NANA BUSINESS ACCOUNTING: A Comprehensive Guide to Financial Accounting Principles

This report provides a comprehensive overview of financial accounting principles, covering key concepts such as double-entry bookkeeping, sales and purchase transactions, trial balance preparation, final accounts, bank reconciliation, and control accounts. It includes practical examples and case studies to illustrate the application of these principles in real-world business scenarios. The report is designed to enhance the understanding of financial accounting for students and professionals alike.

NANA BUSINESS ACCOUNTING
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Table of Contents
Introduction......................................................................................................................................3
[P1] Explain the double entry book-keeping sys debits and credits. Record Sales and Purchases
transactions in the general ledger [D1]............................................................................................4
[M1] Analyze the sales and the purchase transactions to compile a trial balance using the double-
entry bookkeeping appropriately and effectively............................................................................9
[P2] Produce a Trial Balance applying the use of the Balance Off rule to complete the ledger
[D1]................................................................................................................................................10
[P3] Prepare Final Accounts from the given trial balance figures adjusting for accruals,
depreciation, and prepayments [M2, D2]......................................................................................13
[P4] Produce Final Accounts for a range of examples that include sole-traders and limited
companies [D2]..............................................................................................................................17
[P5] Apply the bank reconciliation process to prepare a number of bank reconciliations............22
[P6] Explain the process taken to reconcile control accounts and clears suspense accounts........25
[M4, D4] Demonstrate an understanding of the different types of accounts.................................26
Conclusion.....................................................................................................................................27
References......................................................................................................................................28
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Introduction
The report aims to cover the various aspects relating to business accounting or more probably
financial accounting. As such, all the concepts are covered under this report. This accounting
process will facilitate the reader of the report to gain a better understanding of the scope and
ambit of the financial accounting. Accordingly, all the basic and fundamental tools of financial
accounting namely, sale and purchase transactions, statement depicting reconciliation of bank
balance with the cash book and similar ledgers and accounts. Besides, a brief understanding of
the preparation of different types of final accounts also known as financial statements. These
financial statements help the stakeholders to take various crucial decisions. As such these play a
major and prominent role for the prospective and existing investors. Recording correct
transactions and their preparation of trial balance will help to achieve the objective of preparation
of these financial statements.
3

[P1] Explain the double entry book-keeping sys debits and credits. Record Sales and Purchases
transactions in the general ledger [D1].
Double entry book-keeping system is a system where every transaction has its debit and credit in
a corresponding manner and hence the two accounts are affected. The one account will be
debited along with the credit of the other account (Averkamp, 2018). The golden rule of the
accounting says ‘debit the receiver and credit the giver’. The double entry system was used
earlier in the middle ages and in the today’s scenario, the system has become the detailed system.
The system includes the entries for the sales, purchases, cash, etc. and then the two accounts are
affected, the journal entries are passed to the transactions. The posting in the ledger has been
done and afterward, the trial balance is prepared. The income statement and the balance sheet are
the last steps for the preparation of the financial accounts.
The case study:
On 1st April 2016, John started the business of selling the air conditioners with a capital of £ 30
lakhs. The entire capital was deposited in the bank after keeping the amount for the petty cashier.
On the same date, he entered into an agreement with The Air Conditioning Company to sell the
Air conditioners, bought them on a one-month credit basis.
During the year, he purchased the following assets making the payments through the bank:
Building- £ 2,500,000
Office Equipment’s- £ 200,000
Furniture- £ 150,000
Air Conditioners were to be sold for cash only and the cash proceeds were to be deposited in the
bank on the same day. All expenses except petty expenses were to be paid only by the bank. The
petty cashier was given £ 2,500 on 1st April 2016 under ‘Imprest System’. The petty cashier
would be reimbursed the actual expenses of the month on the first day of the next month before
depositing the sale proceeds of the day.
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The following transactions were affected by the bank during the year ended 31st March 2017:
Purchases £ 1,690,000
Sales £ 2,439,700
Salaries £ 66,000
Advertising Expenses £ 9,400
Telephone Expenses £ 10,200
Electricity Expenses £ 7,600
Printing and Stationery £ 3,600
Insurance Premium £ 4,000
During the year petty cashier was reimbursed for the expenses incurred by him amounting to £
20,300. The cash with the petty cashier on 31st March 2017 was £ 800. The purchases for the
month of March 2017 amounted to £ 140,000. The Air Conditioning Company was paid for the
purchases as per the terms agreed upon.
Other Information:
1. Salaries have been paid for 11 months.
2. Telephone expenses £ 1,000 and electricity expenses £ 800 is yet to be paid.
3. The closing stock as on 31st March 2017 are as follows:
4. Air Conditioners £ 350,000
5. Stationery £ 600
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6. Charge depreciation on Building @4% and on Office Equipments and Furniture @20%.
Record the entries in the general ledger.
Solution:
The general Ledger Accounts of the sales, purchases and the cash are as follows:
Sales A/c
Particulars Amount (£) Particulars Amount (£)
By Bank A/c 2,439,700
To Balance c/d 2,439,700
2,439,700 2,439,700
Purchases A/c
Particulars Amount (£) Particulars Amount (£)
To Bank A/c 1,690,000
To The Air Conditioning
Company
140,000 By Balance c/d 1,830,000
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1,830,000 1,830,000
Bank A/c
Particulars Amount (£) Particulars Amount (£)
To Capital A/c 3,000,000 By Petty Cashier A/c 2,500
To Sales A/c 2,439,700 By Building A/c 2,500,000
By Office Equipment A/c 200,000
By Furniture A/c 150,000
By Purchases A/c 1,690,000
By Salaries A/c 66,000
By Advertisement Expenses
A/c
9,400
By Telephone Expenses A/c 10,200
By Electricity Expenses A/c 7,600
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By Printing and Stationery A/c 3,600
By Insurance Premium A/c 4,000
By Balance c/d 796,400
5,439,700 5,439,700
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[M1] Analyze the sales and the purchase transactions to compile a trial balance using the double-
entry bookkeeping appropriately and effectively.
The sales and the purchases account are prepared for the year and the balances are extracted from
the case study specified above. The sales and the purchases which have been done directly
through the bank are posted in the bank account and the sales and purchases which have been
done on credit basis have been posted in the sales and the purchase account respectively. The
double effect will be through the credit sales and the purchase since they will be posted to the
respective account along with the debtor and creditor account respectively.
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[P2] Produce a Trial Balance applying the use of the Balance Off rule to complete the ledger
[D1].
The trial balance is the presentation of the closing accounts of the ledger accounts on the
particular date. It is the first step which is used for the preparation of the financial accounts
which is prepared at the end of the year. It is a list of items which are prepared and the items of
debit and credit are recorded separately. If all the balances are recorded correctly then the trial
balance will be reconciled otherwise there will be a difference in the debit and credit amount.
The arithmetical accuracy of the general ledger has been checked with the preparation of the trial
balance and the rule of double entry system is verified if the balance of the trial balance is
reconciled. The importance of the trial balance is as follows:
 Ensures that the amount of debit and credit are identical.
 Ensures that the posting is correct and the trial balance has been prepared based on the
transactions.
 The financial statements are prepared.
 Ensures the balance is correct.
 The prima facie evidence for the accuracy of the general ledger accounts.
The balance off rule is the process of totaling the debit and credit side of the account and the
difference amount is the balance which is posted on the trial balance. The difference amount is
shown as the amount carried down which will be carried forward to the next year (Leng &
Zhang, 2014). The amount is carried down for the permanent accounts like the asset, liability,
etc. and for the temporary accounts, the balances are carried forward to the profit and loss
account respectively like the income or the expenses account.
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The trial balance is as follows:
Trial Balance
Particulars Amount (£) Amount (£)
Dr. Cr.
Capital 3,000,000
Building 2,500,000
Furniture 150,000
Office Equipment 200,000
Purchase 1,830,000
Salaries 66,000
Advertisement Expenses 9,400
Telephone Expenses 10,200
Electricity Expenses 7,600
Printing and Stationery 3,600
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Insurance Premium 4,000
Bank Balance 796,400
Petty Cash Expenses 22,000
Cash with the petty cashier 800
The Air Conditioning
Company
140,000
Sales 2,439,700
The expenses reimbursed 20,300
Total 5,600,000 5,600,000
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[P3] Prepare Final Accounts from the given trial balance figures adjusting for accruals,
depreciation, and prepayments [M2, D2]
The final accounts are the statements which are prepared so that the financial position and
performance can be identified. The final accounts help the readers of the financial statements in
making the decisions for the investment. The final accounts provide an idea to the management,
owners and the other parties who are interested in the profitability. The four financial statements
are the balance sheet, income statement, cash flow statement and the statement of retained
earnings. The income statement covers the income, expenses, sales, purchases, etc. while the
balance sheet includes the amount of capital, assets, liabilities, etc. The cash flow statement
includes the cash flow in the context of the operating, investing and financing activities. The
statement of retained earnings includes the changes in the equity which has been incurred during
the period of reporting (Bragg, 2017).
The Financial statements are as follows for the trial balance prepared above:
Trading and P & L Account
Particulars Amount
(£)
Particulars Amount
(£)
To Purchases 1,830,00
0
By sales 2,439,70
0
To Gross Profit transferred to P&L
A/c
959,700 By Closing Stock 350,000
2,789,70
0
2,789,70
0
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To Salaries 66000 By Gross Profit 959,700
Add: Outstanding 6000 72000 By Petty Cash
Expenses
20,300
To Advertisement Expenses 9,400
To Telephone Expenses 10200
Add: Outstanding 1000 11200
To Electricity Expenses 7,600
Add: Outstanding 800 8,400
To Printing and Stationery 3600
Less: Closing Stock 600 3000
To Insurance Premium 4,000
To Petty Cash Expenses 22,000
To Depreciation:
Building 10000
0
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Office Equipment 40000
Furniture 30000 170000
To Net Profit Transferred to the
Balance Sheet
680,000
980000 980,000
Balance Sheet
Particulars Amount
(£)
Particulars Amount
(£)
Capital 3,000,000 Cash with Petty
Cashier
800
Add: Net Profit 680,000 3,680,000 Bank Balance 796,400
Creditors (The Air
Conditioning Company)
140,000 Closing Stock 350,000
Outstanding Expenses Closing Stock of
Stationery
600
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Salaries 6000 Office Equipment 200,000
Telephone Expenses 1000 Less:
Depreciation
40000 160,000
Electricity Expenses 800 7800 Furniture 150,000
Less:
Depreciation
30000 120,000
Building 2,500,000
Less:
Depreciation
100000 2,400,000
3827800 3,827,800
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[P4] Produce Final Accounts for a range of examples that include sole-traders and limited
companies [D2].
The final accounts for the sole trader are as follows which have been taken from the scenario
above:
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The final Accounts for the Limited companies are as follows:
Income Statement for the year ended 31st March 2017
Particulars Amount (£) Amount (£)
Sales 1592700
Less: Cost of Sales 908750 683950
Other Income
Interest Income 23560 23560
Operating Expenses
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Accounting Fee 10000
Depreciation on property, equipment and
plant
30000
Donation 5000
Electricity 33400
Printing 20000
Rent 15000
Salary 400000
Telephone 11000
Petrol 25000 549400
Profit for the year 158110
Retained Profit b/ f 30000
Retained Profit c/d 188110
Balance Sheet as at 31 March 2017
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Particulars Amount (£) Amount (£)
Non-Current Assets 150,000
Current Assets
Inventories 52,000
Trade Receivables 60,000
Other Receivables 35,000
Shareholders Amount Due 140,000
Bank and Cash Balance 120,000 407,000
Current Liabilities
Trade Payables 36,000
Other Payables 25,000 61,000
Net Current Assets 346,000
Total 496,000
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Share Capital 307,890
Retained Profits 188110
Total 496,000
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[P5] Apply the bank reconciliation process to prepare a number of bank reconciliations.
Generally, there is always a difference between the passbook and balance as per records
maintained by the concerned business organization. The reconciliation statement is prepared to
reconcile the balance between the two statements. The bank reconciliation statement is prepared
for a particular or specified period. It can be a month, six months, or a full year (Zhang &
Agarwal, 2015).
Before understanding the importance and significance of bank reconciliation statement, it is
imperative to understand the situations due to which the difference arises.
1. The cheque has been issued by a business organization but the other party has not presented
this cheque for realization.
2. Bank charge has been levied by the bank but the bank holder has not any information
regarding such levying of bank charges.
3. The cheque has been issued and the same has been deposited by another party but the cheque
has been dishonored by the concerned bank due to any reason other than the non-sufficient of
funds.
4. The cheque has been deposited by the supplier into the bank but the bank holder is not aware
of the credit balance in the bank account.
Importance and significance of bank reconciliation statement:
1. Periodical presentation of bank reconciliation statement helps to identify any loophole in the
cash management process (Leng & Zhang, 2014).
2. Reconciling the cash balance is of utmost responsibility of the cashier. Otherwise, the cash
balance will not be reconciled.
3. Cash is the most liquid asset as such it should be handled carefully otherwise there could be a
misappropriation of cash which is the crucial element of any business enterprise, whether
profit oriented or service oriented.
4. Since cash is the most vulnerable asset, the bank reconciliation statement will help to manage
it effectively. Balance in the bank is one of such asset whose little variation cannot be
tolerated.
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Generally, the cash department and the person working thereunder are very much interested in
the preparation of the bank reconciliation statement since they are the person who gets benefitted
from the BRS (Leng & Zhang, 2014). Besides, the banks where the concerned business
maintains the bank accounts are the one who is interested in the BRS and as such wait for the
completion of the bank reconciliation statement (Zhang & Agarwal, 2015).
For the ease of understanding of the concept, following transactions have been taken of which
BRS has been prepared:
1. Cheques issued but not presented for payment by the other party.
2. Bank charges levied by the bank.
3. Interest credited by the bank.
Bank Reconciliation Statement for a period:
Balance as per Cashbook Amount
Balance as per Bank 796400
Less: Cheques issued but not presented
for payment
124000
Add: Bank charges 500
Less: Interest income received from the
bank
13820
Balance as per Books maintained by the
company
659080
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[P6] Explain the process taken to reconcile control accounts and clears suspense accounts.
A control account is an account which represents the summary of all the major account balances.
It is prepared to find out the difference that exists in the accounting treatment as well as the
preparation of ledger accounts and trial balance prepared on their basis. The purpose of
preparation of control account is to ensure that the financial statements are free from any error or
omissions. A control account represents the balances of all similar ledgers or that entire ledger
which belong to the same category. For instance, there can be control account named account
receivable which is prepared to reflect all the debtor balances.
A suspense account needs to be prepared when the trial balance is not matched. Such difference
arises due to any factor other than the omission of accounting principles. The suspense accounts
are temporarily prepared and adjusted whenever the ledger balance is identified, rectified and
analyzed.
Suspense account Control account
A suspense account is prepared to reflect the
difference that exists in the trial balance.
A control account is prepared so as to better
reflect the financial transactions.
Suspense account is a temporary account. A control account is permanent account.
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[M4, D4] Demonstrate an understanding of the different types of accounts.
Image 1: Types of accounts
Source: By Author, 2018
There are different types of accounts and as such, they can be classified on different perspective
or criteria.
However, the most widely used basis of classification is the nature of the accounts. Accordingly,
the accounts can be classified into three categories namely, real accounts, personal accounts and
nominal accounts.
Nominal accounts comprise of expenses and incomes. Real accounts comprise of tangible
accounts including cash and other assets account.
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Real accounts
Personal accounts
Nominal accounts

Conclusion
From the discussion throughout the report, it can be concluded that maintaining proper
maintenance of the accounting records and supporting documents and statements will help to
achieve the purpose of recording and maintaining accounting records. Various suggestions and
conclusions have been inserted at the appropriate place to explain the role and significance of
final accounts in a lucid and impressive manner. For this purpose, an example or instance of a
sole proprietor has been taken into the report. This will provide a better understanding of each
and every single transaction and its impact on the final accounts. This will indirectly explain the
importance of significance of the double effect of any transaction. Further, it can be concluded
that format of final accounts differs for a sole proprietorship, partnership, and business
corporates. However, the transactions almost remain the same. The difference arises because of
the difference in the organizational structure.
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