Financial Accounting Principles Report

This report provides a comprehensive analysis of financial accounting principles, covering key concepts, regulations, and techniques. It includes examples and case studies to illustrate the application of these principles in real-world scenarios.

FINANCIAL ACCOUNTING
PRINCIPLES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
CLIENT 1........................................................................................................................................6
A. Journals entries for the company.......................................................................................6
B. Ledger Account..................................................................................................................8
Cash Book............................................................................................................................14
C. Trial balance ...................................................................................................................16
CLIENT 2......................................................................................................................................17
A. Laurent's income statement.............................................................................................17
B. Financial statements of Laurent.......................................................................................17
CLIENT 3......................................................................................................................................18
A. Preparation of profit and loss account.............................................................................18
B. Formulation of statement of the financial position of an organisation............................18
C). Concepts of consistency and prudence...........................................................................19
D). Purpose of depreciation and its widely used methods....................................................20
CLIENT 4......................................................................................................................................21
A) purpose of preparing the Bank Reconciliation Statement ..............................................21
B) Different areas in which the record is may differ to vary from the bank records...........21
C. I) Cash book for the company..........................................................................................22
C. II) Bank reconciliation statement for the company.........................................................23
CLIENT 5......................................................................................................................................23
A. Preparation of Ledger accounts ......................................................................................23
B). Needs to prepare control accounts..................................................................................24
CLIENT 6......................................................................................................................................24
A) Suspense account and its major features.........................................................................24
B and C. Formulation of Trial Balance making correction .................................................25
D) Difference between clearing and suspense account........................................................25
CONCLUSION..............................................................................................................................26
REFERENCES..............................................................................................................................27

INTRODUCTION
Accounting principles are general guidelines and rules that should be followed by all
organisations during the time of making financial statements. These are generally accepted rules
that are developed for showing the actual financial image of the particular company (Braun and
et.al., 2015). This report shows different financial issues and their proper solutions with usages
of all core financial principles, techniques and methods. It also covers regulations related to the
financial accounting and various accounting principles. Further, it includes concept of
depreciation and its core methods. Lastly, it covers the information about several accounts such
as suspense and clearing account.
Report to the Line Manager
To Line Manager,
From - Junior Accountant
Subject - Regulations and effectiveness of accountancy.
Financial accounting is a perfect way to understand the core position of an organisation in its
target market. It shows the performance or profitability of a firm that are useful for its stake
holders. It is a specific branch of accounting that shows an organisation’s financial transactions.
It is used for recording, summarizing and presenting all transactions in proper financial
statements for example profit and loss account, income and expenses statements and balance
sheet. According to generally accepted accounting principles(GAPP), in financial accounting
there are so many rules and techniques that should be followed by every organisation in the
same way so that business's external stakeholders can satisfy organisation’s work performance
(Downs, 2017). The core purpose of making these financial statements is to show original
image of a company in front of public. In this context, every business entity issues its financial
statements on a routine schedule over a time. Its main purpose is to provide sufficient data or
information to its related person or entities these are commonly utilized by a variety of persons
for their requirements and know about the financial position of that particular company. For
example, each person who wants to know about the equity share price of dividend rate of a
company then he or she sees at its past financial records and understand about the dividend
policy of company or value of firm in stock exchange. In this process of making its financial
statements, there are several accounting standards that are generally accepted all over the world.
In this context, each organisation should use double entry system that provides better result for
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making these records or statements.
Regulations relating to the Financial Accounting: Regulations of financial accounting is a
common set of standards and principles that demonstrates core basis of financial values and
used for preparing such financial statements for the whole year or period of a company. In this
process, there are several rules, laws and techniques for identifying the original image of a
business. In this context, there are certain governmental bodies or authorities that describes the
different regulations relating to financial accounting (Hatfield, 2014). These are discussed as:
Financial Reporting Council (FRC), it is an independent regulatory body situated at United
Kingdom and governs all corporate reporting. Its main function is to supervise all organisations
including Auditing Practices Board and Accounting Standards Board. ASB is collaborated with
several accounting criteria that are useful for other countries. The second regulatory body is
International Accounting Standards Board (IASB). It is established in April 2001 and situated at
London, UK. It provides guarantee that its earlier made standards are accepted in the entire
world with regarding to international developments. ASB plays an autonomous role for issuing
such accounting standards. Accounting Standards Board creates different standards that are
known as Financial Reporting Standards(FRS). These are authoritative statements used in the
process of making financial statements (Henderson and et.al., 2015). These accounting
standards are applied for every organisation that have an intention to provide fair and true view
to its stakeholders. In this context, GAAP provides the corporate reporting model that consists
of financial statements and accompanying notes (Generally Accepted Accounting Principle,
2018). It is also known as procedure of better communication of all data related to the financial
position of a company to its external environment. As per overview of all regulatory and legal
needs for an organisation may be considered by way of the accounting standards.
Accounting principles and rules that are used in the preparation of all types of financial
statements - For all companies, accounting principles plays a significant role in making its
financial statements. Such general rules and concepts must control or govern the accounting
sector. In this context, there is a commonly used theory provided by the Generally Accepted
Accounting Principle(GAPP). These rules are described as follows:
 Going Concern - To follow this accounting concept, it must assume that an
organisation will exist continuously throughout the period and carry out its business
activities to achieve all desired goals and objectives (Khan, 2015). In this context, every
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company should make its all financial statements assuming that an entity is a going
concern and operates its entire business for the long time. So for this reason, it is
compulsory to make financial statements with using better accounting policies.
 Accrual Concept - It refers as all the expenses and incomes should only be recorded
when it occurs in an organisation (Louwers and et.al., 2015). It is not applied in the case
of cash payments and receivables. This concept shows the actual image of a company.
 Consistency - It is described that the organisation follows certain particular accounting
principles that are not changed if the overall policy will not change. These concepts are
widely used method applied appropriately and it is needed in every business for showing
effective financial statements to its potential stake holders. This idea is generated in
accounting for utilizing the particular policy or technique from one period to next.
 Accounting Period - In this accounting principles, it assumes that the organisation
operates its business activities for a certain period (Macve, 2015). In general, this period
in approx. one year that starts from 1 April of current year to 31 march of next year. So
for this reason all financial records pertain only for specific period.
 Prudence Concept - According to this concept, every business should consider only
expected expenditures and never make any assumption about income or revenue. It
should be conducted compulsorily because of accounting transaction are often uncertain
so for this reason never make any assumption about its revenue or income so that
management will able to show its financial statements.
 Conservatism - This is an important concept that refers the critical situation, that if
there are two or more acceptable options for reporting an item then management of a
company should choose best option (Maskell, Baggaley and Grasso, 2016). It also
describes that organisation should choose the alternative that will result in less net
earnings or asset amount. It leads to the managers to disclose or anticipate losses and it
never allows for profits.
 Full Discloser - By following this accounting principle, all companies should show the
actual image of its financial position in its target market. Every important information
related to the business should be provided in its final statements.
 Realization - It states that if any change in organisational asset or liability should not
measure as profit or loss until that asset is sold or liability amount is paid. It is useful in
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estimating the original value of an asset or liability.
 Matching - This concept is systematically derived to use the accrual basis of
accounting. It needs that all revenues will be matched with all expenses (Mullinova,
2016). No business can measure future economic profit so that it would apply for
gaining uncertain revenue in the upcoming.
 Materiality - It refers that management should record only those transactions that are
important for the company. An organisation can ignore minor events but it should
consider that major events should be fully recorded and disclosed.
All these core principles are useful in making the financial statements for a particular period of
a company.
Consistency - It derives that organisation should operate its business activities throughout the
period and never end it until all legal formalities are fulfilled. Every business should assume
that it operates for a long period.
Materiality – This principle should apply for all companies and it describes all major
transactions and give up all immaterial or small transactions (Nobes, 2014). In this context,
management team of an organisation should record only those transactions that are useful in
providing appropriate image of the entity and it is not essential to record any minor events.
CLIENT 1
A. Journals entries for the company
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7

B. Ledger Account
Purchase ledger
8

9

Sales ledger
10

11

Nominal Ledger
12

13

Cash Book
14

Day book
15

C. Trial balance
16

CLIENT 2
A. Laurent's income statement
B. Financial statements of Laurent
17

CLIENT 3
A. Preparation of profit and loss account
B. Formulation of statement of the financial position of an organisation.
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C). Concepts of consistency and prudence.
Consistency – It refers as every business should follow consistency over an accounting
period and it suggests that if an organisation adopts a strategy or accounting policy then it should
continue to follow them regularly in the future. In this context, it will only change if new
technique or version is applied for conducting the organisational work. This accounting principle
shows more accuracy of financial data and performance of financial statements of the company
in its target market (Renz, 2016). This concept is widely used method that is applied
appropriately and it is needed in every business for showing effective financial statements to its
potential stake holders. This idea is generated in accounting for utilizing the particular policy or
technique from one period to next. It is suitable for every organisations and useful for them to
sustain their business activities. In this context, according to the financial accounting board,
consistency is one of the most important quality or characteristic that allows making accounting
information better. It must state that company should use the same treatment for each transaction
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for every event or activities over time. Management team of any company should have to
recalculate everything to prepare the financial statements.
Prudency – According to this concept, a businessman should never underestimate its
amount of total expenses & liabilities as well as never overestimate the amount of income or
assets. Management of an organisation should record all possible expenses without making
assumptions of source of income (Zeff, 2016). In this context, an accounting transaction are
often uncertain so for this reason never make any assumptions about its revenue or income so
that management will able to show its actual financial statements.
D). Purpose of depreciation and its widely used methods.
In an organisation, there are several types of assets such as furniture, plant, machinery,
building and many more. These assets are utilized during this process of manufacturing or
trading and it makes more profitability for the business in its competitive market. Such
equipment’s are generally purchased for the growth of business and main intention of
management authority is to use these assets and not for resale. So in this kind, all fixed assets
exclude the value of land are decreased with time duration because these are used for
organisational work (Hermanson, Ivancevich and Edwards, 2016). Amount that become less
from its residual value is called depreciation. In other words, part of amount that is decreased is
known as depreciation amount and it reduces original value of an asset. It is always fallen in the
amount of asset and gradually it becomes negligible. It is the systematic process of allocation of
cost of assets in a particular period. Depreciation has two major methods that are described as
follows:
 Straight Line Method – This is the simplest and commonly used technique that refers to
organisation estimating the salvage or scrap value of an asset that is balanced at the end
of its life. Sometimes it will be measured as zero because some assets have no resale or
market value at the end of its life (Braun and et.al., 2015). Management authority reduces
the amount of scrap or residual value from original cost of that equipment and divide this
sum from number of its life years. According to straight line method, depreciation is
calculated as:
Annual Depreciation Amount = (cost of asset – scrape amount)/life years of that asset.
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 Written Down Method – In this method, depreciation is calculated at certain percentage
for each year on basis of its decreasing book value. It is also known as diminishing
balance method or reducing instalment method. In other words, depreciation will be
charged on book value of asset. This is useful for every industry because it shows the
perfect value of an asset. For this purpose, it includes application of a pre-determined
percentage of book amount of that asset at starting of each financial period and the value
of depreciation is reduced year after simultaneous. In this context, amount of depreciation
is calculated by this formula:
Amount of Depreciation = written value of an asset*(rate of interest/100)
CLIENT 4
A) purpose of preparing the Bank Reconciliation Statement
It is a report that is prepared after reconciling all the organisational transactions with its
relevant bank records. It is used in checking all records that are made through bank account.
There are many organisations, and may arise a situation where its bank balance amount as per its
statements may differ to that of statement of bank. This situation may arise due to timing
differences in recording the transactions (Downs, 2017). The main purpose is to make bank
reconciliation statements and provide perfect image of company's bank transactions and it is
utilized for clear understanding about all banking events. It also helps to identify several errors in
the accounting records. The purpose to make it, that cash is most vulnerable thing for every
company and this statement provide necessary control mechanism to protect all valuable
resources such as cash. It is also useful in deterring any fraud by providing a means of verifying
the cash balance.
B) Different areas in which the record is may differ to vary from the bank records
The main reason of arising differences in between bank statement in organisational
record and in bank record is timing of recording all such transactions (Hatfield, 2014). There are
some other reasons like deposits in transit, outstanding checks, check printing charges, fault on
the books or accounts, mistakes arise by the bank, electronic, interest and many more charges on
the bank statement not yet recorded on organisational books, financial institution service charges
and electronic deposits on the bank statement that are not yet transcribed on the books of
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accounts in company. In this context, there are some areas in which such balance is differed from
the bank records, that are as follows:
 Credits for interest earned
 Deposit in transit or awaited
 Several outstanding cheques.
C. I) Cash book for the company.
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C. II) Bank reconciliation statement for the company
CLIENT 5
A. Preparation of Ledger accounts
Purchase ledger
Sales ledger
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B). Needs to prepare control accounts
For an organisation, control accounts are referred as the summary account in the general
ledger book. The main purpose of making such control accounts is to keep general ledger free of
details. It is also useful in determining that there are no mistakes or errors in creditors and
debtors related records so that management can make more control on its potential suppliers and
buyers (Henderson and et.al., 2015). It is required for recording all customer’s transactions in
proper manner and determine value of payments to be payable to its potential suppliers. It is
more useful because all staff members working with general ledger credibly do not require
looking information for every collection or all sale transaction. These control accounts also show
the actual image of its payables and receivables.
CLIENT 6
A) Suspense account and its major features.
Suspense account is generally known as a temporary ledger account and it is open for
putting difference amount in shorter side of trial balance. In an organisation, sometimes there are
situations where management cannot find out the error so that for some duration there will be an
additional account that fulfils the short amount, this is called suspense account (Khan, 2015).
After some time, accountant of that company must find the amount that may be generated from
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error or omission of some transactions or any other reason. In other words, it holds entries during
time of classifying them. Its core features are discussed as under:
 It is useful in carrying one or both side errors amount.
 It helps to show the total amount required for rectification.
 This is helping in to the finalising the draft along with checking errors continuously.
It is a special account that is useful for the accountant so that he or she will post any
difference on trial balance while discovery of errors is pending due to some reasons.
B and C. Formulation of Trial Balance making correction
D) Difference between clearing and suspense account.
Clearing account is generally known as general ledger account but in an organisational
recording process it is never used for posting purpose. It is normally open for the temporary basis
in any general ledger (Louwers and et.al., 2015). Its main purpose is to remind a particular
transaction. While suspense account is open for the carrying out any error amount in the trial
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balance. This situation can arise by any confusion between both the clearing and suspense
account but these are very different accounts.
Differences in between suspense account and clearing account:
Suspense Account Clearing Account
It is open in trial balance. It is open as an account for only reporting
purpose.
This account is opened when there is a
difference in the credit and debit or both side
of trial balance.
It is used for making report on those
transactions that are not accomplished still.
It is also utilised if both debit or credit balances
are not matching in an organisation.
It is used for the management purpose.
CONCLUSION
This presented report is fully based on the core financial principle that are given by
GAAP or various other legal bodies. It covered some financial problems that may arise in an
organisation and also provided its appropriate solution. It included major financial principles that
are used in all companies for making the proper financial statements. Further, it included
depreciation concept with its proper methods. Furthermore, it concluded use of suspense account
and described differences between clearing and suspense account.
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REFERENCES
Books and Journals
Braun and et.al., 2015. Principles-based vs. rules-based accounting standards: The effects of
auditee proposed accounting treatment and regulatory enforcement on auditor judgments
and confidence. Research in Accounting Regulation, 27(1), pp.45-50.
Downs, L.C., 2017. Financial Accounting.
Hatfield, H.R., 2014. Accounting: Its Principles and Some ofits Problems. In The Development
of Accounting Theory (RLE Accounting) (pp. 21-29). Routledge.
Henderson and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hermanson, R.H., Ivancevich, S.D. and Edwards, J.D., 2016. Accounting Principles: A Business
Perspective (Financial) Chapters 1-8.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Louwers and et.al., 2015. Auditing & assurance services. McGraw-Hill Education.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat? Routledge.
Maskell, B.H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Mullinova, S., 2016. Use of the principles of IFRS (IAS) 39" Financial instruments: recognition
and assessment" for bank financial accounting. Modern European Researches, (1), pp.60-
64.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Renz, D.O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Zeff, S.A., 2016. Forging accounting principles in five countries: A history and an analysis of
trends. Routledge.
Online
Generally Accepted Accounting Principle. 2018. [Online]. Available through
<https://www.investopedia.com/terms/g/gaap.asp>
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