Purpose of Financial Accounting - PDF

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................4
A.......................................................................................................................................................4
1. Financial accounting and its purpose......................................................................................4
2. Internal and external stakeholders in the organization............................................................5
B.......................................................................................................................................................9
Client 1........................................................................................................................................9
A. Double entry system...............................................................................................................9
...................................................................................................................................................10
...................................................................................................................................................13
...................................................................................................................................................14
...................................................................................................................................................15
...................................................................................................................................................16
Trial balance..............................................................................................................................18
...................................................................................................................................................18
Client 2......................................................................................................................................19
A. profit and loss account..........................................................................................................19
B. Statements of financial position...........................................................................................19
C. Accounting concept..............................................................................................................20
D. Purpose of depreciation with different methods..................................................................20
E Sole traders and limited companies financial statements......................................................21
Client 3 .....................................................................................................................................21
A. Purpose of preparing bank reconciliation account...............................................................21
B. Reason behind the variation of the company financial record from the bank record...........21
C. Imprest system......................................................................................................................22
D. Bank reconciliation statements.............................................................................................22
...................................................................................................................................................23
Client 4......................................................................................................................................23
A Sales ledger and purchase ledger control account.................................................................23
B. Need to prepare the control account.....................................................................................24

Client 5......................................................................................................................................24
A. Suspense account and its features........................................................................................24
B. Trial balance.........................................................................................................................25
CONCLUSION..............................................................................................................................26
REFERENCES..............................................................................................................................27

INTRODUCTION
Financial accounting is used to present the financial data in more understandable manner with
different accounting reports like balance sheet, cash flow statement and profit and loss account.
Financial accounting is used to provide the information to the internal and external record and
record the monetary transaction. Expert wealth management company service based company
and situated in UK. It is a financial consultancy company which provides its innovative ideas and
suggestions to their clients to improve their wealth and profit by investing in different securities
and portfolio. The report highlights the purpose of financial accounting in the company and how
the internal and external stakeholders are interested in financial information. It explains the
accounting concept like consistency and prudency in the company. It also explains the different
method used by the company like the straight line method and written down value method. The
report also highlights the various financial statements used by the sole traders and company. It
helps to understand the requirement of control account in the company and the role of suspense
account in trail balance.
A
1. Financial accounting and its purpose
Financial accounting : it refers to the branch of accounting system which keep records
of the financial transaction of the organization and maintain the financial records for the further
use by the organization. The transaction are summarized, analyse, recorded and evaluate in a
standard guideline (Henderson, and et.al., 2015). It presents the data in various financial reports
like income statement, profit ans loss account, balance sheet and trading account and cash flow
account. The information presented in the financial statement are mainly used by the external
user of the company. They evaluate t eh data to gain the share in the profit and capture the large
share of market.
Purpose of financial accounting
Recording : It helps the organization to prepare the data in systematic manner by
recording them in the various statement. The aim of financial accounting is to record the data to
get t eh useful information and make the decision on the basis of the data. Expert wealth
management consultancy firm record the financial data to get the financial position of the
company in the market and evaluate performance in respect of tits competitor performance
(Parson, and et.al., 2015).
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Decision : The purpose of the financial accounting is to present the data in that manner
that a firm can take the decision on the basis of the data. They present the data to the
stakeholders, suppliers, shareholder., customer etc. to evaluate the performance and take the
decision of investing the amount in the company. Expert wealth management use the financial
data of their clients to take the decision regarding maximize the wealth of the customer by
different investment decisions.
Accuracy : Accuracy used to determine the reliability of the data. Financial accounting
purpose is to provide the accurate data to the stakeholders by evaluating and measuring the data
in different formats. Expert wealth management company provide the accurate data to its
suppliers, customer, so they can reliable on the performance of the company. It also helps to
encourage them to invest in the company assets (Schaltegger, and Burritt, 2017).
Measuring performance : the purpose of financial accounting is to measure the
performance of the organization via comparing its data with the past information or performance.
Every organization need the reliable sources to evaluate the performance via the accounting tools
like key performance indicators, balance score card and benchmarking. Expert wealth
management company measure the performance by analyse their clients performance and the
financial data like the sales of the organization, changes in the profit and gaining the market
share.
Prepare financial report : Financial report of the company are used to maintain the data
in different accounts like profit and loss account, cash flow and balance sheet account. The
financial reports help the company to measure their performance and evaluate the trend of the
variances by comparing it to the last year performance (Drake, Hales, and Rees, 2017). Expert
wealth management company prepare the balance sheet, cash flow and trading and profit and
loss account to measure weather the company is grown in favourable manner or not.
2. Internal and external stakeholders in the organization
Internal stakeholder : Internal stakeholders are the person which work within the
organization and have interest in the financial and management information of the company.
Internal stakeholder of the company are its employees, manager and owner. The demand of
employee is to earn more money from the performance of the company. Owner are interested in
rising the profit of the company (Farooq, Rupp, and Farooq, 2017).
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1. Employees : Employee are the persons who work for the organization to earn the money as
salary and incentives. They get remuneration from the management team on services provided by
them to the organization.
Interest of employees in the financial information
Employees are more interested in the financial performance of the company because the
increment of the salary is based on the growth of the organization. The employees monitor the
accounts of the company to get the information that whether the company id perform better in
the market or not. It also helps them to aware about the various transaction of the company like
the expenses, profit and loss and source of income (Hameed, and et.al., 2016). The financial
information of the company encourage and motivate them to provide their valuable suggestion,
participate in the company activities and work toward the common goal of the organization like
to provide the better plan to the customer to increase their wealth and get the higher profit from
the different portfolio with minimum risk.
2. Owner : Owner are the person who have the highest interest in the performance and profit id
the company because they are the real stakeholders. The profit of the company are belongs to
them, and they take the important decisions for the organization. The term owner is used for the
individual and group of people who have invested in the capital of the company.
Interest of owner in the financial information
The owner of the company are interested in the financial information because they have
to take the important decision regarding the policies, procedure and methods for improving the
financial position and have to monitor and control the internal management. The financial
information like profit, revenue, expenses help them to take the important decisions like
distribute the profit as dividend or retain in the organization as capital reserve (Leonidou, and
et.al., 2017). It also helps them to take the decision whether they have to continue the business
with the present method or change the method to get Higher profit. The large organization uses
the Financial information like the total cash inflow and outflow and provide the information to
the owner to control the expenses and encourage the investor to invest more in the company.
External stakeholder : They are the individual and group of the individual which are not
the part of the organization, but they are interested in the organization activity and indirectly
affect the business of the company. There are different kind of external stakeholder like
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suppliers, government, creditors, customer, intermediary and competitors (Business
Stakeholders: Internal and External, 2019).
1. Creditors : Creditors are the individual, bank and financial institute which provide finance to
the company for the efficient running of the business (Ramus, and Vaccaro, 2017). Bank
provide finance to the Expert wealth management company against some security. They regulate
the performance of the company via the financial statement and may also conduct the internal
audit to check the accuracy if the data.
Interest of creditor in the financial information
Creditors are interested in the financial information of the organization like the
profitability, productivity and performance to regulate the growth profit and loss of the company.
They use the financial information to know that whether the company is able to pay the debt in
future or not (Subrahmanyam, Tang, and Wang, 2017). They also conduct the internal or external
audit of the company before providing fund to run the business of organization. Company can
borrow the money from the bank and from various financial institute to run the business
effectively and efficiently.
2. Customer : Customer are the end user of the product and services of the organization. They
consume or purchase the services to satisfy their demand and needs (Hirshleifer, amd et.al.,
2018). They influence the company to improve their services according to the taste and
preferences of the customer. The satisfaction of the customer with the product and services are
more important for the company. Customer is the valuable person of the company because they
purchase the product and services.
Interest of customer in the financial information
Customer have interest in the financial information of the company like the product and
services offered by the company and their growth trend. They regulate the financial account to
measure the performance of the company and make the decision that whether they have to
purchase the services or not. Customer gets the financial information from the various report
published in newspaper and websites which help them to analyse the performance of the
company (Rikhardsson, 2017). The accuracy of the data make the customer more reliable upon
the company. The growth and profit of the company attract their client and customer to involve
in the financial information.
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3. Suppliers : suppliers are the person who supply the raw material to the company and
negotiate with them regarding the price of the product and services. Supplier play and important
role in the growth and development of organization. The problems in supply of the product affect
the productivity and profitability of the company.
Interest of suppliers in the financial information
Suppliers need the financial information to know the accuracy of the data and
performance of the company in market, so they can set the price of their product and services and
also negotiate with the current price (Maas, Schaltegger, and Crutzen, 2016). Suppliers provide
the raw material to the company. The financial information regarding the sales and revenue and
profit of the company help them to get the price of their product in compare to the competitors in
the market. They also use the financial information to make the decision regarding the safety of
the credit provided by them to the company.
4. Competitors : Competitors are the person who do the same business or deal in same product
line in market. They compete in the market with the price of the product or the customer share in
the market. The number of competitors in the market affect the price of the product and services.
If there are large number of competitors then the profit of the firm will reduce.
Interest of competitors in the financial information
Competitors in the market are more interested in the financial information of the
company because the information regarding the price of product, method of pricing and
depreciation help the competitors to increases or decrease the price of the product and services
and get the higher profit from their competitors (Sethi, Martell, and Demir, 2017). The
information regarding the investor of the company their advertising strategy and investment
strategy influence the company to change their strategy and adopt the new strategy which help
them to get higher market share.
B
Client 1
A. Double entry system
Journal entries in the books of Alexandra for January 2019 are as follows
Date particulars Debit Credit
1st jan 2019 Storage exp.A/c Dr 450
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To bank A/c
2nd jan 2019 Purchase A/c Dr 6080
To S. hood A/c 1450
To D main A/c 2060
To W Tone A/c 960
To R foot A/c 1610
3rd jan 2019 J Wilson A/c Dr 1200
T . Cole A/c dr 1650
F. Syme A/c Dr 2100
J . Allen A/c Dr 1020
P. white A/c Dr F. Lane A/c Dr 2520
F. lane A/c Dr 980
To sales A/c 9470
4th jan 2019 Motor Exp. A/c Dr 470
To cash A/c 470
7th jan 2019 Drawing A/c Dr 1500
To cash A/c 1500
9th jan 2019 T. cole A/c Dr 680
J. Fox A/c Dr 1310
To sales A/c 1990
11th jan 2019 Sales return A/c Dr 680
To J. wilson 270
F.syme 410
16th jan 2019 Cash A/c Dr 7020
To P. Mullen A/c 1400
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To F. Lane A/c 3100
To J. Wilson 850
To F. Shyme 1670
19th jan 2019 R. foot A/c Dr 50
To Purchase return A/c 50
22st 2019 Purchase A/c Dr 3740
To L.Mole A/C 1830
To W. Wright 1910
24th jan 2019 S. Hood A/c DR 3600
J. Brown A/c Dr 4600
R. Foot A/c Dr 1400
To Bank A/c 9600
27th jan 2019 Salary A/c Dr 4800
To bank A/c 4800
30th jan 2019 Business rates A/c Dr 1320
To bank A/c 1320
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Trial balance
Trial balance for the month ended on 31st January 2019
Particular Debit Amount (in £)
Credit Amount (in
£)
S. Hood 10000
J. Brown 12000
D. Main 2060
R. foot 160
W. Tone 960
L. Mole 1830
W. Wright 1910
J whilson 80
F. syme 20
T.cole 2330
J. Allen 1020
P white 2520
F.lane 3980
J.fox 1310
P.mullen 3000
Sales 11460
Purchase 9820
purchase return 50
sales return 680
storage cost 450
Motor expense 470
salary 4800
drawings 1500
business rates 1320
capital 389000
premise 240000
van 51250
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Fixtures 8100
inventory 23900
Cash in hand 13630
Cash at bank 59250
Total 429430 429430
Client 2
A. profit and loss account
Particulars Amount (in £)
Sales revenue 138000
Less: Return inward 3000 135000
Cost of goods sold (W.N.1) 54500
Gross Profit 80500
Depreciation charged on land & building 800
Depreciation on plant & machinery 8000
Administrative Expenditure 30000
Distribution expenses 35000
Less: Prepaid rent -3000
Add: Outstanding salaries 2000
Finance Cost 1500 74300
Corporation tax 2000
76300
Net margin 4200
Total
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B. Statements of financial position
Particulars Amount (in £)
Current assets
Debtors or bills receivable 26000
Prepaid rent 3000
Closing stock 20000
49000
Fixed assets
Land & Building 60000
Less: Accumulated Depreciation charged on L&B 10800 49200
Plant & Machinery 60000
Less: Depreciation @ 20% 28000 32000
81200
Total assets 130200
Liabilities
Current liabilities
Creditors or bills payable 22000
Outstanding salaries 2000
BO 18000
Corporation tax 2000
Total current liabilities 44000
Owners’ s fund 40000
share premium 20000
Retained earnings 22000
Net profit 4 2 0 0
Total shareholders’ equity 86200
130200 Total liabilities
C. Accounting concept
Accounting concept are the basis rules and Guideline used by the company to record and
process the transaction in organized manner to get the useful information from the data. The
guideline force the company to follow the concept in recording the data so the data become more
reliable and accurate (Sethi, Martell, and Demir, 2017).
Consistency concept means that if an organization follow any method for calculation
than they have to consistently follow the method for the particular accounting period. The
randomly change of the method or technique will affect the performance. Concept says that the
method only change when the view one give the higher profit (Singh, Singh, and Kushwaha,
2018).
Prudence accounting concept refers to the proper estimation of the income and
expenses of the company. It states that the overestimation of income and underestimation of the
expenses show the higher profit in the accounts which does not provide the true position of the
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company. The company has to follow the principle for the accurate estimation of the profit and
budget.
D. Purpose of depreciation with different methods
Depreciation on the machinery and tools are calculated for following the accounting
matching concept in the organization. The purpose of calculation of depreciation is to get the
accurate value of machinery in the market at present date. Different methods are used by the
company to calculate the depreciation such as straight line method and written down value
method (Rambaud, and Richard, 2016).
Straight line method is easy to calculate and the amount of the depreciation remain
constant to the life of the product. It can be calculated by subtracting the residual value from the
actual cost of the machinery and divide the amount to the expected life of the machinery.
Written down value method is widely used by the company. It also known as diminishing
method because the amount of depreciation of reduced year by year.
Straight line method is the best method to calculate the depreciation because it is easy to
calculate and also reflect the residual value of the assets. The depreciation is same for the whole
life of the assets and the error in calculation was also minimum (Otley, 2016).
E Sole traders and limited companies financial statements
The sole trader of the company are free to present their data. There is no compulsion to
file the account whereas on limited company are force to file the statement or reports to the
companies house. They also have to file the corporation tax account (Ghosh, Xing, and Wang,
2016).
The interference of the outsiders is much higher in the limited companies account
because of the obligation of presenting the data in the company house and in sole trader business
there is single owner of the company so the interference of the outsiders are also minimum.
Client 3
A. Purpose of preparing bank reconciliation account
The purpose of using bank reconciliation account is to compare the records with the bank
estimate and rectify the error recording the data into the account (Sunarya, Nurhaeni, and Haris,
2017). The difference may be arisen from the omission of the data, duplication of the data or
with the wrong entry of the transaction.
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Bank reconciliation statements is prepared on the monthly basis to match the record with
the bank statement and analyse the bank record and company financial records to get the real
inflow and outflow of cash (Abuhamdeh, Csikszentmihalyi, and Jalal, 2015). On recording the
monthly data will help to reconcile the data and get the variances in particular period.
B. Reason behind the variation of the company financial record from the bank record
Unrepresented cheque to the bank may create variation in the bank account and
company account. Sometimes the manager or employee are forgotten to present the cheque in the
bank which show the higher balance in bank and lower balance in company financial record.
Error in recording transaction may create the differences in the account. Sometime
manager forget to record the data in financial account or may tally the entry in wrong account
like sale of the goods may be recorded in purchase account it also creates the difference in the
account (Clarke, Dean, and Graves, 2017).
Omission of the transaction may be the reason behind the variation of the account. It
means that if manager are forgotten to record the data in financial statement. For example, they
have to record the sales entry of the goods but the omission of the transaction may increase the
balance of the bank account but reduces the stock in books of sale ledger.
C. Imprest system
Imprest system is used to evaluate and documented that how the company spent the cash in
business. Imprest system provide the accountability, versatility and ease of the use of the account
and data. It helps the organization to manage the petty cash and control the expenses (What is an
imprest system of petty cash?, 2004).
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D. Bank reconciliation statements
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Client 4
A Sales ledger and purchase ledger control account
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B. Need to prepare the control account
Control account is prepare to freely keep the general ledger. It is used to present the data
neat and clean without using any details. Many of the control data account are also used in
financial statement like instance cash are shown in balance sheet (Abuhamdeh,
Csikszentmihalyi, and Jalal, 2015).
Client 5
A. Suspense account and its features
Suspense account is used to prepare when there is any doubtful records or entry in trial
balance. If the accountant are not sure about the transaction than the record the entry as suspense
account to match the balance for the short period and further detail analyse the transaction
(Libby, 2017). For example the accountant find the extra balance in the account and did not
recognize that where from the cash arrive than he put the cash as suspense account.
Features
Accuracy : suspense account provide the accuracy of the data by recording the
transaction in suspense account. The recording of transaction account provide the detailed
information about the all transaction in particular period.
Balancing : Suspense account also help to balance the all transaction in the accounts and
balance the credit side of the account with the debit side.
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B. Trial balance
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CONCLUSION
The report summarizes the impact of financial accounting in the company and how the different
stakeholders like creditors, suppliers, customer, government, employees, manger use the
financial information. From the report it can be concluded that the internal and external
stakeholder affect the business of the company by the decisions and behaviour regarding the
financial information and product and services of the company. It also summarizes the role of
suspense account in the trial balance and how it rectifies the variances of the trial balance. It can
be concluded that the different financial report like balance sheet, cash flow, income statement
are prepared to present the data in more organized manner and help the stakeholders to make
their investment decisions.
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