Financial Accounting Principles: A Comprehensive Guide

This comprehensive guide delves into the fundamental principles of financial accounting, covering key definitions, regulations, accounting rules, and principles. It explores concepts like consistency, material disclosure, and depreciation, providing practical examples and real-world applications. The guide also includes sample income statements and balance sheets, demonstrating the practical application of financial accounting principles.

Financial Accounting Principles

Part A
1: Define financial Accounting
Financial Accounting can be defined as a sub-division of an accounting system which is used to
record, summarised and classified the financial transactions so that the accounting managers can
report financial position of a business appropriately. Financial accounting is more than
recordkeeping because it is presented to prepare financial statements to report the monetary
solvency of a company to external users and to meet discloser requirements (Gerber, et. al.,
2014).
(Figure 1: Some users of Financial Accounting Statements)
(Source: ANSWER SIMPLY)
Following three types of financial statements are and under financial accounting
Income or profit statement: To determinate the profit of year.
Statement of Affairs or balance-sheet: to report the position of liabilities and assets.
Cash flow and other Accounting notes statement of cash-ins and outs along with a statement of
retained Earning and other discloser statements.

2: Explain the regulations relating to financial accounting:
Financial statements which are made under financial accounting should be made according to the
GAAP and IASB rules. These regulatory authorities are focused to ensure enough comparability
and accuracy in financial statements of corporates. Some regulation related to financial
accounting is as follows
GAAP: GAAP stands for generally accepted accounting principles which are a group of rules
and assumption to support the accounting managers to prepare a financial statement and maintain
quality in financial reporting. Due to the complexity of financial transactions, every investor is
not able to understand financial statements of different companies if they are made on the basis
of different rules and GAAP provides a solution for the same problem. It provides some basic
standards which are mandatory to follow by every organisation so that external users can get
right and quality information for their decision-making.
IASB: IASB is used for International accounting standard board which is responsible to issue
new standards to regulate the accounting system (Mamić-Sačer, 2015). IASB and IFRS rules are
issued and adopted to guarantee uniformity in the financial statements of corporate companies
which is must in the global business market.

3: Describe Accounting rules and principles:
The basic accounting rules are used to ensure appropriate use of Double-entry accounting
because the method of debiting and crediting is base of this system. The basic rules of
Accounting are as follows:
Debit the Receiver, Credit the Giver:
The current approach is presented during the accounting of personal accounts. If an
organisation receives something from a person it is an inflow and the giver should be credited in
company accounts. Account for which amount is received should be debited. For example, if
supplier gives goods, the supplier will be credit and purchase accounting will be debited.
Debit What Comes In, Credit What Goes Out:
This basic rule is applied during the accounting of real accounts like building, land, equipment,
plant etc. if an organisation receives some asset then it will be added by debiting the asset
account and cash or bank account will be credited because it is paid to acquire that asset.
Debit Losses and Expenses, Credit Gains and Incomes
Accounts of expenses, losses and profit are known as nominal accounts. If a company made
payment for an expense, it reduces the balance of profit thus to give the effect on profit is it
debited. For example, capital always has credit balance because it denotes liability of a business
towards shareholders and shareholders have right on all the incomes and losses. By debiting a
loss, ultimately it reduces the capital of shareholders.
Some basic accounting principles:
The principal of Accrual concept: This principle states that accounting deals should be
included in the financial statements of the company when they actually occur, not when the cash
inflow or outflow is generated. Accrual principal makes accounting more practical. For example,
a credit sale is recorded when it proceeds, not when actual payment received (Unegbu, 2014).
Cost principal: This is the possibility that a business must clearly file its favourable instances,
liabilities, and esteem wanders at their extremely good buy costs. This manipulate is polishing

off less generous, as a big collecting of accounting standards are going toward editing assets and
liabilities to their practical traits.
Matching principle: This is used while pay records, each and every related price have to be
recorded meanwhile. Right, when inventory is charged to the fee of inventory bought meanwhile
pay is recorded from the offer of those stock matters that is a status quo of the social affair start
of accounting. The coins introduce of accounting does now not use the planning to show the
display.
The principal of Conservatism: principal of Conservatism is related to the income and loss
recognition. As per this principle, an organisation should choose that alternative when two or
more accounting treatment available for a situation, which reports less profit (Cole-Ingait, 2018).
For example, this principle includes recognition of potential losses but potential incomes do
include.

4: Explain the concepts relating to consistency and material discloser.
Consistency concept: consistency is related to the going concern assumption. Consistency
concept stated that if an accounting approaches selected by an organisation that should be
followed consistently in forthcoming years also ensure a uniformity and comparability in
financial statements.
It gathers that a business has to dismiss changing its accounting recreation plan unless on
realistic grounds. In the case for any real motives the accounting sports plan is changed, a
commercial enterprise needs to find enhance, the motives at the back of the change and its
consequences for the things of budgetary enunciation (Eccles and Youmans, 2015). To better
understand this concept we can take an example of depreciation. For the calculation of
deprecation various methods like SLM, WDV etc. are available and an organisation can choose a
suitable method. In this situation, the selected method should be regularly implemented to
calculated depreciation.
The concept of materiality Discloser: Material discloser concept describes that accounting
should be dedicated to the discloser of material facts and immaterial or very small transactions
can be ignored. The mean of materiality is different for every organisation and it is possible that
one item which is immaterial for one entity may be material for other (Singh and Peters, 2015).
In a general assumption, term, which has significant power to impact the decision of a person,
who is looking for information in financial statements, is material.
The disclosed concept of materiality states that all material and relevant facts about the financial
position of an entity should be disclosed in financial statements and associated notes. It is
necessary to ensure that user gets the right information and take the right decision.

Part 2:
Client 2: Prepare an income statement and balance sheet.
Statement of Profit and loss for the year ended 31-December-2018.
Particulars Amount
Sales 1215000
Other income 0
Total Revenue 1215000
Expenses:
Cost of material used 759360
Wages and salaries 178720
Motor expenses 87400
Admin expenses 17650
Heating and lighting expenses 4950
Advertising expenses 21750
Deprecation 25450
Total expenses 1095280
Net Profit/Loss 119720
Working Note:
Deprecation
Item Rate Amount
Premises 2% 5400
Equipment 10% 17250
Motor vehicle 20% 2800
Total 25450

Statement of financial position at 31-December-2018
Statement of Financial Position: Amount
Asset
Current Asset
Cash 2440
Inventory 101640
Receivables 106960
Total Current Asset 211040
Non-current Asset
Freehold Premises less ACC. Losses 227100
Equipment less ACC. Losses 57750
Motor vehicle less ACC. Losses 11200
Total Non-Current Asset 296050
Total assets 507090
liabilities
Current and Non-current Liabilities
Wages Outstanding 1220
Advertising Expenses 8470
Payables 76910
Bank O/D 11290
Total liabilities 97890
Equity
Capital (Opening) 332120
ADD: current year profit 119720
Less: Drawings 42640
Net Equity 409200
Total Liabilities and Equity 507090

Client 3:
A: Statement of Profit and Loss of Raintree Ltd. for the Year ended 31st-December-2017
Particulars Amount
Sales 107000
inward Return 2000
Total Revenue 105000
Expenses:
Cost of material used (Opening stock + purchase - closing
stock) 31000
Administration cost 28000
Distribution cost 30000
Administration Salaries 2000
Total expenses 91000
Net Income 14000
Corporation Tax 4000
Profit available for shareholders 10000
Working note:
Deprecation
Item Rate Amount
Building Fifty-year life 1000
Plant and Machinery 20% 10000
Total 11000

B: Statement of financial position of Raintree at 31-December-2018
Statement of Financial Position: Amount
Asset
Current Asset
Inventory 18000
Receivables 24000
Prepaid Rent 3000
Total Current Asset 45000
Non-current Asset
Building less ACC. Losses 52000
Plant and Machinery less ACC. Losses 40000
Total Non-Current Asset 92000
Total assets 137000
liabilities
Current and Non-current Liabilities
Salaries Outstanding 2000
Corporation Tax 4000
Payables 14000
Bank O/D 15000
Total liabilities 35000
Equity
Capital (Opening) 50000
ADD: current year profit 10000
Retained Earnings 22000
Share premium reserve 20000
Net Equity 102000
Total Liabilities and Equity 137000
i.

C: Explain the concept of Consistency and Prudence
The concept of Consistency in accounting is related to the uniformity of accounting principles
and rules. It is used when two or more option is available to treat a particular item or financial
statements. The principal of consistency describes that accountant should use uniform rules in
the preparation of financial statements to ensure the facility of comparability. It means
accounting assumptions does not change year to year. In the case of raintree ltd. the company
follows Stateline method to depreciate building and WDV for Plant and machinery. The
company should use the same concept to evaluate deprecation throughout the life of the asset.
The prudent concept of accounting describes that all liability or losses should be recorded in the
financial statements and if there is a potential loss or outflow of funds which may occur due to a
future event should be reported in notes on accounts. In another hand, an income or revenue
should be recorded, only when the receipt of that income is assured.
D: Deprecation and its components:
Purpose of deprecation:
Every asset has a useful life and business should make appropriate reserve to ensure the
availability of fund when it requires replacement. Deprecation is applied for the same. Another
reason for the depreciation is that it is used to charge the reduction in value of asset against that
period in which asset is used to earn a profit. Deprecation is an allowed expense under tax rules
and it is charged to reduce the tax liability.
There are various methods to calculate the depreciation some of them are as follows:
Straight-line Depreciation: it is a most used method to depreciate the value of the asset. In this
method, the asset is depreciated over the useful life. For example, Raintree deprecates building
by using this method.
Amount of depreciation under SLM: (Cost of asset-salvage value)/ asset Life
It is appropriate for those assets which have nominal salvage value and fixed assets.

WDV: written down value method is a more scientific method for the calculation of
depreciation. In this method, depreciation is charged at a fixed rate. For example, plant and
machinery are deprecated by a rate of 20%.
Amount of depreciation = Deprecation rate* WDV value of the asset
The assets which require more maintenance when they get older like a plant, machine, cars etc.

Client 5:
b: Control account: control account can be defined as a summary account

References:
1. Singh, M. and Peters, S.J., 2015. Materiality: Investor Perspectives.
2. Eccles, R. and Youmans, T., 2015. Implied Materiality and Material Disclosures of
Credit Ratings.
3. Cole-Ingait, P., 2018. Basic Accounting Principles and Full Disclosure. [online]
Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/basic-accounting-
principles-full-disclosure-67682.html [Accessed 2 Jun. 2018].
4. Unegbu, A.O., 2014. Theories of accounting: evolution & developments, income-
determination and diversities in use. arXiv preprint arXiv:1411.4633.
5. Mamić-Sačer, I., 2015. The regulatory framework of accounting and accounting
standard-setting bodies in the European Union member states. Financial theory and
practice, 39(4), pp.393-410.
6. Gerber, M.C., Gerber, A.J. and Van der Merwe, A., 2014. An analysis of fundamental
concepts in the conceptual framework using ontology technologies. South African
Journal of Economic and Management Sciences, 17(4), pp.396-411.