Financial Accounting Principles: A Comprehensive Guide

This comprehensive guide delves into the fundamental principles of financial accounting, exploring its meaning, regulations, rules, and conventions. It provides a detailed analysis of various accounting concepts, including materiality disclosure and consistency, and demonstrates their application through practical examples. The report also includes a thorough examination of the preparation of financial statements, such as the profit and loss statement and balance sheet, along with the analysis of key accounting concepts like depreciation. This guide serves as a valuable resource for students and professionals seeking a comprehensive understanding of financial accounting principles.

Financial Accounting Principles
1

Contents
Introduction.................................................................................................................................................3
PART A.......................................................................................................................................................4
Introduction.............................................................................................................................................4
1. Financial accounting Meaning.........................................................................................................5
2. Regulations related to Financial Accounting...................................................................................5
3. Description about accounting rules and principles...........................................................................6
4. Conventions and Concepts...............................................................................................................7
Conclusion...............................................................................................................................................8
TASK B.......................................................................................................................................................9
Client 1....................................................................................................................................................9
Client 2..................................................................................................................................................17
Client 3..................................................................................................................................................19
Client 4..................................................................................................................................................21
Client 5..................................................................................................................................................23
Client 6..................................................................................................................................................24
Conclusion.................................................................................................................................................26
Bibliography...............................................................................................................................................27
2

Introduction
The main aim of the report is to understand about the various management accounting principles
with the explanation about the financial accounting, and the rules as well as principles of
financial management. The profit and loss statements are also prepared so that the understanding
of the financial accounts can be gained in the better way. These are the accounts which will help
the manager for the strategic decision making and in turn the profitability will be attained.
3

PART A
Introduction
This part of the report deals with the understanding about the financial accounting and what are
the rules and regulations which are used in the financial accounting by the organization. With
this the concepts and the conventions are also heighted which are related to materiality disclosure
and consistency.
4

1. Financial accounting Meaning
Financial accounting can be defined as one of the field of accounting which can be used for the
reporting and the analysis of the financial transactions. It is also used in the preparation of the
financial accounts (Onuoha, 2012). The various statements are prepared and then summarization
is done according to that which can be done in balance sheets, profit and loss accounts/income
statement or the cash flow statement. These statements are used to evaluate the performance of
the business operations within the organization. It is governed with the International Financial
Reporting Standards as well as the local standards which are used in the country. But the main
standard which is given in the jurisdiction is the Generally Accepted accounting Principles
(GAAP). These are the standards which define the rules as well as regulations which should be
considered by the organization so that the financial statements can be prepared in accordance
with those standards. These financial statements should be prepared accordingly as they helps to
take the strategic decisions for the long term objectives of the organization (Ramamoorti, 2017).
The statements available in the financial accounts are recorded so that the outsiders can get the
information related to the organization so that they can take decisions related to the investment
purposes. The main objective of the financial accounting is to maintain the capital of the various
objectives of the financial reporting.
2. Regulations related to Financial Accounting
There are various regulations which are related to the financial accounting so that the reporting
of the financial accounting can provide the clear and fair view of the financial statements of the
organization (Tool, 2018). But the main of the regulations which are used by most of the
organizations are:
Accounting Standard Board
The accounting standard board was taken in 1990 from the Accounting Standard Committee. The
main aim of the accounting standard board was to solve the problem of the financial reporting
and corporate accounting by providing the accurate framework (Ramamoorti, 2017). The
accounting standards determines that how the particular transaction should be reported in the
financial statements so that the true and the fair view of the financial accounts can be provided.
5

These standards can be applied to all kinds of the organization irrespective of their nature. But
the initial aim of developing the accounting standards was to properly define the practices of
accounting so that better understanding can be created between the users and the managers of the
organization who are involved in the preparation of financial accounts (Onuoha, 2012).
Statement of Principles
The statement of principle for the financial reporting was published by the accounting standards
board in 1999. It was believed that the statement of the principle helps in assisting the areas of
issues and rethinking on them so that the judgment regarding sufficiency of the disclosures can
be facilitated (Onuoha, 2012). These statements describe the setters of standards on the view that
the activities should be reported and highlighted in the financial statements. The main motive of
these are to provide the framework which will helps in resolving the issues which are faced by
the accountants (Jones, 2012).
3. Description about accounting rules and principles
The accounting rules and the principles are the basic mechanism through which the financial
transactions are recorded in the financial accounts (Jones, 2012). The set of rules are established
so that the recording can be done according to the set rules and the principles are the common set
of the principles which are to be followed so as to comply with financial statements. There are
basically three rules which are:
Type Debit Credit
Personal The receiver The giver
Real What comes in What goes out
Nominal All expenses and losses All income and gains
The principles of accounting are as follows:
Full Disclosure Principle: It states that all the information should be disclosed by the
organization in their financial statements as all the information is important to the investor and
any other lender and the explanation about each entity should also be provided (Jones, 2012).
6

Going Concern Principle: It believes that the organization will continue to operate in the long run
and will not liquidate in any of the unforeseen situations (Jones, 2012). It defers some its prepaid
expenses until the accounting period in future.
Matching Principle: The matching principle says that the expenses of the company should match
its revenues. It is done so that the misreporting of the earnings for the particular period can be
avoided.
Cost Principle: It is the principle which states that the all the assets are to be recorded in the cash
amount when they are acquired not when the settlement is made. This principle is also known as
the historic cost principle (Onuoha, 2012).
4. Conventions and Concepts
The conventions and the concepts are recorded so as to ensure that information related to
accounting in presented in the accurate and the consistent manner (Onuoha, 2012). The
materiality disclosure and the consistency are majorly explained:
Consistency Concept: The consistency concept states that once the accounting principles are
adopted that should be consistency followed in the future accounting periods (Adkins, 2018).
The change can only be made if that changes in leading to the improvement in the financial
results.
Convention of Materiality Disclosure: It is the convention which states that all the materials in
the financial statements should be recorded in proper manner. This will help the investors and the
shareholders to take the decisions accordingly by actually analyzing the financial performance
(Onuoha, 2012).
7

Conclusion
It can be concluded that the proper rules and regulations should be followed by the organization
so that transparency can be maintained in the financial accounts and the investment decisions can
be taken accordingly. The financial accounting provides the accurate framework so that the
compliance can be reduced.
8

TASK B
Client 1
I) The book of prime entry
In the books of Alexandra
For the year ended January 2018
Date Particulars Debit Credit
1-Jan-
18 Storage Expenses A/C Dr. 400
To Bank A/C 400
(Being Storage Cost paid by Cheque)
2-Jan-
18 Purchases A/C Dr. 6080
To S. Hood 1450
To D. Main 2060
To W. Tone 960
To R. Foot 1610
(Being goods purchased on credit)
3-Jan-
18 J. Wilson A/C Dr. 1120
T. Cole A/C Dr. 1640
F. Syme A/C Dr. 2080
J. Allen A/C Dr. 910
P. Whilte A/C Dr. 2420
F. Lane A/C Dr. 770
To Sales 8940
(Being goods sold on credit)
4-Jan-
18 Motor Expenses A/C Dr. 470
To Cash 470
(Being motor expenses paid)
7-Jan-
18 Drawings A/C Dr. 1500
To Cash 1500
Being cash withdrawal for personal use)
9-Jan-
18 T. Cole A/C Dr. 680
J. Fox A/C Dr. 1310
9

To Sales 1990
(Being goods sold on credit to both)
11-Jan-
18 Sales Return A/c Dr. 680
To J. Wilson 270
To F. Syme 410
(Being sold goods returned)
14-Jan-
18 Van A/C Dr. 28500
To Abel Motors Limited 28500
(For purchased Van on credit)
16-Jan-
18 Bank A/C Dr. 7020
Discount allowed A/C Dr. 511
To P. Mullen 1400
To F. Lane 3100
To J. Wilson 850
To F. Syme 1670
To Receivables 511
(Being discount given and receivables paid)
19-Jan-
18 R. Foot A/C Dr. 50
To Purchase Return 50
(Being goods returned to R. Foot)
22-Jan-
18 Purchases A/C Dr. 3740
To L. Mole 1830
To W. Wright 1910
(Being goods purchased on credit)
24-Jan-
18 J. Brown A/C Dr. 4600
S. Hood A/C Dr. 3600
R. Foot A/C Dr. 1400
Payables A/C Dr. 976
To Bank A/C 9600
To Discount received 976
(Being discount received on purchases)
27-Jan Salaries A/C Dr. 4800
To Bank A/C 4800
(Being salaries paid by cheque)
30-Jan-
18 Business Rates A/C Dr. 1320
10

To Bank A/C 1320
(Being business rates paid)
31-Jan-
18 Abel Motors Ltd. A/C Dr. 20500
To Bank A/C 20500
(Being paid to Abel Motors)
Owner’s Capital at January 1, 2018
Owner's Capital
Particulars Amount
Assets:
Premises 340000
Van 51250
Fixture 8100
Receivables 4500
Inventory 63900
Cash at Bank 62400
Cash in Hand 5600
Total Assets 535750
Liabilities:
Payables 6750
Total Liabilities 6750
Owner's Equity 529000
II) Double entry recording with relevant ledgers
Storage Expenses A/C
Date Particulars Debit Date Particulars Credit
1-Jan-18 To Bank A/C 400 31-Jan-18 By Balance c/d 400
Total 400 Total 400
1-Feb-18 To balance b/d 400
Purchases A/C
Date Particulars Debit Date Particulars Credit
2-Jan-18 To payables 6080 31-Jan-18 By Balance c/d 9820
22-Jan-18 To payables 3740
Total 9820 Total 9820
1-Feb-18 To balance b/d 9820
11

Sales A/C
Date Particulars Debit Date Particulars Credit
31-Jan-18 To Balance c/d
1093
0 3-Jan-18 By Receivables 8940
9-Jan-18 By Receivables 1990
Total
1093
0 Total 10930
1-Feb-18 By balance b/d 10930
Motor Expenses A/C
Date Particulars Debit Date Particulars Credit
4-Jan-18 To cash 470 31-Jan-18 By Balance c/d 470
Total 470 Total 470
1-Feb-18 To balance b/d 470
Van A/C
Date Particulars Debit Date Particulars Credit
14-Jan-
18
To Abel Motors
Limited
2850
0
31-Jan-
18
By Balance
c/d 79750
1-Feb-
18 To balance b/d
5125
0
Total
7975
0 Total 79750
Drawings A/C
Date Particulars Debit Date Particulars Credit
7-Jan-18 To Cash 1500 31-Jan-18 By Balance c/d 1500
Total 1500 Total 1500
1-Feb-18 To balance b/d 1500
Abel Motors Ltd A/C
Date Particulars Debit Date Particulars Credit
12

31-Jan-18 To Bank 2050 14-Jan-18 By Van 28500
31-Jan-18 To balance c/d 8000
Total
2850
0 Total 28500
1-Feb-18 By Balance B/d 8000
Salary A/C
Date Particulars Debit Date Particulars Credit
27-Jan-18 To Bank 4800 31-Jan-18 By Balance c/d 4800
Total 4800 Total 4800
1-Feb-18 To Balance b/d 4800
Purchase Return A/C
Date Particulars Debit Date Particulars Credit
31-Jan-18 To Balance c/d 50 19-Jan-18 By Payables 50
Total 50 Total 50
1-Feb-18 By Balance b/d 50
Sales Return A/C
Date Particulars Debit Date Particulars Credit
11-Jan-18 To receivables 680 31-Jan-18 By Balance c/d 680
Total 680 Total 680
1-Feb-18 To Balance b/d 680
Business Rates A/C
Date Particulars Debit Date Particulars Credit
30-Jan-18 To Bank 1320 31-Jan-18 By Balance c/d 1320
Total 1320 Total 1320
1-Feb-18 To Balance b/d 1320
Discount Allowed A/C
13

Date Particulars Debit Date Particulars Credit
16-Jan-18 To Debtors 511 31-Jan-18 By Balance c/d 976
Total 511 Total 976
1-Feb-18 By Balance b/d 511
Discount Received A/C
Date Particulars Debit Date Particulars Credit
31-Jan-18 To balance c/d 976 24-Jan-18 By Payables 976
Total 976 Total 976
1-Feb-18 By Balance b/d 976
Payables A/C
Date Particulars Debit Date Particulars Credit
19-Jan-
18 To Purchase Return 50
22-Jan-
18 By Purchases 3740
24-Jan-
18 To Bank 9600 2-Jan-18 By Purchases 6080
24-Jan-
18
To discount
Received 976
1-Feb-
18
By Balance
b/d 6750
To Balance c/d 5944
Total
1543
0 Total 15430
Receivables A/C
Date Particulars Debit Date Particulars Credit
3-Jan-
18 To Sales 8940
16-Jan-
18 By Bank 7020
9-Jan-
18 To Sales 1990
16-Jan-
18
By Discount
Allowed 511
1-Feb-
18
To Balance
B/d 4500
11-Jan-
18 By Sales Return 680
31-Jan-
18 By Balance c/d 7219
Total
1543
0 Total 15430
14

Cash A/C
Date Particulars Debit Date Particulars Credit
1-Feb-
18 To Balance b/d 5600 4-Jan-18 By Motor Expenses 470
7-Jan-18 By Drawings 1500
31-Jan-
18 By Balance c/d 3630
Total 5600 Total 5600
Bank A/C
Date Particulars Debit Date Particulars Credit
16-Jan-
18 To receivables 7020 1-Jan-18
By Storage
Expenses 400
1-Feb-
18
To Balance
b/d
6240
0
24-Jan-
18 By Payables 9600
27-Jan-
18 By Salaries 4800
30-Jan-
18 By Business Rates 1320
31-Jan-
18 By Abel Motors Ltd. 20500
31-Jan-
18 To Balance c/d 32800
Total
6942
0 Total 69420
III) Trial balance
Trial Balance of Alexander for January 2018
Particulars Debit Credit
Sales 10250
Payables 5944
Capital 529000
Discount received 976
Abel Motors Ltd. 8000
Purchases 9770
Van 79750
Fixtures 8100
Premises 340000
15

Business Rates 1320
Receivables 7219
Inventory 63900
Discount allowed 511
Drawings 1500
Salary 4800
Storage Expenses 400
Motor Expenses 470
Cash 3630
Bank 32800
Trial Balance 554170 554170
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Client 2
I) Statement of Profit and Loss
Trading Account of Peter Piper
For the year ended 31 December 2017
Particular Amount Particular Amount
To Opening Inventory 82200 By Sales 1215000
To Purchases 778800 By Closing Inventory 101640
To Gross profit c/d 455640
Total 1316640 Total 1316640
Profit and Loss statement of Peter Piper
For the year ended 31 December 2017
Particular Amount Particular Amount
To wages and salaries 178720 By Gross Profit b/d 455640
To Motor Expenses 87400
To administrative expenses 17650
To Advertising Expenses 4810
To Heating and lightening Expenses 4950
To depreciation on premises 5400
To Depreciation on equipment 17250
To Depreciation on Motor Vehicle 2800
To Net Profit c/d 136660
Total 455640 Total 455640
II) Financial Position Statement
Balance Sheet
As on 31st December 2017
Liabilities Amount Assets Amount
Capital 33212
0
Equipments 57750
Less: Drawings 42640 Motor 11200
Add: Net profit 13666
0
Freehold Premises 227100
17

426140 Receivables 106960
Payables 76910 Prepaid advertising
expenses
8470
Bank Overdraft 11290 Closing stock 101640
Outstanding
Salaries
1220 Cash in Hand 2440
Total 515560 Total 515560
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Client 3
I) Profit and Loss Statement of Raintree Ltd.
Trading Account of Raintree Ltd.
For the year ended 31 December 2017
Particular Amount Particular Amount
To Opening Stock 17000 By Sales 107000
To Purchases 32000 Less: Sales Return -2000
By Closing stock 18000
To Gross profit C/d 74000
Total 123000 Total 123000
Profit & Loss Statement of Raintree Ltd.
For the year ended 31 December 2017
Particular Amount Particular Amount
To administration cost 30000 By Gross Profit
b/d
74000
To corporate taxes 4000
To distribution cost 19000
To depreciation on Plant and machinery 10000
To depreciation on building 1000
To Net Profit 10000
Total 74000 Total 74000
II) Financial Position Statement
Balance Sheet
As on 31st December 2017
Liabilities Amoun
t
Assets Amoun
t
Capital 5000
0
Trade Receivables 24000
Add: Net profit 1000
0
Land and Building 52000
60000 Plant and machinery 40,000
Retained earnings 22000 Closing Stock 18000
Trade Payables 14000 Distribution Cost
(Prepaid)
3000
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Share Premium 20000 Bank 15000
Outstanding administration
cost
2000
Corporate Taxes 4000
Suspense account 30000
Total 152000 Total 152000
III) The concepts help in maintaing the accountability in the organization as all the
recording of financial statements is done according to the standard rules and
regulations.
Consistency: It shows that if any of the one concept is adopted by the organization same will
be followed in future as well which will help in maintaing the consistency in their financial
reporting. This is the concept that makes the accounting information useful.
Prudency: This concept believes that there should be the balance between the revenues and
expenses within the organization. The organization should not overestimate the assets, profits
and the revenues and even should also not underestimate the liabilities and losses.
IV) The main purpose of the depreciation is to check that what cost has been incurred form the
assets in respect of that with the revenue which is earned from that asset. It also helps in
determining the decrease in the value of assets over the period of time and also affects the taxes
of business which are used in the statements of taxes. The most widely used methods of
depreciation are:
Straight Line Method: This method is used most probably to calculate the depreciation as it
equally spreads the cost over the life of asset. It is easy to calculate and the advantage is that it
can easily be predictable as it does not cause any of the surprising change in income due to the
change in value of depreciation (Jones, 2012).
Double Declining Balance: This is the method which takes into consideration and records the
transaction which is more in beginning but at the end it reduces. The main advantage of this
method is that it will help in determining the cost of asset in which it will be more useful and
also helps in attaining the tax benefits at the beginning stage (Onuoha, 2012).
20

Client 4
A) Purpose of preparing the Bank reconciliation statement in Kendal Ltd.
The main purpose of the bank reconciliation statement is to check for the differences between the
two sets of the records which are of cash transactions so that the rectifications can be made
(Adkins, 2018). These are prepared so that the balances of the customer’s book can be checked
or matched with that of the bank records. It is useful to prepare on the monthly basis so that so
that the unusual transactions which can impact the business in future can be tracked at the initial
stage (Tool, 2018).
B) The reasons which cause the balance of the banks to differ from the cash balances are the
outstanding checks, deposits in transit and banking service charges, bank statement which
is not yet recorded in books.
Outstanding check: These are the items which has been appeared in the books but yet not
appeared in the bank so the amount has been deducted from the cash book but yet to be deducted
from the bank statement so there occurs the difference (Onuoha, 2012).
Bank Service Charge: It is the service charge which is charged by the bank so the customers are
unaware of it this may lead to the decrease in the bank statement but increase in the cash books.
C) Bank Reconciliation Statement
Bank Reconciliation Statement
as at 1st December 2017
Particulars Amount
Balance according to Pass Book 17478
Less:
Cheques which are issued but not presented
780 Cheque No. 426
781 Cheque No. 737
Add:
Deposits as on 2 December 176
Balance as per Cash Book 16491
21

Bank Reconciliation Statement
as at 1st December 2017
Particulars Amount
Balance as per pass Book 19738
Less:
Cheque issued but not presented
783 Cheque No. 9
785 Cheque No. 97
787 Cheque No. 260
366
Add:
Standing Order 137
Fred 119
Bank Charges 47
Deposits 1
310923 297
601
Balance as per Cash Book 19973
22

Client 5
A) I) Sales Ledger Control Account
Sales Leger
Particulars Debit Particulars Credit
To Balance b/d 12600 By Sales Return 7320
To Sales on
credit
15235
0 By receipts from the credit customers
14161
0
By Bad Debt Written off 120
By Discount allowed 380
By Transfer of balances to sales 330
By Balance c/d 15190
Total
16495
0 Total
16495
0
II) Purchase Ledger Control Account
Purchase Leger
Particulars Debit Particulars Credit
To received amount from suppliers 400 By Balance b/d 9160
To Purchase return 1110 By Credit Purchase 116500
To Discount received 290
To balance transferred from sales account 330
To payments made to suppliers 101010
To Balance c/d 22520
Total 125660 Total 125660
B) The control accounts are the accounts which are prepared so that the subsidiary level of
the ledger group can be summarized and the detail regarding the accounts can be
provided. They also help in cross checking of the subsidiary account balances (Jones,
2012).
23

Client 6
A) The suspense account is the account which is used by the organization to record the
transactions on the temporarily basis (Jones, 2012). The feature of the suspense account
is that it is used on the temporarily basis so that the discrepancies which are arised in the
transactions can be solved. It is used for the money transactions which are entered wrong.
B)
Trial Balance
Particulars Debit Credit
Travel Expenses 160
Receivables 320
Purchases 700
Cash in Bank 840
Rent Paid 250
Sales 1100
Capital 710
Payables 350
Control A/C 110
Total 2270 2270
C)
Suspense Account Entries
S.
No. Particulars Debit Credit
1 Simon A/C Dr. 220
To Smith A/C 220
(Being amount of sale adjusted)
2 John A/C Dr. 420
To Suspense A/C 420
(Being amount adjusted)
3 Suspense A/C Dr. 750
To White A/C 750
(Being amount of purchase settled)
D) The difference between the suspense and the clearing account is that the clearing account
ensures that the entries are correctly entered in their financial accounts and the suspense
24

account is opened when the problem occurs in the financial statements and it appears till
the problem is not resolved (Tool, 2018). So, the suspense and the clearing accounts both
are different aspect.
25

Conclusion
From the above it can be concluded that financial accounting plays the important role in
understanding the financial accounts and the transactions. Various accounts are prepared which
provided the understanding that how the treatment of the various transactions are done. The
balance sheet is also prepared which will help in analyzing the financial position of the
organization.
26

Bibliography
Adkins, W. (2018). Retrieved June 2018, from Chron:
http://smallbusiness.chron.com/difference-between-suspense-account-clearing-account-
81560.html
Jones, D. J. (2012). Visualizing Accounting Transaction Flows Into Financial Statements.American Journal Of Business Education , 5.
Onuoha, L. N. (2012). Bank Reconciliation as a Due Process Imperative for Effective Financial
Management.
Canadian Social Science , 8, 52-56.
Ramamoorti, S. E. (2017). The Proof of Cash Should be King Among Forensic Auditing
Techniques.
Journal of Forensic & Investigative Accounting , 9 (2).
Tool, A. (2018). Retrieved June 2, 2018, from Accounting Tool:
https://www.accountingtools.com/articles/what-is-a-suspense-account.html
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