Financial Accounting Principles: A Comprehensive Guide

This comprehensive guide delves into the fundamental principles of financial accounting, covering key concepts, regulations, and practical applications. Explore the definition of financial accounting, understand the regulations governing its practice, and learn about essential accounting rules and principles. The guide also examines the conventions of materiality and consistency, providing real-world examples to illustrate their importance. Through detailed case studies and practical exercises, you will gain a solid understanding of financial accounting concepts and their application in various business scenarios.

Financial Accounting Principles
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Contents
a........................................................................................................................................................3
1. Define financial accounting.....................................................................................................3
2. Explain the regulations relating to financial accounting..........................................................4
3. Describe accounting rules and principles.................................................................................4
4. Explain the conventions of materiality and consistency..........................................................4
b.......................................................................................................................................................6
Client 1:........................................................................................................................................6
Client 2:......................................................................................................................................22
Client 3:......................................................................................................................................25
Client 4.......................................................................................................................................29
Client 5:......................................................................................................................................32
Client 6:......................................................................................................................................34
Bibliography..................................................................................................................................40
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a.
1. Define financial accounting.
Financial accounting is a set of accounting in which the transactions relating to financial aspects
are recorded and presented in an appropriate manner for making decision of the company. The
process of financial accounting includes the activities related with identifying, recording and
presenting the reports that can give a detailed set of knowledge to the business managers of
company. There are different kinds of reports and statements prepared under financial
accounting which includes statement of profit and loss of company, statements of cash flows
relating to company and the statement of financial position of company (Scott, 2015). The
preparation of financial accounting reports are subjected to different set of principles and
standards and the external users utilizes the type of information in order to make long term and
short term decisions regarding the company. Thus the financial accounting can be referred to as
the system of accounting in which the information is presented in a manner which will help the
business managers in evaluating and analysing the financial performance and position of
company and making decisions for future.
Statement of profit and loss The type of statement contains the information
regarding the profits obtained by the company
by detailing the items of revenues and
expenditures during the year.
Statement of cash flows The information about various types of cash
inflows and outflows relating to company is
presented in this statement (Warren, 2018).
Statement of financial position The information about the assets and liabilities
together with equity is presented in these
statements.
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2. Explain the regulations relating to financial accounting.
There are various kinds of regulations associated with preparation and presentation of financial
accounting reports. The types of regulations and principles introduced helps in maintaining a
high level of standards and quality of reporting for the business managers. The accounting
regulatory framework has been developed in this context and this has led to development of
GAAP (Generally Accepted Accounting Principles). The accountants are required to follow the
proper set of accounting principles and standards as prescribed in the GAAP. The same will help
the organisations in ensuring comparability feature globally. Also the Accounting Standard
Board has prescribed some of ten standards that must be followed while preparing the accounting
work of the company (Henderson, 2015).
3. Describe accounting rules and principles.
The accounting rules and principles refer to the set of policies and standards that must be adopted
by a company and they shall be applied adequately and consistently while preparing the
accounting reports. The International Financial Reporting Framework is the governing body to
prescribe the different set of rules and principles that must be followed globally by the
companies. The various types of rules and principles will help the company in ensuring
correctness and accuracy ion accounting.
4. Explain the conventions of materiality and consistency.
Consistency – The consistency principle of accounting refers to the principle in which it shall be
ensured that same set of accounting policies and methods have been used to record the similar
transactions in a company. Thus the company should ignore using the different accounting
policies and methods over the accounting periods. The same set of principle is significant for the
company as it will allow and enable the users to understand the accounting information and
compare the financially statement for making decision in the company. The changes in the
accounting policies over different accounting periods will affect the comparability feature and
the balances will not match in that case. Therefore it is required to follow the same set of
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principles in the company. The generally accepted accounting principle does not allow the
company to change the accounting methods consistently.
Materiality – The materiality principle of accounti8ng refers to the situation where it is ensured
that all the significant items which can affect the decision of the users have been reported
adequately and timely in the financial reports of company. Thus the principle is concerned with
adequate disclosure policy of the company. The identification of significant items relating to
company will be a subject of judgement and therefore proper care must be taken while
presenting the economic information of the company before the users. The transactions and
events resulting in change of decisions should be appropriately presented and disclosed in the
financial statement of companies (Macve, 2015).
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b.
Client 1:
a) You are required to draw a journal and calculate the owner’s capital on 1st January
2018.
Journal entry:
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b) Ledgers:
Mullen A/c
Allen A/c
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Lane A/c
White A/c
8

Fox A/c
Wilson A/c
9

Cole A/c
Syme A/c
10

Hood A/c
Brown A/c
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Main A/c
Date Particulars J.F £ Date Particulars J.F £
By c/d 2060 By purchases 2060
2060 2060
Tone A/c
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Foot A/c
Wright A/c
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Cash at Bank A/c
Accounts Receivable A/c
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Miscellaneous expense A/c
Cash in hand A/c
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Van A/c
Furniture and fixtures A/c
Inventory A/c
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Sales A/c
Building A/c
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Purchases A/c
Accounts Payable A/c
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Drawings A/c
Sales Day Book
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Purchase day Book
Calculations:
b.
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c) Trial balance:
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Client 2:
Statement of profit and loss for Peter Pipe for the year ended 31 December 2017
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Statement of financial position for the year ending 31 December 2017
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Working Note 1:
Particular Premises Equipment Motor
Vehicle
Cost at 31 December 2017 270000 172500 28000
Depreciation for the year 5400 17250 2800
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Client 3:
a. Statement of profit and loss:
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b. Balance sheet for the year ending 30 September 2017
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Working Note 1:
Buildings (Depreciation) (50000 – 0)/50 1000
Plant and machinery
(Depreciation)
15000 = 50000*20% 10000
Working Note 2:
Working Note 3:
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c. Explain the accounting concept of consistency and prudence.
Prudence – The principle of prudence refers to the conservative approach of accounting in
which the losses are recognized and recorded as soon as they are anticipated or they occur
however the profits and revenues are recorded only when they are actually realized by the
company. Therefore it is the principle which helps in presenting the real picture of profits and
losses (Smith, 2017).
Consistency – The consistency principle of accounting refers to the policy of adopting consistent
policies over the accounting period so as to ensure comparability and transparency in accounting.
The financial statement will be prepared after adopting consistent policies in the company.
d. Describe the purpose of charging depreciation and explain various methods of
depreciation.
The purpose of charging depreciation is to ensure the follow up of matching principle of
accounting in the company as the cost of the asset will be allocated appropriately to the revenues
obtained by the asset by charging depreciation appropriately. Thus the depreciation allows the
company to identify the actual profits during the reporting period. The different methods of
charging depreciation are as follows:
Straight line method of depreciation – The cost of the asset is reduced or distributed equally
over the useful life of the asset after deducting the residual value to be achieved by the asset at
the time of sale. The formula will be as follows = (Cost of asset – Scrap value of asset)/ Useful
life of asset.
Written down value method of depreciation- In this method of charging depreciation the cost
of asset is reduced by a fixed percentage as determined by the management. It is suitable in those
cases where the economic benefits to be achieved by the asset can’t be predicted accurately
(Cheng, 2014)
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Client 4
a) The purpose of bank reconciliation statement for Kendal limited.
The main purpose of preparing the bank reconciliation for Kendal is associated with identifying
the differences which has caused the difference in the balance shown as per cash book of the
company and the bank pass book. The difference in balances will cause errors in accounting as
the payments will be made after considering these statements prepared by the bank. Any types of
frauds and errors can be effectively bought out while preparing the bank reconciliation
statements and the working capital can be managed effectively with this tool of accounting
(Henderson, 2015).
b) Reasons for different balances in the bank statements and cash flow statement.
Delay in clearance of cheques – The cheques presented for payment in the bank takes time to
clear and therefore the cash book shows less balance in comparison to the bank statement.
Errors in the bank statement – The posting of incorrect amount to the debit or credit of the bank
statements can be another reason for the differences realised in both the cash book and the pass
book.
Dishonoured cheques – The cheques dishonoured can be the other reason for differences
realized.
C) Prepare bank reconciliation statement at 1st December 2017
Calculation of updated cash book balance for Dec 2017:
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Bank Reconciliation at 31 Dec 2017:
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Client 5:
a. Sales Ledger control account
Purchase ledger control account
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b. Explain the term control accounts.
The control accounts are prepared to summarise the individual general ledger of the company
and contains the aggregated totals for each of the individual transactions incurred and stored in
subsidiary ledger of the company (Macve, 2015).
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Client 6:
a. Describe with an example what you understand by the term suspense account and what
the main features of suspense account are?
It refers to the account in which amounts are recorded temporarily and the same is utilized when
the account relating to the particular transaction can’t be determined and identified properly.
Example – Received a partial payment of £50
Features of suspense account:
 No information is available about the transaction and the related account.
 Utilized to balance off the trail balance of company (Scott, 2015).
 On acquiring the adequate information the trail balance is balanced.
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b. Draft a trial balance by using suspense account.
Shortfall in credit = 2490 – 2160 = 330
Suspense A/c
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Simon A/c
Smith A/c
Sales
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2. Jones A/c
Sales A/c
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c. Prepare journal entries to show the necessary corrections for all the items and clear
suspense account.
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d. Differentiate between a suspense account and a clearing account.
The suspense account is used when there is problem regarding the identification of the account in
which the entry has to be posted whereas the clearing account is used for holding the transactions
to be utilized later in the accounting report (Cheng, 2014).
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Bibliography
Cheng, M. G. (2014). The international integrated reporting framework: key issues and future
research opportunities. Journal of International Financial Management & Accounting , 90-119.
Henderson, S. P. (2015). Issues in financial accounting. Pearson Higher Education AU.
Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat? Routledge.
Scott, W. (2015). Financial accounting theory. Prentice Hall.
Smith, M. (2017). Research methods in accounting. Sage.
Warren, C. a. (2018). Corporate financial accounting. Cengage Learning.
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