Financial Accounting Principles and Processes

This assignment provides a comprehensive overview of financial accounting principles and processes. It covers the importance of financial accounting in preparing financial statements, regulated by standard-setting bodies and guided by accounting principles. The three golden rules of accounting, going concern, and revenue recognition are discussed, along with journal entries and financial statement preparation. A thorough understanding of these concepts is essential for students to excel in financial accounting.

FINANCIAL ACCOUNTING
PRINCIPLES

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
BUSINESS REPORT......................................................................................................................1
1. Define Financial Accounting..................................................................................................1
2. Regulations relating to financial accounting...........................................................................2
3. Various accounting rules and principles applicable................................................................2
4. Conventions and concepts related to material disclosure and consistency ............................3
PART B............................................................................................................................................4
CLIENT 1........................................................................................................................................4
P1: Double entry recording with relevant ledger........................................................................4
P2: Trial balance to check the relevancy of Journal...................................................................6
CLIENT 2........................................................................................................................................8
P3: Statement of profit and loss for Peter Piper..........................................................................8
P4: Statement of financial position.............................................................................................8
CLIENT 3........................................................................................................................................9
3.1 Statement of profit and loss of Rain-tree ltd. for the year ended 31st march 2017..............9
3.2: Balance sheet as at 31st march 2017....................................................................................9
3.3 Accounting concepts...........................................................................................................10
3.4 Purpose of depreciation in the preparation of financial statements and two methods of
depreciation ..............................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Financial accounting is a form of accounting in which the accountants prepare the
financial statements using the accounting standards formulated by the regulatory bodies.
Financial accounting process ensures that the financial statements prepared by the managers
reflect the accurate and reliable information and represents the true and fair view of the
company. This project report discusses about the financial accounting and regulations that are
required in formulation of these statements. Various accounting rules and principles that must be
considered and implemented in the organisation for the efficiency of operations and proper
reflections of the financial position of company (Bruce Pounder, 2010) Conventions and
concepts related to materiality and consistency. The recording of journal entries using the
transactions of business and preparation of income statements and balance sheets. And finally the
application of depreciation in the financial statements and types of depreciation methods.
PART A
BUSINESS REPORT
1. Define Financial Accounting
Finance accounting is also called commonly as accounting. The finance accounting is the
process of recording, classifying and summarising in a manner that is understandable to the users
of the information such as shareholders, investors etc. The financial accounting is the accounting
process that is undertaken to prepare the financial statements of the company such as income
statement, balance sheet, cash flow statement for the purpose of reflecting the operations of the
company. The financial statements of the company are used in defining the financial position and
health of the company so that the stakeholders of the company can take decisions regarding
various things by relying on these statements and therefore it is the duty of financial managers to
prepare these financials with due care and by using accurate information such that they represent
the true and fair view of the company.
The financial accounting is done using the certain pre specified standards of accounting
which are determined and prepared by the standard setting bodies such as IASB and FASB. The
IASB issues the accounting standards which are called International financial reporting standards
(IFRS) and these standards are recognized in companies all over the globe, the FASB is a US
based accounting standard body which has issued US-GAAP for performing accounting in the
companies. If the companies do not follow these principles in their financials then the accounts
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are rejected by the auditors and said to be adverse accounts, which are not reliable for use ( Chea,
2011 )
2. Regulations relating to financial accounting
Financial accounting is done for the purpose of providing accurate and reliable
information to the users of the financial statements. The assurance of the reliability and accuracy
of the stakeholders are gained by the company when they use the accounting standards that are
issued by the regulatory bodies such as IASB and FASB. The standards provided in these
regulations tells the accountants and managers how they need to keep record of the financial
transactions for regulatory purposes. The reports that are typically prepared under financial
accounting includes income statement, balance sheet and cash flow statements. These bodies
decrease the chances of discrepancies and abuse in the recording of financial transactions. Every
user requires that financial statements represents fair, accurate, reliable, understandable and
comparable information’s about the financial position and health of the company. In order to
accomplish all these requirements, companies are required to undertake these accounting
principles that are issued by these bodies. The most common regulatory frameworks are provided
by IASB and FASB, these reporting standards are IFRS and US-GAAP. Globally accepted
accounting principles are different in every country but the regulation source is almost same in
every country.
3. Various accounting rules and principles applicable
Accounting Rules:
 Debit the receiver and credit the giver: This accounting rule is applicable on all the
personal accounts that are related in the business transactions. The personal account can
include all the natural persons or legal person. If that particular individual receives
anything from the business, then his personal account Is debited and if he gives anythinng
to the entity his account his credited in the accounts of the firm.
 Debit what comes in and credit what goes out: This accounting rule is applicable on
the real accounts of the company. The real accounts are related to the assets or property
that are owned by the company. Whenever the company purchases the assets the real
account is debited as per the rule and when the company discards the property, account of
that property is credited in the accounts of company.
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 Debit all expenses and losses and credit all incomes and gains: this rule of accounting
is applied on the nominal accounts of the company. Nominal accounts are those accounts
that record the expenses and incomes of entity. The accounts such as rent account,
salaries account, sales account come under this head. ( Gitman, Juchau, and Flanagan,
2015)
Accounting principles:
 Going Concern Principle: This accounting principle implies and assumes that the
company will continue to exist for the coming future period and carry on its operations
and continue to attain its objectives, and also that it will not liquidate. And if the
accountant feels that the company will not be able to survive then his duty is to disclose
about that.
 Matching principle: the matching principle of accounting requires the companies to
follow accrual accounting system, according to this principle the accountant tries to
match the revenues with its expenses.
 Revenue recognition principle: This accounting principle states that the company has to
use accrual basis of accounting rather than cash basis accounting which means the
company should recognize the revenue when the product is sold and not when the amount
is received from the customers. And the same goes with the expenditures.
4. Conventions and concepts related to material disclosure and consistency
Material Disclosure: this accounting convention suggests that the accountant should
focus on recording the transactions which are significant and all the insignificant things should
be ignored, this is important because the unnecessary minute transactions overburden the
accounts of company. There so such per determined formula for choosing material or immaterial
events, this decision is totally dependent on the skills and knowledge of the accountant to judge
which transactions are important to be recorded in the books of accounts and which are not. This
should be considered that a transaction which is material for one entity may be immaterial for
another one, and the items which is material in the current year can be immaterial in the another
year.
Consistency: The Consistency convention of accounts implies that the accounting
practices which are applicable in the current year should be remain unchanged for many periods.
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The name itself implies that the rules and policies that are adopted by the business should remain
consistent in the company for longer periods and should only be changed in cases when there are
sufficient grounds for the changes. And if the companies in any case changes the policies
because of the urgent requirements, the company should take proper steps in implementation of
those changes. The stakeholders and employees also require consistency in the the policies so
that they can be comfortable in working with the company.( Glover, 2014 )
PART B
CLIENT 1
P1: Double entry recording with relevant ledger
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5

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Ledger positing
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8

9

10

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P2: Trial balance to check the relevancy of Journal
Trail Balance in the books of Alexandra for the 01 may 2017 (Figures in £)
Particulars Debit Balance Credit Balance
W. Wright Nil 1910
W. Tone Nil 960
Van account a/c 51250 Nil
T. Cole 2320 Nil
Suspense a/c Nil 2300
Storage cost 400 Nil
Return inwards 680 Nil
Sales a/c Nil 14670
Salaries 4800 Nil
S. Hood Nil 2150
R. Foot Nil 1560
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Purchase Return Nil 50
Purchase a/c 9820 Nil
Premises a/c 340000 Nil
P. White 2420 Nil
P. Mullen 1400 Nil
Owner's Capital Nil 520500
Motor expenses 470 Nil
L. Mole Nil 1830
J. Fox 1310 Nil
J. Brown Nil 4600
J. Allen 910 Nil
Inventory a/c 63900 Nil
Fixtures a/c 8100 Nil
F. Lane 3100 Nil
Drawing account 1500 Nil
Discount Received Nil 960
Discount Allowed 352 Nil
D. Main Nil 2060
Cash in hand 5600 Nil
Bank balance 62400 Nil
Business rates 1320 Nil
Abel motors a/c Nil 8500
562052 562052
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CLIENT 2
(a): Statement of profit and loss for Peter Piper
(b): Financial statements of peter piper
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Statement of financial position
(b) Financial Position Statements
(b): Balance sheet
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CLIENT 3
3.1 Statement of profit and loss of Rain-tree ltd. for the year ended 31st march 2017
Particulars Amount Particulars
Amount
(Figures in £)
To Opening stock 17000 By Sales a/c 107000
To Purchases a/c 32000
To sales returns 2000
To Gross profit c/d 74000 By closing Stock 18000
125000 125000
To Distribution expenses 19000 By Gross profit c/f 74000
To Depreciation expenses 15000
To Corporate charges 4000
To administration charges 30000
To Net profit 6000
74000 74000
3.2: Balance sheet as at 31st march 2017
Particulars
Amount
(Figures in
£)
ASSETS:
Current Assets
Stock 18000
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Bills receivables 24000
Rent paid in advance 3000
Cash at bank -15000
Total current assets 30000
Non-Current Assets:
Building and Land 60000
Machineries and plant 65000
Total non-current assets 125000
Total assets 155000
Shareholder's equity and Liabilities:
Current liabilities
Bills payables 14000
Outstanding administration cost 2000
Tax provision 37000
Corporate
Tax 4000
Total liabilities 57000
Shareholder's Equity
Equity stock @ £1 each 50000
Equity premium reserve 20000
Retained earnings 22000
Earnings 6000
Total equity 98000
Total equities and liabilities 155000
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3.3 Accounting concepts
Consistency: this concept of accounting implies that the principles of accounting or
accounting framework that is adopted by the organisation in the year of commencement should
stay consistent meaning that it should be followed by the company for a longer time period and
the accounting techniques used in preparation of financial statements should also be consistent.(
Hyndman, and Connolly, 2011) This accounting concept motivates the company to avoid
frequent changes in the accounting principles until and unless there are some reasonable
conditions that requires the modification or changes. And in circumstances where the policies are
modified or changed, the company should undertake necessary measures for the implementations
of changes perfectly. The managers of the company should communicate about the changes to all
the employees and stakeholders. The investors require the consistency so that they can easily
compare the financials of the company with the industry average in order to come at a decision
regarding whether to invest in the company or not.
Prudence: This accounting concept states that the company should be conservative in
recording the revenues, gains and incomes of the company or it can also be said that profits of
company should not overestimated by the managers. In the same way expenditures and losses of
the company should not be underestimated by the accountants. This concept is also applicable on
the assets and liabilities of the company, the accountants should not overvalue the assets of the
company in its balance sheet and the amount liabilities must not be undervalued. This states that
the managers should be proactive in the recording of the liabilities and expenses. Because of this
prudence concept, many companies prepare accounts such as tax provisions, bad debts
provisions in the financials of the company (Weil, Schipper, and Francis, 2013)
3.4 Purpose of depreciation in the preparation of financial statements and two methods of
depreciation
Depreciation is the method of decreasing the value of the assets from the books of the
company that happens because of the wear and tear and usage of machinery (Needles, Powers,
and Crosson, 2013) Depreciation helps the company in reducing the valuation of the machinery
every year from its original value such that the company can discard the asset without incurring a
higher loss in the year which it is discarded. The depreciation of the assets is done by using
various methods in the company such as written down value method and straight line method.
These are described in brief as below:
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Straight line method: this method of depreciating the value of machinery decreases a
fixed amount every year from the cost of the machinery every year till the time it is discarded
from the company's assets. This amount is determined at the time the asset is purchased by
determining the total life of the asset and its ending scrap value. The formula of this method is
under: = (Original cost – Scrap value) / Total life of asset
Written down method: this method of depreciation of assets decreases the amount of asset by
decreasing an amount which is calculated at the beginning of every accounting year (Pratt, and
Salimi, 2010) The opening balance of the asset is taken for each accounting year and it is divided
by remaining life of an asset and the amount is then decreased from the opening balance of that
asset and next year the closing balance is used as opening balance.
Formula: = Opening balance / remaining life of the asset
CONCLUSION
It can be concluded from the above report that financial accounting process is very
important for the preparation of financial statements of the company. The financial statements
which are prepared, are regulated by the standard setting body whose accounting principles are
used by the company. The rules and principles of accounting in the process of financial
preparations, three golden rules of accounting and principles such as going concern and revenue
recognition are discussed here. The recording of journal entries from business transactions and
preparation of financials are also illustrated here.
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