Introduction to Financial Accounting

This document provides an introduction to financial accounting, explaining its importance in decision-making. It covers the preparation of accounting records and financial statements for a specific company. It also discusses the reporting of assets and their usefulness. The document includes examples and explanations of various accounting entries and ledger accounts.

INTRODUCTION TO
FINANCIAL
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
1. Accounting records and financial statements for Corr.:.....................................................1
Journal entries:........................................................................................................................1
Ledger accounts......................................................................................................................5
Corr Income Statement for the year ending 30 September 2019...........................................8
Statement of financial position...............................................................................................9
Trial Balance:.......................................................................................................................10
2. Reporting of assets is useful.............................................................................................11
3. Causes of difference in cash accounts and profit.............................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
In accounting term, the method that is used by companies to collect, record and calculate
revenue, expenses and receivables is known as financial accounting (Bushman, 2014). It mainly
includes the formulation of effective financial documents which are used by stakeholders,
suppliers, employees, customer, business owner to make valuable decision. In this report Corr,
sole trader company is selected that help to better understand the concept of financial accounting.
In companies accounting personnels prepares financial statements which includes P&L Account,
balance sheet and trial balance which are ultimately used by management for managerial and
financial decision-making. The whole process of financial accounting begins with journal entries
and books and leaders which end with fictionalisation of balance sheet.
In this report accounting records and financial statements for Corr are being prepared,
reporting of assets is useful for making decision and Causes of holding cash is elaborated.
QUESTION 1
1. Accounting records and financial statements for Corr.:
Journal entries:
Following are key accounting entries for September month's transaction in books of Corr, as
follows:
Sales on credit
S. No. Particulars Debit Credit
1 Mr Otis a/c Dr.
To Sales a/c
15000
15000
2 Mr Jack a/c Dr.
To Sales a/c
35000
35000
3 Mr Joe a/c Dr.
To Sales a/c
50000
50000
4 Mr Sean a/c Dr.
To Sales a/c
10000
10000
5 Mr Kawin a/c Dr. 25000
1

To Sales a/c 25000
Sales on cash
S. No. Particulars Debit Credit
1 Cash a/c Dr.
To Sales a/c
50000
50000
2 Cash a/c Dr.
To Sales a/c
35000
35000
3 Cash a/c Dr.
To Sales a/c
45000
45000
Returns inward
S. No. Particulars Debit Credit
1 Sales Return a/c Dr.
To Mr Kawin a/c
8000
8000
2 Sales Return a/c Dr.
To Mr Joe a/c
15000
15000
Receipts from trade receivables
S. No. Particulars Debit Credit
1 Cash a/c Dr.
To Trade Receivables a/c
15000
15000
2 Cash a/c Dr.
To Trade Receivables a/c
10000
10000
Purchases on credit
S. No. Particulars Debit Credit
1 Purchase a/c Dr.
To Alex Ronald a/c
30000
30000
2 Purchase a/c Dr.
To Adam a/c
10000
10000
2

3 Purchase a/c Dr.
To Michael a/c
25000
25000
4 Purchase a/c Dr.
To William a/c
32000
32000
5 Purchase a/c Dr.
To Nick a/c
40000
40000
Expenses paid for in cash
S. No. Particulars Debit Credit
1 Rent Dr.
To Cash a/c
5000
5000
2 Office Expenses a/c
Dr.
To Cash a/c
7500
7500
3 Electricity expenses a/c Dr.
To Cash a/c
3000
3000
Return Outwards
S. No. Particulars Debit Credit
1 Michael a/c Dr.
To Purchase Return a/c
5000
5000
2 William a/c Dr.
To Purchase Return a/c
15000
15000
Payments to trade payables
S. No. Particulars Debit Credit
1 Trade Payables a/c Dr.
To Cash a/c
6000
6000
2 Trade Payables a/c Dr.
To Cash a/c
4000
4000
Discount received and allowed
3

S. No. Particulars Debit Credit
1 Cash a/c Dr.
Discount Allowed a/c Dr.
To Miss Sophie a/c
25000
5000
30000
2 Miss Jennifer a/c Dr.
To Discount Received a/c
To Cash a/c
40000
4000
36000
Drawing
S. No. Particulars Debit Credit
1 Drawing Dr.
To capital a/c
3000
3000
2 Capital Dr.
To cash a/c
3000
3000
Loan
S. No. Particulars Debit Credit
1 Loan a/c Dr.
To Bank a/c
20000
20000
Purchase of Equipment for £20,000
S. No. Particulars Debit Credit
1 Equipment a/c Dr.
To Bank a/c
20000
20000
Wages paid in cash of £4,000:
S. No. Particulars Debit Credit
1 Wages a/c Dr.
To Cash a/c
4000
4000
Ratification Entry:
S. No. Particulars Debit Credit
4

Electricity Expenses A/c Dr.
To Drawings
1000
1000
Wages accrued:
S. No. Particulars Debit Credit
Wages A/c Dr.
To Wages Outstanding
1000
1000
Prepaid Rent:
S. No. Particulars Debit Credit
Prepaid Rent A/c Dr.
To Cash
2500
2500
Depreciation Entry:
S. No. Particulars Debit Credit
Depreciation A/c Dr.
To Equipment A/c
2000
2000
Allowance for doubtful debts should be 8% of the year end receivables:
S. No. Particulars Debit Credit
Trade receivables A/c Dr.
To Allowance for doubtful debts
(155860 * 8% = 12468.8)
12468.8
12468.8
Ledger accounts
Purchase Account
Date Particular Dr Date Particulars Cr
2018 2018
01/12/01 To Alex Ronald a/c 30000 By balance c/d 137000
02/12/01 To Adam a/c 10000
5

03/12/01 To Michael a/c 25000
04/12/01 To William a/c 32000
05/12/01 To Nick a/c 40000
137000 137000
Sales Account
Date Particular Dr Date Particulars Cr
2018 2018
To Balance c/d 265000 01/12/02 By Otis a/c 15000
02/12/02 By Jack a/c 35000
03/12/02 By Joe a/c 50000
04/12/02 By Sean a/c 10000
05/12/02 By Kawin a/c 25000
06/12/02 By Cash a/c 50000
07/12/02 By Cash a/c 35000
08/12/02 By Cash a/c 45000
265000 265000
Cash a/c
Date Particular Dr Date Particulars Cr
2018 2018
To Sales a/c 50000 By Rent a/c 5000
To Sales a/c 35000 By Electricity a/c 3000
To Sales a/c 45000 By Salaries a/c 50000
To bills Receivable a/c 15000 By Bills payable a/c 15000
To bills Receivable a/c 10000 By Bills payable a/c 20000
To Sophie a/c 30000 By Jennifer a/c 36000
6

To Capital a/c 45000 By balance c/d 101000
230000 230000
Return Outwards a/c
Date Particular Dr Date Particulars Cr
2018 To Balance c/d 20000 2018 By Michael 5000
By William 15000
20000 20000
Return Inwards a/c
Date Particular Dr Date Particulars Cr
To Mr Kawin a/c 8000 By Balance c/d 23000
To Mr Joe a/c 15000
23000 23000
Rent a/c
Date Particular Dr Date Particulars Cr
To Cash a/c 5000 By balance c/d 5000
Office expenses a/c
Date Particular Dr Date Particulars Cr
To Cash a/c 7500 7500
Electricity a/c
Date Particular Dr Date Particulars Cr
To Cash a/c 3000 By balance c/d 3000
Discount Allowed a/c
7

Date Particular Dr Date Particulars Cr
To Sophie a/c 30000 By balance c/d 30000
Discount Received a/c
Date Particular Dr Date Particulars Cr
To balance c/d 40000 By Jennifer a/c 40000
Trade Receivables Account
Particular Dr Particular Dr
To Balance b/d 45860 By Sales Return 23000
To Credit Sales 135000 By Allowance for bad debts 10628.8
By Cash 25000
By Balance C/d 122231.2
180860 180860
Trade Payable
To Purchase Return 20000 By Balance b/d 25900
To Cash 10000
To Balance C/d 130900 By Credit Purchase 135000
Corr Income Statement for the year ending 30 September 2019.
Description Amount in (£)
Sales 542460
(-) Cogs -454590
Gross profit 87870
8

Add: other operating income
Discount received 4000 4000
Less: operating expenses
Rent 39380
Electricity 20100
Allowance for receivables 13628.8
Depreciation of equipment 2000
Discount Allowed 5000
Office Expenses 7500 -87608.8
Net profit 4261.2
Statement of financial position
Financial position statement
Details Amount
Equipment 170000
Add: Addition 20000
Less: Depreciation 36000 154000
Trade Receivables 122231.2
Prepaid Rent 2500
Inventory 62000
Bank 12880
Cash and Cash Equivalent 6550
360161.2
Capital 165000
Add: Net Profit 4261.2
9

Less: Drawings 8000
Add: Rectification in Drawing 1000 178261.2
Outstanding Wages 1000
Trade Payable 130900
Bank Loan 50000
Other
360161.2
Trial Balance:
Trial Balance
Dr. Cr.
Equipment 190000
Trade Receivables 122231.2
Prepaid Rent 2500
Inventory 62000
Bank 12880
Cash 6550
Bank Loan 50000
Trade Payable 130900
Outstanding Wages 1000
Capital 178261.2
Rent 41880
Prepaid Rent 2500
Electricity 20100
10

Depreciation of equipment 36000
Discount Allowed 5000
Office Expenses 7500
Discount Received 4000
Sales Return 23000
Wages 56390
Carriage inwards 1300
Purchases 403300
Outstanding Wages 1000
Sales 542460
Purchase Return 20000
Suspense Account 6490
963621.2 963621.2
2. Reporting of assets is useful.
In business firm the sources that are counted in economic worth and can be used to pay
current and upcoming obligation so that revenue can be generated is defined as assets (Bevis,
2013). The accounting concept related to assets states that they are in form of cash to value of
building that are recorded on the balance sheet of company within an accounting period. There
are different types of assets which are classified below:
Tangible assets: These are mainly physical items which are recorded in balance sheet
and it add value to to total worth of company. For example: cash, land, inventory, bonds, stock
etc. which are depreciate at a specific time to distribute cost for more number of years.
Intangible assets: These kind of assets do not have any kind of physical appearance and
are not easily converted into cash but add value to the total volume of company in an accounting
year (Modell, 2014). For example, patents, trademark, customer list, goodwill etc. which are
amortize on particular time so that cost can be spread.
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Current assets: These items add value to the business and are easily gets converted into
cash whenever the company needed to meet any kind of obligation. These are mainly consider as
shot term investment which can be used to meet the day to day business operations (Jansson,
Jönsson and von Koch, 2012).
Fixed assets: All the long term assets which add value to the business for more than one
year are known as fixed assets. As they are depreciated annually so can not be converted into
cash before than one year (Socea, 2012).
The manager of Corr are confused with the concept of treatment of assets, therefore detail
explanation is discussed below that help to understand the reporting of assets.
In accounting the value of asset do not remain the same because the amount of
deprecation impact the fair market value. The market value of assets of corr can be higher, equal
or even lower as compared to the original purchase price so that decision are made to determine
the total value of company (Weil, Schipper and Francis, 2013). To ascertain the worth of assets
manager conduct the analyse in which information is collected and is compared to the value of
assets available in market.
Importance of Reporting of assets:
The accurate and updated financial strength of company is defined by the number of
assets shown on the balance sheet within a year. It is necessary for the manager of Corr to record
assets always in descending order according to the the intensity of being liquidate. Through
subtracting existing debts from the assets of the company to see the current property the business
actually holds, a shareholder can determine the approximate valuation of a corporation. It is also
help to reduce any kind of risk within business of Corr for example, maintaining manufacturing
equipment will actually protect from health and safety threats to employees, reduce wastage and
overcome the missed working hours (Glover, 2014).
3. Causes of difference in cash accounts and profit.
Profit can be seen on income statement which is equivalent to income minus associated
costs while earning certain money (Liu, Yao and Yao, 2012). It tests the company's continuing
stability for that specific time period. On the other side the cash flow is helpful in determining
the actual ability of company to write off its current liabilities and bills. The actual balance of
cash for that period is determined by subtracting the amount if cash paid from the cash received
from different business operations (Mancini, Vaassen and Dameri, 2013). In case if company
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cash flow is negative than firm have spend more than its earning which is needed to be overcome
in future time period. It is observed that cash at the end of accounting year is not equivalent to
the profit for that period because of accrual basis of accounting. As it defines that revenues are
basically recorded on income statements when they actually gets received, that might happen
before cash is eared for perspective customer. Similarly on the other side, all the expenses are
recorded into the income statements within the time frame (Reasons of difference in cash and
profit, 2019). These expenses are actually relevant to the revenues happen or gets expired at the
time which is totally different from the period of making payment.
In Corr, in cash flow statement it might include a positive cash flow without any gain if
the funds come through sources in fact of income, like when the investor places his own money
or taking out any mortgage. Such kinds of operations are not revenue, but responsibility or equity
and investment transactions appearing on the balance sheet (McCarthy Shelmon and Mattie,
2012). On the other side there can be a negative cash flow despite company gaining a huge
amount of income, in case when employees take money out to pay daily expenses or using to
make appropriate and suitable investments. The balance sheet records these certain kinds of
cash-out payments transaction but not in the declaration of profit and loss statements. In simple
words, the accrual accounting stated that cash receipts and cash payment are not considered at
the time of reposting of expenses and revenue. As it mainly focuses on what actual revenue were
earned by company and total expenses incurred to run different business operation. The accrual
accounting framework thus gives a much more accurate representation of the performance of a
business through a reporting era and a more reliable description of the assets and liabilities of a
position at the end of an accounting period (McLaney and Atrill, 2014).
CONCLUSION
In the conclusion of this report, it has been founded that principle of financial accounting
defines that it very much crucial for an organisation to record and maintain valid financial record
that ease in making decision for future improvement. Preparing of accounting record and annual
financial statements help the stakeholders to determine the exact and detail information about
company during a year. Reporting of assets is helpful for management to identity the ability of
company to pay its liabilities and it also support external parties to determine the financial
strength in that year. According to the accrual accounting method (or accrual accounting
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method), income is reflected on the statement of income once it is earned. If money is earned but
income is not obtained, the assets receivable account will be reported.
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REFERENCES
Books and Journals
Bevis, H. W., 2013. Corporate Financial Reporting in a Competitive Economy (RLE
Accounting). Routledge.
Bushman, R. M., 2014. Thoughts on financial accounting and the banking industry. Journal of
Accounting and Economics. 58(2-3). pp.384-395.
Glover, J., 2014. Have academic accountants and financial accounting standard setters traded
places?. Accounting, Economics and Law Account. Econ. Law. 4(1). pp.17-26.
Jansson, A., Jönsson, M. and von Koch, C., 2012. Has the introduction of IFRS improved
accounting quality? A comparative study of five countries. In 35th Annual Congress of
the European Accounting Association, Ljubljana, May 9-11, 2012.
Liu, C., Yao, L. J. and Yao, M. Y., 2012. Value relevance change under international accounting
standards: an Empirical Study of Peru. Review of Pacific Basin Financial Markets and
Policies. 15(02). p.1150008.
Mancini, D., Vaassen, E. H. and Dameri, R. P., 2013. Accounting information systems for
decision making.
McCarthy, J. H., Shelmon, N. E. and Mattie, J. A., 2012. Financial and accounting guide for
not-for-profit organizations(Vol. 6). John Wiley & Sons.
McLaney, E. J. and Atrill, P., 2014. Accounting and finance: an introduction. Pearson.
Modell, S., 2014. The societal relevance of management accounting: an introduction to the
special issue. Accounting and Business Research. 44(2). pp.83-103.
Socea, A. D., 2012. Managerial decision-making and financial accounting information.
Procedia-Social and Behavioral Sciences. 58. pp.47-55.
Weil, R. L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Online
Reasons of difference in cash and profit. 2019. [Online] Available Through:
<https://www.fundera.com/blog/cash-flow-vs-profit>.
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