Importance of financial accounting : Assignment

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Defining financial accounting and its purpose........................................................................1
2. Explanation of regulation which related to financial accounting............................................2
3. Description of accounting rules and principles.......................................................................2
4. Explanation of conventions and concepts which relates to consistency and material
disclosure.....................................................................................................................................3
CLIENT 1........................................................................................................................................4
(I). Book of prime entries............................................................................................................4
CLIENT 2......................................................................................................................................12
1. Peter Doo statements of profit and loss for the year ended for 31 July 2018.......................12
2. Balance sheet for the year ended 31 July 2018.....................................................................13
CLIENT 3......................................................................................................................................16
(A.) Profit and loss statement....................................................................................................16
(B.) Statement of financial position..........................................................................................17
(C.) Explanation of following concept......................................................................................18
(D.) Description of purpose of depreciation in formulating accounting statements with two
appropriate methods .................................................................................................................19
CLIENT 4......................................................................................................................................20
A. Purpose of preparing bank reconciliation statements...........................................................20
B.) Explanation of areas which cause records vary with bank records.....................................20
(C.) Preparation of accounts through cash flow statements......................................................21
CLIENT 5......................................................................................................................................22
(A.) Preparation of sales ledge and purchase ledger accounts..................................................22
(B). Explanation of need for preparing control account...........................................................23
CLIENT 6....................................................................................................................................23
(a.) Explanation of the term suspense account with its main feature........................................23
(b.) Drafting a trail balance.......................................................................................................25
(c.) Trial balance suspense account...........................................................................................25

(d.) Difference between suspense account and clearing account..............................................25
CONCLUSION .............................................................................................................................26
REFERENCES..............................................................................................................................27

INTRODUCTION
Financial accounting is the term which is used to prepare financial statements of
companies in order to evaluate its performance and positions to stakeholders of the entity (Khan,
2015). This assessment will provide a study on financial accounting where its definition and
purpose will be evaluated. Further, regulations which relates to this accounting with its
accounting rules and principles will be explained where more understanding is provided on the
conventions and concepts which relates to consistency and material disclosure. Lastly, in this
report financial accounting calculation will be provided with proper format. Here accounting
firm is L.V. Audit Kft. Which provide range of service in audit, tax counselling etc.
MAIN BODY
1. Defining financial accounting and its purpose
Financial accounting is the process which is used by entities in order to evaluate their
financial performance and position to stakeholder and people which are outside the company.
This performance will be evaluated by making financial statements where transaction during
financial year of company get recorded (What is Financial Reporting, 2019). Preparing such
statement is known as important aspect for company with the view point of managerial
accounting so that detailed report will get develop in order to forecast managerial information.
There are four basic statements in this accounting which prepared by entities to show its
performance which includes income statement, balance sheet, cash flow statement and statement
of retained earnings. Purpose of making income statement is developed information which
relates to business operations, financial position and cash flows of organisation. Purpose of
preparing balance sheet is to inform users regarding current status of business during financial
year. Purpose of preparing cash flow statement is to show users regarding nature of cash receipts
and disbursements in organisation.
Its main purpose are as follows-
 The main purpose of making financial statements is to provide information which
evaluate company's performance, capabilities and changes in financial position. This
information will be useful for users of company for making economic decisions.
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 Another purpose of making these statements is to help users and owners for taking
credit decisions, investment decisions, taxation decisions and union bargaining
decisions (Dutta and Patatoukas, 2016).
 It also gets prepared by entities in order to provide internal analysis of business
operations to managers which helps in decision-making process.
2. Explanation of regulation which related to financial accounting
Financial accounting is the tool which focused on identification and recording of
financial information, measurement of financial performance, and communication through
statements with users. Therefore, in order to develop accurate financial statements there are some
regulation which needs to followed by entities which are as follows-
IASB: international accounting standards board is standard setting body which has
developed IFRS for preparing financial statement (Warren and Jones, 2018). It is known as non-
profit organisation which was founded on 1 April 2010. Motive of this body is to develop
accurate principle which provide clear understanding of financial statements. By following such
regulations, entities are able to clearly record transaction in books of accounts.
IFRS: It is the international accounting framework which develop by IASB for entities to
properly organise and report financial information. It is also developed to provide a common
language for business affairs of companies so that their financial statements are understandable
and comparable. Its main purpose is to maintain stability and transparency so that it provides
clear understanding to foreign investors of company.
GAAP: It is a cluster of accounting principles which known as generally accepted
accounting principles. It is used by organisation which have motive to operate business with long
term perspective. Therefore, it is used to properly organise financial information into accounting
records which will then summarise into financial statements so that certain information will get
disclosed by entities.
3. Description of accounting rules and principles
Accounting rules are types of statements which provides guidance for recording business
transactions (Weygandt, Kimmel and Kieso, 2015). There are some golden rules of accounting
which relates to personal account, real account and nominal account. According to personal
account the rule describe that debit the receiver, credit the giver. Real account specifies that debit
what comes in, credit what goes out and nominal account explain that debit all the expenses and
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losses and credit all income and gains. As per the rule it is stated that all accounting related
transactions needs to be recorded in books of entity with the use of double entry accounting
method. For example: a person purchased asset on credit for £10,000, its accounting will be
recorded by crediting cash amount and by debiting asset account with the amount of 10000.
The main accounting principles are as follows-
 Economic Entity Assumption: which means that accountant keep business
transaction separate from personal transaction of owner.
 Monetary Unit Assumption: it is an accounting principle which assume that business
transaction can be measured only in terms in monetary units.
 Time Period Assumption: this principle assume that it is possible for businesses to
record complex and ongoing transactions in a very short time interval.
 Cost principle: this principle states that financial transaction related to business needs
to be record at actual cost rather than on current value.
 Full disclosure principle: according to this principle if certain information is useful
for investor then in financial statement it must be disclosed within statement or in
notes because of basic accounting principle (Law, 2016).
 Going Concern Principle: this principle states that company will carry out its
business operations of long term perspective and will not liquidate in the future.
 Matching Principle: this principle requires companies to maintain financial
statements with accrual basis of accounting where expenses will be matched with
revenues.
 Revenue Recognition Principle: according to this principle revenue are recognised as
soon as product been sold or service been performed.
 Materiality: This principle states that all the material information must be disclosed
by organisation.
 Conservatism: This is the general principle of recognising expenses and liabilities
when there is uncertainty about its outcome.
4. Explanation of conventions and concepts which relates to consistency and material disclosure
Consistency:
It is an accounting principle which states that once entity has adopted an accounting
principle for preparing financial statements, then it must have to continue follow for future
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accounting periods (Cascino and Gassen, 2015). It only gets changes if there is new version of
accounting principle which improve financial result reports. If valid reason has been found for
changing accounting principle than business must have to disclose nature of change, its reason
and effect on financial statements. It is an important concept because it provides effective
comparability by which investors and other users of company will easily able to analyse and
compare financial statements of company.
Material Disclosure:
According to this accounting principle, company must have to provide necessary
information to investor and other users of company so that decision will get developed by them
in accordance with investment. Material disclosure need to be disclosed with financial statements
including any supplementary footnotes and schedules. Information also get disclosed though
annual reports or with quarterly earning reports, press releases or with any other communication
technique (Barker and Teixeira, 2018).
CLIENT 1
(I). Book of prime entries
Journals entries in books of David Study's for the month of January are as follows-
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5

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Ledger accounts:
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8

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10

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Trial balance:
Trial Balance for the month ended January
Particulars Debit Credit
D Main account 2560
W Tag account 1050
R Foot account 260
L Mold account 1330
W Wright account 1810
P Mole account 490
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F Lane account 510
J Wilson account 726
T Cole account 3120
F Seema account 526.5
J Allen account 990
P White account 2820
J Fox account 2310
Sales account 14810
Purchases account 18410
sales return account 680
Purchase return account 110
storage costs account 800
motor expenses account 670
Drawings 2000
Discount allowed account 287.5
discount received account 2135
salary account 14500
business rates account 2220
capital account 36610
premises account 440000
motor van account 45250
fixture and fitting account 10100
cash in hand 5600
cash at bank 49550
suspense account 541395
Balance 546670 546670
CLIENT 2
1. Peter Hampau statements of profit and loss for the year ended for 31 July 2018
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Particulars £ £ £
Sales 1200000
cost of sales
opening inventory 4500
add purchases 70000
74500
less closing inventory 42640 31860
Gross profit 1168140
Expenses
wages and salaries 165000
add amount accrued 1520 166520
motor expenses 45800
admin expenses 16500
heating and lightning 5500
advertising expenses 10300
less amount prepaid 4470 5830
depreciation on premises 5600
depreciation on equipment 19000
depreciation on motor vehicle 3600 28200 268350
Operating Profit 899790
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2. Balance sheet for the year ended 31 July 2018
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CLIENT 3
(A.) Profit and loss statement
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(B.) Statement of financial position
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(C.) Explanation of following concept
Consistency: it is a principle which states that accounting method which is once adopted
must be consistently applied in future as well (Hasan, 2019). It means that same type of method
and situations will be used for preparing all types of books of accounts. According to this
principle, if entity wants to change accounting principles then they have to provide reasonable
ground with clear reason. If valid reason generated to change accounting policy then business
must have to provide nature of changes, disclosure of nature of change with effective reasons and
effect on financial statements. It is important concept because it provides comparability which
helps investor and other users to easily compare financial statement of company.
Prudency: It is a concept which states that accounting transactions and other events
sometimes become uncertain but entity must have to report them in time in order to make them
relevant. It means that an entity must not have to overestimate their revenue, assets and profits
and also entity must not have to underestimate its liabilities, losses and expenses. Because of this
principle accurate and trustworthiness figure reported in financial statements. Through this
method, accountant must have to show statement in conservatism approach while reporting
entity's profits, revenue and assets. It means that financial statement must be prepared with
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realistic approach where every possible event and outcomes needs to be appeared so that investor
can easily be understand.
(D.) Description of purpose of depreciation in formulating accounting statements with two
appropriate methods
Main purpose of calculating depreciation is to match cost of productive assets which has
useful life more than a year and to measure revenue which has been earned with the use of such
assets (Dickinson, Wangerin and Wild, 2016). Charging expenses in asset is the matching
concept and both will then appeared in income statements of an entity. Through this method, it is
effectively analysed about the performance of company in business market. Therefore, this
method considered as an important aspect in concept of finance and accounting. Its purpose are
as follows-
 Depreciation in accounting: its applicability is completely depended upon the
materiality concept of accounting principle which state that cost of asset must be
matched with value which generated during its useful life. Therefore, to measure real
cost of the assets its value are reduced in financial year and get written off as an
expense in income statement of entity.
 Depreciation in taxation: in accordance with taxation law, value of depreciation
needs to be deducted when tax liabilities calculated. It is because value of
depreciation on assets written off as expenses under the income tax act 1961.
 It also measures income or loss which generated from assets, it determines real value
of assets with true expenditure which incurred in production and it also provides
benefits in tax and deductions.
Its two appropriate methods which widely used are as follows-
Straight-line depreciation method: This is the simplest method of calculating
depreciation which is calculated by subtracting scrap value of asset from its original price
(Straight Line Depreciation, 2018). Further, such price will be divided estimated total number of
years. Once the rate has been calculated, it will apply throughout the year.
Reducing balance depreciation: this is the another method which is also widely used by
the entities where amount of depreciation changes with the time. This method is useful for assets
which typically lose value in its earlier year. This method is also known as accelerated
depreciation method.
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CLIENT 4
A. Purpose of preparing bank reconciliation statements
Bank reconciliation statements are prepared to compare business records to bank, in order
to analyse difference in two sets of cash transactions (The purpose of Bank Reconciliation
Statements, 2018). In this statement, ending version in cash records in known as book balance
and ending version of bank column is known as bank balance. This account helps in confirming
the accuracy of balances which recorded in books of company and in bank. It also provides
complete check regarding accuracy of entries which made in book and bank records of entity. It
also helps in detecting and rectifying any type of errors which committed in recording such
transactions. Its purpose are as follows-
Detecting errors: through this statement, entities able to find accounting errors which
are common and related to every business. Such types of errors include addition, subtraction,
missed payments and also double payments.
Track interest fees: Banks may charge amount relates to interest payments, fees or
penalties. Therefore, this account allows such adjustments so that it get added to subtract from
books of accounts.
Detect Fraud: This statement helps in detecting and finding fraudulent transactions. By
making regularly, company will able to prevent its money which was steeled by anyone which
working in organisation.
Track receivables: This statement allows accountant to confirm all the receipts which is
related to business operations. It also helps to identify situations which will not deposited by an
entity (Del Giudice, Manganelli and De Paola, 2016).
B.) Explanation of areas which cause records vary with bank records
Reason behind areas which cause difference between balance on the bank statement and
balance of book is because of outstanding checks, deposit in transit, bank services, check
printing charges, errors on books, error by bank, other electronic charges which occurred in bank
statement and not recorded in books ans also not recorded. Difference also created when item
shown in book but not yet appeared under bank statement because of which item considered as
an adjustment for balance per bank statement (Farrell, 2016). Another reason of occurring
difference is when any outstanding check deduct to balance per bank and any deposit in transit
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added to as balance per bank. Difference also occurred if an item of bank statement not yet
entered by entity in the books of accounts then this also will differ the balance of cash and bank.
This will further add as an adjustment for balance per book. Items like bank service charges,
check printing charges, with electronic charges get deducted but will not record on books of
accounts also create difference in book and bank balance. This is the reason because of which
balance between cash and book get differed.
(C.) Preparation of accounts through cash flow statements
Back reconciliation statement:
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CLIENT 5
(A.) Preparation of sales ledge and purchase ledger accounts
Sales ledger account
Purchase ledger account
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(B). Explanation of need for preparing control account
Control accounts are considered as general ledger account which only contains summary
amounts. Detail of this account will be found in subsidiary ledge account. It is used to record
balances of subsidiary accounts because in large organisations daily recording of transaction
need to be handled in very proper way (Benesh and Bryant, 2018). Therefore, entities has need to
prepare this accounts. By recording daily transaction this account helps in managing policy
formulation. With this account, accountants of any entity will easily able to prepare income
statements and financial position of company with the quick stock figures. Auditors will also
easily able to analyse internal policies of company through this account as this will provide
accuracy in recording daily transactions. With that also basis for reconciling cost and financial
accounts easily get assessed.
CLIENT 6
(a.) Explanation of the term suspense account with its main feature
Suspense account is known as general ledger account in which transactions are
temporarily recorded. This account prepared when ledger account could not determine time of
transaction when it is recorded. The amount of this account will soon get transferred to proper
accounts. It is located in general ledge account and amount which recorded in this account will
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be for temporarily basis only. Entity needs to investigate time being of that particular transaction
and need to post it into correct account. If this account is created during recording of transaction,
then accountant of firm needs to explained its reason so that investigation gets started.
It is important because if transaction is completed and accountant did not know where
this came from then to matched expenses and invoice amount, suspense account is created until
such transaction get identified. Its main features are as follows-
Helps in preparing Trial Balance: when trial balance does not get matched than in such
case difference amount will get recorded in suspense account for short period of time.
Helps in locating the errors: it helps accountant to locate error and find such error which
got occurred in the past.
Helps in judging the nature of errors: through this account accountant will able to
measure and locate error because of which balance it might get committed. Such balance may be
a nature of debit or credit.
Helps in rectifying one sided error: by analysing nature of error, accountant will transfer
such transaction to proper account by which suspense account will automatically get closed with
the rectification of entire one sided error.
Helps in preparation of final accounts: trial balance is known as main account in order to
prepare final accounts of company and it needs to matched with both debit and credit columns.
Therefore, difference amount for short period of time will be transferred in this account by
accountant.
(b.) Drafting a trail balance
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(c.) Trial balance suspense account
(d.) Difference between suspense account and clearing account
Suspense account Clearing account
This account is used when problem is related
to difference of amount in trial balance. It is
used for short term period until problem get
resolved.
This account used to hold transactions for
future so that it get posted accurately and
completely in that time of period.
Amount of this account moved to original
account it has been identified. It is used to
track uncertainties.
Amount of this account also get transferred to
their respective accounts with the identification
of problem.
Figures which included in this account are of
transactional nature.
In this account figures may or may not be
considered of transactional nature.
This account usually prepared for handling
ambiguities.
Clearing account did not prepare to handle
ambiguities of company.
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CONCLUSION
From the above report it can be concluded that financial accounting plays an important
role to attain success of the business. In order to evaluate financial performance of the enterprise,
financial reports help in disclosing information among investors. In this report, explanation is
provided on different regulators of this accounting in which IASB, IFRS and GAAP is explained.
Further, this report also provides information relates to accounting concepts like consistency,
prudence and conservatism so that better understanding get develop in order prepare financial
statements.
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REFERENCES
Books and Journals
Barker, R. and Teixeira, A., 2018. Gaps in the IFRS conceptual framework. Accounting in
Europe. 15(2). pp.153-166.
Benesh, B.K. and Bryant, M.K., 2018. Depreciation Handbook. LexisNexis.
Cascino, S. and Gassen, J., 2015. What drives the comparability effect of mandatory IFRS
adoption?. Review of Accounting Studies. 20(1). pp.242-282.
Del Giudice, V., Manganelli, B. and De Paola, P., 2016, July. Depreciation methods for firm’s
assets. In International Conference on Computational Science and Its Applications (pp.
214-227). Springer. Cham.
Dickinson, V., Wangerin, D.D. and Wild, J.J., 2016. Accounting Rules and Post-Acquisition
Profitability in Business Combinations. Accounting Horizons. 30(4). pp.427-447.
Dutta, S. and Patatoukas, P.N., 2016. Identifying conditional conservatism in financial
accounting data: theory and evidence. The Accounting Review. 92(4). pp.191-216.
Farrell, B., 2016. Depreciation and the Time Value of Money. arXiv preprint arXiv:1605.00080.
Hasan, T., 2019. Conceptual Framework for IFRS Adoption, Audit Quality and Earnings
Management: The Case of Bangladesh. International Business and Accounting Research
Journal. 3(1).
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Law, J. ed., 2016. A dictionary of accounting. Oxford University Press.
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons.
Online
Straight Line Depreciation. 2018. [Online]. Available through
<https://www.accountingtools.com/articles/2017/5/15/straight-line-depreciation>
The purpose of Bank Reconciliation Statements. 2018. [Online]. Available through
<https://www.accountingtools.com/articles/what-is-the-purpose-of-a-bank-
reconciliation.html>
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