Financial Accounting Principles Project

This project provides a comprehensive overview of financial accounting principles, covering key concepts, regulations, and practical applications. It explores topics such as financial accounting's purpose, accounting rules and principles, consistency and material disclosure, bank reconciliation statements, control accounts, and suspense accounts. The project includes detailed explanations, examples, and illustrations to enhance understanding. Desklib provides past papers and solved assignments for students.

FINANCIAL ACCOUNTING
PRINCIPLES

TABLE OF CONTENTS
INTRODUCTION..........................................................................................................................4
MAIN BODY.................................................................................................................................4
1.Financial accounting and its purpose..................................................................................4
2.The regulations of the Financial accounting.......................................................................5
3. The Accounting rules and principles that governs the presentation and preparation of the
financial statements................................................................................................................6
4. Explain the convention and concepts relating to consistency and material disclosure......7
CLIENT 1.......................................................................................................................................8
a..............................................................................................................................................8
b..............................................................................................................................................9
c............................................................................................................................................10
CLIENT 2.....................................................................................................................................11
a............................................................................................................................................11
b............................................................................................................................................11
CLIENT 3.....................................................................................................................................13
a............................................................................................................................................13
b............................................................................................................................................14
C. Explain the following concept, consistency and prudency..............................................14
CLIENT 4.....................................................................................................................................16
a. Explain the purpose of bank-reconciliation-statement and its importance.......................16
c............................................................................................................................................18
CLIENT 5.....................................................................................................................................20
a............................................................................................................................................20
B. Explain the term Control account and the need to prepare the account..........................21
CLIENT 6.....................................................................................................................................22
a. Explain the purpose of the suspense accounts..................................................................22
b............................................................................................................................................23
D. Differentiating between suspense account and clearing account....................................23

CONCLUSION............................................................................................................................24
REFERENCES.............................................................................................................................25

INTRODUCTION
Financial accounting principle are general guidelines and rules on the basis of which the
company prepares its financial statements. If company distributes its financial statements to the
public, it is required to follow generally accepted accounting principles in the preparation of
those statements. This report aims at giving an overview of accounting principles and concepts
and recording transactions using double entry book keeping. Along with this there will be
presentation and illustration of recording various financial statements. The report presents
depict the depreciation accounting and its methods with examples. The report mentioned the
importance of making control account. The report extract the trail balance and helps in
understanding the purpose of making suspense account and clearing account with the
differentiation of both.
MAIN BODY
1.Financial accounting and its purpose.
It is the specialized branch of accounting that keeps track of all the financial
transactions of the company. Using the financial standards the financial transactions are
recorded and summarized in the financial statements such as balance sheet. Financial
accounting measures the economy performance of a company with the means of money. The
main objective of financial accounting is to show an accurate and fair picture of financial
affairs of the company for external users with useful information to investors, creditors and
other people outside the organization.
The following are some important financial statements which are made with the financial
accounting: Income Statements: in a specific period of time, the company's profitability is measures
through the income statements. Revenue, expenses, gains and losses are the main
components of the income statements (Basu and Waymire, 2017). It provides
information to the outsiders not only about the company's financial affairs but it also
provides an overview of company sales and net income. Balance Sheet : It is the financial statements of the company which includes the assets,
liability,equity capital, total debt etc, at a point in time. Balance sheet is more like a
picture of the financial position of the company is specific period of time like six
months, or one year.

 Cash Flow Statements: this statements shows the cash inflow and outflow in the
business. Cash flow statements reports the operating cash flow, investing cash flow and
financial cash flow, it is important for assessing the company's liability, flexibility and
overall financial performance.
The purpose of the financial accounting are as follows:
 The main purpose of financial accounting is to provide information to the investors and
creditors about financial position of the company in a specific time periods.
 Financial accounting helps in the systematic recording of the financial transactions of
the company (Ijiri, 2014).
 Financial accounting helps in the ascertaining the net profit earned or loss in the
business with he help of financial statements.
 The accounting gives the amount of profit and loss occurred in a specific period of time.
2.The regulations of the Financial accounting.
Regulation defined as the set of rules that is designed to control and conduct by
authority. The rules that are developed by independent authoritative body to govern the
preparation of financial statements which are accounting standards. The user of financial
information are broad and diverse group. Every user of accounting has a common requirement
that the information in the financial statement should be relevant, fairly presented,
understandable and comparable. In UK, the major authorities involves in formatting the
regulation of accounting are as follows: IASB: The international Accounting Standards Board in the conceptual framework for
financial reporting and the general purpose of financial reporting is to provide financial
information about the reporting entity that is useful foe external users for decisions
regarding providing resources to the entity.. It is also used for revealing the financial
statements to the public. FRC: Financial regulation council is the regulation for the accounting formulated by
different authorities and corporation of UK to make some standards for accounting in
UK (Jayaram and et.al., 2018). It is the domestic regulation board which frame worked
the guidelines after monitoring and execution of different financial disclosure associated
with financial accounting.

 IFRS: international financial regulation system in the internationally accepted
accounting standard, which stated to the full disclosure of the organization's key
financial statements.
3. The Accounting rules and principles that governs the presentation and preparation of the
financial statements.
Generally accepted accounting principles are the set of ten accounting standard and
guidelines created and maintained by FASB. GAAP guidelines ensures that the financial
statements are both informative and reliable. The ten basic accounting rules are as follows: Single entity concept: the business should be considered as separate entity from its
owner in the eye of the law. In legal term a business can exist longer even after the
existence of its owner or promoters. Money Measurement Concept: This concept stated that a particular measure of
currency is specified for recording financial statements (Jerry, J. and et.al., 2018). If
other type of transaction are made they should keep aside of the financial statements. Dual aspect concept: This concept stated that there will be dual system for every
transaction. For example, for every debit there should be a credit and vice versa. Going concern concept: In this concept it is expected that the business will work for
the infinite time period. Cost Concept: this concept only apply to the fixed assets, it stated that the assets will be
recorded on their original price and in the first year. Than this assets will be recorded in
next year with the subtraction of depreciation. Accounting year concept: Financial statements are always prepared in a specific time
period to complete a cycle of the accounting process. For example, monthly , quarterly,
annually. Matching concept: this principles stated that for every entry of revenue recorded in a
accounting period, an equal expense entry has to be recorded for correctly calculating
profit or loss (Khan, 2015). Realization concept: According is said to made only when it is earned. An advance or
fee paid is not considered a profit until the good is being transferred to the buyer.

 Full-Disclosure concept: it id the important concept which requires the full disclosure
of the financial statements to the outsider for the decision making (Financial Accounting
Concepts, 2018).
4. Explain the convention and concepts relating to consistency and material disclosure. Consistency concepts: this convention stated that once an entity has decided to adopt
one method of accounting, it should use the same method for over and over the
accounting year. The business can never ever use a different method of accounting
unless there are more than a sound reason for the change in method. And if a company is
changing a accounting method the new method should show the better financial position
than the previous accounting method (Lessambo, 2018). Id there occurs any change it
should be disclosed, as it would be difficult for the outsiders to compares the financial
statement with previous year's financial statements.
 Materialist Concept: It refers to the importance of an item or an event. It is important to
report every material item in the financial statements as the knowledge of the item might
influence the decisions of users of financial statements. The financial reporting process
should be cost effective, that is the value of information should exceed the cost of its
preparation (Mellemvik and Badshah, 2017). Convention of materiality allows
accountants to ignore other principles with respect to item that are not principle. It helps
in overburden of minute detail in the statements.

CLIENT 1
a.

b.
Mentioned in appendix.

c.

CLIENT 2
a.
b.
Balance sheet

CLIENT 3
a.

b.
C. Explain the following concept, consistency and prudency.
Accounting concepts refers to the basic assumptions and rules and principles which act as the
basis of recording and maintaining the financial statements. There are many concept in
preparing of accounting for the preparation of accounting statements. The two main concepts
are: Consistency concepts: This concepts state that a company should use the same
accounting method of accountancy for any events or transaction. Once a method is
appointed should be followed over and over years. It means that a company should not
change any method whenever it wants. Similar transactions should be recorded with the

similar method applied before. This creates consistency in providing information to the
financial statements users like investors and creditors. This concepts doesn't means that
a company can not change its accounting method forever, a company can change the
method of accounting if only if there is some reasonable grounds of changing the
methods are there. But the company should disclose the reason of changing the
accounting methods in the note section of financial statements and the new method
adopted should give the better picture of financial statements than the previous method
of accounting.
 Prudence concepts: This is the fundamental concept which increases the worthiness of
the transaction recorded in the financial statements. It means that all the assets, revenue
and the income recorded in the financial statement will be shown only when they are
actually realized. The income or assets of the company should not be overrated. It also
stated that the liability and loses should not be underrated. The prudence concept state
that the financial statements of a company shows a realistic perspective about every
possible transaction that may influence the decision of the final users of the company.
D. Explain the purpose of depreciation in financial statements with the example of two widely
used method of depreciation.
In accounting, depreciation is the reduction in the value of a recorded cost of a fixed assets
over and over year with a systematic manner, until the value of the fixed assets become zero.
Depreciation occurs because with the passage of time, with the usage of the fixed assets or wear
or tear the value of the asset will not be the same with the cost when it was recorded.
Depreciation is not just a valuation of cost but also the allocation of cost (Depreciation and its
methods, 2018). Allocation of cost means the revenue generated by the assets in the specific
period of time. The depreciation expense is the amount of cost allocation within the accounting
period. The widely used methods of depreciation are:
 Straight line depreciation: it is the simplest and most common used method for
calculating depreciation. It involves the same amount of depreciation every year over
the useful life of an asset.
Formula of straight line method:
Depreciation expenses = (cost – salvage value) / useful life
*salvage value is the amount received by selling the asset after its useful life.

Example: a company purchase a machinery worth $10000, the useful life is 3 years and the
salvage value is $1000.
annual depreciation expense will be = 10000-1000/3 = 3000
year Original cost-
salvage value
Depreciation
expense
Balance
1 9000 3000 6000
2 6000 3000 3000
3 3000 3000 0
 Diminishing balance method: In this method , the amount of the asset will be decreasing
every year and the rate of depreciation will be same. This is suitable for the assets whose
maintenance charges is high. The value of asset will never be zero in this method.
Formula of diminishing balance method:
Depreciation amount = (net asset value- salvage value) / rate of depreciation
same example can be used in context with diminishing balance method with rate of
depreciation 10%
Year Net asset value-salvage value Depreciation expense Balance
1 9000 900 8100
2 7100 710 6390
3 6390 639 5651
CLIENT 4
a. Explain the purpose of bank-reconciliation-statement and its importance.
Business entity maintains the cash book for recording the cash and bank transactions, it
serves as a bank account also. Bank also maintains the accounts for the company's transaction in
its books and the copy of the bank statements will send to the company regularly. But
sometimes the balance of bank in cash book by company and balance in bank statements do not
match (Bank reconciliation statement, 2018). To reconcile the differences the bank-

reconciliation-statement are prepared. The bank-reconciliation-statement is prepared to
reconcile the difference between the balance I the cash book and the balance in the bank
statements. The purpose of preparing Bank-reconciliation-statement are:
 to check all the bank transaction are recorded correctly by the bank and in the cash book
by the company.
 To check any fraud and embezzlement don by company or bank.
 To rectify any error occurs by ether in bank statements or in cash book.
 To check any undue delay in the collection and clearance of some cheque.
 It helps in preparing accurate financial statements.
 It helps in the cash flow inside and out of business.
Bank-reconciliation-statement should be made on monthly basis to rectify the
error if any so that the cash book will be accurate during the preparation of financial statements.
Big company usually have more than one bank accounts so thew accountant needs to check and
update the bank-reconciliation-statement as in big companies the chances of frauds are often
high.
B. explain the reason of difference in the bank statements.
The reasons for the difference in the bank statements are as follows: Cheque issued but not presented: when cheque issued by the company, the immediate
entry is done in the cash book. But sometimes the customer will not present the cheque
in the bank on the same day. This issue of time period may cause difference to the bank
statement and cash book. Cheque deposit but not collected: when cheque deposited in bank the company will
enter it into the cash book as payment received (Miller-Nobles, Mattison and
Matsumura, 2016). It will increase the bank column in cash book. But the bank will
credit it only after the amount is actually realized. Amount directly deposited in bank: sometimes, before informing the company a debtor
or customer will directly deposit the payment into bank. The information of this
transaction will known only when the company gets the bank statements. This makes the
balance in cash book less than the balance in bank statements.

 Bank charges: the bank provides various services to its customer and charges fees or
commission for them from the company's account which the company get to know once
the bank statements is received.
 Errors in recording transactions: sometimes bank may commit errors that is omission
or wrong recording of transactions relating to cheque deposit (Weil, Schipper and
Francis, 2013). The company also commit errors like wrong recording of transactions,
wrong balancing etc.
c.

CLIENT 5
a.

B. Explain the term Control account and the need to prepare the account.
A control account or a controlling account, is a general ledger that summarizes and
combines all the similar transactions in a subsidiary account. If all the accounts are included in
the general ledger than it will make it very large, unorganized and difficult to use. That is why
control data are used to summarized data from the numbers of related data. Sales ledger account
and Purchase ledger account are two type of control account (Rodrigues, Carqueja and Ferreira,
2016). Sales ledger accounts includes all the transactions related to sells from the different
debtors. Purchase ledger includes all the transactions relating to all the creditor.
Advantage of control account are:
 It assists to check the accuracy between the total of all sub ledger account and related
account in general ledger.
 It helps to remove all the bulky details from the general ledger.
 It provides a basis for the reconciliation of cost and financial accounts.
 I the internal check which leads to greater accuracy of records.

 By providing figures quickly it facilitates in the preparation of profit and loss account
and balance sheet.
CLIENT 6
a. Explain the purpose of the suspense accounts
Suspense account is a temporary place for an entry or transaction whose source are
unidentified. Suspense account are also opened to put any difference in trail balance or on the
shorter side of the trail balance. This accounts temporarily holds the unclassified transactions
while the company makes a decision about their classification. Sometimes, at the time of
recording a transaction or amount the correct account are not clear. Suspense account is used to
enter those transactions but on the temporarily basis (Ruppel, 2017). Once the problem of
identification of the transaction is solved, the amount will transferred to the appropriate
account, and the suspense account will be closed to zero. The main features of the suspense
accounts are as follows:
 While preparing trail balance, if any difference between credit or debit side occurs the
amount of difference can be put the shorter side as suspense account.
 The suspense account helps in locating the errors, the accountant can find the errors
committed in the past with the help of amount in suspense account (Weygandt, Kimmel
and Kieso, 2015).
 Suspense account helps in preparing of financial statements.

b.
D. Differentiating between suspense account and clearing account.
Suspense account is found in the general ledger which holds the amount on temporarily
basis. It is used because the proper account could not be determined at the time of recording
the transaction.
Clearing account is a general ledger account which is used to record the incomplete
transactions, that can not be recorded in the original account.
The difference between suspense account and clearing account are:
 Clearing account are used to hold transactions for later posting and ensure information is
recorded correctly and completely. A suspense account is used when there appears to be
a problem. It serves to record an amount until the problem is resolved.

 Clearing account states that transaction is incomplete, whereas suspense account
indicates resolution in the amount. Both the accounts will be closed to zero. Everything will be moved to other account.
Suspense account will be closed when the problem of identification of transaction is
solved. Clearing account will be closed when the transaction is completed (Edwards,
2013).
CONCLUSION
On the basis of above report, it can be said that financial principles is very important for
the preparation of financial statements. The report shows the making of different financial
statements. The report also states various accounting concepts and regulations. The report
mentioned the final accounts of sole-traders, partnerships or limited companies in accordance
with different conventions and principles. The report will help to perform bank reconciliation
statements. The report is summed up with the purpose and making of control account, suspense
account and clearing account.

REFERENCES
Books and Journals
Basu, S. and Waymire, G., 2017. The Evolution of Double-Entry Bookkeeping.
Beatty. A. and Liao. S. 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics. 58(2-3). pp.339-383.
Edwards. J. R. 2013. A History of Financial Accounting (RLE Accounting). Routledge.
Ijiri, Y., 2014. The beauty of double-entry bookkeeping and its impact on the nature of
accounting information. Economie Notes by Monte dei Paschi di Siena. 22(2-1993).
pp.265-285.
Jayaram, A. and et.al., 2018. MULTIPARTY RECONCILIATION SYSTEMS AND METHODS.
U.S. Patent Application 15/702,684.
Jerry, J. and et.al., 2018. ACCOUNTING PRINCIPLES. JOHN WILEY & SONS.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6).
Lessambo, F. I., 2018. Audit Evidence and Documentation. In Auditing, Assurance Services,
and Forensics (pp. 155-182).
Mellemvik, F. and Badshah, I., 2017. Development of accounting and financial reporting
practices in the Islamic Republic of Pakistan. In The Routledge Handbook of Accounting in
Asia (pp. 89-104).
Miller-Nobles, T. L., Mattison, B. and Matsumura, E. M., 2016. Horngren's Financial &
Managerial Accounting: The Managerial Chapters. Pearson.
Rodrigues, L. L., Carqueja, H. O. and Ferreira, L. F., 2016. Double-entry bookkeeping and the
manuscripts dictated in the Lisbon School of Commerce. Accounting history. 21(4).
pp.489-511.
Ruppel, W., 2017. Wiley GAAP for Governments 2017: Interpretation and Application of
Generally Accepted Accounting Principles for State and Local Governments. John Wiley &
Sons.
Weil. R. L. Schipper. K. and Francis. J. 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Weygandt, J.J. Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons.

Online
The Difference Between Suspense Account & a Clearing Account. 2018. [Online] Available
through: <https://smallbusiness.chron.com/difference-between-suspense-account-clearing-
account-81560.html>
Accounting principle. 2018. [Online] Available
through:<https://www.accountingcoach.com/accounting-principles/explanation>
Depreciation accounting. 2018. [Online] Available
through:<https://www.accountingformanagement.org/bank-reconciliation-statement/<https://
www.accountingcoach.com/depreciation/explanation>
Bank reconciliation statement. 2018. [Online] Available
throgh:<https://www.accountingformanagement.org/bank-reconciliation-statement/>.