(PDF) Financial Accounting Principles

FINANCIAL ACCOUNTING
PRINCIPLES

Table of Contents
INTRODUCTION...........................................................................................................................1
BUSINESS REORT........................................................................................................................1
1. Defining financial accounting.................................................................................................1
2. Regulations related to financial accounting............................................................................2
3. Accounting rules and principles..............................................................................................4
4. The conventions and concepts relating to consistency and material disclosure.....................5
CLIENT 1........................................................................................................................................6
CLIENT 2........................................................................................................................................9
a) Profit and loss statement ........................................................................................................9
b) Financial position statement.................................................................................................10
CLIENT 3......................................................................................................................................11
a) Profit and loss of Raintree Ltd..............................................................................................11
b) Financial position statement of Raintree Ltd........................................................................11
c) Accounting concepts.............................................................................................................12
d) Purpose of depreciation in formulating accounting statements............................................12
CLIENT 4......................................................................................................................................13
a) Bank reconciliation Statement..............................................................................................13
b) cash book..............................................................................................................................14
CLIENT 5......................................................................................................................................15
a) Sales ledger control account and purchase ledger control account.......................................15
b) Importance of control account..............................................................................................15
CLIENT 6......................................................................................................................................16
a) Suspense account and main features.....................................................................................16
b) Trial balance (£)....................................................................................................................16
(c) Reconcile suspense account.................................................................................................16
d) Difference between clearing accounts and suspense accounts.............................................16
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18

INTRODUCTION
Accounting and management are the key requirement of business and organisations.
There are type of strategies and plans are made in terms of maintaining financial ethicalness and
consistency. Accounting principles and concepts frame the structure of keeping records and
details in organised manner. Financial accounting rules, legislations and standards assist
managers and accountants to operate the business and functions according to rules and
legislations (Edwards, 2013).
There is a business report prepared which defines the meaning of financial accounting,
regulations related to financial accounting. There are rules and principles defined subject to
maintain financial ethicalness and discipline are defined in this context. Conventions and
consistency which remain related to consistency and material disclosure are also defined in this
context. Practical evaluation done subject to book-keeping system, trial balance, accounting
rules, retaining of transactions and information in books of accounts elaborated in this context.
Analysis of financial information by using various data are reconciled and operated in financial
accounting.
BUSINESS REORT
1. Defining financial accounting
Financial accounting
Financial management and accounting is one of the important branch of management
accounting which assist managers and accountants to keep financial records and information in
systematic manner. There are guidelines, legislations and rules made subject to financial
accounting. These rules are followed by organisations to present financial reports and publish
relevant information for stockholders, shareholders and owners of organisation. Mainly financial
accounting is used to maintain the financial records and information in effective manner and
present these reports to managers and stakeholders of organisation. These statements are mainly
associated with external and internal environment of business (Hatfield, 2014).
Financial accounting is also considered as a language of organisation which
communicates the organisational aim and objectives in financial terms and provides an
information related to economic and financial information for outside parties as shareholders and
creditors. Financial accountants and chartered are hired by the business to maintain and analyse
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the essential aspect in terms of business and operations. There are type of financial statements
are prepared by organisations which present the information related to financial performance and
analyse the financial health of business.
Cash flow statement: this is the statement which present the information related to
consumption of cash during the year. This statement mainly contains the information of
utilization of cash in in various activities such as cash flow from operating activities, cash flow
from investing activities and cash flow from financing activities. Overall cash inflows and
outflows information are presented in this statements. With the help of this statements managers
and accountants be able to make strategies and plans for arrangement of cash (Songini, Gnan and
Malmi, 2013).
Income and expenditure statement: this is the statement which defines the profitability
of organisation. This statement covers all the revenue expenditure and income to evaluate the
profit and loss for the year. All the expenses are recorded in the debit side of statement and all
the income and revenues are recorded in credit side. Excess over expenditure is considered as a
profit and excess over income indicates loss. Evaluation of income statement helps mangers and
accountants to make profit strategies and plans.
Financial position statement: this statement mainly associated with identifying the total
assets and liabilities of organisation. This statement present the clear picture of financial position
of organisation to stakeholders, investors, financiers and directors. Current assets, fixed assets,
current liabilities, share capital (Equity and preference), non current and current liabilities are the
elements which are considered in this statement. To generate financial help and funds, there are
strategies and plans are prepared by mangers of association.
Change in equity statement: this statement mainly associated with analysing the
variations in equity and share capital of organisation. There is a statement prepared which
contains equity share capital, shares issued during the year, sum of reserves and surplus,
securities premiums and profit. With the help of this statement managers be able to identify the
difference and variations done during the year subject to equity (Zeff, van der Wel and
Camfferman, 2016).
2. Regulations related to financial accounting
Rules, regulation and legislations helps to maintain and control the accounting records in
more effective and efficient manner. To get accurate information and results managers and
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accountants adopt financial rules and legislations. By adhering financial rules and regulations
organisation be able to maintain its financial information and details in systematic way. Financial
accounting is a process which starts form gathering information, collecting financial data and
keeping the records for making financial plans and strategies. It is very important for the
business to present the financial information accurately and as per the legal structure.
IASB (International Accounting Standards Board)
IASB was formed in April 2001 which is one of the independent accounting standard
board produces rules and regulations related to financial accounting. There is a committee
operates the IASB and keep align with making financial plans and strategies for better
management and operations. There are two main bodies as the trustees and the IASB works upon
financial accounting standards. Financial reporting standards and Standard Advisory council
works together to produce financial rules and regulations.
FRS
Financial Reporting standards and the quality management are the essential aspect in
terms of making the financial rules and regulations for better evaluation and management of
finance department. FRS 1 mainly associated with handling cash flows, operating activities,
taxation treatment, return on investments and producing finance, acquisition and disposals,
equity dividends and management are considered in this context (Aletkin, 2014).
FRS 3 provides rules and regulations related to present the financial performance in terms
of profit and loss of organisation. Financial performance of organisation is evaluated on the basis
of following components under FRS 3;
 Outcomes of regular operations containing acquisition
 Outcomes subject to discontinued operations
 Revenues and losses on the sale or termination of an operation, costs of a fundamental
reorganisation or reconstructing, profitability and losses on the disposal of non current
assets
 Records of extraordinary items and transactions.
There are also some financial reporting standards made which are adopted by organisations
which are as follows
FRS 10 which is related to treatment of goodwill and intangible assets.
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FRS 15 this is the principle which provides rule related to tangible fixed assets with exception of
investment properties. SSAP 19 also followed under this standard as accounting for investment
properties. Main objective of FRS is to define the tangible fixed assets which are counted at
consistent basis (Ennew, Waite and Waite, 2013).
FRS 18 standard defines the policies and standards subject to disclosure of accounting policies.
Main objective of this standard is to assure managers and accountants for material information in
more effective and efficient manner. This FRS is also interrelated with SSAP 2 which is related
to 'disclosure of accounting policies' which are published under accounting periods. This
contains following essential elements such as relevance, reliability, comparability,
understandability.
3. Accounting rules and principles
Rules of accounting
Credit what goes out and debit what comes in: The given guideline applies on the
genuine records of the organization which its arrangements with. These are the advantages of the
organization and in this way they have a charge adjust in the books of record. The genuine
records of organization incorporates records, for example, plant and gear, Building, Land and so
forth (Boone, Linthicum and Poe, 2013).
Debit all expenses and losses, credit all the revenues and gains: This manage of
bookkeeping applies on all the ostensible records that the organization manages. The capital that
the organization have is an obligation for it and in this manner it has credit adjust.
Credit the giver and debit the receiver: The individual records of organization are the
genuine individuals who manages the business and these records can likewise additionally be
legitimate body. According to this control of bookkeeping, it applies on all the individual records
that are managing the business either immediate or in a roundabout way (Colasse and Durand,
2014).
Accounting principles:
Matching principle: This rule suggests that the incomes that are happened in a money
related year ought to be coordinated with the cost that is caused in delivering that income.
Historical Cost principle: According to this rule of bookkeeping, It is required by the
bookkeepers that they record the advantage bought by the organization at the value which is paid
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by the organization to obtain the benefit and this cost is considered as the premise of
bookkeeping at the season of the buy and furthermore in the resulting Financial years.
Revenue recognition Principle: The standard of income acknowledgement is principally
worried about chronicle the incomes of business in the salary articulation of the company (Di
Pietr, AyArt and Ronen, 2014).
4. The conventions and concepts relating to consistency and material disclosure
Material Disclosure: This progression is taken by the bookkeepers so money related
proclamations of the organization are not loaded with consistently subtle elements and exchanges
that are not critical to be recorded. According to this tradition of bookkeeping , it infers that the
bookkeepers of organization need to record and mull over just those exchanges which are
applicable and have noteworthy direction and all the unimportant things must be overlooked. It
ought to likewise be noticed that a thing which is material for one concern can be Irrelevant or
insignificant for another worry. Yet at the same time this procedure is entangled on the grounds
that their no such particular recipe with respect to which exchanges are applicable and which are
not, this is simply an issue of decisions that will be taken by the bookkeeper who is setting up the
records. And furthermore, a thing material in one monetary year may get superfluous in next
bookkeeping year.
Consistency convention: According to this tradition of bookkeeping, it suggests that
bookkeeping hones which are relevant or embraced in current year ought to be appropriate in the
organization for the specific time frames and ought not be changed for specific periods. This
tradition just infers that associations need to stay steady when they embrace any rule of
representing different periods (Drexler, Fischer and Schoar, 2014). At the point when the
organization's have settled approaches, it additionally turn out to be simple and straightforward
for the partners to utilize the money related articulations as against when the organizations
change the strategies consistently. This is on account of when the organization's stay consistent
for a more extended span it implies that organization's tasks are fruitful and they don't require
any adjustments in the arrangements. For example if the organization esteems the stock at the
market cost or cost whichever is less, at that point it ought to take after this standard for different
periods. So also, if some organization deteriorates the settled resources of the organization
utilizing straight line technique for devaluation, at that point the organization should utilize that
specific strategy for deteriorating every one of the benefits.
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CLIENT 1
Double entry book keeping system
This accounting system mainly associated with maintaining accounting information and
details in books of accounts for a particular duration and time. There are two major two sided
formates made as debit side and credit side. As per this concept every transaction contains two
aspects which affects the accounts. This is one of the essential accounting tool which follows the
following accounting equation as
Assets = Capital + liabilities
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CLIENT 2
a) Profit and loss statement
Profit and loss statement of Peter Piper for the year ended 31st December 2017
Particulars Amount Particulars Amount
To Opening stock 82200 By sales a/c 1215000
To wages and salaries (177500+1220) 178720
To Purchase a/c 778800
To Gross Profit 276920 By closing Stock 101640
1316640 1316640
To motor expenses 87400 By Net Profit 276920
To Heating and lighting 4950
To Depreciation
on freehold primes 4650
on equipments 7500
on Vehicle 2800 14950
To Advertisement expenses 4810
To administration expenses 17650
To net profit 147160
276920 276920
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b) Financial position statement
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CLIENT 3
a) Profit and loss of Raintree Ltd.
b) Financial position statement of Raintree Ltd.
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c) Accounting concepts
d) Purpose of depreciation in formulating accounting statements
Depreciation is the way toward decreasing the estimation of settled resources of the
organization in the monetary of the organization with the goal that the organization can expand
the costs of the organization and in this way lessen the benefits. Depreciation process diminishes
the book estimation of the advantage of organization. Depreciation of settled resources are
started when the organization buys the benefits of the organization. For deteriorating the benefits
of the organization, the chiefs right off the bat need to choose the technique for devaluing the
advantages and later the assessed life of hardware and the administrators of the organization
additionally need to decide the piece estimation of the benefits toward the end (He, Craig and
Wen, 2013). The techniques for the Depreciation incorporate straight line strategy, lessening
esteem technique and per unit devaluation strategy. Depreciation helps the supervisors in
lessening the gainfulness of the organization by expanding the costs by mulling over devaluation
as a cost. Devaluation is a non money use yet assumes a noteworthy part in the monetary
articulations. The strategies for devaluation are examined underneath to sum things up:
Straight line technique: This technique is considered as the one of the simplest strategy
for devaluing the advantages and is effectively reasonable by everybody, which is the reason the
greater part of the organizations receive this technique for Depreciation. Under this strategy for
Depreciation, the settled resources are devalued by the comparative sums in consistently. Under
this technique for Depreciation the first cost of advantages are taken and the evaluated scrap
esteem is deducted from it and furthermore, it is separated by the aggregate existence of the
benefits that was at first assessed by the bookkeepers of the organization. The sum which is
figured is then deducted from the adjust of the benefits each year till the life of the advantage and
afterwards the advantage is disposed of by the organization
Diminishing balance method: According to this technique for Depreciation, the sum is
figured by taking the opening estimation of the advantage and separating it by the rest of the life.
The sum is deducted from the estimation of the advantage, till the estimation of the benefit winds
up zero.
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CLIENT 4
a) Bank reconciliation Statement
BRS or Bank compromise explanation is a money related report which is set up to
accommodate bank adjust of passbook and bank adjust of money book, the word accommodate
characterize as making one exchange with another. The essential point of this archive is to
distinguish the reasons of deviation in account adjusts, this announcement is made on a particular
date when bank passbook is refreshed (Seda and Kramer, 2014). This statement is prepared to
comprehend the contrasts between the bank adjust of both the books. The distinction in the
equalizations happens because of few reasons which influences certain exchanges and they are
defined as follows:
 Postponement is likewise considered as the most widely recognized reason of deviation
in the equalizations of passbook and money book. Here postponement is alluded as the
deferral from banks in freedom of specific checks and request drafts.
 Premium earned is the sum which is earned by the client against their saved sum which at
times isn't spoken with the clients and distinction in equalizations of both the books
happens.
 Mistakes and oversights are the most well-known reason because of which couple of
exchanges like check issued, instalment got are influenced. Exclusion is the state when an
exchange is erroneously precluded to record and blunder is the state when an exchange is
wrongly recorded.
 Administration charges additionally drives the distinction, as now and then customer is
unconscious of bank expenses which are charged without suggesting the clients. .
 Exchange of money through different sources requires time, if a customer instantly
records an exchange of instalment which is still during the time spent travel than it will
prompt deviation in both the books.
 Extortion recognition; it isn't essential that each time the deviation happens because of
some oversight, now and again it can be an after-effect of misrepresentation submitted by
customer or the bank. BRS is the key of keeping these cheats.
Bank Reconciliation Statement As on 1december December 2017
Date Particulars Details Amount
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31/12/17 Bank Balance as per cash book (Dr. Balance) 19973
01/12/17 Add: opening adjusting figure 987
02/12/17 Add: deposits 176
06/12/17 Add: Distinction between adjust of 783 9
17/12/17 Add: instalment to Cook 97
29/12/17 Add: Finding of lease 260 1529
Total 21502
02/12/17 Less: 780 426
02/12/17 Less:781 737
05/12/17 Less: bank charges 47
10/12/17 Less: standing orders 137
11/12/17 Less: 310923 297
24/12/17 Less: difference of cash deposit (sales) 1
30/12/17 Less:Payment received from Fred 119 1764
Balance as per passbook (Cr. Balance) 19738
b) cash book
Cash book of Kendal Ltd. (Bank only)
Date particular amount Date particular amount
01/12/17
To balance b/d(Balancing
figure) 20208 02/12/17 By 780 426
01/12/17 To balance adjustment 987 02/12/17 By 781 737
02/12/17 To Deposits 176 05/12/17 By bank charges 47
06/12/17 To difference of balance 9 10/12/17 By standing orders 137
17/12/17 To cook 97 11/12/17 By 310923 297
29/12/17 To rent 260 24/12/17 By cash deposit 1
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30/12/17 By Fred a/c 119
By balance c/d 19973
21737 21737
CLIENT 5
a) Sales ledger control account and purchase ledger control account
Sales ledger control account for Henderson
Particulars Amount Particulars Amount
To balance b/d (Debit
balance) 12600
To credit sales 152350 By Transfer to purchase ledger 330
By Discount allowed 380
By Receipts from debtors 141610
By opening balance 12600
By Sales return 7320
By Bed debts written off 120
By balance c/d (Debit balance) 2590
164950 164950
Purchase ledger accountant
Particular Amount Particular Amount
To general ledger control a/c
By opening balance on (Cr.
balance) 9160
Purchase return 1110 Credit purchase 116500
Payment to creditors 101010
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Discount Received 290
To transfer from sales ledger 330
To balance c/d 22920
125660 125660
b) Importance of control account
Control accounts are prepared to analyse the financial accounts which are prepared on the
basis of detailed accounts. It become difficult for the organisations to maintain and record the
detailed information about transactions in that condition control accounts plays vital role.
CLIENT 6
a) Suspense account and main features
There are some key features defined below which defined the suspense account as;
 Used to prepare trial balance
 To assist detecting undefined transactions and fining errors
 To assist the management decisions and making the difference
 To rectifying one sided errors and completing accounts
 To prepare final accounts
b) Trial balance (£)
Particular Debit amount Credit amount
Suspense a/c 110
Sales 1100
Rent paid 250
Receivables 320
Travel Expenses 160
Purchase 700
Payables 350
Cash at bank 840
Capital 710
Total 2270 2270
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(c) Reconcile suspense account
Suspense account
Particulars Amount Particulars Amount
To White's personal account 750 By balance b/d 330
By John's personal account 420
750 750
d) Difference between clearing accounts and suspense accounts
In general context suspense account and clearing accounts are considered similar but
there is a significant difference found subject to those accounts. There are some transaction
which remain unrecorded are considered in suspense account. Whereas, clearing accounts are the
accounts which are open to clear all the relevant accounts which do not exist for further. The
closing balance remain Zero after clearing the accounts whereas there are chances that balance
can be remained in suspense accounts (Seda and Kramer, 2014).
CONCLUSION
As per above defined report the scope of management accounting elaborated in
organisational context. Financial accounting is very crucial subject in organisational context
which helps to correlate the financial information and management decision for growth and
development of organisation. The business report defined the meaning of financial accounting
and process of making the financial accounting. There are rules and regulations subject to
maintain financial records and information also defined in this context. Accounting conventions
and concepts related to consistency and material disclosure also defined in this context. Journal
entries, book keeping system, trial balance, process of preparing income and expenditure
accounts, bank reconciliation, ledger control accounts, suspense accounts are defined in this
context.
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REFERENCES
Books and Journals:
Edwards, J. R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.
Hatfield, H. R., 2014. Accounting: Its Principles and Some ofits Problems. In The Development
of Accounting Theory (RLE Accounting) (pp. 21-29). Routledge.
Songini, L., Gnan, L. and Malmi, T., 2013. The role and impact of accounting in family
business. Journal of Family Business Strategy. 4(2). pp.71-83.
Zeff, S. A., van der Wel, F. and Camfferman, C., 2016. Company financial reporting: A
historical and comparative study of the Dutch regulatory process. Routledge.
Aletkin, P. A., 2014. International financial reporting standards implementation into the Russian
accounting system. Mediterranean Journal of Social Sciences. 5(24). p.33.
Ennew, C., Waite, N. and Waite, R., 2013. Financial services marketing: An international guide
to principles and practice. Routledge.
Boone, J. P., Linthicum, C. L. and Poe, A., 2013. Characteristics of accounting standards and
SEC review comments. Accounting Horizons. 27(4). pp.711-736.
Colasse, B. and Durand, R., 2014. 3 French accounting theorists of the twentieth
century. Twentieth Century Accounting Thinkers (RLE Accounting). 34. p.41.
Di Pietr, A., Ay, M., Art, S. and Ronen, J., 2014. Accounting and regulation. Springer,.
Drexler, A., Fischer, G. and Schoar, A., 2014. Keeping it simple: Financial literacy and rules of
thumb. American Economic Journal: Applied Economics. 6(2). pp.1-31.
He, H., Craig, R. and Wen, J., 2013. Developing critical thinking skills and effective co-
operative international accounting degree programs in China. Asian review of
accounting. 21(2). pp.144-159.
Seda, M. and Kramer, B., 2014. An examination of the availability and composition of forensic
accounting education in the United States and other countries. Journal of Forensic &
Investigative Accounting. 6(1). pp.1-46.
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