Financial Accounting Principles and Concepts

This assignment delves into the significance of financial accounting principles for creating accurate company financial statements. It covers various financial statement types in double-entry bookkeeping, essential accounting concepts, methods of depreciation with examples, features and importance of bank reconciliation statements, control accounts, suspense accounts, and clearing accounts.

FINANCIAL ACCOUNTING
PRINCIPLES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
A) Report to Line Manager explaining accounting regulations.............................................1
CLIENT 1........................................................................................................................................5
A) Producing journal entries for the business........................................................................5
B) Exhibiting ledger accounts for organisation......................................................................6
................................................................................................................................................7
C) Extracting trial balance by compiling accounts...............................................................21
CLIENT 2......................................................................................................................................22
A) Producing Statement of Profit and Loss for client..........................................................22
B) Preparing Statement of Financial Position......................................................................23
CLIENT 3......................................................................................................................................25
A) Profit and Loss account of LMS Ltd...............................................................................25
B) Statement of Financial Position of company...................................................................26
C) Explaining concepts of consistency and prudency (150)................................................27
D) Describing purpose of depreciation and explaining methods of charging depreciation. 28
CLIENT 4......................................................................................................................................29
A) Preparing bank reconciliation statement.........................................................................29
B) Causes of varying accounting records with bank statements..........................................29
C) Preparing cash book and bank reconciliation statement of Kendal Ltd .........................30
........................................................................................................................................................32
CLIENT 5......................................................................................................................................32
A) Enumerating sales and purchase ledger account of Henderson Ltd................................32
..............................................................................................................................................33
B) Describing the term control account................................................................................33
CLIENT 6......................................................................................................................................33
A) Explaining suspense account and discussing features.....................................................33
B) Trial balance....................................................................................................................34
C) Distinguishing clearing and suspense account................................................................35
CONCLUSION..............................................................................................................................35
REFERENCES..............................................................................................................................36

INTRODUCTION
Financial accounting principles are very important for preparing financial statements
which show the financial performance of a company. Financial accounting principles are general
guidelines and rules of accounting.
The present report helps in understanding the double entry book-keeping and how the
transactions are recorded in it. The report presents different final account of sole trader,
partnership or limited company. The report depicts different methods for depreciation of fixed
asset with proper examples.
The report complies Bank-reconciliation-statement with its needs and objectives with
preparing bank-reconciliation-statement of a month. The report mentioned the control and its
importance in financial statements. The report gives overview of different accounting concepts.
The report mentioned the suspense account and the purpose for preparing it. The differences
between suspense account and clearing account is mentioned in the report. The report includes
preparation of different financial statements.
A) Report to Line Manager explaining accounting regulations
To: Line Manager
From: Junior Accountant
Subject: Accounting terms and regulations useful for organisation to comply with
Respected Sir,
Accounting is a crucial activity to record each and every transaction occurring in the
business on day-to-day basis. Various transactions take place in the company on daily basis and
it is required to keep track of the same so that accounts can be maintained in a better way.
Accountants have main responsibility in recording all such transactions, which will be helpful
in preparation of final accounts with ease. Journal entries are recorded with sale and purchases
in business, then inflows and outflows are analysed.
Next step is to post journal entries into individual accounts known as ledger accounts.
Afterwards, summarized view of accounts is provided by producing trial balance reflecting
equality of debit and credit. In relation to this, errors if any prevailing in journals or ledgers are
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rectified by extracting trial balance. Next step is to prepare final accounts such as cash flow
statement, income statement and Statement of Financial Position. Hence, financials are
prepared in effective manner by relying on reliability of accounting.
In order to extract true financials, accounting practices are followed that should be
proper so that organisation may be able to provide clear view of financial statements to internal
and external stakeholders in the best possible manner. For accomplishing this, accounting
concepts and regulations are vital to follow by accountants to extract accounts quite fairly. By
strictly following such concepts, true and fair statements are prepared revealing authentic and
reliable information of financial health of firm (Renz, 2016). This is because investors,
creditors, government and related parties rely on such statements so that they may take
enhanced decisions. Investors come to know earning capacity of an organisation whether
adequate returns will be generated and paid to them in the way of dividends. Creditors who lend
money to business who also seek solvency and liquidity aspect of company in paying-off
liabilities in a timely manner. Government and taxation authorities are benefited to analyse tax
obligation of firm and hence, reliability of financials is a must, which can be enhanced by
abiding with concepts and regulations imparted by accounting bodies.
Financial Accounting
It is a useful branch of accounting, which helps to prepare financial statements quite
effectively. Financial accounting takes past information and is mainly concerned with
summarizing, analysing, reporting of monetary transactions that pertains to organisation. Public
or external parties are benefited because it helps them to review financial standing of business
and then carry out better decisions with ease. Apart from external stakeholders, it is also
beneficial for the management to take enhanced decisions and straightening internal operations
so that productive results that may be achieved in effectual way. Costs can be controlled and
profits can be maximised (Warren and Jones, 2018.). Financial statements are formulated by
accountants, which are analysed by internal and external stakeholders by which decision-
making can be done. Overall, liquidity, profitability, solvency and efficiency of business is
carried out with the help of financial accounting as statements are produced on such basis.
Financial statements are useful for taxation authorities as it helps to carry out tax obligation of
business in effective manner. True and fair position of business can be assessed by relying on
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financials.
Financial accounting rules and regulations
Accounting is a large field by which professional records, summarizes and report data in
the form of final accounts that help stakeholders to make enhanced decisions with ease. It is
required for the preparation of true accounts, regulations governed by professional bodies that
are followed for presenting true health of business (Weygandt, Kimmel, and Kieso, 2015). This
is particularly important to eliminate manipulation of records that affect fairness and reliability
of statements up to a high extent. It is required so that business may be able to reveal perfect
information to users of financial accounting and as a result, external parties are not fooled by
inaccurate and manipulative information. In relation to this, financial regulator of UK FRC
(Financial Reporting Council) has imparted guidelines to be followed by corporates. Legal
frameworks provided by accounting bodies are enumerated as under-
FRC: It is a body which is formed as limited by guarantee and regulate not only corporates but
also government units. By such legal framework, UK economy is benefited as proper financials
principles are followed and as a result, true final accounts are produced revealing health of
company with much ease. Corporate governance is effectively regulated to promote economic
development of the nation.
IASB (International Accounting Standards Board): The body is empowered to effectively
regulate accounting policies so that true financials may be prepared. The accountants are
benefited as they prepare accounts in relation to the regulations prescribed by IASB and as
such, it helps company to produce statements exhibiting correct position.
IFRS (International Financial Reporting Standards): This professional body also helps and
guides in producing financial reports in the best possible manner. This helps accountants to
follow policies and rules so as to exhibit information and provide clarity to external parties for
making decisions.
Enumerating principles and rules for accounting
There are certain guidelines which are universally accepted by accountants in
preparation of financials. GAAP (Generally Accepted Accounting Principles) provide
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guidelines to professionals so that true information may be reflected in overall final accounts.
Monetary assumption (unit)- This assumption states that transactions may be handled or made
in that currency which is universally accepted. In relation to this, US Dollar should be used as
monetary currency value as it is less fluctuating for maintaining transactions.
Economic assumptions- The economic assumption means that firm takes into account of
economic environment which prevails in the country. In relation to this, assumptions are made
which help to estimate viability of upcoming project whether it will reflect the forthcoming
project of a company or not.
Cost principle- The costs which are needed to be incurred are analysed in anticipation of
requirements of departments and as such, budget is prepared so that needs may be fulfilled quite
effectually. It is helpful in order to initiate control on expenses and meet operational
requirements and thus, trade requirements are fulfilled as well.
Full disclosure concept- This concept postulates that each and every transaction that occurs at
a particular time period must be recorded so that proper financials may be extracted with ease.
This is a prerequisite because with absence of information, effective financial statements cannot
be prepared. In addition to this, to enhance reliability, audit should be conducted and
compilation should be done in single statements so as to provide attractive information readily
available to analyse by stakeholders. Hence, disclosure of income statement, balance sheet is
must at year ending.
Going concern concept- The concept clearly states that business commences its operations in
the market with a view to continue for a long-run and attain good market share. By complying
with this principle, financial statements are prepared which are imparted to external parties
which enhance their reliability and decisions are made accordingly.
Materiality concept- As the name suggests, material information is taken into account and
other immaterial information is ignored by the firm. This means that in books of accounts that
information must be reflected which could affect decision-making of firm. The information
which might not affect taking decisions should be ignored.
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CLIENT 1
A) Producing journal entries for the business
Journal entries are prepared which is the first step in carrying out final accounts in an
appropriate manner. It is the first stage where records are maintained in effective manner with
reference to transactions occurred in normal business operations. Summarized data is provided in
order to carry out true position of various transactions in company (Macve, 2015.). On the other
hand, entries are recorded in consideration of the time in which they have occurred. In simple
words, chronological order is followed when transactions occur. This helps to even rectify
whether entry found on particular day matches with bill or not. The journal entries are made
below-
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B) Exhibiting ledger accounts for organisation
Ledger preparation is the next step by which information is prepared in effective manner.
This helps company to separate information in individual accounts which provides clear view of
the transactions in particular heads with ease (Macve, 2015.). This helps company to assess costs
incurred and profit garnered. Hence, ledger accounts provide the entire record of transaction over
a particular period. This information helps to carry out and supports preparation of financials in
effectual way. Assets, liabilities, expenses, revenues are easily identified. Thus, ledger
preparation is required for carrying out accurate financials.
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C) Extracting trial balance by compiling accounts
Trial balance is another useful way of assessing whether entries made in journals and
posted into ledger are error free or not. In other words, trial balance is extracted to match both
sides of account i.e. debit and credit. Moreover, with error detection concept, mathematical
accuracy is highlighted and errors if any can be rectified in the best possible manner. This is
helpful for evaluating accuracy of financial statements in effective way.
Trial balance for the trader is extracted below-
JOURNAL ENTRIES
ASSETS Debit (£) Credit (£)
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Premises 200000
Van 45250
FIXTURES AND
FURNITURES 10000
INVENTORY 45900
ACCOUNTS
RECEIVABLES:
P Games 3000
F Steel 3100
BANK BALANCE 60400
CASH 6600
LIABILITIES
ACCOUNTS
PAYABLES
S Lyle 3950
J BROWN 4200
CAPITAL
BALANCING
FIGURE 366100
Total 374250 374250
CLIENT 2
A) Producing Statement of Profit and Loss for client
Financial performance of business can be effectively analysed by looking at Statement of
Profit and Loss, which is an important type of financial statement. It helps in reflecting the
business position whether it has earned significant profits or not. In simple words, revenues
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earned and expenditures incurred are reflected in such statement, which clarifies financial
conditions of an organisation in effective manner. This statement is also termed as income
statement as it shows income garnered from operations and expenses incurred. It is useful for
company because costs can be analysed in better way and control can be initiated to maximise
profits quite easily. Income statement of Sierra Laurent at 31 July 2018 is prepared below-
Sierra Laurent's Statement of Profit and loss as at 31st July 2018
£ £ £
Revenue 1750000
cost of goods manufactured
opening stock 40500
Add: Purchases 1050800
1091300
less: closing stock 38640 1052660
Gross profit 697340
Expenditures
wages and salaries 144000
add: accrued amount 2220 146220
motor expenditures 68000
administrative expenditures 20000
heating and lightning expenditures 6200
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advertising expenditures 14800
less: Prepaid 7470 7330
Premises (depreciation) 8000
equipment (depreciation) 28000
motor vehicle (depreciation) 6200 42200 289950
Operating Profit 407390
B) Preparing Statement of Financial Position
The financials are reflected in a better way with the help of preparation of balance sheet.
This type of statement reveals assets and liabilities at a particular time period generally at the end
of accounting year. Assets and liabilities should be balanced and in no manner liabilities may be
more as business will face difficulties as assets fall short then. It is also termed as position
statements because financial position is analysed at the end of period. Hence, it will be fruitful
for organisation to assess its exact health in the business. Statement of Financial Position of
Sierra Laurent is prepared below-
Sierra Laurent's Statement of Financial Position as at 31st July 2018
Particulars Amount (in £)
Current assets
closing stock 38640
Amount of Prepaid advertising 7470
receivables 115200
cash balance 5200
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Total current assets (CA) 166510
Fixed assets
Freehold premises 400000
Less: Premises (depreciation) 48000 352000
Equipment 280000
Less: equipment (depreciation) 118000 162000
Motor Vehicles 45000
Less: motor vehicle (depreciation) 20200 24800
Total fixed assets (FA) 538800
Total assets 705310
Liabilities
Current liabilities
creditors 45800
O/S salaries 2220
Bank overdraft (od) 9900
Total current liabilities 57920
Capital 275000
Add: Net profit 407390
Less: Drawings made 35000
Total shareholder’s capital 647390
Total liabilities or obligations 705310
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CLIENT 3
A) Profit and Loss account of LMS Ltd
Profit and Loss account clarifies revenue earned and expenses incurred in a particular
time period. This means that revenues and expenditures are highlighted which provides whether
expenses are more than income or not (Miller-Nobles, Mattison, and Matsumura, 2016.). If this
happens, then loss is being attained. In contrary to this, income should be more than expenditures
which is beneficial for the firm highlighting its positive earnings capacity. In consideration to
this, Statement of Profit and Loss is produced below for LMS Limited-
LMS Limited Statement of Profit and Loss as at 31 July 2018
Particulars Amount
Revenue 1200000
Less: Sales returns 11200 1188800
Closing inventory 38000
Stock in the opening of financial year 45800
Purchases 655400
less: purchase returns 7500 647900
Cost of Goods Manufactured 655700
Gross profit 533100
building Depreciation 29200
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plant and machinery Depreciation 164100
Administration expenditures 88000
Expenses pertaining to distribution 45000
Less: advanced rent 3000
Add: O/s salaries 2000 44000
Corporation tax applicable 4000
329300
Net profit 203800
B) Statement of Financial Position of company
Balance sheet lets out to know the exact position of business at a particular point of time
in the best possible manner (Law, 2018.). In simple words, assets and liabilities are analysed in a
better way. This helps to know whether firm has enough quantum of assets in relation to
liabilities or not. If there is balanced level of both elements, then financial position reflected is
better for company. In addition to this, Statement of Financial Position of LMS Limited is
prepared as under-
Statement of financial position of LMS Ltd as at 31st July 2018
ASSETS £ £
NON-CURRENT ASSETS
Land and buildings 1585000
Less: depreciation (accumulated) 325000
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Less: depreciation 29200 1230800
Plant and machinery 875000
Less: depreciation (accumulated) 54500
Less: depreciation 164100 656400
Total fixed assets (FA) 1887200
CURRENT ASSETS
Stock 38000
Accounts Receivables 125600
Prepayments made 3000
Total current assets (CA) 166600
TOTAL ASSETS 2053800
EQUITY AND LIABILITIES
Equity
Share @ £1 each 1200000
Share premium applicable 450000
Retained Earnings 298800
Total Equity of company 1948800
CURRENT LIABILITIES
Accounts Payables 54000
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bank overdraft (OD) 45000
Accruals 2000
tax to be paid 4000 105000
TOTAL EQUITY AND LIABILITIES 2053800
C) Explaining concepts of consistency and prudency (150)
The accounting concepts are useful in carrying out proper practices which are used to
effectively attain clarity and as a result, fair financials can be produced relying on the same.
Consistency and prudence concepts are explained below-
Consistency concept-
This accounting concept postulates that business entity once adopted a method should
have applied its constantly in future as well. The concept stated that the similar transaction
should be accounted with the same method as done before. The company should not use one
accounting method today, switch to another tomorrow (Accounting Concepts, Principles and
Basic Terms.2018.). The external users of financial statement will not be able to compare
financial position if accounting methods keeps on changing. A company can only change the
accounting method if there is more than a reason to do so, but the new method adopted should
show the better picture of financial performance than the previous method.
Prudence concept:
This is the fundamental concept of accounting which states that any expenses or
liabilities should be recorded as soon as possible. But the income or asset much be entered only
when it is actually realized (Accounting Principles .2018). This concept stated that the liabilities
should not be underrated and assets should not be overrated. Prudence concepts helps in
accuracy of the financial statements of company.
D) Describing purpose of depreciation and explaining methods of charging depreciation
The reduction in the value of a fixed asset over years because of usage, wear and tear and
obsolescence. Depreciation is used to ascertain the current value of fixed assets to be recorded in
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the financial statements. The depreciation is calculated by estimating useful life or productive
life of the asset, salvage value and cost of the asset.
The two methods of calculating the depreciation are:
Straight line method: It the simplest method of calculating depreciation. It gives the same
amount of depreciation every year over the useful life of the asset.
Formula: Depreciation amount= (asset cost- salvage value) / useful life of asset.
Example: Company A purchased a machine on 1st January 2012 worth $10000. the expected
life period is 5 years at the end when sold for $2500. calculate depreciation for next two years.
Solution:
depreciable amount is $7500 (10000 cost-2500 residual value) useful life is 5 years
depreciation amount of 2015 = 7500 / 20% is $1500
depreciation of 2012= $7500/20% is $1500
Diminishing value method: In this method, rate of depreciation is fixed and the amount of
depreciation will be decreasing with decreasing in the value of assets.
Formula: Depreciation amount= (net value-salvage value) / rate of depreciation
Example: a company purchased a machine on January 1st 2013 of rs. 30000 and sold for 5000
on 31st December 2017, the rate of depreciation is 10% .calculate the depreciation amount for
two years.
Solution: depreciation of 2014 = 30000-5000/10
depreciation of 2014 = rs.2500
Depreciation of 2015= 27500-500/10
Depreciation of 2015 = rs.2250
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CLIENT 4
A) Preparing bank reconciliation statement
It is a financial statement which is prepared to find and explain the difference between the
amount is bank in cash account and in bank statements (Duru and et.al., 2018). The BRS is
prepared by the company accountant or book keeper in order to compare the accounting records
in both the files. The purpose of preparing BRS are:
 To check the accuracy of the entries recorded in both the books.
 To check any undue delay in collection of any cheques.
 To find any unusual transactions that leads to fraud.
B) Causes of varying accounting records with bank statements
The causes of varying in accounting records are: Outstanding Cheques: if a cheque is issued to the customers by company, this
transaction will be recorded in cash book. But, sometimes customers present the cheque
in next day, it will create differences in recording of transaction (Jayaram and et.al.,
2018). Deposit in transit: if the payment is made by the customers in advance, a direct entry in
cash book will be made. But the bank has not made the entry in pass book.
 Error in recording: there can be errors committed by either bank or company in
recording of a transaction, wrong balancing etc, it will create difference in balance of
both the books.
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C) Preparing cash book and bank reconciliation statement of Kendal Ltd
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CLIENT 5
A) Enumerating sales and purchase ledger account of Henderson Ltd
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B) Describing the term control account
It is a summary account in general ledger as it is a ledger outside a ledger which
summarized all the similar transactions in one account (Macve, 2015.). There can be hundreds
types of similar account of income and expenditure or asset and liabilities are there. It would be
difficult to manage and organize all the accounts, so there is a need of an account which can
accumulate all the accounts in one subsidiary accounts. Control account act as a double check on
the accuracy of the analysis and helps in preparing the accounting and financial statements. Sales
ledger control account, purchase ledger control accounts are examples of control accounts.
CLIENT 6
A) Explaining suspense account and discussing features
It is an account in which all the unidentified and unclassified transactions are recorded. It
is a temporary account which holds all the transaction whose original source is unidentified.
Once the company makes a clarification on the source of the transaction, the amount will be
transferred to its original account (Renz, 2016.). The identified transaction includes the payment
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received, but the source of the payment is not clear, until the company investigate on the amount
it will transferred to the suspense account.
The feature of suspense accounts is:
 It is important for making trail balance if the debit and credit side balance do not match,
the difference amount will be transferred to suspense account for the temporarily basis.
 It is a temporary account, once the reason of imbalance in amount is found it will have
transferred to its account leaving the suspense account to zero.
B) Trial balance
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C) Distinguishing clearing and suspense account
Suspense Accounts: It is the account which is created to enter all unclassified
transaction. It is a temporary account and once the source of the transaction will be cleared the
amount will be transferred and the account will be closed when the amount will reach to zero.
Clearing Account: When the transaction is incomplete that will be entered in clearing
account. If a client is paying the bill instalment that amount will be entered in clearing account
until the payment is fully received (Henderson and et.al., 2015). It is like a reminder that a
particular transaction is incomplete. After the completion of transaction, amount will be
transferred to the correct account and cleared from the clearing account.
CONCLUSION
By summing up the above report, the importance of financial accounting principle for
making financial statements of a company has been explained. The report showed the making of
different financial statements in double entry book keeping. Different accounting concepts that
was explained in the present report. The report concluded different methods of depreciation with
some examples. The report also showed an importance and also put features of bank-
reconciliation-statement with examples. The report presented different accounting concepts in
the brief. The importance and features of control account had been mentioned in the report. The
report presented an importance and features on suspense account and differentiate it from
clearing account.
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