Sample Financial Accounting - Assignment

Financial accounting principle.

INTRODUCTION
Financial accounting principles are referred as the rules or the regulations that has be
comply by the organization at time of reporting the financial data within the statements. The
organization has to formulate its financial reports in accordance and compliance with accounting
principles or rules. Present study is based on Brooks City which is an small business accountancy
firm, it provides tax and accounting services to its customers. This study is based on various
aspects relating to financial accounting. Furthermore, the report present deep insights towards the
meaning and the purpose of the FA. Moreover, it includes the information regarding all the
stakeholders with appropriate preparation of the primary books and the final accounts of the
company. It also highlights the accounting principle that includes consistency and prudence
concept. Report will also provide deeper insight about accounting concepts or rules pertaining to
depreciation, suspense and control account etc. In addition to this, it also develops understanding
about BRS and causes due to which deviations occurred in the same in comparison to cash flow
statement.
MAIN BODY
a. Defining financial accounting and its major purposes
FA refers to the practice of recording, reporting and interpreting the transactions are
resulting from the operations of the business. In this, business transactions are been summarized
within the formulation of the financial reports that includes profit and loss statement, b/s and the
cash flow statements (Barth, 2015). These statements record for the operating performance of an
entity over the particular time period. Financial accounting makes utilisation of the established
principles for the accounting. It is mandatory for all the organization to report their financials in
compliance with the IFRS and GAAP. The development of these principles of an accounting is
to facilitate information on the constant basis to the stakeholders namely creditors, investors, tax
authorities, regulators etc (Libby, 2017). Financial accounting could be performed by utilising
the two main methods that includes accrual and cash method. However, cash method reflects the
recording of the business transactions only on the exchange of the cash. Financial and
management accounting are the main branch of the accounting but differs with each other in the
following manner-
Basis Financial accounting Management accounting
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Meaning It refers to the system of
accounting which emphasize
on formulating the financial
reports in order to facilitate
financial information for the
interested parties.
It implies for the one that
provides relevant information
to managers for the purpose of
making the effective plans,
policies and the strategies in
order to achieve smooth
running of the business
operations.
Type of information It facilitates only monetary
information and not accounts
for the non-monetary
information.
This system provides monetary
as well as the non-monetary
information.
Purpose The major purpose of FA is to
facilitate financial information
to the users.
MA enables the managers in
planning and in taking
adequate decisions with
providing the detailed
information to the management
on several matters.
Users Insider and the outsider
parties, both are considered as
the user of the FA
(Christensen, Nikolaev and
Wittenberg‐Moerman, 2016).
Internal members are the main
users of the management
accounting.
Auditing Financial report under this
system are required to be
audited by the appropriate
statutory auditors.
The reports formulated under
this system does not requires
any auditing.
Time frame Financial statements under Under this reports, financial
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financial accounting is been
framed at year end which is
specifically one year.
statements are been formulated
as per the requirements of an
entity.
Purpose of FA- The main objective of the financial accounting is to facilitate
information that is required for making appropriate economic decisions (Balakrishnan, Watts and
Zuo, 2016). It aims for preparing the financial statements which provides adequate information
in relation to the performance and the position of the firm to the interested internal and the
external parties. The other purposes are as follows-
 Maintaining adequate control on the assets and making an efficient plan in context of the
cash.
 Providing a reliable series of the financial data in order for preparing the financial
statements accurately.
 To formulate financial reports by meeting the regulatory requirements.
b. Describing 2 internal and 4 external stakeholders with showing their interest in the financial
report
Internal stakeholders-
They are referred as the members of an entity's management and the other individuals
present within the organisation makes use of the financial information for the purpose of running
and in managing business (Abernathy and et.al., 2015). The two internal users are as follows-
Managers- They are the person who manages the entire organization. As managers are
responsible for managing the routine functioning of the business so they require accounting
information in order to monitor, measure, plan and in making the business decisions. They need
financial information for allocating human, capital and financial resources towards meeting the
competitive needs of an enterprise by following the process of budgeting (Kim and et.al., 2016).
For framing an effective budget, manager needs relevant accounting data regarding several
processes, services, products, segments, activities and the departments of business. Managers
needs the accounting information for monitoring performance of the business by making the
comparison relating to the past performance benchmarks and the competitors' analysis. They rely
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on the accounting data in respect of forming their business decisions relating to financing,
pricing and the investment. For example- In Case the managers want to compute the ROI from
proposed project are been supported by the reliable anticipations of revenues and the cost.
Owners- They are the parties who has a keen interest in knowing the how well is the
performance of its business. Financial reports facilitate the information to the owners relating to
the profitability gained by its the overall business and towards the geographic segments and the
individual products (Gaynor and et.al., 2016). They are also interested in assessing the risk of
their business so accounting information helps the owners in analysing the stability level in the
business and an extent to which the modifications within the economic factors that has affected
the functioning of its business. Information relating to financials assists the owners in making
decisions that they should made any further investment or should use its financial resources in
other profitable ventures.
External stakeholders-
Lenders- Lenders are individuals public or private that provides funds to companies and
expect that their funds will be repaid with interest. They main role of lenders is to provide funds
or credits so that business invest and grow within the market. They make use of the financial
information for assessing the creditworthiness of the company in paying the loan. They offered
the loans and the credit facilities based on assessing the financial state of an entity. A financial
health of the borrower or firm is said to be good when it is has the capability in to pay back its
obligation on time, gaining profits, better liquidity and sustainable assets (Cao, Chychyla and
Stewart, 2015). However, low profitability, poor liquidity, low assets and the inability of the
company in paying its liabilities reflects poor financial state of the borrowers. Company could
get the loan from the lenders if their financial statements shows sound and better financial
performance and position.
Investors- Investors are people or partners who provide funds to expand business and
provide knowledge and skills in order to improve business operations. They have a ownership in
the company and want information relating where company has invested their money. They need
to assess the accounting information for monitoring the performance of their investment and in
assessing the trend of company's performance. They rely on financial report that is been
published by an organization for analysing the valuation, risk and profitability within their
investment (Keune, Keune and Quick, 2017). They make use of the financial information for the
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purpose of determining that they should hold, withdraw or increase the proportion of their
investment.
Auditors- They are authorized person who review financials of the company and records
every transaction to ensure that business follows tax laws. It provides financial statements to
lenders and investors in order to tell them financial position of the company. External auditors
makes analysis of the financial report and an accounting record in relation to forming a true and
fair audit opinion. Stakeholders highly relies on independent opinion of an auditor regarding the
accuracy and relevancy of the financial reports.
Government- This party makes use of the accounting information in order to ensure that
that an enterprise discloses all the information that are material and are reporting as per the
appropriate standards. They aim at protecting interest of the several stakeholders who relies on
the accounting information in order to form suitable decisions (Bailey and Sawers, 2018). They
monitor and clearly defines the thresholds limit within the accounting like towards the sales
revenue, business size and the net profit. Government reviews the accounting information for
ensuring that they are making all the compliance in relation with the safety, employee and the
consumer related regulations
CLIENT 1
I. Journal entries
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
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
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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
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
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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
2. Ledger accounts
Ledger of Alexandra for the month January 2019 are as follows:
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F. Lane
Date Details Amount Date Details Amount
1st Jan 2019 Balance b/d 6100 16th Jan 2019 Cash 3100
3rd Jan 2019 Sales 980 31st Jan 2019 Balance c/f 3980
7080
1st Feb 2019 Balance b/d 3980
J. Fox
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Capital account
Date Detail Amount Date Detail Amount
31st Jan 2019 Balance c/d 389000 1st Jan 2019 Balance c/d 389000
389000 389000
D. Main a/c
Date Details Amount Date Details Amount
31st Jan 2019 Balance c/f 2060 2nd Jan 2019 Purchase day
book
2060
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2060 01/02/19 2060
1st Feb 2019 2060
3. 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
business rates 1320
capital 387500
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premise 240000
van 51250
Fixtures 8100
inventory 23900
Cash in hand 13630
Cash at bank 59250
Total 427930 427930
CLIENT 2
a. Profitability statement
Profit and loss statement of Munteanu Plc for
year ended 31st December 2018
Particulars Amount (in £)
Revenue (W1) 135000
Cost of sales (w2) -55300
Gross profit 79700
Distribution costs (w3) -36000
Administrative cost (w3) -36000
Operating profit 7700
Finance cost -1500
Profit before tax 6200
Tax payable -2000
Profit for the year 4200
b. balance sheet
Balance sheet of Munteanu Limited for the year ended on 31st December 2018
Particulars Amount (in £)
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Assets £
Non-current assets
Property, Plant and Equipment w4 81200
Current assets
Inventory note (I) 20000
Trade receivables 26000
Prepayment note (iii) 3000
Total Current assets 49000
Total assets 130200
Equity and liabilities
Equity
Ordinary share capital @ £ 1 each 40000
Share premium 20000
Retained earnings 26200
Total shareholders fund 86200
Current liabilities
Trade payables 22000
Accruals Note (iii) 2000
Tax payable note (iv) 2000
Bank overdraft 18000
Total Current liabilities 44000
Total liabilities 130200
Working notes:-
w3
Particulars Amount (in £)
Sales 138000
less: return inwards -3000
Revenue 135000
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w2
Particulars Amount (in £) Net amount (in £)
Opening Inventory 15000
add: purchases 61000
less: return outward -1500 59500
74500
less: closing stock (I) -20000
54500
add: Dep on buildings 800
Cost of sales 55300
w3
Administration cost
Costs Distribution cost
TB 30000 35000
Dep on plant and machinery 4000 4000
Admin salary accrued 2000
Rent prepaid -3000
36000 36000
w4
PPE
Land and building Plant and machinery
as per TB
cost/valuation 60000 60000
acc dep @ 1 jan 2018 -10000 -20000
current year -800 -8000
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Depreciation
Carrying value @
31/dec 18 49200 32000 81200
c. Explaining the consistency and the prudence concept within accounting
Consistency- This concept is important because it provides for the comparability which
enables the investors and the users of the financial report in making easy and correct comparison
of an entity's financial statements (Pan, 2018). For example- ABC Company is using straight
line method for the purpose of charging the depreciation on its equipment so in accordance with
the consistency concept the company has to use this method for the constant period till the useful
life of an asset.
For example: Company XYZ is valuing its inventory by making use of the FIFO method
so as per this principle, it will have to use this method for the continuous period until and unless
there are valid grounds.
Prudence- It is also called as the conservatism concept as it tells about not overestimating
the revenues that are been recognized and also not underestimating the expense amount (Cao,
Chychyla and Stewart, 2015). It means that an entity must be conservative in recording its asset
amount and does not underestimating its liabilities. For example- Provision for bad and doubtful
debts and recording of the expected expenses.
d. Describing the objectives of the depreciation in relation to preparation of financial statements
and explaining the types of depriciation
Depreciation: it is a method of calculating real price or value of the tangible assets to
measure its efficiency and life. It is charge on the annual basis and present in financial
statement such as income statement and balance sheet. There are two common method of
estimating depreciation. SLM is used to charging a fixed amount on the assets of the
company. Per annum a fixed amount is subtracted from asset value by taking life of asset.
In WDV method the depreciation amount is reducing per annum. At the end of the life of
asset company get scrap value in written down value method. The reason of calculating
depreciation is to match the historical cost. The SLM method is appropriate for the assets
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like the lease and copyright while WDV method is appropriate for the assets like
machinery and vehicles.
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Particulars Figures (in £)
Machinery £100000
Life 5 years
Depreciation 20000
Straight line method
WDV
Particulars Figures (in £)
Machinery £100000
Life 5 years
Rate of Depreciation 20%

From the above table, it can be concluded that WDV method is the best way of calculating
depreciation because at the end of the life of asset user get scrap value whereas in SLM method the asset
value is zero at the end of the life of asset.
e. Stating the difference in between the final reports of the sole trader and the Limited company
Limited company Sole trader
The final reports of the limited company
requires auditing from the statutory auditor and
requires to follow all the rules and regulation
that are been provided by IFRS in compliance
with the regulatory framework.
Financial statements of the sole trader need not
have to be audited and does not have to follow
any guidelines.
Shareholders equity section of the limited
company includes retained earnings, revenues,
share capital and the capital reserves.
In the balance sheet of the sole trader owners’
equity section contains only a single item that
is proprietor's equity account.
Tax is directly levied in the name of the
company as it is a separate legal entity. which
means that owners and the firm are counted as
separate from each other (Gaynor and et.al.,
2016).
Under this the tax is been levied on the income
of the owner.
Company requires to follow all the accounting
standards, rules, regulatory framework and the
principles at the time of preparing the final
reports.
Sole trader is not subjected to any of the
standards of GAAP and they has full liberty to
decide that whether to frame the final reports or
not.
CLIENT 3
a. Explaining meaning and the purpose of BRS.
Bank reconciliation referred as the document which is been prepared by the depositor in order to
find, understand and measuring any of the differences in the bank statements and the remaining balance

within their accounting records. The transactions that takes place in between the bank and the depositor
are been recorded separately by the parties within their records. Bank reconciliation statement is prepared
for the purpose of comparing the differences in between the cash and the bank records. The balance at the
end of the cash records are called as book balance, however record of the bank is known as the bank
balance. The other purposes of formulating the BRS are as follows-
 It aims for confirming accuracy of balances that are been presented in the books of an
organization and the bank records.
 It facilitates the check on accuracy of the entries that are been made in both books that is the bank
and the cash statement.
 It helps in rectifying and detecting the error that are committed within the records.
 It provides for the indication in relation to updating books in case of omission of an entry.
 It assists the individual in checking the undue delay within the clearance and the collection of the
cheques.
b. Explaining the purpose of finding bank reconciliation statements
Bank reconciliation statement are used calculate the differences between the cash book and bank
statement. There is mismatch between the pass book and cash balance because of the omission of
transaction, double entry of one item or enter the transaction in different day book etc. The reason behind
the differences are:
Outstanding cheques: It refers to the cheque which are generated by the company but show in
bank statement at the time of payment. Depositor of the cheque credited the books of account after
issuing cheque to the other party but may be the other party does not deposit the cheque in bank at the
same time. It increases the difference between the cash book and bank statement.
Deposit in transit
 Cash deposit: It refers to deposit the cash in the ledger account of depositor at the same day but it
deposited in the bank statement on other day which create differences in books of account.
 Standing order: Bank may pay the standing order on the instruction of depositor like the payment
of interest, instalment amount and the insurance premium etc. But the depositor forgets to record
the entry in books of account. The direct payment by bank reduces the bank statements but the
cash book of the depositor still presents the increasing cash amount which might be the reason of
imbalances.

 Direct payment by third party: the third party or debtor of the company pay the debt in bank
account of the company without informing the owner or account manager (Causes of
Disagreement between Depositors Book and Bank Statement, 2017). It increases the bank account
amount but did not present the cash in company cash book. It may be the reason of difference in
cash and bank statement.
Cheque dishonour: It refers to returning the cheque by the bank to the depositor on insufficient
balance in account or finding the unfair practice of company. Cheque dishonour by bank due to the
insufficient amount debited the bank account but the due to the delay in information depositor still
credited the cash book amount. Due to the interim period differences in the bank and cash statement
occurs.
Bank charges: It refers to charging amount from the account holder on providing the deposit and
withdrawal facility to the account holder. On charging the amount from the depositor, it debited the bank
amount and reduces the balance in bank statement. Due to the unavailability of the information cash book
did not credit the amount. It can be the reason of differences in bank and cash statements.
The imbalances in the cash and bank statements may due to the bank interest, bankers or
depositor's error, printing charges etc. To rectify the error or imbalances in the statements account holder
use the bank reconciliation statements.
c. Stating the imprest system in petty cash account
Petty cash : It taken by the company to pay daily expenses of small amount. The petty cash
amount is different for the company to company. Large organization require higher amount in petty cash
whereas small organization require less amount.
Imprest system : It is a financial system used for petty cash replenish. Company allocate a specific
amount which are presented in separate general ledger of petty cash account. They present all the cash
distribution in single receipt document.
The feature of imprest system are:
 Allocate fixed amount to petty cash account in separate account of general ledger.
 Disbursement receipt of petty cash account are used for the replenishment of petty cash on
periodic basis.
 A separate document is used to record petty cash distribution. It helps the company to control the
cash disbursement.

 The variances or differences between the actual and expected fund are regulated and monitor
regularly.
Imprest account is prepared to pay the daily, small expenses of the company. It is used by the
company to estimate the need of cash and monitor them to get effective result from organisation
performance. The documentation of all receipts and expenditure provide a direction to control the cash
transaction and monitor the usage of money in different activities of the company. But now the
requirement of imprest system is reducing because of the increasing role of credit card in the organisation
(The imprest system, 2019). Most of the company use the credit card system to purchase the inventory,
machinery and other items. The imprest cash system in petty cash also increases the cash leakage by theft
of cash. The unfair or careless practice of petty cash custodian or manager increases the cash leakage.
The rising electronic transaction also reduces the use of imprest system. The usage of electronic
transaction or credit card are more easy way to pay the amount in compare to the imprest system.
d. Bank reconciliation statement of Burcu Ltd.
DR. CASH BOOK(Bank Only) CR.
Date Receipts £ Date Payments £
01-Sep-18 Balance b/d 515 09-Sep-18 M.Potter 251
07-Sep-18 Cash Sales 64 10-Sep-18 C Lyons 87
12-Sep-18 M.Pointer 26 14-Sep-18 C Hallerns 89
17-Sep-18 Cash Sales 171 20-Sep-18 C David 122
24-Sep-18 Cash Sales 103 28-Sep-18 S Leeming 116
30-Sep-18 Balance c/f 214
879 879
30-Sep-18 Balance b/d 214

DR. Corrected CASH BOOK(Bank Only) CR.
Date Receipts £ Date Payments £
30-Sep-18 Balance b/d 214 17-Sep-18 DD 105
30-Sep-18 Bank Charges 36
30-Sep-18 Balance c/f 73
214 214
30-Sep-18 Balance b/d 73
Bank Reconcilliation Statement
Particulars £
Balance as per Bank Statement 398
Add:- Outstanding Lodgements 0
398
Less:- Unpresented Cheques(87+112+116) -325
Balance as per Corrected Cash Book 73

CLIENT 4
a. Sales and purchase ledger account of hilly
Dr.
Sales
(Receivables)
Ledger Control
Accounts Cr.
Date Details £ Date Details £
01/01/19 Balance b/d 12600 Bad Debts 1600
Credit sales 152350
Discount
allowed 1060
Sales Returns 4320
Receipts from
customers 120610
Contra 640
31/01/19 Balance c/f 36720
01/02/19 Balance b/d 36720
Dr.
Purchases
(payables)
ledger control
accounts Cr.
Date Details £ Date Details £
Discount
received 850 01/01/19 Balance b/d 11360
Purchase returns 3110 credit purchases 126500
payments to
suppliers 91010
refund from
suppliers 500
Contra 640
31/01/19 Balance c/f 42750

138360 138360
01/02/19 Balance b/d 42750
b. Explaining control account
Control account
It refers to a general ledger which are used to combine and summarize the all subsidiary account
belongs to same type or nature. They are also known as controlling account. Moreover, they are used to
simplifying the general ledger by adding the subsidiary account of similar nature. A general ledger is
prepared to record the transactions which are link to liability, assets, expenses and income etc. Each
transaction or account has different subsidiary account. Consideration of every single account in general
ledger increases the length which is difficult for the user to understand the real sense of account
preparation (Maas, Schaltegger and Crutzen, 2016). So the control account helps the accountant to add all
the subsidiary account of specific type.
The control account is needed by organisation or company to help the financial accountant to
control balances of subsidiary account. They are not directly related to the general ledger(Andrei,
Gâlmeanu and Radu, 2018). Control account helps to find out the error in the subsidiary ledgers and
faster the producing management account process. Further it can be used to minimize the need or
requirement of general ledger. It is used to rectify and identify the fraud or misrepresentation in control
account.
CLIENT 5
a. Describing different characteristics of suspense account
Suspense account refers to an account which are used to record all doubtful transaction and
entries for temporarily or permanent basis. It is used by the company to balance the trial balance and
analyse the different accounts to identify the error in recording, calculating or balancing the account. It
acts as holding account to rectify the error and get progress in presenting financial statements
(Abuhamdeh, Csikszentmihalyi and Jalal, 2015). Suspense account is used to rectify the difference in the
trial balance calculation by matching debit side with the credit side. It used to identify the differences in
trial balance statement and help to prepare accurate balance account and income statement. After
rectifying the error it is removed to the trial balance as well as it was closed in the final account.
Role and importance of Suspense account

Preparation of trial balance: It is used to prepare and balancing the trial balance amount. It
provides solution to record the differences between both the side of trial balance by opening suspense
account.
Identify the nature of error: The role of preparing suspense account is to judging the nature of
error in presenting transaction. Reason behind arising the difference may be because of omission of data
or recording the transaction in different account. For example, accountant can forget to record the sales
entry in sales ledger or record the purchase transaction in purchase return book. It may increase the one
side amount in books of account.
Preparation of financial account: The final account of the company are based on journal, ledger
and trial balance to record the transaction in systematic manner. The imbalances in trial balance create
the misrepresentation of final accounts as well as false presentation of final position. Suspense account
help to balance the amount and further rectify them to get accurate financial position.
Save time: It is prepared to record imbalances in debit and credit side (Moll, Kane and
McGowan, 2016). Further it saved the time of accountant or finance manager to identify the problems or
error at the time of preparation of trial balance and resolve them after preparing the account statements.
Characteristics of suspense account:
 It help the company to rectify the imbalance in trial balance credit and debit side.
 It is used when the transaction are omitted to record or wrongly entered into the other account.
 It helps record transaction in final accounts of the company.