Importance of Financial Accounting in Business Entities

The provided assignment delves into the vital role of financial accounting in every business entity. It emphasizes the importance of financial statements in gaining a financial position and stability for specific organizations. The report also discusses depreciation methods, including written-down value and straight-line method, as well as variances between clearing and suspense accounts.

FINANCIAL ACCOUNTING
PRINCIPLES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1.1. The financial accounting and its purpose.............................................................................1
1.2. Regulations on Financial Accounting..................................................................................2
1.3. The 10 accounting rules and principles................................................................................3
1.4. The convention and concepts of consistency and material , disclosure...............................4
Client 1.............................................................................................................................................5
1. Presenting journal entries of specified transactions................................................................5
2. Presenting ledger accounts with context of double entry........................................................6
3. Presenting level of accuracy with context of trial balance....................................................22
Client 2...........................................................................................................................................23
A. Presenting profit and loss statement of Sierra Laurent of July 2018...................................23
B. Presenting statement of financial position of Sierra Laurent for July 2018.........................24
Client 3...........................................................................................................................................25
A. Presenting income statement of July for LMS Limited.......................................................25
B. Presenting statement of financial position of LMS Limited for July 2018..........................26
C. The consistency and Prudence concepts of accounting principle.......................................26
D. The purpose of depreciation and method of calculating depreciation.................................27
Client 4...........................................................................................................................................29
A. The need for preparing Bank-reconciliation-statement and its purpose of preparing on
monthly basis............................................................................................................................29
B. The reason for difference in record of bank book................................................................29
C. Presenting cash book for Kendal with its Bank reconciliation statement............................31
Client 5...........................................................................................................................................33
A. Presenting Sales and purchase ledger control account.........................................................33
B. The importance of Control account......................................................................................34
Client 6...........................................................................................................................................35
A. The importance of suspense account and features of suspense account..............................35
Presenting trial balance.............................................................................................................36
B. The difference between clearing account and suspense account..........................................37
CONCLUSION..............................................................................................................................38
REFERENCES..............................................................................................................................39

INTRODUCTION
Financial accounting is referred as a very important concept for every industry along with
its organization and industry. The accounting and financial principles are the key elements of
business life. The fundamental principles of accounting and the ways in which accounting is
regulated is an important topic for the business entity.
The present report will show the importance of financial accounting for preparing
financial statement and its purpose. The report dictates about the regulations on financial
reporting and will show accounting standards by International Financial Recording system and
General Accepted Accounting principles.
Present report highlights the main concepts and principles of accountancy. In this report,
various financial statements have been discussed which helps in decision making for every
investor and manager. In the same series, it had justified option of depreciation with its
implication of both methods. It had also discussed about control account with its sales and
purchase ledger control account. There is a presence of comparison and similarity of suspense
and clearing account with its appropriate implication.
1.1financial accounting and its purpose.
Financial accounting is a branch of accounting which records each and every financial
transaction of a company. Financial recording is a standardized process in which transaction are
recorded, summarized and presented in a financial report or financial statements which records
the company's overall financial position and performance in a specific accounting principle.
Financial accounting focuses on providing external users with useful information. It transfers
financial transaction and activity of a company in a form of information to the external parties
like investors, shareholders, creditors etc.
The purpose of financial accounting:
 Financial accounting is done to keep systematic record of financial transaction. So it
would help in getting correct information at the time of preparing income statements or
financial statements (May, 2013).
 Financial accounting assists in finding the net profit earned and loss suffered on account
of carrying business, by keeping proper record of financial activity of a particular time.
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 The main purpose of financial accounting is to help in ascertaining financial position of a
company during a particular period of time. The balance sheet of a company shows total
assets and total liability of a company on a particular date. It assists the external users to
know the financial position of company.
 Financial accounting helps in making an overall decision to management of the company
by providing systematic record of financial transactions of a company.
1.2 Regulations on Financial Accounting.
Accounting standards are authoritative standards for reporting financial transaction.
Accounting standards specify how transactions and other activities are presented and displayed
in financial statements. The objectives of accounting standards or regulations is to provide
financial information to the investors, lenders, creditors, shareholders so that they can make
decisions regarding their investments in company.
Different boards for accounting regulations are:
IFRS: International Financial Reporting Standards is a board of accounting method that
has been practised in many countries across the world. IFRS is globally accepted standard for
accounting and is used in more than 110 countries. It helps the company which does business
internationally and sets standards on preparing the financial statements of their company. IFRS
covers wide range of accounting activities, which includes regulations on the statements of
financial statements (Giordano-Spring, Maurice and Cho, 2018). In addition to financial
statements, the company has to give summary of its accounting policies.
GAAP: General Accounting Accepted Practice is a commonly followed practice in UK
and EU for the financial reporting. GAAP is exclusively used within the domestic boundaries
and has a different set of rules for accounting than most of the world. Under GAAP regulations,
all the transaction has to be recorded under a specific set of rules. Its main aim is to make the
financial statement more transparent and consistent. The new UK GAAP aims to make the
financial reporting cheaper and easier. GAAP provides characteristics like relevance, reliability,
comparability and understand ability.
1.3. The 10 accounting rules and principles
GAAP has founded the basic of accounting principles and guidelines.
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The following is the list of ten main accounting principles and guidelines:
Business as a single entity: a business will be treated as a different entity from its owner.
The law states that the business entity and business owner should be consider as separate from
each other. In legal terms, a business entity will exist even after the retirement or death of the
business owners.
Going concern principle: this principle states that the business entity will continue to
function indefinite time period. According to this principle the liability can be accounted in next
accounting period and assets value are recorded on this principle.
Monetary Unit: According to the monetary principle, only those transactions will be
recorded that can be measured in a specific form of money or currency. If company records the
financial transaction is USD then it cannot change its monetary unit.
Matching concept: this principle dictates that sales and revenue which are actually
realised should be included in the same accounting period. The transaction recorded should give
the actual profit.
Historical Cost: the value of the fixed assets should be recorded in financial statement
on their actual cost or at original value and not on the current market price.
Full Disclosure Principle: This principle states that company should disclose all
information related to the function of financial statements in the note under the statements
(Shroff, 2017).
Accounting period: The business entity has to complete its business accounting process
within a specific accounting period like quarterly, half yearly or annually.
Conservatism: This principle dictates while recording a transaction if two amounts for
similar transaction are there, and where the lower amount would be recorded in final statement.
Consistent: The accounting method once adopted should be used for different
accounting period. And it cannot be changed without any specific reasons (Zeff, 2016). The
newly adopted method should be disclosed in financial statement and must show better picture of
financial performance.
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Objectivity: According to this principle, every transaction amount in financial
statement should have some form of evidence.
1.4. The convention and concepts of consistency and material, disclosure.
Consistency concept: The concept dictates that accounting method once adopted should
not be changed and continuously followed after every financial year. This concept provides a
consistent basis for the external users to compare and understand financial statement. If a method
is adopted in first year and another method is adopted in next year, then it would be difficult for
the user of financial statement to analyse the statement with previous one and hence correct
position will not be reported to investors and shareholders (Schaltegger and Burritt, 2017). It
doesn't mean that you cannot change the accounting method ever, a company can change its
accounting method only and only if there is more than a specific reasonable grounds to change it.
But the reason for changing accounting method should be mentioned in the note
section of financial statements and method which are being adopted has to reflect the accurate
picture of financial position of company than the previous method.
Materiality Concept: this concepts dictates that company should disclose each and
every information in financial statement that could be useful to the end users. The transaction or
event happened in the accounting year cannot be avoided, even if company thinks it’s not much
important. The information can only be avoided if it has no or little impact on financial statement
of the year.
Full Disclosure Concept: This concept states that each financial detail like accounting
policies, method of calculation should be mentioned in the note section of financial statement.
The investors should have a full knowledge about the relevant information of the business
activity. This principle helps outside world to know the relevant and financial information of the
business entity (Carey, Knowles and Towers-Clark, 2017). This information could be anything
that could change the decisions of investors or shareholders about their investment in the
company. It emphasis the company to be transparent in their financial statements. It will be
added as footnotes with financial statements of the company.
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Client 1
1. Presenting journal entries of specified transactions
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2. Presenting ledger accounts with context of double entry
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Ledger accounts
Purchase ledger
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Sales Ledger
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3. Presenting level of accuracy with context of trial balance
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Client 2
A. Presenting profit and loss statement of Sierra Laurent of July 2018
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B. Presenting statement of financial position of Sierra Laurent for July 2018
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Client 3
A. Presenting income statement of July for LMS Limited
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B. Presenting statement of financial position of LMS Limited for July 2018
C. The consistency and Prudence concepts of accounting principle.
The General accepted accounted principles has framed certain concepts of accounting.
The two accounting concept of consistency and prudence concept are described below:
Consistency Concept: This concept dictates that there should be uniformity in the
accounting treatment of the similar transaction over different accounting period. A company
cannot change its accounting as and when required. It is necessary to apply similar accounting
methods as it would be easy for the end users to compare and understand the financial statements
with previous statements (Guay and Verrecchia, 2018).
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Using one accounting method in a financial year and changing the method for same
transaction in next year will bring confusion for the external users and will not give proper
financial performance report. For example: a company is using First in First out method of
inventory valuation and after 2 years, it changes it to the method of weighted average inventory
valuation method, then it will certainly leads to confusion. A proper identification must be
needed by auditor for a reason of changing in accounting method of valuation inventory.
Consistency concept does not imply that a company can never change its accounting
method ever. If a company has more than a reasonable grounds to change the accounting
method. The reason of changing the accounting method should be revealed in the note section
under the financial statements and new method adopted should give more accurate picture of
financial performance of the company.
Prudence Concept: It is an ethical concept which states that the income and revenue
should not be anticipated and included in financial statement only when it actually realized in the
form of asset or cash. According to this concept, losses and expenses have to be recorded at the
same time but income and revenue must be recorded only when it is received. It is a key
accounting concept which makes sure that assets are not overrated and liabilities are not
underrated in the financial statements (Barker, 2015). It helps in showing a true picture of
financial recording and accuracy of financial statements.
D. The purpose of depreciation and method of calculating depreciation.
Depreciation is reduction in the recorded value of fixed assets in a systematic manner
until the value of the asset becomes zero or negligible. Building, machinery, furniture etc. are
some examples of fixed assets.
Depreciation is also a method of allocation of cost of an assets over its useful time. The
reduction in value of fixed assets occurs due to the usage of assets, wear and tear and
obsolescence (Hatfield, 2014). Depreciation gives the current value of an asset which provides
fair value in financial statements.
The purpose of charging a depreciation are:
 To determine the current value of fixed assets.
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 To identifies revenue earned by using the assets by estimating the cost of productive
assets.
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The two widely used method of depreciation are:
Straight line method: In this method, an equal amount will be deducted from the value
of assets each year. Under straight line method, the value of an asset will become zero after its
useful life period. It is the simplest and widely used method of depreciation.
Formula: (Asset cost - Salvage value) / useful life of an asset
Asset cost is the recorded value of fixed asset, salvage value is the expected value that
would be earned at a time of disposal of asset and useful life is expected productive period of
asset.
Example: Company A purchased a machine on 1st January 2014 worth $10000. the expected life
period is 4 years at the end when sold for $2000. calculate depreciation for next two years.
Solution:
Depreciate amount is $8000 (10000 cost-2000 residual value) useful life is 4 years
Depreciation amount of 2014 = $2000
Depreciation of 2015= $2000
Diminishing value method: Under this method, the depreciation amount will be charged
on the reducing value of asset every year. Amount of depreciation will decreased every year with
the decreasing in the value of asset. This method is suitable for the assets whose maintenance
cost is very high (Küpper and Pedell, 2016). The value of asset in diminishing method can never
be zero.
Formula: Depreciation amount= (net asset value – salvage value) / useful life
Example: A company purchase a machinery worth $20000, the useful life is 3 years and
the salvage value is $2000.
Solution: 20000-2000=18000
Year Net asset value-salvage value Depreciation expense Balance
1 18000 6000 12000
2 12000 4000 8000
3 8000 2667 5333
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CLIENT 4
A. Preparation of Bank-reconciliation-statement and its purpose of preparing on monthly basis
It is the summary statement which shows and rectifies the differences in amount in
company's cash book and bank transaction as in bank book. A copy of the bank statements is
regularly sent to company at the end of every month. The accountant of the firm tallies
difference between both the books, rectifies it in a statement which is known as bank
reconciliation statements.
It’s not compulsory to prepare a bank-reconciliation-statement nor a specific date is
required to prepare it. But to identifies the difference of amount and check that all the bank
transactions are recorded properly, it’s important to prepare the statement as it would easy to
prepare the trail balance and other financial statements. It is useful in controlling the cash inflows
as well as outflows.
The purpose of bank reconciliation statements is:
 Bank-reconciliation-statement helps to assure that the balance in the bank statements is
accurate with balance recorded in the bank accounts.
 It assists in finding and rectifying any errors in recording the transactions in cash book
and bank book.
 With the updated and accurate cash book, it’s easy for business entity in showing figures
in financial statements and balance sheet (Law, 2018).
 The bank-reconciliation-statement assists in deterring fraud by providing a means of
verifying the cash book balance.
 It also helps in identifying any undue delay in collection or clearance of cheques.
The bank-reconciliation-statement should be prepared every month to avoid an error or
difference in both the books. Preparing the statement every month will help the preparation of
general ledger and an error free trail balance.
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B. The reason for differences in record of bank book
The reasons which can cause difference in Bank records are:
Cheque issued but not presented: when cheque is issued by the company to the
customer, then direct entry is been made in the credit side of cash book as per accounting
principle. However, sometimes client may not deposits the cheque in bank at the same day which
will create time difference in recording the transaction.
Cheque deposited but not collected: When cheques are being presented in the bank,
the firm will make a debit entry in the bank column of cash book. But the bank will enter the
amount only when it is actually realizing, it can take days which result in dis balance in amount.
Direct deposit in account: When customers deposit the money directly in bank, the
transaction will be recorded in the bank account. But the firm will come to know about the
transaction only when it receives bank statements at the end of the month (Arora, 2016). It will
create the errors in cash book of the firm.
Direct debit made by bank: Sometimes the bank may deduct charges for various
services from the bank account without the knowledge of firm. For example, cheque collection
charges, incidental charges, interest on overdraft, unpaid cheques deducted by the bank. This
deduction creates a balance in bank book lower than cash book.
Interest collected by bank: Sometimes, the interest and dividends on the shares that are
held by the firm is directly credited in bank. The firm will get to know at the end of month when
bank statements in being received by the bank.
Error committed in recording the transactions: there can be errors from firm side of
recording the transaction of bank like cheque issued, cheque collected, wrong balancing of
account etc. Bank can also commit the errors regarding omission or recording of any transactions
in company's bank accounts. This usually happens during last days of months.
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C. Presenting cash book for Kendal with its Bank reconciliation statement
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CLIENT 5
A. Presenting Sales and purchase ledger control account
Sales ledger Control Account
The balance of this specific control account is replicated as trade debtors control which
must equal to balance with context of customer account on individual aspect. It is also known as
trade debtors control account, which is a contribution to balance sheet (Kumaran, 2015). It also
reflects the required time about how much had been owed by company. The main objective of
this account is to track amount which had been owned to business by customers. All specific
individual transactions are posted in ledger cards of customers such as invoices, credit notes and
receipts in particular account.
Purchase Ledger Control Account
It is also referred as trade creditors control account which reflects on the sum of total
creditors which is specified at given duration. In simple words, it could be justified about its
suppliers owe at specific duration.
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B. The importance of Control account.
Control account is a summary account in the general ledger which holds all subsidiary
accounts of similar type of transactions to simplify the general ledger. There could be hundreds
of accounts from income and expenses, if every single account will be recorded in general ledger
it would be very large, unorganized and difficult to use. That is why, control account is used
which combines all the subsidiary account of a specific type; for example amount receivable
amount payable, sales and purchase ledger etc (Thomson, Besner and Smilek, 2015). Control
account helps the accountant and book-keepers by cleaning up the general ledgers.
The needs for preparing control accounts are as follows:
 Control account helps in summarizing the general ledger which makes it easier to use
general ledger.
 It assists in specialization of work by dividing accounting work among ledger keeper.
 It facilitates the preparation of trail balance and profit and loss statements at the end of
each accounting period.
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 Control account helps in removing the bulky details from general ledger.
 It assists in internal check which leads to accuracy of records.
CLIENT 6
A. The importance of suspense account and features of suspense account.
The transaction whose original source cannot be identifies at a time of recording; it will
be entered in a temporary account called suspense account. All the unclassified and unidentified
transactions are being recorded in suspense account. It is recorded in general ledger for all the
entries that are recorded in this account until the company identifies the real account. Once the
original account is found, the amount will be transferred from suspense account and it will be
closed from general ledger (May, 2013). The account is an important account at the time of
making trail balance. If an amount of debit-credit does not match, the difference account will be
transferred to suspense account. The rectification of that amount will be done afterwards.
The features of suspense account are as follows:
 It is a temporary account, once the source of imbalance in the amount will be cleared,
then it will be transferred to its original account.
 It helps in preparing trail balance by recording all unclassified transactions.
 Suspense account helps to settle the unclassified transactions, by recording the
imbalanced amount.
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Presenting trial balance
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B. The difference between clearing account and suspense account.
Suspense account: In this account, the transaction whose source is unidentified will be
recorded. It is a temporary account, once the original account detected the amount will be
transferred and suspense account will be closed.
Clearing account: It is a temporary account which hold the cost until the transaction is
completed. Clearing account used record the incomplete transactions. It is like a general ledger
which is used as a reminder for some goods or services that have not been billed or payment has
not received yet or the client is paying on instalment basis. Once the due payment is cleared and
transaction being completed the clearing account will be closed.
The difference between the suspense account and clearing accounts are:
 Temporary account: Both the accounts are temporary, but the suspense is created for
recording unidentified amount (Giordano-Spring, Maurice and Cho, 2018). Whereas,
clearing account is used to record the incomplete transactions. Uncertainties: Suspense account is made to hold the uncertain amount whose source is
unidentified or used when there is an accounting problem for time being where, clearing
account is made to track the incomplete transactions.
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 Closing of accounts: Both the accounts will be zeroed out at time of closing. But
suspense account are closed when the amount is cleared of its source, where clearing
account will be closed when transaction will get completed and amount is being
transferred to the original account.
CONCLUSION
From the above report, it had been concluded that in every business entity, financial
accounting plays a vital role. It had been justified from that preparation of financial statement
always had a huge requirement of the following standards such as IFRS, GAAP and IASB. It had
also represented an importance of financial statements as they were very important for gaining
financial position and stability of specific organization.
In the same series, written down value and straight line method are very useful for
depreciation in final accounts which had been shown in specific report. Further, it could be
summed up by variances among clearing and suspense account which stated that both were made
on temporary basis but balance of clearing is stated in the final accounts and in suspense account,
it had been stated in its correct account.
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REFERENCES
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Giordano-Spring, S., Maurice, J. and Cho, C.H., 2018. Sustainability Accounting: Education,
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Hatfield, H.R., 2014. Accounting: Its Principles and Some ofits Problems. In The Development
of Accounting Theory (RLE Accounting) (pp. 21-29). Routledge.
Küpper, H.U. and Pedell, B., 2016. Which asset valuation and depreciation method should be
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Law, J., 2018. A Dictionary of Finance and Banking. Oxford University Press.
May, G.O., 2013. Financial accounting. Read Books Ltd.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
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Shroff, N., 2017. Corporate investment and changes in GAAP. Review of Accounting
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Thomson, D. R., Besner, D. and Smilek, D., 2015. A resource-control account of sustained
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Zeff, S. A., 2016. Forging accounting principles in five countries: A history and an analysis of
trends. Routledge.
Kumaran, S., 2015. The Ten Generally Accepted Accounting Principles ( GAAP). [Online].
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