Financial Accounting Principles

This assignment provides a detailed explanation of financial accounting principles, including revenue recognition, historical cost, and matching. It also covers accounting rules and conventions, and their application in real-world scenarios. The assignment includes solved examples and practical exercises to enhance understanding.

FINANCIAL ACCOUNTING
PRINCIPLES

INTRODUCTION
Financial accounting refers to the accounting process and techniques which deals with the
preparation of financial statements of the company such as statement of profit and loss, cash flow
statement and balance sheet. This project discusses about the principles of financial accounting
which assists managers in the preparation of accounts. The company and the regulatory bodies
requires the managers of company to prepare the financial accounts using these principles of
accounting so that financial accounts of company are reliable and represents true and fair view of
the financial health of company( Agoglia, Doupnik, and Tsakumis, 2011). The principles such as
prudence, consistency are being discussed and applied in the preparation of accounts here in this
report. This project report is divided into two broad parts, first report consists of introduction to
financial accounting, rules and principles applicable in the financial accounting and second part
of project discusses about preparation of various accounts such as bank reconciliation statement,
balance sheet, trail balance etc. by keeping in view the principles and rules related to accounting.
PART A
BUSINESS REPORT
1.1: Define Financial accounting
Financial accounting is the process that is related to summarising, analysing and
interpreting the transactions of business. Financial accounting deals with the preparation of
financial accounts of business such as Statement of profit and loss account, balance sheet and
cash flow statement. Financial accounts are prepared so that the various stakeholders of the
company can use those accounts for taking various decisions regarding the operations and
financial health of company. The process of financial accounting initiates with recording the
transactions of business into journal , after that posting it into ledger and then preparing trail
balance for the company( Albrecht, Stice, and Stice, 2010). Finally, the financial accounts are
prepared for the company using the trial balance after the transactions are properly recorded in
the books. It is the responsibility of financial managers to accurately record the transactions of
the business that reflect the true and fair view of business and are reliable, such that various
stakeholders of company can make decision regarding their needs by using those information.
1

The stakeholders considers the reliability of information when the managers use the principles
and rules of accounting in the preparation of accounts of company.
The process of financial accounting is done according to the financial standards that are
determined by the regulatory bodies such as IASB and FASB. The companies uses different
standards of the accounting as per the requirements and needs of the owners and other
stakeholder of company. The companies that are operating in united states generally opt for US-
GAAP and IFRS can be adopted by any firm in any country as these standards are internationally
recognised by every regulatory body and government. The main reason behind the use of these
standards is to ensure that financial accounts are prepared in reliable manner and represent fair
view of the company as the stakeholders have trust in these standards which are regulated by the
government( Balakrishnan, and Cohen, 2011).
1.2: Regulations relating to the financial accounting
Financial accounting process undertakes the preparation of financial accounts and
statements which represents true and fair view about the financial health of company and
contains the reliable information of the transaction of company. It is the responsibility of every
account of company to ensure that information contained in the accounts of company are true
and reliable such that stakeholders get the correct information. This assurance is provided to
stakeholders when the company uses standards of accounting which are issued by the regulatory
bodies operating in the country. The two most famous regulatory bodies that provides the
standards of financial accounting are International accounting standards board (IASB) which
operates globally and Financial accounting standards board (FASB) which operates in united
states. These regulatory bodies issues the standards for financial accounting such as IFRS and
US-GAAP which are to be adopted by the company in order to give the assurance to
stakeholders that accounts and statements prepared by the company are in accordance with
principles and rules of accounting and that it represents true picture of financial position of the
business. Use of these standards by companies gives the assurance to the stakeholders that the
accounts does not have any discrepancies or any kind of manipulations in principles used by
accountants. It is required by the every stakeholders that financial statements of company are
fair, accurate , reliable, true, understandable, and comparable with the other companies and with
industry average so that stakeholders can take the decisions an easy manner. The rules and
2

principles of accounting are different in every country but the regulation source is almost same in
each country( Brief, and Peasnell, 2013).
1.3: Various accounting rules and principles applicable in organisations
Rules of accounting:
 Credit the giver and debit the receiver: According to this rule of accounting, it applies
on all the the personal accounts that are dealing with the business either direct or
indirectly. The personal accounts of company are the real people who deals with the
business and these accounts can also also be legal body. When the companies purchase
anything from these, the personal account is debited in the books of company and when
company sells or gives anything the personal accounts are credited in the company's
books.
 Credit what goes out and debit what comes in: The given principle applies on the real
accounts of the company which its deals with. The real accounts of company includes
accounts such as plant and equipment, Building, Land etc. These are the assets of the
company and thus they have a debit balance in the books of account. Whenever the
company purchases or buys these assets, the company debits the accounts of the company
according to the rule of debit what comes in. And whenever the company discards the
assets which means real accounts these accounts are credited according to the rule of
credit what goes out( Chea, 2011).
 Credit all Incomes & Gains , Debit all expenses and losses: This rule of accounting
applies on all the nominal accounts that the company deals with. The capital that the
company have is a liability for it and thus it has credit balance. When the company earn
revenue or generates any income the nominal accounts are credit according to the rule of
credit all income & gains which increases the capital of company and whenever the
company incurs losses the accounts are debited according to the rule debit all losses and
expenses which reduces the capital of company, which is what the company is required to
do in order to maintain the balances.
Accounting principles:
 Revenue recognition Principle: The principle of revenue recognition is mainly
concerned with recording the revenues of business in the income statement of the
company. Revenue means the gross inflow of cash from the sales of the company , or
3

accounts receivables and other types of considerations that company receives by doing
ordinary operations of the company such as selling products and providing services and
other things such as dividends, royalties etc.
 Historical Cost principle: According to this principle of accounting, It is required by the
accountants that they record the asset purchased by the company at the price which is
paid by the company to acquire the asset and this cost is considered as the basis of
accounting at the time of the purchase and also in the subsequent Financial years. Also, if
the something is acquired without paying the price of it then it will not be recorded in the
accounts of the company as asset. For ex. A favourable location and increasing brand
value of a enterprise will not be recorded although these are very valuable to the
company. The reason behind using the historical cost principle is that the value of asset is
easily verified in the future( Gehrke, and Mueller-Wickop, 2010).
 Matching principle: This principle implies that the revenues that are occurred in a
financial year should be matched with the cost that is incurred in producing that revenue.
For instance, of the company recognises the revenue by the sale of certain products and
services then company should also recognise the cost of producing those goods in that
particular period. But matching concept does not implies that expenses must be
identifiable with the revenues.
1.4: Conventions and concepts related to material disclosure and consistency
Material Disclosure: According to this convention of accounting , it implies that the
accountants of company have to record and take into consideration only those transactions which
are relevant and have significant bearings and all the insignificant things must be ignored. This
step is taken by the accountants so that financial statements of the company are not burdened
with every minute details and transactions that are not important to be recorded. But still this
process is complicated because their no such specific formula regarding which transactions are
relevant and which are not, this is just a matter of judgement that is to be taken by the accountant
who is preparing the accounts. It should also be noted that an item which is material for one
concern can be Irrelevant or immaterial for another concern. And also, an item material in one
financial year may get irrelevant in next accounting year.
Consistency convention: According to this convention of accounting, it implies that
accounting practices which are applicable or adopted in current year should be applicable in the
4

company for the certain periods and should not be changed for certain periods. This convention
simply implies that organisations have to remain consistent when they undertake any principle of
accounting for various periods . This is because when the company's stay constant for a longer
duration it means that company's operations are successful and they do not require any changes
in the policies( Jeter, Chaney, and Bline, 2010). When the company's have fixed policies, it also
become easy and simple for the stakeholders to use the financial statements as against when the
companies change the policies every year. For instance if the company values the stock at the
market price or cost whichever is less, then it should follow this principle for various periods.
Similarly, if some company depreciates the fixed assets of the company using straight line
method of depreciation, then the company should use that particular method for depreciating all
the assets.
5

PART B
CLIENT 1
P1: Double entry recording with concerned ledger
6

7

8

9

10

11

12

13

(c) Accounting Concepts:
Consistency: The consistency concept of accounting conveys that the policies, principles and
regulations related to accounting should be adopted by the companies and it should remain
applicable for the longer periods once the company have decided to undertake a specified
principle or policy in the preparation of its accounts. The principle of consistency is very
significant as it assists the internal management of the company in comparing the performances
with the other competitive firms and industry average so that they can check the performance of
the company in comparison of the industry and take corrective actions, if required( Jeucken,
2010). If the company will change the policies every year it will become difficult for the
managers to make the comparison and ultimately affect the workings of the company. The
14

consistency concept implies that when the company adopt a specific reporting standard then it
should also encourage its proper implementation and its consistency in the company, and if in
any circumstance the company changes the policies of the company then the managers should
take proper steps for implementing those policies like informing to employees regarding the
changes and asking if they any issues regarding that. The managers should properly see that
company is efficiently adopting the policy until its complete application.
Prudence: According to this concept of accounting, it suggests that company should not
overestimate the revenues, profits and other gains of the company until the company has realised
it. And also the company should not underestimate the liabilities, losses and expenses of
company, which means that company should record the expenses and losses that the company
has made no matter whether the company has paid for it or not. The concept of prudence
provides the guidelines for being conservative when the company determines the gains and
profits of the company and must not be conservative when they are recording losses and
expenses of company( Kober, Lee, and Ng, 2010).
(d) Requirement of depreciation in the preparation of financial statements
Depreciation is the process of reducing the value of fixed assets of the company in the
financial of the company so that the company can increase the expenses of the company and
thereby reduce the profits. Depreciation process decreases the book value of the asset of
company. Depreciation of fixed assets are initiated as soon as the company purchases the assets
of the company. For depreciating the assets of the company, the managers firstly have to decide
the method of depreciating the assets and then the estimated life of machinery and the managers
of the company also have to determine the scrap value of the assets at the end. The methods of
the depreciation include straight line method, diminishing value method and per unit
depreciation method( Taipaleenmäki, and Ikäheimo, 2013). Depreciation assists the managers in
reducing the profitability of the company by increasing the expenses by taking into consideration
depreciation as an expense. Depreciation is a non cash expenditure but plays an significant role
in the financial statements. The methods of depreciation are discussed below in brief:
Straight line method: Under this method of depreciation, the fixed assets are
depreciated by the similar amounts in every year. This method is considered as the one of the
easiest method of depreciating the assets and is easily understandable by everyone, which is why
most of the companies adopt this method of depreciation. Under this method of depreciation the
15

original cost of assets are taken and the estimated scrap value is deducted from it and then it is
divided by the total life of the assets that was initially estimated by the accountants of the
company(Whittington, and Pany, 2010). The amount which is calculated is then deducted from
the balance of the assets every year till the life of the asset and then the asset is discarded by the
company
Diminishing balance method: According to this method of depreciation, the amount is
calculated by taking the opening value of the asset and dividing it by the remaining life of the
asset and every year that amount is deducted from the value of the asset, till the value of the
asset becomes zero.
CLIENT 4
P5: Apply the bank reconciliation process to make a number of a reconciliation
16

17

CLIENT 5
Ledger control accounts
CLIENT 6
P6: Process to be taken to reconcile control accounts and clear suspense account
18

CONCLUSION
According to the above project it has been concluded that Financial accounting process
plays an significant role in the preparation of financial accounts of the company. The financial
statements should be prepared by the company by using the principles and rules of accounting
which are necessary for the preparation of financials statement in reliable and fair manner. This
project report discusses about the financial statements and also preparation of the accounts such
as journal and trail balance. Under this project the preparation of trial balances have also been
performed and why these statements are necessary to be reconciled.
19

20