[PDF] Financial Accounting Principles : Assignment

Financial Accounting

Contents
INTRODUCTION.....................................................................................................................................3
1) Short explanation of the events........................................................................................................3
2). Transactions and records....................................................................................................................5
3). Principle of prudency.......................................................................................................................10
CONCLUSION........................................................................................................................................11
REFERENCES........................................................................................................................................12

INTRODUCTION
Financial accounting is a wider concept having number of activities comprising of recording,
summarizing and reposting the results to the users of such information. The transactions included
are of financial nature (Weil, Schipper and Francis, 2013). These are used to prepare financial
statements such as balance sheet, income statement and cash flow statement for disclosing the
position and performance of the company for a particular time period which is normally
annually. The main aim is to present these reports to the shareholders as their money are invested
in the organization (May, 2013). This report is based on a company which is having retail
business and it covers the detail understanding of the various events which taken place in the
month as specified, preparation of accurate and reliable accounts, trial balance, income statement
and balance sheet which can be relied upon and principle of prudence in maintaining the
authenticity of such reports.
1) Short explanation of the events
Trial balance- It is a bookkeeping worksheet which includes all the amounts of the ledgers
accounts. Two columns are drawn for debit and credit amounts which are made equal in order to
check the accuracy (Meaning of Trial Balance, 2019). An organization prepares it mainly at the
end of a particular reporting period. The main purpose is to attain the fact that each and every
entry in the books are mathematically correct. The trial balance of Dandy’s shows that sales are
of 301,000, purchases are of 154,840. Apart from this, there were genuine expenses such as
wages, electricity, rent which are fixed. Furthermore, it made purchases of equipment for
170,000 on which a depreciation of 34,000 was received. The amount available as capital as on
1st June is 205,000 which can be utilized wisely for multiplying the profit.
Sales Account- This account includes every transactions related to sales. There is no
exclusion of cash or credit sales. In other words, sales in the nature of credit as well as cash are
included. Furthermore, it is then teamed up with all the sales returns and allowances account in
order to ascertain the net sales (Meaning of sales account, 2019). It is the actual sales which is
mentioned in the income statement. In the context of Dandy’s business, the account depicts that
sales made in the month of June is 10,360 which includes cash sales of 6,820 whereas the sales
returns are 2,700 and the net sales is 315,480.

Purchase account- In this account, all the purchases are recorded which have occurred within
a period. Inventory is purchased for selling it by making a final product. It also includes
purchases made on credit and also on cash. This is to keep track of the raw material and other
assets in order to run the business successfully. Dandy made purchases of 10,020 in which cash
purchases on 2,100. In addition to this, the net purchases has a balance of 166,960 to be show in
the income statement as it is the net purchases made Dandy for the month of June. There were
purchase returns which amounted to 4,850 from two of its customers.
Carriage inwards account- The cost spent on transportation of the goods are included in this
account. It is paid by the purchaser. It is treated as the cost of the main product. These are the
direct expense which is taken into account while calculating cost of goods sold. In majority of
the cases it is made a part of the manufacturing of good to be sold to the customers. In Dandy’s
business, the total carriage inwards for the purchases made in the month of June is 1,300.
Cash receipts books- This is a book in which all the transactions happened in cash recorded.
It important to differentiate between cash and other dealings (Cash book, 2019). Apart from this,
discount which are allowed to a customer is also shown to find out the actual cash received by
the company at the end of the month. Dandy has made cash sales for 6,820 after providing a
discount of 500. The amount actually received by it is 5,900 on account of this book. These are
amounts which have been received by the company from the buyers to whom goods are sold.
Cash payments book- An entity also makes payments to buy different kinds of assets, raw
materials etc. It can be made on cash or credit. Hence, all the payments made by the company on
cash are shown in this book. Dandy has made a total payment of 38,420 which is divided among
rent, electric and other transactions. He also received a discount of 210 and paid 2100 in cash.
Wages Expense account- Every business organization hires employees for making them work in
order to complete the goals, and in return they are being paid. Hence, wages expense account
includes the amount given to the workers. It depicts that 56,890 is the amount which comprises
of wages paid and accrued wages also.
Rent expense- The place where the business activities are being conducted may be taken on rent
by the owners. This is an expense which occurs every month and should be made within the right
time to avoid any late payment. Dandy has a place for which a fixed rent has to be paid. Also, it

does not always include the rent of the property but any other things can also be rented.
Furthermore, it can also be paid in advance. In the case of Dandy the prepaid rent is 1,250 and
rent paid is 4,100.
Electricity expense account- The amount paid for consuming the electricity is shown in this
account. Dandy has paid an amount of 1900 on 30th June.
Income statement- It is prepared to have track of revenue and expenses during a particular
period. The alternative names for this are profit and loss statement or statement of revenue and
expense. It is helpful in calculating the profit after deducting all the expenses from the income. If
the answer is positive then it is net profit and if the answer is negative then it is the loss. Dandy
has earned a profit of 37,740.
Balance sheet- It covers the assets and liabilities of a company for a particular period.
The main aim is to find out the financial position and soundness of the company (Reid, 2018). It
shows the performance and the findings are disclosed to the shareholders for making them invest
more into the company. In the current scenario of Dandy, the current assets are 133,780 and
fixed assets are 138,000. On the other hand, current liabilities is 28, 040 and non-current
liabilities are 48,000.
There are many different accounts having the amount which is important to determine in order to
have accurate entries in then accounts.
2). Transactions and records
Dandy Sales day book June 2019
Date Customer Invoice number Amount
2 June Mild 0035 1400
5 June Tup 0036 1200
11 June Warm 0037 2600
11 June Warm 0038 3100
24 June Wet 0039 2060
30 June Tup 0094 4000
Total 14360
Dandy sales return book June 2019

Date Customer Credit Note No. Amount
16 June Cold 003 1200
20 June Freeze 004 1500
Dandy purchase day book June 2019:
Date Supplier Invoice No. Amount
5 June Dark I39B 2650
6 June Night XXX97 1400
8 June Lin 08814 2000
10 June Night I40B 870
21 June Shine 210955 3100
30 June Lin 08819 1800
Total 11820
Dandy Purchase returns day book June 2019:
Date Supplier Credit note no. Amount
9 June Dark XX949 2650
18 June Ray 712 2200
30 June Night C48 1400
Total 6250
Dandy cash receipts book June 2019:
Date Detail Discount
allowed
Total Cash sales Receivable
s
Other
12 June Wind 400 4600 4600
14 June Items sold 920 920
18 June Mild 100 1300 1300
20 June Loan 20000 20000
25 June Items sold 3400 3400
27 June Items sold 2500 2500
30 June Warm 3100
30 June Item sold 600
Total 500 35820 7420 5900 20000

Dandy cash payments book June 2019:
Date Detail Discount
received
Total Cash
purchase
s
Payable Rent Electric Other
10 June Rent paid 4100 4100
12 June Dark 150 2500 2500
14 June Shadow 60 820 820
16 June Electric 1700 1700
21 June Equipmen
t
20000 20000
25 June Electric 200 200
27 June Purchases 2100 2100
29 June Drawings 3000 3000
29 June Wages 4000 4000
30 June Equipmen
t
9000
30 June Night 870
Total 190 38420 11100 4190 4100 1900 27000
Change in ledger accounts:
Purchase account
Date Description Dr. Date Description Cr.
1 June Balance b/d 154840
30 June Purchase day
book
10020
30 June Cash purchases 11100 30 June To income
statement
175970
175970 175970
Sales account
Date Description Dr. Date Description Cr.
30 June Sales returns day
book
2700 1 June Balance b/d 301000
30 June To income
statements
316080 30 June Sales day book 10360
30 June Cash sales 7420

318780 318780
Bank account
Date Description Dr Date Description Cr.
1 June Balance b/d 72880 30 June Payments in June 38420
30 June Receipts in June 35820 30 June Balance c/d 70280
Equipment account
Date Description Dr Date Description Cr.
1 June Balance b/d 170000
21 June New equipment 29000 30 June Balance c/d 199000
199000 199000
Trade payable account
Date Description Dr Date Description Cr.
30 June Purchase returns
book
6250 1 June Balance b/d 25900
30 June Discount received 210 30 June Purchase day book 11820
30 June Paid in June 3320
30 June Balance c/d 27940
Trade receivable account
Date Description Dr Date Description Cr.
1 June To balance
b/d
45860 30 June Sales returns
day book
2700
30 June Sales day
book
14360 Discount
allowed
500
Receipts 5900
Balance c/d 51120
Dandy trial balance at 31 May 2019:

Dr. Cr.
Sales 316080
Purchase 175970
Carriage inward 1300
Return outwards 10300
Wages 56890
Rent 37230
Electricity 17000
Inventory 51600
Loans 50000
Trade receivables 51120
Discount allowed 500
Allowance for receivables 3770
Allowances for expenses 770
Trade payables 27940
Discount received 210
Equipments 190000
Provision for depreciation 52000
Depreciation 18000
Bank 70280
Drawings 7000
Capital 205000
Accruals 500
Prepayments 1250
665800 665800
Dandy income statement for year ending 30 June 2019:
Sales 316080
Opening inventory 51600
Purchase+ carriage- returns 166790
Less- Closing inventory (62000)
Cost of sales (156390)
Gross profit 159690
Discount received 210
159900
Expenses:
Wages 56890
Rent 37230
Electricity 17000
Discount allowed 500

Allowance for doubtful 770
Depreciation 18000
(130390)
Net profit 29510
Dandy statement of financial position 30 June 2019
Non current assets Cost Depreciation Carrying
Equipment 190000 (52000) 138000
Current assets
Inventory 62000
Trade receivables 51120
Less: Allowance for doubtful debts (3770)
47350
Bank 70280
Prepayment 1250 128880
Capital
Opening 205000
Net profit 29510
Drawings (7000)
227510
Non current liabilities
Loan 48000
Current liabilities
Trade payables 27940
Accruals 500 28440
3). Principle of prudency
The concept of prudence ensures that assets and income are not overstated and provision
is made for all known expenses and losses (Barker, 2015). In other words, when all the
transactions are recorded by mentioning their true and real amount by making provisions for
every possible loss or expenses known to the owner without understating them in the books of
accounts. It is also called as conservatism principle and considered a prime principle in the
accounting.

The main focus is on taking all the losses into the consideration which may occur in
future. However, very little or zero consideration is given to prospective profits (Dennis, 2013).
This principle helps in bringing the information with enhanced realistic view depicting the actual
conditions of the company’s affairs. This principle can be applied in Dandy’s case which are as
follows:
1. Allowances for doubtful debts is provided which is the actual amount as shown in the
financial statement. It was likely that such a debt can be created in the future so Dandy
already took this into account.
2. It has provided the real amount which has been made in advance. The prepayments are
not overstated.
CONCLUSION
From the above report, it has been concluded that financial accounting is one of the
branches of accounting which deals with financial transactions. There is no inclusion of non-
financial records. Investors are more interested in financial activities as their money is utilized in
the operations of the company to make the money double. Every year financial statements are
prepared to ascertain the financial position of the organization and make decisions to improve the
working of the company. However, these can also be prepared on half year basis to develop short
term goals and strategies. Every account should be prepared by following number of accounting
principles so that accuracy and reliability of the financial information can be maintained. Since,
the shareholders and other stakeholders rely greatly on these documents, it should be taken into
that concept of prudence is abide by for avoiding any overstating the amounts in financial
statements.

REFERENCES
Books & Journals:
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
May, G.O., 2013. Financial accounting. Read Books Ltd.
Barth, M.E., 2013. Measurement in financial reporting: The need for concepts. Accounting
Horizons. 28(2). pp.331-352.
Henderson, S., and et. Al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Barker, R., 2015. Conservatism, prudence and the IASB's conceptual framework. Accounting
and Business Research. 45(4). pp.514-538.
Dennis, I., 2013. The nature of accounting regulation. Routledge.
Gheorghe, D., 2012. The accounting information quality concept. Economics, Management, and
Financial Markets. 7(4). pp.326-336.
Reid, W., 2018. The meaning of company accounts. Routledge.
Online:
Meaning of Trial Balance. 2019. [Online]. Available through :< https://accounting-
simplified.com/trial-balance.html>.
Meaning of sales account. 2019. [Online]. Available through :<
https://www.principlesofaccounting.com/account-types/>.
Cash book. 2019. [Online]. Available through :< https://www.investopedia.com/terms/c/cash-
book.asp>.