Financial Accounting: Understanding Transactions and Financial Statements

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
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1.2 Journal Entry
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