Introduction to Financial Accounting

This document provides an introduction to financial accounting, covering topics such as trading accounts, profit and loss accounts, and statement of position. It also discusses the main features of financial statements and their importance in decision making. Additionally, it includes examples and calculations for profitability ratios and liquidity ratios.

Introduction to Financial
Accounting

TABLE OF CONTENTS
Question 1a)...............................................................................................................................3
Question 1b)...............................................................................................................................4
Question 2 a)..............................................................................................................................6
Question 2 b)..............................................................................................................................8
Question 2 c)............................................................................................................................10
REFERENCES.........................................................................................................................14

Question 1a)
(a)
Trading account for the year ended 30 April 2019
Particulars Amount in £ Amount in £
Sales 30000
Opening stock 4700
Purchases 15700
20400
Less: Closing stock 4400
Cost of goods sold 16000
Gross profit 14000
(b)
Profit and Loss Account for the year ended 30 April 2019
Particulars Amount in £ Amount in £
Gross profit 14000
Less: expenses:
Shop wages* 4420
Light and heat 260
Rent 4500
Insurance 120 9300
Net profit 4700
* Shop wages could also be shown as a trading account expense.
(c)
Statement of Position as at 30 April 2019
Particulars Amount in £ Amount in £
Fixed Assets
Shop fittings 13000
Current Assets
Stock 4400
Debtors 120
Bank 610
Cash 100 5230
Total assets 18230

Capital
Opening capital 15000
Add: profit 4700
Less: Drawings 3500 16200
Current Liabilities
Creditors 2030
Total liabilities 18230
Question 1b)
There are six main features of information provided by the financial statements are stated
below.
Relevance: This feature represents how much useful and supportive the information
for the purpose of taking important business decisions. For making the accounting data to be
relevant, it must have:
Confirmation value – Provides information in respect to the past occasions
Predictive value – Provides predictive value in regards to conceivable future events.
Accordingly, accounting information is applicable on the off chance that it can give
supportive data about past events and help in foreseeing future events or in making a move to
manage conceivable future events (Pirayesh, Forouzandeh and Louie, 2018). For instance, an
organization encountering a solid quarter and introducing these improved outcomes to the
lenders or investors is very relevant for the banks or investors in the decision making process
to stretch out or broaden credit accessible to the organization.
Representational Faithfulness: This is another feature of information which is also
called reliability, is the degree to which data precisely mirrors an organization's assets,
obligations, exchanges, and so on. To help, think about a pictorial portrayal of something, all
things considered – how precisely does the image speak to what you find, in actuality? For
bookkeeping information to have authentic faithfulness, it must be:
 Complete – Financial statements ought not prohibit any transaction.
 Neutral – how much data is liberated from biasness. It is important to note that there
are subjectivity and estimation engaged with fiscal summaries, in this way data can't
be truly "neutral." However, in the event that an organization surveyed 1,000

bookkeepers and took the average of their answers, that would be viewed as unbiased
and liberated from errors.
 Free from mistake – the level to which how much data is free from blunders or errors.
Verifiability: It is the degree to which data is reproducible with the given similar
information and the assumptions. For instance, if an organization possesses hardware worth
$1,000 and told a bookkeeper the buying cost, salvage value, method of depreciation, and life
of the asset, the accountant ought to have the option to imitate a similar outcome. In the event
that they can't, the data is considered not unquestionable.
Timeliness: It refers to how rapidly the data is accessible to clients of accounting
information (Floştoiu, 2019). The less timely (in this way bringing about an older data), the
less valuable data is for purpose of decision making. Timeliness matters for bookkeeping data
since it contends with other data. For instance, if an organization gives its fiscal reports a year
after its bookkeeping period, clients of budget summaries would think that it’s hard to decide
how well the organization is getting along in the present.
Understandability: This feature refers to as how much data is effectively comprehended.
In the present society, corporate yearly reports are more than 100 pages, with noteworthy
subjective data. Data that is understandable to the normal client of financial reports is
exceptionally desirable. It is regular for inadequately performing organizations to utilize a
great deal of language and troublesome phrasing in its financial report in order to trying to
mask the underperformance.
Comparability: It is the degree to how much accounting guidelines and approaches are
reliably applied starting with one period then onto the next. Annual summaries that are
comparable, with consistent bookkeeping guidelines and approaches applied all through each
bookkeeping period, empower clients to reach insightful conclusion about the patterns and
execution of the organization over the period of time. Furthermore, comparability
additionally alludes to the ability to handily compare and contrast an organization's fiscal
summaries with those of different organizations within the same industry.
Benefits and importance of features of information to its users
These features of the accounting information are very crucial as it make it very easy
for the management along with the investors in effectively utilizing the organization’s
financial information provided in the reports in order to make an informed and better

decisions. For making the right decision, it is very important to comply with the above stated
characteristics of information which leads to true and fair presentation of the financial
information of the company leading to meaningful decision making.
Question 2 a)
Gross profit margin
It is the profitability ratio which provides the GP generated by the company on
account of its sales in percentage terms. The GP margin of the Danaye Ltd is very good. It
has shown an increase from the year 2 to year 1 which means that there is an increase in the
sales and a reduction in the cost of sales which has led to greater gross profit percentage in
respect to sales. This indicates that the company is working effectively in managing its cost
of sales and the revenue.
Particulars Formula Year 1 Year 2
Cost of Sales 3020 4650
Sales 4940 6850
Gross profit 1920 2200
Gross Profit Margin Total Sales – COGS/Total Sales
38.87
%
32.12
%
Return on capital employed
ROCE represent how efficiently the company is making use of its capital employed in
earning higher profits. It is always favourable to have higher ratio which indicates growth. It
can be seen that there is an increase in ROCE of the company in Year 1 as compared to year
2. This increase is because the company is able to make use of its capital employed more
efficiently and effectively in respect to generating profits (Kimmel, Weygandt and Kieso,
2018). The company has shown a rise in profits even though the capital employed is reduced
in contrast to the previous year. It is always better to have higher ratio.
Particulars Formula Year 1 Year 2
Employed Capital Total assets - current liabilities 3810 4760
Net operating profit 460 350
Return on capital
employed
Net operating profit/Employed
Capital
12.07
% 7.35%
Current ratio

The current ratio is very useful in depicting the liquidity position of the business
entity. It is helpful in determining whether the company is in the position to pay off its
current obligation with the current assets available with it. The current ratio of Danaye Ltd is
very sound and good which is higher than 3 in year 1 as compared to year 2. This shows that
the company can very easily meet its short term obligations with its currently available short
term assets without any need of taking any additional funds. In the year 1 it can be seen that
there is a decrease in the current assets of the company but along with that there is a reduction
in the current liability which might be because of the reason that the Danaye Ltd has used it
in paying off few of its debts.
Particulars Formula Year 1 Year 2
Current assets 1770 2390
Current liability 560 840
Current ratio Current assets / current liabilities 3.16 2.85
Trade payable period in days
It is used to measure how much time it will be taken by the organization in regard to
making payment to its trade payables or the suppliers (Avakumovic and Avakumovic, 2016).
If the days tends to increases over from one period to another indicates that the company is
making payment very slowly or taking long time which might be because of the bad business
conditions. In case of Danaye Ltd, the trade payable days does not depict any major change
as it is just a difference of 1 day. The company is making payment quickly in comparison to
the days in which it is receiving payment from its debtors. Thus, the overall performance of
the company is good.
Particulars Formula Year 1 Year 2
Trade payables 560 840
Purchase 3320 4870
Creditors payment period Trade payables / purchase *365 62 days 63 days
Trade receivable days
It represents the amount of time within which the business entity is able to receive the
due amount from its trade receivables. It also determines the effectiveness of the organization
in terms of its credit policy and collection team for recovering the due amount from the
customers. Lower the ratio better for the company as the high ratio indicates that the

company is having trouble in amount collection. In Danaye Ltd, the trade receivable days is
nearly same as payable days which means that as the company receives the amount from its
debtors, it makes payment to its creditors which is very good. It can be interpreted that the
company is efficiently and timey managing its receivables which results into avoiding the
situation of bad debts.
Particulars Formula Year 1 Year 2
Trade receivables 820 1230
Sales 4940 6850
Debtors collection period Trade receivables / Sales *365
60.59
days
65.54
days
Question 2 b)
(a)
Bank Account
Date Particulars Amount in £ Date Particulars Amount in £
01-Mar Capital 500 01-Mar Purchases 150
10-Mar Sales 290 05-Mar Rent paid 50
27-Mar Sales 240 22-Mar Advertising 25
26-Mar Drawings 100
31-Mar Balance c/d 705
1030 1030
01-Apr Balance b/d 705 02-Apr Purchases 100
14-Apr L Lock 450 05-Apr Rent paid 50
16-Apr Sales 330 23-Apr Drawings 75
26-Apr Sales 180 29-Apr Advertising 30
30-Apr Balance c/d 1410
1665 1665
01-May Balance b/d 1410
(b)
Capital Account
Date Particulars Amount in £ Date Particulars Amount in £
30-Apr Balance c/d 500 01-Mar Bank 500
01-May Balance b/d 500

Purchases Account
Date Particulars Amount in £ Date Particulars Amount in £
01-Mar Bank 150 30-Apr Balance c/d 250
02-Apr Bank 100
250 250
Rent Paid Account
Date Particulars Amount in £ Date Particulars Amount in £
05-Mar Bank 50 30-Apr Balance c/d 100
05-Apr Bank 50
100 100
Sales Account
Date Particulars Amount in £ Date Particulars Amount in £
30-Apr Balance c/d 1040 10-Mar Bank 290
27-Mar Bank 240
16-Mar Bank 330
26-Mar Bank 180
1040 1040
01-May Balance b/d 1040
Advertising Account
Date Particulars Amount in £ Date Particulars Amount in £
22-Mar Bank 25 30-Apr Balance c/d 55
29-Apr Bank 30
55 55
Drawings Account
Date Particulars Amount in £ Date Particulars Amount in £
26-Mar Bank 100 30-Apr Balance c/d 175
23-Apr Bank 75
175 175
01-May Balance b/d 175
L Lock: Loan Account
Date Particulars Amount in £ Date Particulars Amount in £
30-Apr Balance c/d 450 14-Apr Bank 450
450 450

01-May Balance b/d 450
(c)
Trial balance of Gilberto Wahabo as at 31 April 2018
Particulars Debit Credit
Bank 1410
Capital 500
Purchases 250
Rent paid 100
Sales 1040
Advertising 55
Drawings 175
L Lock: loan 450
Total 1990 1990
Question 2 c)
(i)
Provision for depreciation on machinery account
Date
Particular
s
Amoun
t Date Particulars
Amoun
t
31.12.201
7 Balance c/d 2000
31.12.201
7
Depreciation expense (WN
1) 2000
2000 2000
31.12.201
8 Balance c/d 4000
31.12.201
8 Balance b/f 2000
31.12.201
8 Depreciation expense 2000
4000 4000
31.12.201
9 Balance c/d 6000
31.12.201
9 Balance b/f 4000
31.12.201
9 Depreciation expense 2000
6000 6000
WN 1 Depreciation under straight line method
Particulars
Amount
in £

Cost of machine as on 1 January
2017 16000
Depreciation for each year
(16000*12.5%) 2000
Closing balance as at 31 December
2017 14000
Opening balance as on 1 January
2018 14000
Depreciation for each year 2000
(16000*12.5%)
Closing balance as at 31 December
2018 12000
Opening balance as on 1 January
2019 12000
Depreciation for each year 2000
(16000*12.5%)
Closing balance as at 31 December
2019 10000
(ii)
Provision for depreciation on machinery account
Date
Particular
s
Amoun
t Date Particulars
Amoun
t
31.12.201
7 Balance c/d 2400
31.12.201
7
Depreciation expense (WN
2) 2400
2400 2400
31.12.201
8 Balance c/d 4440
31.12.201
8 Balance b/f 2400
31.12.201
8 Depreciation expense 2040
4440 4440
31.12.201
9 Balance c/d 6174
31.12.201
9 Balance b/f 4440
31.12.201
9 Depreciation expense 1734
6174 6174
Depreciation under reducing balance method
Particulars
Amount
in £

Cost of machine as on 1 January
2017 16000
Depreciation for each year
(16000*15%) 2400
Closing balance as at 31 December
2017 13600
Opening balance as on 1 January
2018 13600
Depreciation for each year 2040
(13600*15%)
Closing balance as at 31 December
2018 11560
Opening balance as on 1 January
2019 11560
Depreciation for each year 1734
(11560*15%)
Closing balance as at 31 December
2019 9826
(iii)
Going Concern Concept
Otherwise called the continuity concept, the going concern basically expresses that a
business organization will proceed to exist and stay in business in the unforeseeable future.
Picture a business that stops to exist anymore. At the point when this occurs, the business
needs to exchange or auction the resources for take care of the liabilities first. At that point
the business circulates any outstanding incentive to the equity holders (Kumor and
Poniatowska, 2017). This is then a proportion of the current worth. Be that as it may, in the
event that the business keeps on developing and stay in business, at that point the business
may not be able to measure the actual worth and it turns into a going concern. It is considered
that there is no intention of the business to shut down or cease its business in the future and if
the situation arises of the same, then it has to disclose it in the financial reports.
Materiality
The materiality concept basically expresses that an organization should carefully state
records and exchanges that are huge to the association's activities. A record or exchange is
material if it's consideration in the financial summaries were to alter the final decision of the
users. Irrelevant things are insignificant (Beske, Haustein and Lorson, 2019). They are

likewise not required to be carefully or explicitly expressed on the grounds that the
incorporation or avoidance of them would not change a client's supposition. It ought to be
noticed that materiality doesn't imply that an organization doesn't need to represent each
exchange. Rather, it expresses that the exactness of these exchanges isn't as significant.
Business entity concept
The business entity concept (otherwise called separate entity or the economic entity
concept) expresses that the exchanges identified with a business must be recorded
independently from those of its proprietors and some other business (Warren, Jonick and
Schneider, 2020). At the end of the day, while recording exchanges in a business, we
consider just those events that influence that specific business; the events that influence any
other person other than the business entity are not applicable and are in this manner excluded
from the bookkeeping records of the business. This idea is significant provided that the
transactions of a business are stirred up with that of its proprietors or different organizations,
the bookkeeping data would lose its ease of use.

REFERENCES
Books and Journals
Avakumovic, J. and Avakumovic, J., 2016. Method Financial Analysis and Impact on the
Quality of Decision Making. EuroEconomica. 35(2).
Beske, F., Haustein, E. and Lorson, P. C., 2019. Materiality analysis in sustainability and
integrated reports. Sustainability Accounting, Management and Policy Journal.
Floştoiu, S., 2019, June. The Role and Place of Accounting Information in the Decision-
Making System. In International conference KNOWLEDGE-BASED
ORGANIZATION (Vol. 25, No. 2, pp. 46-51). Sciendo.
Kimmel, P. D., Weygandt, J. J. and Kieso, D. E., 2018. Financial accounting: Tools for
business decision making. John Wiley & Sons.
Kumor, I. and Poniatowska, L., 2017. The going-concern assumption in the assessment of
management and auditors. Economic and Social Development: Book of Proceedings.
pp.804-812.
Pirayesh, R., Forouzandeh, M. and Louie, S. I., 2018. Examining the effect of computerized
accounting information system on managers' decision making process. Revista
Publicando. 5(14 (1)). pp.68-82.
Warren, C., Jonick, C. and Schneider, J., 2020. Accounting. Cengage Learning.