Financial Accounting Principles Report

This report provides a comprehensive overview of financial accounting principles, covering topics such as GAAP, IFRS, and IASB. It explains accounting rules, conventions, and concepts, and explores key financial statements, including income statements, balance sheets, and bank reconciliation statements. The report is a valuable resource for students seeking to understand the fundamentals of financial accounting.

Financial Accounting
Principles

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Purpose of financial accounting.........................................................................................1
2. Regulation relating to financial accounting........................................................................2
3. Accounting rules and principles.........................................................................................2
4. Conventions and concepts..................................................................................................3
CLIENT 1........................................................................................................................................4
A. Journal entries....................................................................................................................4
B. Ledger Accounts................................................................................................................5
CLIENT 2......................................................................................................................................22
A Drafting an income statement...........................................................................................22
B. Preparing a Financial statement of financial position......................................................22
CLIENT 3......................................................................................................................................23
A. Preparing an Income Statements.....................................................................................23
B. Statement of Financial Position.......................................................................................24
C. Consistency and prudence...............................................................................................24
D. Purpose of depreciation and its methods.........................................................................25
CLIENT 4......................................................................................................................................26
A. Bank Reconciliation Statement.......................................................................................26
B. Reasons for mismatch......................................................................................................27
C. Preparing the cash book (bank only) for Kedal Ltd.........................................................28
CLIENT 5......................................................................................................................................29
A. Drafting and Balancing Accounts....................................................................................29
B. Control accounts and need to prepare it...........................................................................30
CLIENT 6......................................................................................................................................31
A. Suspense account.............................................................................................................31
B&C. Drafting The Trial Balance with Suspense account...................................................33
D. Difference between suspense accounts and clearing accounts........................................33
CONCLUSION..............................................................................................................................34
REFERENCES..............................................................................................................................35

INTRODUCTION
Financial accounting is regarded to be an important operation that has an effective role in
every business. There are various tools and methods which are used for evaluating financial
aspects of a company which is used in making strategies for a stable financial growth. Apart
from this, it includes a systematic keeping of various records that are essential for acquiring
information resulted to many commercial transactions which has been done. It is very useful for
firm in many ways.
This report includes several methods of recording various business transactions with the
use of double entry book keeping and from that a trial balance is extracted for further usage. It
comprises of preparing final accounts for all sole traders, limited companies as well as
partnerships in accordance to several accurate principles, standards and conventions. Also,
reconcile control accounts and associated shift records has been provided from suspense
accounts to right one.
1. Purpose of financial accounting
Financial Accounting is directly concerned with Summarising, analysing and reporting of
financial transactions related to a business entity. It involves preparation of financial statements
and is governed by both local and international standards. Accountants follow some specific
rules and guidelines in summarising, analysing and recording of financial transactions in
financial statements (Weil, Schipper and Francis, 2013). GAAP, IFRS and IASB are some
accounting principles that are used in United Kingdom.
Purposes of preparing financial accounts are as follows:
Score Keeping: Score keeping function is one of the most primary purpose of preparing
financial accounts. This function shows financial health of organisation by answering several
questions; some of them are: How are we doing? Good, bad or different? etc.
Attention directing: This function inculcates a sense and of taking any decision by the
user of accounting information. It directs the attention of user to focus on deviations, variances
of budgets.
Problem Solving: This function provides manager with such information which enables
him to find solutions to the problems. There are many problems which are highlighted by
accounting information and could provide solutions to these problems. There are solutions such
as buying and selling decisions, drop decisions with respect to product lines leasing.

2. Regulation relating to financial accounting
Financial Accounting Regulations are; GAAP, IFRS, IASB, which govern the financial
accounting of UK.
Generally Accepted Accounting Principles (GAAP): It refers to a set of accounting
principle, procedure and standards that is to be followed by every company while compiling their
financial accounts. It must be followed when a company distributes its financial statements
outside the company (Sharma and Panigrahi, 2013). Revenue recognition, balance sheet
classification, outstanding share measurements, such things are covered in GAAP.
International Financial Reporting Standards (IFRS): These are set of international
accounting standards which states ways of reporting each particular type of transaction in
financial statements. This allows any business or individual investors to make healthy decisions,
as they are able to see what is happening with company in which they wish to invest. Main aim
of IFRS is to maintain stability and transparency across the world.
International Accounting Standards Board (IASB): These are older accounting
standards which were replaced by IFRS, issued by IASB. It was the first set of accounting
standards that was issued by International Accounting Standards Committee. The goal was to
compare business around the globe in an easier way. Through this there was an increase in
transparency and trust in financial reporting.
3. Accounting rules and principles
Basic accounting principles are as follows:
11 Economic Entity Assumption: For accounting purpose, sole proprietor and its owner are
considered as two separate entities but for legal purposes and they are considered as the
same. Accountant keeps all business transactions separately from that of personal
transactions of business owner.11 Monetary Unit Assumption: Only transactions that can be expressed in U. S. dollars are
expressed. Due to this principle it is assumed that dollar purchasing power has not yet
changed over the time. As an outcome accountants prevent recording of such transactions
which include effects of inflation.11 Time Period Assumption: This principle of accounting assumes that, reporting of
complex and ongoing activities of a business entity is possible in comparatively short
intervals.

11 Cost Principle: From an accounting point of view, cost refers to the value of or amount
spent on purchasing of any product when that item was originally received irrespective of
its time period (Lovell and et.al. 2013).11 Full Disclosure Principle: If any information which is important to know for the
investor or lender using financial information, then that information should be provided
or mentioned within the statement or in notes of statements.11 Going Concern Principle: This principle assumes that, a company will exist for a very
long enough to carry out its business transactions and objectives and will not liquidate in
the foreseeable future. In a situation if accountant believes that business will no longer be
able to survive, the accountant is required to disclose this assessment.11 Matching Principle: This principle requires that expenses should be matched with
revenue incomes. Accrual basis of accounting is the requirement for this principle.11 Revenue Recognition Principle: Under accrual basis of accounting, incomes or
revenues are recognized as soon as the transaction takes place or there is sell of goods
and services, irrespective of when the actual money is received.11 Materiality: This principle allows an accountant to violate another principle if an amount
is insignificant.
111 Conservatism: In a situation where two acceptable alternatives are present to report an
item, conservatism directs the accountant to choose the alternative that will result in less
income or less asset amount.
4. Conventions and concepts
Accounting conventions relating to materiality and consistency are as follows:
Convention of disclosure: It is very important to disclose every significant information
in accounting conventions. It suggests that accounts should be prepared in such a way that each
materialistic information is disclosed to the reader. It only implies to disclosure of material trust
with proprietors, investors, creditors, etc.
Convention of Materiality: This convention states that only important information
should be recorded in the books and insignificant should be ignored. If this is not done, then it
will become a burden on everyone reading information with per minute details. There is practical
formula for measuring information, it is the judgemental decision of accountant to take decision

of important and unimportant materials. It is possible that an item is material this year, may not
be a material in next year.
Convention of consistency: This states that any accounting practice should be free from
charge from one period to another (Horngren and et.al. 2012). For example; depreciation is
charged on any fixed asset by method of diminishing balance, it should be charged again year
after year. It does not mean inflexibility, if some changes become necessary its changes and
effects should be stated clearly.
CLIENT 1
A. Journal entries

B. Ledger Accounts
Purchase Ledger

Sales Ledger

CLIENT 2
A Drafting an income statement
B. Preparing a Financial statement of financial position

CLIENT 3
A. Preparing an Income Statements

B. Statement of Financial Position
C. Consistency and prudence
"Consistency" an accounting concept: This accounting principle states that, a company
should use same techniques and methods to record every transaction of similar events from one
fiscal year to another. It is very significant for a company to apply same policies and methods
from one year to another. a company can change its method and policies of recording transaction
only on the grounds of serious reasons (Edwards, 2013). Change in policies and methods
presents a more accurate image of financial position of business in company's accounting books.

Although, this principle does not prevent company to change their methods and policies for
recording business transactions. In fact, companies are free to change their policies and methods
if there are one or more reasons to do so. The change must be disclosed in the notes of financial
statements along with the date of change and reasons.
"Prudence" an accounting concept: Financial Accounts are prepared by the use of
professional judgement in adoption of accountancy policies. Prudence demands that accountants
should exercise a degree of caution before selecting policies and significant estimates such that
income and assets of the company are not overstated. The reason behind prudence is that a
company should not recognize value of an asset higher than the actual amount that is expected
from the sale of that item or use.
D. Purpose of depreciation and its methods
Purpose of depreciation in formulating accounting statements is as follows:
To ascertain profits: Unless proper charge for capital assets is made in accounts, the
correct profit cannot be ascertained.
To show the assets at their proper values: By reviewing assets at their present value by
applying depreciation can provide us with actual financial position of any business.
To create funds for replacement of assets: The depreciation amount that is charged, is
deducted from profit and loss account but remains in the business for replacing the fixed assets at
the end of their working life.
To keep capital intact: If the depreciation is not charged, the amount of profits will be
inflated. If such profits are distributed among owners, then it will to the distribution of fixed
capital from business.
The two types of basic depreciation are:
Straight line depreciation: This method of depreciation, depreciates asset over its useful
life by using the same amount every year. Illustration for the same is shown below;
Yearly Straight Line Depreciation = Asset Cost - Salvage Value Useful Life
= $125,000 - $5,000
= $24,000
Yearly Depreciation Expense Accumulated Depreciation Asset at Book Value
Year 1 $24,000 $24,000 $101,000

Year 2 $24,000 $48,000 $77,000
Year 3 $24,000 $72,000 $53,000
Year 4 $24,000 $96,000 $29,000
Year 5 $24,000 $120,000 $5,000
(salvage value)
Declining Method: This method is based on premise that an asset is more useful its earlier years
so depreciation should follow the same concept; being greater in early years and less in the last
years. Illustration for the same is below;
First Year Declining Balance Depreciation = (Declining Factor/Useful Life) * Asset Book Value
= (2/5) * $125,000
= $50,000
Formula Yearly Depreciation Expense Accumulated Depreciation Asset Book value
Year 1 (2/5) * $125,000 $50,000 $50,000
$75,000
Year 2 (2/5) * $75,000 $30,000 $80,000
$45,000
Year 3 (2/5) * $45,000 $18,000 $98,000
$27,000
Year 4 (2/5) * $27,000 $10,800 $108,800
$16,200
Year 5 (2/5) * $16,200 $6,480 $115,280
$9,720
CLIENT 4
A. Bank Reconciliation Statement
Bank Reconciliation Statement is prepared after inter-checking the accounts with that of
company records of same transactions (Deegan, 2013). In simple words it is done to check
whether company records and bank records of transactions that took place in a month are same

or not. This account is prepared by company's accountant or the book keeper in order to
understand any differebnce between bank statements and company accounting records. Purpose
of preparing bank reconciliation account is as follows:
 It assures the balances of company's books and bank records that are shown.
 It provides a check of accuracy of entries made in the company and bank.
 It helps in rectifying errors or mistake in records.
 It reminds to update book records if some entries are not recorded properly.
 It enables to check delay in collection and clearance of some cheques.
B. Reasons for mismatch
Reasons for mismatch in balance of company accounts and bank statements:
1. No corresponding entry in cash book against debit entry in bank statements: Knowledge
of some bank charges can only be received to entity's accountant after receiving bank
statement end of the month. This will result in high cash book balance than bank
statement balance. To avoid such situations, all the unrecorded transactions and caherges
are to be recorded in books of company in the month by entering an entry of consolidated
amount on the closing date of month.
2. No corresponding entry in cash book against credit entry in bank statements: Any amount
that is directly credited into account by customers without informing company, this
mismatch results in low cash book balance than the balance of bank statement.
3. No corresponding entry in bank statement against credit entry in cash book: If entity pays
a cheque to creditor for payment in this month and recorded it in company's account but
the cheque was not presented in the bank in this month. This mismatch resulted in low
cash book balance than bank statement balance.
4. No corresponding entry in bank statement against debit entry in cash book: If entity
receives a cheque should be entering into the books of accounting. This mismatch results
in high cash book balance than bank statement.
All above differences are common and bound to occur in every organization irrespective
of its size and structure. Hence, BRS acts as a memorandum document that helps in tracking all
the above mismatches. It can also help in finding stale cheque.

C. Preparing the cash book (bank only) for Kedal Ltd.

BRS Statement
CLIENT 5
A. Drafting and Balancing Accounts
Sales ledger control account

Purchase ledger control account
B. Control accounts and need to prepare it
A control account is also called as controlling account and is a general ledger account
that summarizes and combines all the other accounts for a specific type. In simple words, It is a

summary of accounts that equals to the sum of all the subsidiary accounts and is used to simplify
and organize general ledger. The general ledger can have many accounts and hundreds of sub
accounts, if every account was to be record in general ledger then it would be so difficult for
anyone to do so. That is why control accounts are used to summarize data from large number of
subsidiary accounts (Carmichael and Graham, 2012). The purpose is to keep general ledger free
of details, yet have the correct balances for the financial statements. Few advantages of control
accounts are:
 Control accounts are useful in management policy of accounts.
 It makes possible the division of accounting work.
 By providing stock figures properly at the end of each period it facilitates prompt
preparation of profit and loss account.
 It provides internal check leading with greater accuracy.
 It provides a basis for reconciliation of cost and financial accounts.
For Example: The best example of it is the accounts receivable general ledger accounts.
CLIENT 6.
A. Suspense account
Suspense account is used to carry doubtful pending amount temporarily or permanently.
For monetary transactions entered with unauthorised account numbers it may be a facility. Any
transaction is directed to suspense account if specified account doesn't exist or may be deleted. It
is an account in a general ledger in which amounts are recorded temporarily. Use of this account
is done to record actual transactions which cannot be determined. After determination of proper
account, the balance is transferred from suspense account. Clearing accounts and suspense
accounts do not differ a much from each other.
Rain features of suspense account can be sum up with following points:
 Intermediate: It works as an intermediate between accounting books and actual
transaction.
 Temporary: It is made on a temporary basis till the actual transaction is found and
recorded.
 Resolve problems: It solves the problem of accountant and business when a transaction is
not made or deleted.
 Zero balanced: After posting to actual accounts it is balanced as zero.

 Resolution: Balance in suspense account indicates transactions that are not recorded or
deleted by mistake.
 Track errors: This account helps in finding out actual errors.
For Example: Transaction of receiving partial payment of $50.
By opening a suspense account $50 will be credited to it and same amount would be debited .
Account Debit Credit
Suspense Account 50
Cash 50
On receiving full payment from customer, $50 would be debited from suspense account. Further,
same amount will be credited in accounts receivable. This balances the suspense account and
transfer's the payment to the actual account.
Account Debit Credit
Suspense Account 50
Accounts Receivable 50

B&C. Drafting The Trial Balance with Suspense account
D. Difference between suspense accounts and clearing accounts
Difference between suspense and clearing accounts:
 Both are temporary accounts; transactions are entered but are finally transferred to actual
accounts. Clearing accounts are hold transactions for later posting and to check the
recorded transactions are correct and complete (Berton and De Rosa, 2012). Whereas,
suspense accounts are used when there is a problem, this account serves to record any
transaction until the problem is solved.
 Suspense accounts are a type of general accounts that hold transactions when there is
some problem involved. And clearing accounts holds transactions until its right time to
post them into a permanent one.

 Suspense accounts are used to track uncertainties. And clearing accounts are used to track
transactions on a temporary basis till the right time is not reached to post them on to their
permanent accounts.
 Both accounts are zeroed out periodically, means everything in an account is transferred
to other accounts leaving a zero balance (Beatty, and Liao, 2014). These accounts are
closed at the end of each fiscal year.
There can be a confusion between a suspense account and clearing account, as significance of
these accounts is based on balance sheet or book keeping affairs of owner. In a way suspense
accounts can be known as interoffice or clearing accounts (Albrechtice and Stice, t, S2010). The
most basic difference between both of them is that, clearing accounts can be zeroed but suspense
accounts can't be zeroed until the problem is rectified.
CONCLUSION
It has been concluded that Financial accounting is related with Summarising, analysing
and reporting of financial transactions related to a business firm. Purposes of preparing
financial accounts can be Score Keeping, Attention directing and Problem Solving. Financial
Accounting Regulations can be GAAP, IFRS, IASB that helps to govern financial accounting of
UK. Basic accounting principles includes Economic Entity Assumption, Conservatism,
Materiality, Revenue Recognition Principle, Matching Principle, Going Concern Principle, Full
Disclosure Principle, Cost Principle, Monetary Unit Assumption which helps in providing the
record of various accounts in an effective manner. Accounting conventions are also related to
materiality and consistency which are discussed in a proper manner in order to provide the
applicability of these concepts in accountability. Further, detailed study on control accounts is
also done and included in the report with appropriate examples and advantages of it with the
purpose of creating it. Some of the features of Suspense account can be Intermediate,
Temporary, Resolve problems, Zero balanced, Resolution, Track errors that serves various
purposes. It helps to record temporary information of transaction which are not sure to be added
in records or not.

REFERENCES
Book and Journals
Albrecht, W., Stice, E. and Stice, J., 2010. Financial accounting. Cengage Learning.
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.
Bertoni, M. P. G. V. A. G. and De Rosa, B., 2012. Green accounting: an alternative approach to
reporting emission trading allowances in financial statements.
Carmichael, D. R. and Graham, L., 2012. Accountants' handbook, financial accounting and
general topics (Vol. 1). John Wiley & Sons.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Edwards, J. R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.
Horngren, C. and ed.al. 2012. Financial accounting. Pearson Higher Education AU.
Lovell, H. and ed.al. 2013. Putting carbon markets into practice: a case study of financial
accounting in Europe. Environment and Planning C: Government and Policy, 31(4),
pp.741-757.
Sharma, A. and Panigrahi, P. K., 2013. A review of financial accounting fraud detection based
on data mining techniques. arXiv preprint arXiv:1309.3944.
Weil, R. L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Online
Financial Accounting: Foundations. 2018. [online]. Available Through
<https://www.coursera.org/learn/financial-accounting-basics>
Financial Accounting. 2018. [online]. Available Through <https://www.edx.org/course/financial-
accounting-0>