[DOC] Financial Accounting Principles Assignment

FINANCIAL ACCOUNTING
PRINCIPLES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
A.1 Financial accounting and its purpose...................................................................................1
A.2 Regulations relating to financial accounting........................................................................2
A.3 Accounting rules and principles...........................................................................................3
A.4 Conventions and concepts relating to consistency and material disclosure.........................4
CLIENT 1........................................................................................................................................4
1. Drafting journal entries...........................................................................................................4
2. Drafting double entry recording with context of ledger..........................................................6
3. Drafting accuracy level with context of trial balance...........................................................22
CLIENT 2......................................................................................................................................23
A. Drafting Statement of Profit and Loss account (Sierra Laurent).........................................23
B. Drafting Statement of Financial Position (Sierra Laurent)...................................................24
CLIENT 3......................................................................................................................................26
A. Drafting statement of Profit and loss statement of LMS Limited........................................26
B. Drafting Statement of Financial position of LMS Limited..................................................27
C. Drafting concept of Consistence and Prudence....................................................................27
D. Drafting purpose of depreciation for framing accounting statements along with its two
methods.....................................................................................................................................28
CLIENT 4......................................................................................................................................29
A. Drafting objective of preparing Bank Reconciliation Statement.........................................29
B. Drafting areas which creates variations in transaction from bank records...........................29
C.1 Draft Kendal's Cash-book as per July 2018.......................................................................30
C.2 Drafting Bank Reconciliation statement as per July 2018.................................................31
CLIENT 5......................................................................................................................................31
A.1 Draft Sales ledger control account for Henderson for year 2018 (July)............................31
A.2 Draft Purchase ledger control account for Henderson for year 2018 (July)......................32
B. Draft the definition of control account.................................................................................32
CLIENT 6......................................................................................................................................33
A. Suspense Account................................................................................................................33
B and C Draft trial balance........................................................................................................34
D Draft comparison between clearing and suspense account...................................................35
CONCLUSION..............................................................................................................................37
REFERENCES..............................................................................................................................38

INTRODUCTION
Financial Accounting is a field which is concerned about summarising, recording and
analysing fiscal transactions which occur daily in an organization. This present report file is a
brief study of principles of financial accounting with solved practical examples denoting
operations of its fiscal statements. In this project report guidelines and regulations that govern
financial accounting in UK are explained briefly, like GAAP, IFRS, IASB. Moreover, this
assignment gives a brief study of accounting rules and principle that needs to be considered
while recording transactions in accountancy books. Further, a mini- research is conducted to
describe purpose of financial accounting to determine objectives and needs for maintaining its
books. Conventions and concepts relating to materiality and consistency are also highlighted
carefully. In addition to this, double entry recording would be drafted in context with ledger.
A.1 Financial accounting and its purpose
Financial Accounting is the base of accountancy in any organisation concerned about
summary, analysis, and recording of fiscal transactions of that business. This process of
recording of financial transactions involves preparation of fiscal statements, which are available
for public consumption (Renz, 2016). It is governed by both local and international accounting
standards, like GAAP, IFRS and IASB. It is used to show financial situation of company to any
outsider or the one who is interested in daily functioning of business. Most basic accounting
principle is "The Measuring Unit principle". Knowing the purpose of financial accounting make
differences between just being a bean-counter and really knowing what business in doing. So,
some objectives or purpose of financial that every business should know are as follows:
 Relevance: The information provided should be relevant to be useful for users.
Moreover, it should help the statement readers to make decisions about the financial
wellness of an organization. To satisfy this objective, any company reports its financial
results either quarterly or annually.
 Reliability: Any organization should provide investors with reliable information of
financial statements in order to enable them to gain understanding of fiscal position of
company to make any decision. Any reliable information is free from biases, misleading
and should be verified.
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 Comparability: There is an established system of recording transactions and reporting
accounting information in order to verify comparability. It benefits and helps investors to
make judgemental decisions about their investment opportunities.
 Consistency: It is a secondary quality of financial information because users are mostly
provided with financial information that spans various periods of time. As everything like
standards, business changes, it is not possible every time to have consistent information.
A.2 Regulations relating to financial accounting
Financial accounting of UK is governed and regulated by GAAP, IFRS, IASB. Following
is a brief study of these regulations:
 GAAP (Generally Accepted Accounting Principles): It is a collection or set of
commonly followed and used accounting rules and standards for reporting any financial
transaction. These regulations are followed to ensure consistency and transparency of
financial reporting from one organization to another. GAAP is not universal it differs
from one country to another or from one geographic location to another. It should be
followed while distributing financial statements outside a company. Financial Accounting
Standards Board regulates GAAP for the state government and local government (Petty
and et. al., 2015). It also includes signified amount of accounting guidance, which is
often issued to explain accounting convections used by specialised industries. These are
termed as Statements of Recommended Practice and in addition to that ASB issues
Urgent Task Force Statements.
 IFRS (International Financial Reporting Standards): It is a collection or set of
accounting standards which states how a particular transaction and other financial events
should be reported in financial statements. IFRS are issued by IASB to specify exactly
how accounts of a company are to be maintained and reported. It ensures common
language so that business and accounts could be understood from one company and
country to another.
 IASB (International Accounting Standards Board): These are older accounting
standards which were replaced by 2001 by IFRS. Earlier it had fifteen members around
the world then the number extended to sixteen (Morden, 2016). IASB has full control
over developing and setting up of its own agenda, IFRS considers this agenda but don’t
have power to determine it. It aims to establish a thorough due process; engagement of
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investors, regulators at every stage of the process and collaborative efforts with world-
wide standard setting community.
A.3 Accounting rules and principles
General rules and concepts that governs the field of accounting are referred to as
principles and guidelines. Following is a list of 10 main accounting principles and guidelines:
 Economic Entity Assumption: This principle states that all the business transactions
should be kept aside or separate from the business owner's personal transactions. As sole
proprietor and business are considered as two separate entities for the purpose of
accounting (Zeff, 2016).
 Monetary Unit Assumption: According to basic accounting principle, it is assumed that
the purchasing power of any currency is not changed over time. Hence, effects of
inflation should be avoided on recorded amounts.
 Time Period Assumption: This principle assumes that it is possible to report complex
and ongoing activities of a business in relatively short intervals to determine more likely
need for the accountant to estimate amounts relevant to that period.
 Cost Principle: This accounting principle does not allow assets to be adjusted upward
for inflation.
 Full disclosure Principle: This principle states that every information should be
disclosed within the statement in order to facilitate investors with honesty and loyalty.
 Going Concern Principle: This accounting principle assumes that a company will exist
long enough to carry out its objectives and commitment and will not get liquidated in
future.
 Matching Principle: This principle requires that expenses should be matched with
revenues.
 Revenue Recognition Principle: This principle guides accountant to record all cash
basis accounting as soon as product has been sold or a service is given irrespective of
when money is actually received.
 Materiality: This accounting principle give rights to accountant to violate another
accounting principle in case of insignificant amount (Schaltegger and Burritt, 2017).
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 Conservatism: This allows accountant to choose the alternative that will result in less net
income or less asset amount. It happens in a situation where there are two acceptable
alternatives for reporting any transaction.
A.4 Conventions and concepts relating to consistency and material disclosure
Materiality Concept: This concept ensures disclosure of all materials from which
decisions of the user of financial statement may affect. It is defined as the characteristics
attaching to a statement, fact or item where its disclosure can influence judgement of a
reasonable person. So, if the event is material it should be disclosed but if it is not a material then
it may not be disclosed (Bobryshev and et. al., 2015).
Consistency Concept: The consistency concept requires that the basis of income
measurement and financial statement preparation should remain consistent for intra firm
comparison. GAAP allows more than one method of describing identical looking operating
situations. Accounting Standards also assumes that these policies are consistent from one-time
period to another. Thus, it is recommended to use same accounting methods each year by firm.
Convention of Materiality: This convention says that only those item should be
recorded in the books which have significant bearing and other insignificant items should be
avoided. This is done to prevent burden of minute things which are unnecessarily recorded on the
reader of accounting books. It is a matter of judgement of accountant to take a decision of
material and immaterial events and only those should be noted.
Convention of Consistency: This convention signifies that accounting practices should
be unchanged from one year to another. It is also necessary for the purpose of comparison and it
does not mean inflexibility of accounting practices. It can consider a new introduction of
improved accounting techniques. If any change is necessary than it should be stated clearly
denoting its effects and reasons for change.
CLIENT 1
1. Drafting journal entries
Journal entries are referred as initial step with reference to accounting cycle which is used
for tracing each business transactions along with specific events with context to this system
(Maskell, Baggaley and Grasso, 2016). The events with context to business occurs in particular
accounting period, journal entries would be recorded in that specific journal for reflecting
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alterations in accounting equation. In the below scenario, Amstel D is referred as sole trader
along with its specific tasks so there would be presentation of its journal entries in general books.
Sole trader is referred as sole proprietorship with context to structure of small business where
each individual operates and owns full business. The accounting equation which helps in
describing specific resources which are applied with reference to business along with its
suppliers. The accounting equation always states that assets are equal to combination of
liabilities and capital. In simple words it helps in justifying resources of economic value which is
directly linked to business and originated from investment through its owners.
Assets = Liabilities + Equity
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2. Drafting double entry recording with context of ledger
In the end of every trading period, all specific transactions are traced in books of prime
entry and adjusted in ledger account. Its total had been traced by using in such format of double
entry which would be directly replicating duality concept. In simple words it could be elaborated
as every transaction must have two effect on organization. Every transaction could be traced in
its account is referred as ledger. It is framed in T format where one side reflects debit and other is
justifying credit entry (Engel, 2016).
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3. Drafting accuracy level with context of trial balance
Every ledger balance had been included in books as it is directly classified in above
journal entries. There is articulation of various data set which helps in summarizing transactions
and referred as primary contribution with respect to its general accounts. The trail balance also
helps in signifying accuracy level of its transactions. In the same series, below trial balance
belongs to year 2018 (Larrinaga, Luque-Vilchez and Fernández, 2018).
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CLIENT 2
A. Drafting Statement of Profit and Loss account (Sierra Laurent)
It is also referred as income statement which reflects expenses and revenue of specific
duration which could be consolidated for one month of a year. Its figures would be justifying that
particular business had gained profit or loss in selected duration (Kristensen, Nielsen and Grasso,
2016). Generally, profitability of specific business had been represented through income
statement. In the below scenario it would by reflecting balances as of year 2018 (July) which
shown financial performance along with stability of given duration.
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B. Drafting Statement of Financial Position (Sierra Laurent)
It is also known as balance sheet as it is a financial statement which helps in reporting
liabilities along with its assets and equity on particular date. In simple words it could be justified
as listing of obligations, ownerships and resources of business organisation. It signifies historical
report which reflects items that are present on specific day (Statement of Financial position,
2018). It would be recording organization’s account information on its ending day of accounting
period.
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CLIENT 3
A. Drafting statement of Profit and loss statement of LMS Limited
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B. Drafting Statement of Financial position of LMS Limited
C. Drafting concept of Consistency and Prudency
Consistency: This concept is referred as an accounting method which is adopted at initial
stage then it should be applied in future in consistence aspect. In the situation which are similar
there should be adaptation of same method and techniques. It could be implied that business
should always refrain from alterations in accounting policy of grounds which are reasonable
(Consistency concept, 2013). In the same series, if there is change in accounting policy but due
to valid reasons then there is necessity for disclosing through business with its specific nature of
change and reason for this alteration. This concept is mandatory due to requirement of
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comparability as it would be enabling investors and various other users of financial statements
for comparing and to gain financial performance of organization.
Prudency: There is always requirement while preparing financial statements for
professional judgement for the purpose of adopting accounting estimates through policies. The
main objective for this concept that organization must be capable for recognizing asset as
specific value which is higher from expected amount which is recovered from its application or
sale. It could be said that liabilities of any business entity must be not justify as amount which
has to be paid with context of future. It is an accounting principle which had huge requirement
for recording liabilities along with its expenses as soon as possible but in that series, revenues are
assured. It is also referred as conservatism principle (Prudence Principle, 2017).
D. Drafting purpose of depreciation for framing accounting statements along with its two
methods
The main objective of depreciation is to match its revenue which had been earned by
using specific asset with productive one. It is considered as very difficult to link it with specific
revenue and cost of asset which is directly allocated for years by which it is used. Generally,
depreciation moves or allocates cost of asset through balance sheet with context of expense to an
income statement on useful life of particular asset (Purpose of depreciation, 2018). In simple
words, depreciation could be referred as process of allocation for attaining principle of matching.
It is not referred as technique for identifying asset’s fair market value. The two types of methods
of depreciation are stated as:
 Straight Line method
 Written down value method
Straight line method: The amount of depreciation had been extracted on original cost of
asset. The specific amount remains similar with perspective of useful life of any asset. In this
method, asset's book value could be directly decreased to zero along with its scrap value. In the
same series, it is not useful for tax and in primary year, total amount of repairs and depreciation
is less. After some time, its expenses increase due to repairs and amount of depreciation remains
same. It is suitable for assets whose most of utility with context of productivity for various assets
such as copyrights, trademarks, patents etc.
Written down value method: in this specific method, depreciation amount always
reduces every year. While decrement in its book value should not reach at zero. It has huge
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applicability for tax perspective. Its sum of charge must be same in its initial year. If there is
increment in repairs, then it would be reducing depreciation amount. It is suitable for assets
which helps in providing utility for primary year such as machinery.
CLIENT 4
A. Drafting objective of preparing Bank Reconciliation Statement
The main objective of preparing bank reconciliation statement is to replicate various
differences with respect to bank records and this reconciliation account. It is stated as very basic
document for perspective of accounting. It is not compulsory unlike balance sheet, income
statement from legal perspective as it reflects different objectives which are stated below:
 Accuracy had been provided with reference to cash-book and passbook. Generally,
accuracy level had been recorded through investor with respect to transactions which are
recorded in both books.
 With the context of mistakes which had been extracted from books with inflow and
outflow of cash could match as per cash-book and bank statements. This specific
statements lay special focus on errors and irregularities in every book with its business
entity.
 It also tracks position of cheques which is gained for objective of collection is traced
through bank reconciliation statement.
 Determination of balance of particular business entity which is corrected had been
provided.
 It helps in gaining level of convenience for the purpose of issuing cheque and bank
balance with context to future.
 It is referred as objective for control of internal outflow and inflow of cash. The bank
drafts problems and malpractices with context of happening in organization linked to
cash and bank are checked.
B. Drafting areas which creates variations in transaction from bank records.
It signifies different factors for creating differences with context to bank statements:
 There is presence of various mistakes because of server issue, as in simple words it could
be stated as for transferring money depositor gets full information and books of accounts
are also updated with this information. But there was server issue which did not transfer
specific amount.
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 There are various books of account which might get overwritten because of immediate
cheque issuance to any particular party. There is absence of cheques for perspective of
encashment.
 There are different services which are given via bank for depositors for the purpose of
issuing cheque and to collect them so in this context commission is charged.
 If there is irregularity or lack of balance or dishonour of cheque, then penalty had been
charged.
 In the same series, if account had been not debited through depositors then it would be
considered as very important factor for creating variations in specific bank accounts
(Fourie and et. al., 2015).
C.1 Draft Kendal's Cash-book as per July 2018
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C.2 Drafting Bank Reconciliation statement as per July 2018
CLIENT 5
A.1 Draft Sales ledger control account for Henderson for year 2018 (July)
Sales Ledger control account is referred as a summary which helps in observing
arithmetical accuracy with context of this specific sales ledger. It would be enabling to observe
proper glance that balance of general books had agreed with context of sales ledger for the
purpose of separate accounts receivable account which is held within sales books. It is also
replicated as trade debtors control account which helps in reflecting sum of trade debtors with
context of organization for given duration. In simple words it could be justified as sum of
amount which had been owned to organization through its consumers at specified duration i.e.
sum of trade receivables. It is referred as major contribution to balance sheet and asset for short
term perspective (Labro and Hemmer, 2017).
Sales Ledger control account
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A.2 Draft Purchase ledger control account for Henderson for year 2018 (July)
Purchase ledger is also replicated as trade creditor control account which must equalise
balance on separate account of supplier. It is also referred as part of balance sheet which helps in
reflecting time and amount which had been owed to major suppliers. All the individual
transactions which are altered in ledger of supplier are considered in this specific account with
recording of credit notes, invoices and payments are traced. In simple words it reflects amount of
total business which had been owned to suppliers at specific duration i.e. sum of trade payables.
Purchase Ledger Control Account
B. Draft the definition of control account
It is also termed as controlling account which helps in summarizing general ledger
account for the purpose of combining subsidiary account of particular type. In simple words it
could be stated as summary account which helps in equalising aggregate of subsidiary account
for specifying and organizing general ledger. There is presence of numerous accounts from
liability and asset with context to expense and income account. The main objective of this
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account is to make general ledger with free of specific details for having appropriate balance of
financial statements. The account of trade receivables could be considered as control account in
its general ledger. If its presence would be in specific account then organization would be
updating accounts at appropriate time like total sales, collections or allowances for specific day
etc.
It would also help in identifying department of particular business entity. It could be
stated through its initial name for its execution process. It always accomplishes good control
through its professionals in decision making process.
CLIENT 6
A. Suspense Account
It is an account where unclassified transactions are recorded on temporary basis. This
account is used to carry temporary or doubtful transactions; it may be repository in terms of
monetary proceedings. Transactions should be directed to suspense account only if the account
specified does not exist, it may be deleted or entered invalid account numbers. This is used
because the proper account could not be determined at the time when transaction was recorded.
When proper account is determined amount is transferred from suspense account to the proper
account. Some features of suspense account are:
 Intermediate: It is an intermediate account between proper account and transaction.
 Temporary: Amount is transferred to actual account after determining the proper place.
 Resolve Problem: It resolves the problem of recording amount on missing of actual
account.
 Zero Balanced: This account is balanced zero after posting it to correct account.
 Balance Indicates Transaction in Suspense: Balance in suspense account indicates
transaction that is been forgotten or deleted.
 Track Problems: It helps in tracking problems and errors in recording of transactions in
financial books of accounting (Hassan and Mollah, 2018).
For Example:
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A supplier invoices for $1,000 of services. You might be unsure about which department of your
business to charge, so you place the amount in a suspense account.
First, open a suspense account. Then, debit the suspense account and credit accounts payable.
Account Debit Credit
Suspense Account 1,000
Accounts Payable 1,000
Later, you decide to bill supplies account of the purchasing department. To close the suspense
account, credit it and debit the supplies account for the same department.
Account Debit Credit
Suspense Account 1,000
Supplies – Purchasing Dept. 1,000
B and C Draft trial balance
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D Draft comparison between clearing and suspense account
Suspense and clearing account consists of various similarities along with its huge
variations. The duration of preparation of this specific account is considered on temporary
aspect. There is presence of various transactions which are adjusted in these specific account at
particular duration. In the same series, it had numerous variations which are mentioned below:
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Illustration 1: Difference between clearing and suspense account
(Source: Difference between clearing and suspense account, 2018.)
Clearing and suspense account sounds similar in various aspects as they are temporary.
The transactions which are altered and amount had been transferred via book keepers in proper
expense or income account. These both account consist of contrary functions. Generally, clearing
account holds various transactions on later aspect and information had been ensured which is
traced in complete and correct aspect. On its contrary, suspense account is framed when problem
had been occurred as it provides amount which had been recorded till issue is solved. Both these
accounts function in different aspects as clearing account keeps transactions for later application
on accurate basis. Suspense account had functioned with context of accounting issue for
specified time then it is resolved on later aspect. As these both account are zeroed at end (Holm,
2018).
This account is used for objective of clearing and is directly reviewed for ensuring the
left balances which might be zero. The main objective of clearing for ensuring that it is zero and
other balance must be valid. It is very applicable for purpose which consist of:
 Funds which are not directly transferred with context of bank till commencement of new
year.
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 The amount which is incorrectly posted and there is requirement of clearing it out.
 There is requirement of wages for banked and cleared which must be zeroes.
CONCLUSION
Concluded project report is a brief understanding of financial accounting principles with
relevant examples and illustrations as per requirement. From understanding of above concluded
report, it is found that there should be consistency in applying principles in recording
transactions. It is also mandatory for any accountant or business to follow accounting rules and
regulations in order to maintain consistency. Further, it is determined that purpose of financial
accounting is relevance, reliability, consistency and comparability and regulations that govern
accounting in UK are; GAAP, IFRS and IASB. It is also clearly stated in the report that IASB are
older accounting standards. And concepts relating to consistency and material disclosure are;
concept of material and consistency. These both concepts states that consistency in accounting
principles should be maintained and there should be disclosure of all necessary materialistic
events of the company. This file is very useful in analysing and knowing need, importance, types
and purposes of financial accounting in any business.
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REFERENCES
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Accounting. In Islamic Finance (pp. 285-293). Palgrave Macmillan. Cham.
Holm, L., 2018. Cost Accounting and Financial Management for Construction Project
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Kokubu, K. and Kitada, H., 2015. Material flow cost accounting and existing management
perspectives. Journal of Cleaner Production. 108. pp.1279-1288.
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Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
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Zeff, S. A., 2016. Forging accounting principles in five countries: A history and an analysis of
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