Financial Accounting Concepts and Techniques

The provided document is a compilation of articles and research papers on financial accounting. It includes topics like complexity of financial reporting standards, accounting expertise, financial risk tolerance, mental accounting, and value-based management. The document also covers financial statement comparability and its impact on stock prices. It provides a comprehensive overview of financial accounting concepts and techniques, making it a valuable resource for students and professionals in the field.

Financial Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
1.1 Debit and credits...................................................................................................................1
1.2 System of double-entry book keeping...................................................................................1
1.3 Cash-book.............................................................................................................................1
1.4 Ledger...................................................................................................................................1
1.5 Trial balance..........................................................................................................................2
1.6 Accruals.................................................................................................................................2
1.7 Depreciation..........................................................................................................................2
1.8 Profit and loss Account.........................................................................................................2
1.9 Balance sheet.........................................................................................................................3
1.10 Cash Flow Statement...........................................................................................................3
1.11 Financial Statements ..........................................................................................................3
1.12 Bad debts.............................................................................................................................3
1.13 Bank reconciliation.............................................................................................................4
1.14 Control accounts .................................................................................................................4
1.15 Suspense accounts...............................................................................................................4
TASK 2............................................................................................................................................4
2.1................................................................................................................................................4
2.2................................................................................................................................................9
2.4..............................................................................................................................................10
2.5..............................................................................................................................................11
TASK 3..........................................................................................................................................12
TASK 4..........................................................................................................................................13
4.1 Explaining the process used to reconcile the control accounts and clearing the suspense
account. ....................................................................................................................................13
4.2 General entry for the suspense and preparation of control account ...................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Financial accounting is the process of formulating the financial statements by recording,
classifying, summarizing interpreting and communicating the results to the users. It is counted as
the most specialized branch of the accounting that traces the financial transactions of the
company's business. The present study describes various concept of the accounting,
understanding of which plays a crucial role in preparing and maintaining the business
transactions of an entity. The report also includes the preparation of the financial statements of
the J&J Ltd. Bank reconciliation statements are also formulated of the ABC Ltd.
TASK 1
1.1 Debit and credits
Debit- It refers to the accounting entry which lets to either increases the asset or the
expense account and decreases the liability or the equity account (Zeff, 2016). Debit is
positioned towards the left side in accounting entry.
Credits- It is the accounting entry which results in increasing the liability or the equity
account and decreases the asset or the expense account. Credit is positioned to right side when
the accounting entry is made.
1.2 System of double-entry book keeping
Double entry book keeping system states that for every transaction in the business, the
amounts has to be recorded in minimum two accounts (Bailey and Samuels, 2018). It also
requires for the amount of all the transactions must be entered as the debits with the equal
amount to the credit side. It basically reflects that each business transaction contains both the
aspects that is debit and the credit.
1.3 Cash-book
It is the financial journal that records for all the cash receipts and the expenditures with
the inclusion of bank deposits and the withdrawals. Entries made in cash book are posted to the
general ledger (Chychyla, Leone and Minutti-Meza, 2019). It is set upprepared as the ledger
where all the cash transaction are entered in a logical order as per the date. It is the book of
the final and the original entry.
1.4 Ledger
It is the written or the computerized record of the business transactions that are made in
an accounting year. Different accounts are prepared for recording all the transactions in the
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ledger. The list of the accounts framed are called as the accounts chart. Classification of the
recording made is known as the ledger (Martin and Davari, 2018). It is also called as the
secondary books of accounts.
1.5 Trial balance
It is the accounting or the book-keeping report that list down the balances in each of the
general ledger accounts of an entity. It facilitates the preparation of the financial statements of
the organization (Orlova and et.al., 2015). The total of the debit side must be equal to the total of
the credit side in accordance with the trial balance account.
1.6 Accruals
It refers to the adjustments that are made before the financial statements of the company
are issued. It includes two kinds of the business transactions that are as follows-
 Such losses, liabilities and the expenses that has been incurred but are not recorded in the
books of accounts.
 Assets and the revenues that has been earned but are not recorded in the accounting
books.
1.7 Depreciation
It indicates the fall in the monetary value of an asset over its useful life, due to any wear
and the tear or the obsolescence (Smieliauskas and et.al., 2018). Decrease in the value may
incurred because of various factors like unfavorable conditions in the market etc. The assets that
are been depreciated are machinery, currency and the equipment.
1.8 Profit and loss Account
It is thean statement account that shows the profit earned and the losses incurred by the
company in its business during a particular accounting or time period. It allows in viewing the
net profit or the net loss of the business during the year after the deduction of all the income and
the expenditure (de Aguiar, 2018). This statement account summarizes all the costs, expenses
and the revenues incurred in a specified period. This statementaccount helps the firm in knowing
its ability or the inability in generating the profits by the increase in the revenue or reducing the
cost. It states the financial performance of an entity.
1.9 Balance sheet
It refers to the statement that includes the liabilities, equity capital and the assets of the
corporate at one point of time (Bay, 2018). It depicts the financial position of the enterprise in
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the overall market. It equates the assets and the liabilities of the firm and reflects the true
financial health of the company. It illustrates the net worth of the business. It is useful for both
internal and the external users as their decisions are based on the financial information in terms
of their investment made in the business.
1.10 Cash Flow Statement
It is a statement that shows the changes in the financial position of the enterprise on the
cash basis (Porter, 2019). It reveals about the net effects of all the transactions of the business in
terms of the cash during a specific accounting period. It records for all the inflows and the
outflows of cash in the business. It enables the firm in knowing the cash position of their
company in the market.
1.11 Financial Statements
Financial statements refer to the reports that are prepared by the management of the
organization for presenting the financial performance and the position of the entity at a point of
time. Financial statements are the set that includes the income statements, balance sheets and the
cash flows report (Gordon, 2019). These reports are formulated to facilitate useful information
to the outsiders such as creditors, investors, government and tax authorities. Such statements are
considered as the major source of evaluating the financial information for the decision makers.
Reporting of such information places high focus on the relevance, reliability and the accuracy. It
provides the true and fair view of the company's overall standing in the market.
1.12 Bad debts
These are the due receivable that are not paid by the customers and the debtors. It arises
when the organization extends too much of the credit to its customers, who are incapable of
meeting their liability or meeting their debt (Hsieh, Ma and Novoselov, 2019). It occurs due to
the reduced, missing and the delayed payments from the customers. Moreover, when the
customer misrepresents himself in relation to obtaining the sale on the credit and purchases the
product with no intention of paying seller. This resulted as the fraud from the side of the
customers. The bad debts that are attached with the account receivable are reported in the income
statement as the bad debt expenses or the non-recovered expense account. Two method are used
for recording the bad debt such as direct write-off method and the allowance method.
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1.13 Bank reconciliation
It is the process that describes the difference between the bank balances shown in the
organization's own records and as facilitated by the bank on a particular date (Nishimura, 2019).
It assists the firm in matching the cash balances on the books of accounts of company to the
corresponding values on the bank statement of the enterprise. All the transactions incurred
between the bank and the depositors are recorded separately by both parties. The major purpose
of framing the bank reconciliation statement is to create findings and understanding the grounds
of the different present in the account balance.
1.14 Control accounts
It is referred as the general ledger account which combines and summarizes all the
subsidiary accounts of a particular type. It sums up all the subsidiary accounts and is utilized to
organize and simplify the general ledger (Choi and et.al., 2019). For instance- If the company is
dealing with large number of customers then the account receivable balances of such customers
are recorded in the Account receivable control account.
1.15 Suspense accounts
It is the account in which the amount of the transactions are recorded temporarily. It is
used when the appropriate ledger accounts could not be able to determine the time of recording
the transactions.
TASK 2
2.1 Preparing the journal, ledger and trial balance.
J&J Ltd.
Journal entries
Date Particulars Debit Credit
01/01/18 Cash a/c Dr. £810,000.00
To capital a/c £810,000.00
15/02/18 Equipment a/c Dr. £45,000.00
To cash a/c £45,000.00
01/03/18 Purchase a/c Dr. £500.00
To supplier's a/c £500.00
30/06/18 Debtors a/c Dr. £5,000.00
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To sales a/c £5,000.00
01/07/18
Account payable a/c
Dr. £400.00
To bank a/c £400.00
15/07/18 Bank a/c Dr. £3,000.00
To account
receivable a/c £3,000.00
01/08/18 Rent a/c Dr. £500475.00
To cash a/c £500475.00
01/08/18
Utility expense a/c
Dr. £2300.00
To accounts payable
a/c £2300.00
01/08/18
Prepaid insurance a/c
Dr. £1,200.00
To bank a/c £1,200.00
29/08/18 Bank a/c Dr. £2,400750.00
To unearned revenue
a/c £2,400750.00
09/10/18 Drawings a/c Dr. £1,000.00
To bank a/c £1,000.00
£26,000.00 £26,000.00
Ledgers
(Dr.) Cash a/c (Cr.)
Date Particulars Amount Date Particulars Amount
01/01/18 To capital a/c £810,000.00 15/02/18
By equipment
a/c £45,000.00
01/08/18 By rent a/c £500475.00
31/12/18 By balance £3,5004,525.0
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c/d 0
£810,000.00 £810,000.00
(Dr.) Capital a/c (Cr.)
Date Particulars Amount Date Particulars Amount
01/01/18 By cash a/c £810,000.00
31/12/18 To balance c/d £810,000.00
£810,000.00 £810,000.00
(Dr.)
Equipment
a/c (Cr.)
Date Particulars Amount Date Particulars Amount
15/02/18 To cash a/c £45,000.00
31/12/18
By balance
c/d £45,000.00
£45,000.00 £45,000.00
(Dr.) Purchase a/c (Cr.)
Date Particulars Amount Date Particulars Amount
01/03/18
To supplier's
a/c £500.00
31/12/18
By balance
c/d £500.00
£500.00 £500.00
(Dr.) Suppliers a/c (Cr.)
Date Particulars Amount Date Particulars Amount
6

01/03/18
By purchase
a/c £500.00
31/12/18
By balance
c/d £500.00
£500.00 £500.00
(Dr.) Debtors a/c (Cr.)
Date Particulars Amount Date Particulars Amount
30/06/18 To sales a/c £5,000.00
31/12/18
By balance
c/d £5,000.00
£5,000.00 £5,000.00
(Dr.) Sales a/c (Cr.)
Date Particulars Amount Date Particulars Amount
30/06/18
By Debtors
a/c £5,000.00
31/12/18
By balance
c/d £5,000.00
£5,000.00 £5,000.00
(Dr.)
Account
payable a/c (Cr.)
Date Particulars Amount Date Particulars Amount
01/07/18 To bank a/c £400.00 01/08/18
By utility
expense a/c £200.00
31/12/18
By balance
c/d £200.00
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£400.00 £400.00
(Dr.)
Account
receivable a/c (Cr.)
Date Particulars Amount Date Particulars Amount
15/07/18 By bank a/c £3,000.00
31/12/18
By balance
c/d £3,000.00
£3,000.00 £3,000.00
(Dr.) Rent a/c (Cr.)
Date Particulars Amount Date Particulars Amount
01/08/18 To cash a/c £500475.00
31/12/18
By balance
c/d £500475.00
£500475.00 £500475.00
(Dr.)
Utility
expense a/c (Cr.)
Date Particulars Amount Date Particulars Amount
01/08/18
To accounts
payable a/c £2300.00
31/12/18
By balance
c/d £2300.00
£2300.00 £2300.00
(Dr.) Prepaid (Cr.)
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insurance a/c
Date Particulars Amount Date Particulars Amount
01/08/18 To bank a/c £1,200.00
31/12/18
By balance
c/d £1,200.00
£1,200.00 £1,200.00
(Dr.)
Unearned
revenue a/c (Cr.)
Date Particulars Amount Date Particulars Amount
29/08/18 By bank a/c £2,400750.00
31/12/18
By balance
c/d £2,400750.00
£2,400750.00 £2,400750.00
(Dr.) Drawings a/c (Cr.)
Date Particulars Amount Date Particulars Amount
09/10/18 To bank a/c £1,000.00
31/12/18
By balance
c/d £1,000.00
£1,000.00 £1,000.00
(Dr.) Bank a/c (Cr.)
Date Particulars Amount Date Particulars Amount
15/07/18
To accounts
receivable a/c £3,000.00 01/07/18
By accounts
payable a/c £400.00
29/08/18
To unearned
revenue a/c £2,400750.00 01/08/18
By prepaid
insurance a/c £1,200.00
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09/10/18
By drawings
a/c £1,000.00
31/12/18
By balance
c/d
£3,0003,150.0
0
£5,400750.00 £5,400750.00
Trial balance for the year
ended 31/12/18
Particulars Debit Credit
cash £3,5004,525.00
bank £3,000150.00
capital £810,000.00
equipment £45,000.00
purchases £500.00
suppliers £500.00
debtors £5,000.00
sales £5,000.00
account payable £2400.00
accounts receivable £3,000.00
rent £500475.00
utility expense £200300.00
prepaid insurance £1,200.00
unearned revenue £2,400.750.00
Drawings £1,000.00
Suspense account 56500
£24,150.00 £21,7004,150.00
2.2 & 2.3 Preparing the final accounts
Profitability statement of Tech Support Ltd
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Particulars Figure (in £) Figure (in £)
Revenue 5000
Rent Expenses 425
Utilities Expense 125
Accountancy fee 400
Depreciation-Fixtures 365 1315
NP 3685
Statement of financial position of Tech Support Ltd
Particulars Figure (in £) Figure (in £) Figure (in £)
Assets
Fixed assets
Supplies 500
equipment 4201
Total fixed assets 4701
Current assets
cash 6,000.00
Accounts Receivable 2,300.00
Prepaid Insurance 1025
Total current assets 9,325.00
Total assets (fixed + current) 14,026.00
Liabilities and shareholders
liability
Non-current liabilities
Accumulated depreciation 365
Total Non-current liabilities 365
Current liabilities
Accruals 375
Accounts Payable 325
unearned Revenue 2225
Total Current liabilities 2925
Shareholders’ equity
Owners Investment 8000
Share capital 1
less: owners withdrawal 950 7051
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Add: NP 3685 10736
14026
2.4 Final accounts of the sole-trader.
Profitability statement for the year ended on 31.12.2018
Particulars Figure (in £) Figure (in £)
Sales a/c 5200
Less: Purchase A/C 465
Gross profit 4735
Rent A/C 575
Utility A/C 358
933
NP 3802
Balance sheet for the year ended on 31.12.2018
Particulars Figure (in £) Figure (in £)
Current assets
Pre-Paid Insurance A/C 2204
Cash A/C 5,045.00
Debtor A/C 2381
Total current assets 9630
Non-current assets
Equipment A/C 3,728.00
Total non-current assets 3,728.00
Total assets 13,358.00
Liabilities
Non-current liabilities
Creditor A/C 300
Unearned Revenue A/C 2069
Total non-current liabilities 2369
Owner investment 7187
add: NP 3802 10989
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Total liabilities 13358
2.5 Final accounts for the Zee partnership.
Profitability statement of Kim & Kam partnerships for the year ended on 31.12.2018 is as
follows:
Particulars Figure (in £) Figure (in £)
Sales a/c 5200
Less: Purchase A/C 465
Gross profit 4735
Rent A/C 575
Utility A/C 358
Less: total expenses 933
NP (partner A)
(3802*60%) 2281
NP (partner B)
(3802*40%) 1521
Total NP 3802
Balance sheet of Kim & Kam partnerships for the year ended on 31.12.2018
Particulars Figure (in £) Figure (in £)
Current assets
Pre-Paid Insurance A/C 2204
Cash A/C 5,045.00
Debtor A/C 2381
Total current assets 9630
Non-current assets
Equipment A/C 3,728.00
Total non-current assets 3,728.00
Total assets 13,358.00
Liabilities
Non-current liabilities
Creditor A/C 300
Unearned Revenue A/C 2069
Total non-current liabilities 2369
Owner investment 7187
add: NP 3802 10989
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Total liabilities 13358
TASK 3
Bank reconciliation
statement for the
month
Date Particulars Amount total
01/05/18
Balance as per bank
statement 240000
02/01/19
add: bank cheque
printing charges 250
03/02/19
add: bank service
charges 175
30/04/18add: cheque
deposited but not yet
cleared80000
30/04/19
add: cheque deposited
but not yet cleared 25000 10535025425
30/04/19
less: cheque deposited
but not yet cleared 92000
28/04/19 less: interest income 35 3092035
Balance as per cash
book 425320173390
Bank reconciliation
statement for the
month
Date Particulars Amount total
Balance as per cash 425320173390
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book
01/01/19 less: bank charges 250
01/02/19
less: bank service
charges 175
30/04/18less: cheque
deposited but not yet
cleared80000
30/04/19
less: cheque deposited
but not yet cleared 25000 10535025425
30/04/19
less: cheque deposited
but not yet cleared 92000
28/04/19 add:interest income 35 3092035
Balance as per pass
book 240000
TASK 4
4.1 Explaining the process used to reconcile the control accounts and clearing the suspense
account.
Reconciliation is the working that shows the entries relating to the sales and the purchase
ledgers are matching or agreeing with the recording in the control accounts. The total of each of
the account must be same. Itf the total is not same then it reflects the errors in the
memorandum or the control accounts (Bailey and Samuels, 2018). All the discrepancies that
are mentioned in the accounts are investigated and are corrected by preparing the reconciliation
control accounts. Control account are formulated for receivables as well as the payable.
For example- the account payable shows the balance of $15786. The errors discovered in the
account are as follows-
 The total discount received amounted to $1515 which has not been recorded in the
control account but has been recorded in the individuals account.
 The credit of the individual resulted as $190 that has been wrongly treated as the debit
balance.
 Treatment of petty cash expenses of $45 has been entered in control account but entry has
been omitted in supplement account.
 The total of the purchase account has been resulted as under-valued by $1000
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 Set off within receivable ledger valued to $1940 has not been entered in the control
account but is recorded in the individual ledger.
Process-
Step-1 : the total amount of the discount received has to be debited in the payable control
account and will be credited to the discount received account. As it has been recorded in the
individual account , so no adjustment are required in the list of the balances.
Step-2 : the credit balances of the individual will be extracted from the ledger account of payable
and no adjustments are needed in the control accounts.
Step-3 : Amendments are to be made in the list of the balances as it is clearly stated that the
errors are been resulted in ledger of individual account. Therefore, no changes has to be made
in the control accounts.
Step-4 : The total amount of the purchases book is to be posted by debiting the purchases and the
payable are credited in the ledger control accounts. In case the total is under-valued, the relevant
book-keeping entry has to be made by posting $1000 as understated. The total of the purchase
day book will not be affecting the list of the balances as an account of the individual ledger are
directly posted individually from purchase book.
Step-5 : Thus under this step it is been cleared that the errors occurred are affecting the control
account rather than the payable ledger. Correction will be made by the double-entry book
keeping.
4.2 General entry for the suspense and preparation of control account
General entry
Date particulars Debit Credit
15/01/19 Bank a/c Dr. £55.00
To XYZ ltd a/c £55.00
21/01/19 Cash a/c Dr. 55
To XYZ ltd a/c 55
30/04/19 Purchases a/c Dr. 1000
To supplier a/c 1000
Control
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accounts
(Dr.) Bank a/c (Cr.)
Date particulars Amount Date Particulars Amount
15/01/19 To XYZ ltd a/c 55
31/12/18 By Balance c/d 55
55 55
(Dr.) XYZ Ltd a/c (Cr.)
Date particulars Amount Date Particulars Amount
15/01/19 By bank a/c 55
21/01/19 By cash a/c 55
31/12/19 To balance c/d 110
110 110
(Dr.) Purchases a/c (Cr.)
Date particulars Amount Date Particulars Amount
30/04/19 To supplier a/c 1000
31/12/19 By Balance c/d 1000
1000 1000
(Dr.) Suppliers a/c (Cr.)
Date particulars Amount Date Particulars Amount
30/04/19
By purchases
a/c 1000
31/12/19 By Balance c/d 1000
1000 1000
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CONCLUSION
From the above report it is concluded that Financial accounting is very essential for every
organization as it facilitates keeping track on systematic records to protect the business
properties and to ascertain the operational loss and the profits so that performance can be
measured effectively. It provides the users with adequate information so that they can take
decisions efficiently and could select the best alternative. Financial accounting is helpful in
making the comparative study and enables the management to have the control over the assets. It
settles down the tax liability and provides for raising of the loans. The statements can be used as
the legal evidence in relation to the financial position of the company. It creates the value of the
business which in turn leads to wealth and profit maximization.
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REFERENCES
Books and journals
Bailey, W. J. and Samuels, J. A., 2018. Analyzing Two Investments—An Instructional Case to
Introduce Basic Financial Accounting Concepts. Issues in Accounting Education Teaching
Notes. 33(4). pp.18-29.
Bay, C., 2018. Makeover accounting: Investigating the meaning-making practices of financial
accounts. Accounting, Organizations and Society. 64. pp.44-54.
Choi, J. H. and et.al., 2019. Financial statement comparability and the informativeness of stock
prices about future earnings. Contemporary Accounting Research, 36(1), pp.389-417.
Chychyla, R., Leone, A. J. and Minutti-Meza, M., 2019. Complexity of financial reporting
standards and accounting expertise. Journal of Accounting and Economics. 67(1). pp.226-
253.
de Aguiar, T. R., 2018. Turning accounting for emissions rights inside out as well as upside
down. Environment and Planning C: Politics and Space. 36(1). pp.139-159.
Gordon, E. A., 2019. Advances and opportunities in international accounting research. Revista
Contabilidade & Finanças. 30(79). pp.9-13.
Hsieh, C. C., Ma, Z. and Novoselov, K.E., 2019. Accounting conservatism, business strategy,
and ambiguity. Accounting, Organizations and Society. 74. pp.41-55.
Martin, W. C. and Davari, A., 2018. EXAMINING FINANCIAL RISK TOLERANCE VIA
MENTAL ACCOUNTING AND THE BEHAVIORAL LIFE-CYCLE
HYPOTHESIS. Academy of Marketing Studies Journal. 22(4). pp.1-13.
Nishimura, A., 2019. Conceptual Analysis of Value-Based Management and Accounting: With
Reference to Japanese Practices. In Management, Uncertainty, and Accounting (pp. 51-72).
Palgrave Macmillan, Singapore.
Orlova, L. and et.al., 2015. Financial accounting centers: concepts and tools. Mediterranean
Journal of Social Sciences. 6(4).
Porter, J. C., 2019. Beyond debits and credits: Using integrated projects to improve students’
understanding of financial accounting. Journal of Accounting Education. 46. pp.53-71.
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