Introduction to Financial Accounting

This document provides an introduction to financial accounting, covering topics such as the preparation of trading and profit and loss accounts, drafting financial statements, and the evaluation of financial information. It also explores key financial ratios and their interpretation, as well as the significance of accounting concepts. Suitable for students studying financial accounting.

Introduction to
Financial Accounting

Table of Contents
Q1a...................................................................................................................................................3
a. Prepare Trading account..........................................................................................................3
b. Prepare profit and loss account................................................................................................3
c. Draft statement of financial position........................................................................................3
Q1b. Evaluate six of main features of information for users of financial statements. Explain why
they are important and the benefits they will bring to the users......................................................4
Q2a...................................................................................................................................................7
Gross profit Margin.....................................................................................................................7
Return on capital employed.........................................................................................................7
Current ratio.................................................................................................................................8
Trade payables period in days.....................................................................................................8
Trade receivable in days..............................................................................................................9
Q2b..................................................................................................................................................9
a. Bank account............................................................................................................................9
b. All other accounts..................................................................................................................10
c. Trial balance...........................................................................................................................11
Q2c.................................................................................................................................................11
i. Straight-line method at 12.5% per annum..............................................................................11
ii. Reducing balance method at 15% per annum.......................................................................11
iii. Explain the meaning and significance of the following accounting concepts.....................12
References......................................................................................................................................15

Q1a.
a. Prepare Trading account
Bob's trading account
(for the year ended 30th April, 2019
Particulars Amount (£) Amount (£)
Sales £30,000
Less: COGS
Opening stock £4,700
Purchases £15,700
Light and heat £260
Less: Closing stock £4,400 £16,260
Gross profit £13,740
b. Prepare profit and loss account
Bob's Profit and loss account
(for the year ended 30th April, 2019)
Particulars Amount (£) Amount (£)
Gross Profit £13,740
Less: Operating and
administrative
expenses
Shop wages £4,420
Rent £4,500
Insurance £120 £9,040
Net profit £4,700
c. Draft statement of financial position
Balance Sheet
as on 30th April, 2019
ASSETS Amount (£) Amount (£)
Fixed Assets:
Shop fittings 13000 13000
Current Assets:
Inventories 4400
Bank 610
Cash 100

Debtors 120 5230
Total Assets 18230
Equity and Liabilities Amount (£) Amount (£)
Liabilities:
Creditors 2030 2030
Equities:
Capital 15000
Less: Drawings 3500
Retained earnings 4700 16200
Total Liabilities 18230
Q1b. Evaluate six of main features of information for users of financial
statements. Explain why they are important and the benefits they will
bring to the users.
1. Relevance:
Relevance is the concept in which data generated by an accounting framework should
affect the viability of someone analyzing the data. The idea can be about the content of the data
and its practicality, and both can have a dynamic impact. In particular, relevant data provided to
users is considered to be faster. This effect can be simply a confirmation of a choice made by the
spy (for example, holding an interest in a group) or an alternative (such as to sell an investment
in a business). Here are some examples of the importance of using relevance concept:
 A company controller chooses to accelerate the month-end close, with the aim of being
able to provide budget minutes in three days, as opposed to the usual three-week average.
This improves the speed at which different collections can be found in and out of tax
summaries, improving the quality of the data they receive.
 The industrial engineering manager is considering installing another higher level machine
in the fabrication area. If the industrial sector provides another data showing a decrease in
contracts, this is of considerable significance for the choice of the design manager, as it
may not again be important to get such a high-end machine (Kimmel, Weygandt, Kieso
and Trenholm , 2016).

2. Reliability:
The reliability includes ensuring that all exchanges, opportunities, and transactions
included in balance sheets are reliable. Information is considered to be an opportunity that cannot
be analyzed, verified, and tested with targeted tests.
3. Understandability:
Understandability is the concept that balance sheet data should be included is
understandable with the aim that a user can appreciate them without too much difficulty. This
idea embraces meaningful business intelligence from the consumer, but does not require
advanced commercial intelligence to maximize value. Adhering to a reasonable level of
understanding would prevent a society from deliberately tampering with money-related data in
order to remove messengers from their balance sheets. Early comments do not mean that baffling
data should be excluded from balance sheets. For example, the ideas identified by annuities and
subsidiaries are difficult to understand. In these cases, use the notion of comprehension for as
long as is expected, but at the same time present the necessary data.
4. Comparability:
Financial statements of one accounting period must be substantially comparable to another
company's accounting information so that customers can make important decisions about money
presentation and content placement patterns over time. The appearance of tax reports on different
accounting periods can be ascertained using comparative accounting methods over time
(Kimmel, Weygandt, Kieso and Trenholm, 2016).
A change in accounting strategies may be required for an element that improves the
dependency and adequacy of tax summaries. A change in accounting strategy can also be
brought about by changes in accounting practices. In these terms, the nature and conditions that
determine the change must be disclosed in the financial statements.
5. Consistency:
In accounting, consistency requires that organization tax reports follow accounting
standards, strategies, practices and procedures, starting with one accounting period and then the

next. This allows balance sheet users to make important reviews between years (Kimmel,
Weygandt, Kieso, and Trenholm, 2016).
Consistency allows an organization to implement a preferred accounting method.
However, the change and its impact must be demonstrated to support users of tax summaries.
6. Neutrality:
It implies that fiscal reports must be free from errors or from other biases. Budget reports can't be
set up with the reason to impact certain choices, for example they may be nonpartisan. Clients of
the bookkeeping information ought to have the capacity or plausibility to settle on their own
choices dependent on that data.
Importance of accounting informations:
1. Accounting data is important for evaluating the application of various businesses. Despite
the fact that expense reports are the accounting information tool used to evaluate
businesses, business owners can examine this information more closely as they evaluate
businesses. Respond in cash by using accounting information with explanations of
charges and dividing it into guidance signals.
2. Business owners regularly use accounting information to do money-related planning for
their associations. Information on tax evasion verification provides entrepreneurs with a
top-down analysis of how their associations have spent money on specific business
capabilities. Entrepreneurs often take this accounting information and pass the future
through projects to secure operators money for their associations. These money-related
plans can also be modified by relying on standard accounting information to ensure that a
business owner doesn't stop spending on the underlying assets.
3. Accounting information is commonly used to determine business preferences. To the
detriment of executives, the importance of finance and accounting gives the industry an
important focus. Other options may include the growth of a conventional facility, the use
of various financial resources, the purchase of new equipment or workplaces, compliance
with future agreements or entering into experimentation with new business openings.

4. Foreign exchange brokers often use accounting information to draw theoretical
conclusions. Banks, loan experts, financial analysts, or private theorists often break down
the collection of accounting information to determine budget quality and operating profit.
This suggests that an autonomous group is a theoretical choice (Yu, Lin and Tang, 2018).
Benefits of accounting information:
1. Increased automation - more consistent output and fewer resources (people) needs
2. Better information - this is important for strategic decision-making
3. Faster turnaround times - this is important for compliance filing as well as
management reporting. For the latter, stale data is not helpful in making strategic
decisions (Kolitz, 2016).
4. Connectivity & flexibility - this allows for increased automation, greater flexibility in
data gathering and reporting and the ability to connect financial and non-financial data
(Kolitz, 2016).
Q2a.
Gross profit Margin
Gross profit margin
Year 1 Year 2
Gross profit £1,920 £2,200
Net Sales £4,940 £6,850
Gross profit margin (a/b)
38.866
%
32.117
%
Interpretation: The above calculation of gross profit margin for two consecutive years shows
that in Year 1 company has records more gross profit margin compares to second year and hence
this indicates poor performance records by the company in Year 2 (Dauderies and Annand,
2019).
Return on capital employed
Return on capital employed
Year 1 Year 2
Operating profit £460 £350

Capital employed:
Total assets £4,370 £5,600
Less: Current liabilities £560 £840
£3,810 £4,760
ROCE (a/b)
12.073
% 7.353%
Interpretation: The above result shows that like gross profit margin; ROCE has shown poor
performance in year 2 as compared to year 1. The reason behind this noticed is less operating
income and increased capital employed in year 2 (Dauderies and Annand, 2019).
Current ratio
Current ratio
Year 1 Year 2
Current assets 1770 2390
Current liabilities 560 840
Current ratio (a/b)
3.16071
4
2.84523
8
Interpretation: In both years, current ratio is higher than ideal ratio which is 2:1; this indicates
inefficiency of the company to utilize its current assets for earning returns. But the comparison
shows that year 2 is near to ideal ratio and hence shows good performance in terms of current
ratio (Dauderies and Annand, 2019).
Trade payables period in days
Trade payable
Cost of sales ×365
Year 1:
560
3020 ×365=67.68∨68 days
Year 2:
840
4650 × 365=65.93∨66 days
Interpretation: Year 1 has more trade payable period as compared to year 2 and hence shows bas
performance by the company in current year (Dauderies and Annand, 2019).

Trade receivable in days
Trade receivables
Credit sales ×365
Year 1:
820
4940 × 365=60.58∨61 days
Year 2:
1230
6850 ×365=65.54∨66 days
Interpretation: This is the average period for a company to get their payment back. The key is to
get the exchange at the earliest opportunity to eliminate the shortage of working capital. After
that, in year 1 the group gets its assertion in 61 days; in year 2 it takes 66 days to get the full
amount back to work. In this sense in year 1; business is good compared to year 2 (Ainsworth
and Deines, 2019).
Q2b.
a. Bank account
Bank Account (March)
Particulars
£
(Dr.) Particulars
£
(Cr.)
To Capital a/c 500 By Purchases 150
To business takings 290 By rent 50
To business takings 240 By advertisement 25
By drawings 100
By Balance c/d 705
1030 1030
Bank Account (April)
Particulars
£
(Dr.) Particulars
£
(Cr.)
To balance b/d 705 By Purchases 100
To L Lock 450 By rent 50
To business takings 330 By drawings 75
To business takings 180 By advertisement 30
By Balance c/d 1410
1665 1665

b. All other accounts
Purchase a/c
Particulars £ (Dr.) Particulars £ (Cr.)
To bank a/c 150
To bank a/c 100 By balance c/d 250
250 250
Rent a/c
Particulars £ (Dr.) Particulars £ (Cr.)
To bank a/c 50
To bank a/c 50 By balance c/d 100
100 100
L Lock a/c
Particulars £ (Dr.) Particulars £ (Cr.)
To balance c/d 450 By bank a/c 450
450 450
Advertisement a/c
Particulars £ (Dr.) Particulars £ (Cr.)
To bank a/c 25
To bank a/c 30 By balance c/d 55
55 55
Drawings a/c
Particulars £ (Dr.) Particulars £ (Cr.)
To Bank a/c 100
To Bank a/c 75 By balance c/d 175
175 175
Business takings
Particulars £ (Dr.) Particulars £ (Cr.)
By bank a/c 290
By bank a/c 240
By bank a/c 330
To balance c/d 1040 By bank a/c 180
1040 1040
c. Trial balance
Trial Balance as at 30 April, 2018

Particulars Dr. Cr.
Bank £1,410
Purchases £250
Rent £100
Capital a/c £500
L Lock £450
Advertisement £55
Drawings £175
Business takings £1,040
£1,990 £1,990
Q2c.
i. Straight-line method at 12.5% per annum
Accumulated Depreciation (Straight line @ 12.5%)
Date Particulars Dr. (£) Date Particulars Cr. (£)
2017 Bal c/d 2000 2017 Dep. Expense 2000
2000 2000
2018 Bal c/d 4000 2018 Bal b/d 2000
Dep. Expense 2000
4000 4000
2019 Bal c/d 6000 2019 Bal b/d 4000
Dep. Expense 2000
6000 6000
ii. Reducing balance method at 15% per annum
Accumulated depreciation (Reducing balance method @ 15%)
Date Particulars Dr. (£) Date Particulars Cr. (£)
2017 Bal c/d 2400 2017 Dep. Expense 2400
2400 2400
2018 Bal c/d 4440 2018 Bal b/d 2400
Dep. Expense 2040
4440 4440
2019 Bal c/d 6174 2019 Bal b/d 4440
Dep. Expense 1734
6174 6174

iii. Explain the meaning and significance of the following accounting concepts
Going Concern
Meaning:
The going concern concept of accounting suggests that the content of the business will continue
with its activities later and will not sell or discontinue activity as a result of any explanation. An
organization works if there is no evidence to accept that it will stop or must stop its activity in
the future (Horngren, Sundem, Elliott & Philbrick, 2002).
Significance:
Going concern is an important part of reasonable accounting rules. Without it, societies
would not be able to control accrued or prepaid expenses.
A model that shows the direct use of business in progress is the estimate of the reduction in
government support. This start-up is based on the prevailing advantage, rather than the
conventional market signal. The associations expect that they will continue to work indefinitely
and that their benefits will be used in the industry until they are completely rejected.
The accounting guidance serves a very useful purpose in regulating how associations carry
out their budgetary activities. It is important that all associations screen their own expense
reports and ensure that they are prepared in a competent and appropriate manner (Horngren,
Sundem, Elliott & Philbrick, 2002).
Materiality
Meaning:
In accounting, materiality refers to the effect of excluding or misinforming data in an
organization's financial statements summaries on the customer of such announcements. At the
point where it is unlikely that the clients of the financial statements have changed their actions on
the off chance that the data had not been excluded or misused, at that point the something is seen
as material. Since clients would not change their actions, the ban or misquote should be
meaningless at that time (Horngren, Sundem, Elliott & Philbrick, 2002).
Significance:

Materiality is an idea in accounting that states that the organization can withhold some
information that will not have a significant impact on the industry. This also means that an
organization has to keep various informations in mind for their essential costs / costs. This
important factor is understandable from the customer's point of view of the costs involved.
Therefore, if information management is critical enough to change a company's messaging
valuation, the information must be accessible in expense reports. Also, if the information is not
satisfied enough to change a customer's view or decision, the information is not important and
starts now and in the future should not be linked to equality reports (Horngren, Sundem, Elliott
and Philbrick, 2002).
Business entity concept
Meaning:
The concept of the business entity suggests that the business is different from the business
owners. In this way, the accounting records for even the simplest business, the sole broker, must
be kept separate from the individual businesses of the owner or owners (Horngren, Sundem,
Elliott & Philbrick, 2002).
That way, any personal expenses incurred by business owners are not reflected in the
item's payment statement. Similarly, if the costs of the material close to home are offset by the
benefits of the material, one withdrawal is considered to be a cash withdrawal.
The business entity concept further clarifies why an owner’s value manifests itself on the
risk side of a cash register (e.g. on the credit side). The capital that one merchant offers to his
business, for example, speaks of a kind of risk (called value) of the `` business '' that is payable to
its owner, which is why it is introduced on the credit side of disc.
Significance:
1- The business entity concept is significant to independently measure the presentation of a
particular business in terms of profits and revenues and so on.
2- Helps to assessing each company's financial position independently on a specific date.

3- It is difficult and impossible to review business records by chance not to be confused with
records of different products / people.
4- The idea ensures that all company materials are uploaded independently.
5- The industrial product idea work is widespread among sector associations. Unless an
organization overlooks this idea, it would have no choice but to compare its budget
presentation with that of other industry players. (Horngren, Sundem, Elliott and Philbrick,
2002).

References
Ainsworth, P. and Deines, D., 2019. Introduction to accounting: An integrated approach. John
Wiley & Sons.
Dauderies, H. and Annand, D., 2019. Introduction to financial accounting. Lyryx.
Horngren, C.T. and Sundem, G.L., 1990. Introduction to financial accounting (Vol. 1). Prentice
Hall.
Horngren, C.T., Sundem, G.L., Elliott, J.A. and Philbrick, D.R., 2002. Introduction to financial
accounting (Vol. 8). Prentice Hall.
Kimmel, P.D., Weygandt, J.J., Kieso, D.E. and Trenholm, B., 2016. Financial Accounting.
Wiley Custom Learning Solutions.
Kolitz, D., 2016. Financial accounting: a concepts-based introduction. Taylor & Francis.
Yu, T., Lin, Z. and Tang, Q., 2018. Blockchain: The introduction and its application in financial
accounting. Journal of Corporate Accounting & Finance, 29(4), pp.37-47.