Financial Accounting: Understanding Transactions and Financial Statements

This document provides an introduction to financial accounting, including the recording of business transactions, the preparation of financial statements, and the importance of bank reconciliation. It discusses the types of business transactions, regulations for financial accounting, the double entry bookkeeping system, and the role of trial balance. It also explains the different types of financial statements and their purpose. Additionally, it covers the process of bank reconciliation and its importance in detecting errors and fraud.

Financial Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Recording of business transactions applying double entry book keeping..............................1
1.1...........................................................................................................................................4
1.2 Journal Entry....................................................................................................................5
1.3 Ledgers.............................................................................................................................8
TASK 2..........................................................................................................................................17
2.1.........................................................................................................................................17
2.2.........................................................................................................................................19
2.3.........................................................................................................................................19
2.4 Calculation of Ratios:.....................................................................................................21
TASK 3..........................................................................................................................................22
3.1.........................................................................................................................................22
3.2.........................................................................................................................................24
3.3.........................................................................................................................................25
3.4.........................................................................................................................................25
TASK 4.................................................................................................................................26
4.1.........................................................................................................................................26
4.2.........................................................................................................................................26
4.3.........................................................................................................................................27
4.4.........................................................................................................................................28
CONCLUSION..............................................................................................................................29
REFERENCES..............................................................................................................................31

INTRODUCTION
Financial accounting is a specialized branch of accounting which is utilised by the
organisation to track records as well as financial transactions of business. For this follow proper
procedure to recognise overall value of business in proper manner. This accounting based on the
proper guidelines and accounting concepts that follows by the business to produce financial
statements of business (Badertscher, Burks and Easton, 2012). These statements are presenting in
front of outsider stakeholders of company and after analysis they take decision in regard of
investment and provide suggestion for growth & success. This project report has been
categorised into various task where discuss about the financial transactions like journal ledger,
trial balance, ledger and other financial accounts of various types of companies. Such as, this
report carry out all results on basis of company take effective decision and design strategy for
business in order to get effective results.
TASK 1
Understanding of company transactions applying double entry book keeping
Types of Business transactions:
There are discussed different kinds of financial transactions that can conduct by a
business entity in order to analysis the accurate position of business in effective manner: Sales: This term is recording by business in financial statements when sale out products
& services to other party in regard of profit. It can be done in two manner credit and cash.
In credit sales, sell out products & services under a credit policies and do not take amount
at the time of selling rather than in specific period of time like 6 months and more than.
In cash sales take amount instantly from the party. This transaction record as credit in
entries and in ledger debit side. Purchase: This term record by company when purchase raw material and other things
from another party. When an organisation can purchase any thing so that time it will be
recorded as purchase in debit side. The goods are purchasing in credit and cash basis that
can transact as per the requirement (Akintoye, 2012). Receipts: When company complete any transaction and collect amount from another
party so it is called as receipt and it can other corporate or people. Moreover, all the
activities are written as per the nature and categorise into debit and credit manner.
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 Payments: There are consisting of those transactions which are paid by the company to
other party in regard of credit purchase or cash. When company conduct these
transactions so recorded in the accounting books that maintain by company as per the
accounts and further produce journals.
Regulation for financial accounting
There is required to follow specific regulations in regard of financial accounting that
based on the Generally Accepted Accounting Principles (GAAP) and International Financial
Reporting System (IFRS). Both are important for the business that are discussed below: Full Disorder: It is effective regulation that follow by the company in which record all
the financial Transactions that can be presented in front of external as well as internal
stakeholders. Accordingly they are taking right decision in regard of business that
supports to analysis actual financial performance. Monetary terms: It is defined as basic principle in which record all the transactions that
are measure in monetary value and there are not recording non monetary value to identify
financial position (Bouaziz and Bouri, 2012).
 Matching principle: This principle can help to identify transaction that conduct on
particular date with a party. It is known as double entry book keeping system where all
transactions can show double impact and help to evaluate actual situation.
As per the above discussion there are analysing different types of principles which is
followed by the particular organisation in order to maintain their financial statements in effective
manner. Along with analysis the financial position that can change as per the transactions.
Double Entry Bookkeeping system
Double entry bookkeeping system is a effective concept of accounting in which conduct
all the transaction that shows impact in two manner on a finance of business. After conduct all
the transactions are recorded in to general ledger. When a business sale out products so increase
cash so it affects on both sides like revenues increases and cash increases. If company take loan
from the creditors so cash balances increases but its impacts on company's debt as well as on
cash balance in increasing manner.
Double entry recording in sales, purchase and cash book impact in two way manner
because in general ledger record all these transactions after that recording into ledger account of
related account. There is following formula of accounting equation Assets = Liabilities + Equity.
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Manual and electronic system
When owner of business select manual recording system that time use electronic record
keeping system to order to maintain all the transactions effectively. With the help of this system
easier to capture all the information and produce reports on time and meet tax and legal reporting
requirements on time (Carmichael and Graham, 2012). There are identified various types of
issues that can focus on setting up electronic or manual record to keeping system. Most of the
organisations can use accounting software to record all the transaction and prepare meaningful
reports.
Effectively recording of debit and credits
There are mentioned different types of regulations of financial accounting that follow by
the business to record all the transactions as per the category of debit and credit such as:
 First: Debit what comes in, credit what goes out.
 Second: Debit all the expenditure and losses, credit all incomes and gains.
 Third: Debit the reviver and credit the giver.
Trial Balance
It is a particular formate in which consist of all the balances of ledger accounts that
categorise according to their nature debit and credit manner. In the trial balance, an accountant
can total of balance that must be equal of debit and credit. These trial balance can be prepare on
period basis at the end of financial year. The main reason to prepare of this statement to assure
about that all the transactions are recorded in good manner according to their nature and it helps
to maintain double book keeping system.
Role of trial balance for identification and rectification of error
When an accountant produce trial balance after ledger posting and total does not match it
means there are required to rectifying a problem by accountant. For this require to see all the
transactions are recorded properly other wise it can transfer into suspense account after that
finding that amount and close suspense account (Collins, Pasewark and Riley, 2012). There are
discussed two options that can discuss by the company like:
 When error affecting trial balance: When errors can impact on the trial balance so in
that situation provide descriptive explanation by transitory anticipation account. When
mistakes can find out before recording or record ledger amounts so it can be change after
analysis. But after prepare of trial balance it become complex to find out error that time
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amount shown in suspense account. There are identified some errors that become reason
of wrong posting of amount.
 When error not affecting trial balance: This form of mistake will affect on the
individual times of two types of transactions, which is why it does not affect the financial
statement. An auditor needs all irregularities to be evaluated to modify the entire journal
submission that can be reported as to transaction. Cancelling the effect of incorrect
journal entry is permitted. This reveals opposite affect and detects those faults, such as a
total exclusion to submit (Dyreng, Mayew and Williams, 2012).
1.1
4

1.2 Journal Entry
5

6

30/04/20 Business Rates A/c 1320
To Bank A/c 1320
(Being business rates are paid through cheque)
31/04/2020 Abel Motors ltd A/c 28500
To Bank A/c 28500
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1.3 Ledgers
8

9

10

11

12

13

14

15

Balance sheet
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TASK 2
2.1
Financial statements are written records which is produced by every type of organization
in order to analysis actual performance of business and analysis all financial activities. It is
categorised into three manner such as profit & loss statement, balance sheet and cash flow
statements (Francis and et. al, 2015). All the statement are provided overall information that
helps to business to take effective decision in regard of future activities and investment. These
statements are often audited by government agencies, firms and accountants to assure about the
accuracy, investing purpose, for financing and tax.
Type of information presentation in each statement
Balance sheet: It is providing an overview of a business assets, liabilities and
stockholders in certain period of time. Features: It is produced by accountant at the end of accounting year as per the double
entry system. Balance sheet has two sides left is assets and right is liabilities and both are
always equal. Purpose: To present accurate financial position in over specified time period. Along with
shows that how much entity owns (Assets & liabilities) in the business entity. Structure: It is prepared after record transactions after the trial balance at the end of
accounting cycle. Therefore total of assets and liabilities at the end.
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 Content: Assets can be categorised into current, non current and intangible, in liabilities
consist of rent, tax and utilities and many others. Along with shareholders equity is
related with total assets that represents the amount of money that would be returned to
paid off debt of organisation (Juárez, 2015).
Income statement: It is essential income statement in which consist of all the
expenditure and income of business over a particular accounting period. There are recording all
types of expenses that can less from the income and get net profit otherwise vice versa. Features: The main feature of this statement to present expenditure and incomes in
particular time and also consist of advance and outstanding expenses & incomes. Purpose: To show the reader how much profit/loss gain by the company in specific
financial period. Structure: In this structure consist of revenues, profits and expenditure of an entity in
particular time period. On the basis of these transactions calculate profitability of
business.
 Content: This statement consist of revenues (money received from sale of the products as
well as services before occur transactions) and expenses in particular year after that
calculate net income and loss (Libby, 2017).
Cash flow statement: It is a financial statement that presents aggregate data in regard of
cash inflows which is received by the organisation from operational activities. Features: The most important features of cash flow is helping to forecast cash, reveals
actual position, results of planning and many others. Purpose: The purpose of prepare this statement to present an entities of cash inflows as
well as cash outflows in certain period of time. It is essential for evaluating the liquidity
and long term solvency of a business. Structure: This statement has been categorised into three manner such as, operating,
financing and investing activities. In three categories information can be categorised
according to transactions. There are not including non cash activities.
 Content: This method is used by company in direct and indirect method in which
classified section as per the provided cash in these sections (Magnan, Menini and
Parbonetti, 2015).
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2.2
19

2.3.
20

21

2.4 Calculation of Ratios:
TASK 3
3.1
It is a procedure where record all the bank tractions that record into cash book as well as
into pass book in case of recognise all the bank records that can correct or not. The main aim of
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this statement to analysis the cash position of business and all transaction must record into
accounting books otherwise it shows differences in big manner. The bank reconciliation
statement can be developed by a business in order to assure about the balance of cash book is
correct or not. There are defined requirement of bank reconciliation statement such as:
 It supports to business to recognise all the errors before it’s too late, regular checking of
accounts that supports in recorded transactions twice time (Taipaleenmäki and Ikäheimo,
2013).
 Timely check out all the transactions and reduce chances of errors that can be identified
into bank statement.
 Prevent administrative problems: This statement can helps to analysis of all internal
administrative problems which is required to focus by an organisation. When company
reconcile of the statement that time identify all these problems due to changes of
bookkeeping system.
 Detecting fraud: Through this statement staff members not able to stealing money and
prevent for future. The bank reconciliation statement supports in detecting and
identifying all fraud activities as per the transactions.
Described of bank reconciliation statement:
 The first move is to evaluate the starting accounts of the money register and the bank
panel to detect discrepancies from the prior season attributable to unrepresented and
approved checks.
 After that, make a comparison debit side of deposit banking app and money book loan
segment. Tick the items that were reported from both parties during most of the
assessment (Tinoco and Wilson, 2013).
 Evaluate all payments in the third phase, beginning with the detection of mistakes and
concentrating on the account column and money column for missing inputs reported in
cash. Create a list of such entrants, and change all submissions as per the cash journal
specifications.
 Check out any mistakes or faults found in the Cash Ledger.
 Calculate the revised and re-analyzed bank column amount of the money ledger.
 Launch revised cash book with new equilibrium even with all the changes.
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 Add disenfranchised invoices that are company concerns but are not used for
transactions. In addition to deducting unproduced checks, which are paid to the institution
but not received (Wang, 2014).
• Upon completion delete all mistakes however in place of account consolidation
transactions continue with debit deposits according to the money card row. All those
sums that are required are added and all the other payments are deducted which are
reported often.
• The statistics will be the sum of the account according to the credit card statement
Interested in outcome of bank Reconciliation statement
In bank reconciliation statement take interest by company because of they can identify all
the problems and adjustment on time as per the requirement. Along with stakeholders also take
interest because it helps to prepare effective financial statements that present actual position of
business.
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3.2
25

3.3
3.4
Deposit in transit: It is defined as money that has been received from an organisation
and record all the transactions in appropriate system as per the requirement of business. These
deposits has already sent to bank but has been processed and recorded in bank account. In the
context of financial accounting these funds can impacted on the cash balance of business on the
day of received that may take various days for procedure and post into bank balance. This term
mainly utilised by company for the cash entry and keep track of timing differences as per the
reason f face problems in recoiling of cash balances (Wen and Moehrle, 2016).
Outstanding Cheques: According to this term a company has issued and recorded all
transactions into general ledger accounts but yet not check and not cleared and the bank account
on drawn. It means balance of bank will be higher than the company's true amount of cash. This
concept mainly utilised to derivation month end of bank. This check has been conduced in
between multi day period at the time created of cheque.
Not Sufficient funds check when applying the reconciliation procedure: This check
has not been worthy by the bank because of insufficient funds as per the bank accounts.
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According to this concept amount has not been deposit into account but deducted from the cash
so it create error in financial statement (Yu, Lin and Tang, 2018).
TASK 4
4.1
Before Rectification:
After Rectification:
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4.2
28

4.3
29

4.4
Reconciled Trial balance:
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CONCLUSION
As per the above report it has been analysed that financial accounting is playing essential
role for very type of business and supports to present actual position of business in particular
period of time. There are calculated trial balance, ledger posting, preparing balance and income
statement as per the specific guidelines. Along with analysis all the concepts which is mainly
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based on double bookkeeping system and affect in both sides. Moreover, preparing of bank
reconciliation statements to identify errors and adjust all the requirements.
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