounting rules and principles so that a nationwide regularity and
applicability of these regulations and principles can be ensured.
25

REFERENCES
Books and Journals
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics. 58(2-3). pp.339-383.
Dutta, S. and Patatoukas, P. N., 2016. Identifying conditional conservatism in financial
accounting data: theory and evidence. The Accounting Review. 92(4). pp.191-216.
Hatfield, H. R., 2014. Accounting: Its Principles and Some of its Problems. In The Development
of Accounting Theory (RLE Accounting) (pp. 21-29). Routledge.
Henderson, S and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
(PP.169).
Jaggi, B., 2015. RESEARCH IN FINANCIAL ACCOUNTING, ACCOUNTING THEORY II
(26: 010: 652) Fall 2015. PP. 632
Khan, M., 2015. Accounting: Financial. In Encyclopaedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat? (pp.98-120). Routledge.
Miller-Nobles, T.L., Mattison, B. and Matsumura, E.M., 2016. Horngren's Financial &
Managerial Accounting: The Managerial Chapters. Pearson. (PP. 655).
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning. Pp 98.
Zeff, S. A., 2016. Forging accounting principles in five countries: A history and an analysis of
trends. (pp. 39-58). Routledge.
Online:
Depreciation Expense. 2018. [Online]. Available
through:<https://accountingexplained.com/search?q=control+account>.
26