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, accounting rules and principles, conventions like materiality, disclosure, and consistency, and their impact on financial reporting. The guide also includes a portfolio of client case studies demonstrating real-world applications of financial accounting principles, including journal entries, ledger accounts, trial balances, profit and loss statements, balance sheets, bank reconciliation statements, control accounts, and suspense accounts. Learn how to prepare financial statements, analyze financial data, and make informed financial decisions.

Financial Accounting Principles
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Contents
Written Report....................................................................................................................3
Definition of Financial Accounting..................................................................................3
Regulations relating to financial accounting..................................................................3
Accounting rules and principles.....................................................................................3
Conventions and concepts relating to consistency and material disclosure.................4
Materiality...................................................................................................................4
Disclosure...................................................................................................................4
Consistency................................................................................................................4
Portfolio of Clients..............................................................................................................6
Client 1...........................................................................................................................6
Client 2.........................................................................................................................16
Client 3.........................................................................................................................18
Client 4.........................................................................................................................21
Client 5.........................................................................................................................23
Client 6.........................................................................................................................25
References.......................................................................................................................27
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Written Report
Definition of Financial Accounting
Financial accounting is defined as the procedural framework which is used to record, summarise
and present the financial data in accordance with the standardized guidelines ion the form of
financial report to the stakeholders of the business or entity (Shah, 2013). It is the form of
accounting which deals with the monitoring and tracking of financial transactions of a business.
The purpose of financial accounting is to present the financial data in a uniform and organised
manner to the stakeholders of the company so that the stakeholders can access the required
information and make financial decisions with regards to their association with the company and
its business. . This financial data is included in the financial report in the form of financial
statements which include statement of financial position which describes the financial position of
the company at the reporting date, profit and loss statement which presents the financial
performance of the business during the period for which the statement is prepared and cash flow
statements which presents the details of cash inflow and cash outflow of the business. The
concept of double entry system of accounting is used in the financial accounting process which
determines the method and flow of recording the business transactions for preparation of books
of accounts and financial statements. In this way the financial accounting system provides the
guidance in proper and appropriate financial recording and financial reporting for the decision
making of internal as well as external users of an entity or a business.
Regulations relating to financial accounting
The general rules and regulations in relation to financial accounting include accounting
standards, generally accepted accounting principles (GAAP), International Financial Reporting
Standards (IFRS) etc. In UK, Financial Reporting Council (FRC) is the regulating authority for
governing the financial reporting by the entities. Other financial reporting regulatory bodies
include The Codes and Standards Committee, Accounting Council and Financial Reporting
Review Panel. The accounting standards were developed by the Accounting Standards Board
(ASB) which reports to the Codes and Standards Committee... These accounting standards apply
to the accounting process and preparation of financial statements. All the companies registered in
UK are required to follow the provisions of accounting standards and Companies Act and
guidelines and announcements from the above mentioned regulatory bodies
Accounting rules and principles
The accounting rules include the double entry system of accounting and book-keeping.
According to this rule, the business transactions are required to be posted with dual effect. The
debit side of the transaction shall be posted along with the recording of the credit side of the
transaction. This helps in the easy recording and interpretation of the financial data (Maheshwari,
2015). Thus, every business transaction shall affect two accounts at the same time. There are
various principles of accounting which are explained as follows:
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 Economic entity Assumption – It states that the business entity is separate from the owner
in economic terms.
 Monetary unit assumption – It states that the business transactions will be required to be
measured in monetary terms and denominations in currency value4.
 Time period assumption – It states that the financial accounting relates to a specific time
period or interval for which the transactions are recorded and financial reports are prepared.
 Cost principle – It states that the amounts are to be recorded in the financial statement at
their historical cost and therefore the assets are not adjusted for upward inflation.
 Matching Principle – This principle relates to the accrual system of accounting in which the
incomes and expenses are recorded for the period as and when they are earned or expended
irrespective of receipt and payment.
 Conservatism – this principle states that all the losses are to be disclosed but the disclosure
of incomes and gains shall be on the basis of their accrual or receipt
Conventions and concepts relating to consistency and material disclosure
The Accounting conventions or concepts are the guidelines which assists the accountants in
preparing and finalising the accounts of a business. There are four types of accounting
conventions which include disclosure, materiality, consistency and conservatism. The
conventions of materiality, disclosure and consistency are explained as follows:
Materiality
This concept relates to assigning the weightage or importance to the items of financial statements
or business and accounting events. According to this convention, the items and transactions
which have a significant impact on the financial positions and financial performance of the
business shall be taken into consideration and others shall be ignored. The recording of only
material transactions reduces the burden on the accounting process. However the judgement as to
the materiality of a transaction or an event depends upon the accounting estimates and policies
and there is no specific rule for deciding the materiality of the transaction (Ofori-Atta, et.al,
2017).
Disclosure
According to the concept of disclosure, all the material and relevant information about the
business or the entity shall be disclosed in the financial statements of the business. The
information which is material in the best interest of the stakeholders of the business is only
required to be disclosed in the financial report of the business. The disclosure is required for
effective interpretation of financial data by the users and preventing the users from misleading.
Consistency
Under this concept it is assumed that the business is carried on for long term and is a going
concern. Therefore the accounting is done for long term and the policies and practices which are
followed remain to continue throughout the accounting period and are carried forward to the next
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period also. The accounting policies remain same in all periods and the change in accounting
policies and estimates and the impact of such change on the financial statements are required to
be disclosed under the notes to financial statements.
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Portfolio of Clients
Client 1
i) Books of primary entry
Alexandra Study
Journal for the month of January 2018
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Owner’s capital calculation
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ii) Double entry accounts
Ledger Accounts for the month of January 2018
Purchases A/c
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Sales A/c
Cash A/c
9

Bank A/c
Motor Expenses A/c
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Storage Expenses A/c
Receivables A/c
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Van A/c
Payables A/c
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Particulars Debit Particulars Credit
To purchases
To Bank
To discount received
By Balance c/d
50
9600
976
5944
By balance b/d
By Purchases
By Purchases
6750
3740
6080
Total 16570 Total 16570
Drawings A/c
Discount Received A/c
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Abel motors Ltd. A/c
Discount Given A/c
Salary A/c
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Business rates A/c
iii) Closing the accounts
Trial Balance as on 31st January 2018
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Client 2
Books of Peter Piper
Profit & Loss A/c For the year ending 31st December 2017
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Balance sheet as on 31st December 2017
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Client 3
(a) Statement of profit and loss
Rain tree Ltd
Statement of profit and loss for the year ending 31st December 2017
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(b) Statement of financial position as on 31st December 2017
Statement of financial position as on 31st December 2017
c) Concepts of accounting
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Prudency – This concept of accounting is used to appropriately record the incomes and expenses
and assets and liabilities of the business so that they are not overstated. Thus, it requires making
proper accounting judgements and estimates for effective recording of business data and
transactions.
Consistency – This concept of accounting relates to the consistency in the application 0of
accounting policies, estimates and principles for the subsequent account6ing periods. It requires
that the accounting policies shall continue to the next period also for the purpose of uniformity
and comparison.
d) Depreciation
In preparing the financial statements and accounts of a business, depreciation is charged on the
fixed assets of the business in order to present the true and fair value of the cost of the fixed
assets. As per the costing principle, the fixed assets are recorded at the historical cost and
therefore depreciation is used to present the decline in the value of fixed assets (Del Giudice,
et.al, 2016). The different methods used for calculating the depreciation are as follows:
 Straight line method – In this method the total value of asset is depreciated throughout the
life of the asset by dividing the life of the asset by the cost of the asset. The equal amount is
reduced from the asset every year till the completion of the life of asset.
 Reducing Balance Method – In this method the amount of depreciation is calculated at a
fixed percentage on the value of asset. Every year the amount is charged on the written down
value or reduced value of the asset which is arrived at after deducting the depreciation of
prior period.
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Client 4
A) Bank Reconciliation statements
The bank reconciliation statement is prepared to tally the balance of company accounting
statements with the bank statement. There are various reasons which results in deviation in the
balance shown at the bank and company accounting statements. The reasons for the deviation are
being depicted and balances are matched so that any flaws or improper transaction are being
rectified. The reconciliation statement can be useful tool for the checking of each and every
transaction that is being done through the bank.
B) There are various reasons which can result in the deviation of the balance from the books such
as the bank charges, interest received etc. The other reasons can be due to presentation of the
cheque but the clearing of the same is not done or the cheque is issued but there is no
presentation of the cheque by the customer. There can be transactional error also such as the
amount in the cheque is written different from the company accounting statements. The omission
error such as the employee forgot to pass any entry which may result in the deviation in figures.
C) Bank Reconciliation statement
Bank reconciliation statement as at 1st December 2017
Bank reconciliation statement as at 31st December 2017
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Client 5
a) Control accounts
Sales ledger control account
Purchase ledger control account
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b) In the business there are various accounts which are prepared and they are having certain
subsidiary accounts too. All the balances and the details of those will be entered in a separate
account which will be recognised as the control account. By this all the components which are
related to them will be available at the same place. Also the cross checks will be established by
which the accuracy of the values will be ensured.
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Client 6
a) Feature of suspense account
Suspense account is the account which is opened on the temporary basis and in that the
transactions which are pending or doubtful will be recorded as otherwise the deviation in the
accounts will have to be faced. They will be eliminated once the clarification in relation to them
will be obtained. Certain errors which arise in the business such as one sided errors will be
balanced with the help of this. It will not be required that this shall be closed and it will occur
automatically once the transaction or the error will be set off.
b) Preparation of trial balance
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c) Correction for suspense account
d) Difference in clearing and suspense account
In the business there are certain situations in which the reporting of certain transactions is not
made or they have been transferred to some other account and in order to include them in the
accounts there is the clearing account which is used. They will be posted in the accounts in the
coming span of time and not in the same period. On the other hand the suspense account is made
so that all the variances in the trail balance can be set off and they can be matched so that the
errors which are there can be identified and dealt accordingly and will be closed once the error is
removed.
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References
Agoglia, C.P., Doupnik, T.S. and Tsakumis, G.T., 2011. Principles-based versus rules-based
accounting standards: The influence of standard precision and audit committee strength on
financial reporting decisions. The accounting review, 86(3), pp.747-767.
Hyndman, N. and Connolly, C., 2011. Accruals accounting in the public sector: A road not
always taken. Management Accounting Research, 22(1), pp.36-45.
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of
IFRS. Abacus, 50(1), pp.107-116.
Ward, D.M. and Calabrese, T., 2018. Accounting fundamentals for health care management.
Jones & Bartlett Learning.
Maheshwari, S., 2015. Fundamentals of Accounting.
Del Giudice, V., Manganelli, B. and De Paola, P., 2016, July. Depreciation methods for firm’s
assets. In International Conference on Computational Science and Its Applications (pp. 214-
227). Springer, Cham.
Shah, P., 2013. Financial Accounting. OUP Catalogue.
Ofori-Atta, K., Bruce-Twum, E. and Appiah-Gyamerah, I., 2017. Fundamentals of financial
Accounting 11.
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