Understanding Accounting Information and Financial Statements

The assignment explains the significance of preparing accurate and reliable financial statements for users' decision-making purposes. It highlights the importance of opening and closing accounts in a trading account and how it affects profitability. The document provides information on the differences between financial accounting, which is used to provide information to internal and external users, and management accounting, which is used for internal decision-making by management.

UNDERSTANDING
FINANCE

Table of Contents
INTRODUCTION ..........................................................................................................................3
Question 1........................................................................................................................................3
(a) Accounting terms ..................................................................................................................3
B) Preparation of trial balance...................................................................................................3
QUESTION 2 ..................................................................................................................................5
a) Balance sheet ..........................................................................................................................5
b) 5 users of accounting information .........................................................................................6
QUESTION 3 ..................................................................................................................................6
a) Income statement ...................................................................................................................6
QUESTION 4 ..................................................................................................................................8
1. Financial and management accounting...................................................................................8
2. Significance of financial statement ........................................................................................8
3. Reason for capital shown in liability side of balance sheet ...................................................9
4. Difference between carriage inwards and carriage outwards .................................................9
5. Effect of opening and closing account have on a trading account ........................................9
CONCLUSION ............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Finance provide understanding about the business financial information which assist in
identifying the profitability and performance of the organisation. In this assignment, It will
contain information about the financial statement and the purpose of preparing the financial
statement Moreover, It will include information about management accounting and financial
accounting. Also, it will contain the information about the accounting terms which consist of
journal., ledge and trial balance.
Question 1
(a) Accounting terms
Journal : It is a record of financial transaction which is being prepared by the
organisation to record the various transaction which are occurred in the organisation. For
example, capital investment in the business is the transaction which is recorded in the accounting
record in the form of entry.
Ledger : It is the principal book which is prepared by the organisation and include the
double entry of the financial transaction recorded in the journal. The ledger accounts are
prepared to identify the closing balance to prepare the financial statement. For example, cash
account, account receivable accounts etc (Wright and et.al., 2016).
Trial balance : It is the statement which consist of debit and credit sides to present the
closing balance of the accounts to identify if the records maintained are effective or if there is
any error in recording the transaction. For example, Closing balance of sales is presented on the
credit side of Trial balance as it is income for the company.
B) Preparation of trial balance
Ealing council services
date particular Amount date particular Amount
TO cash 10000 By cash 10000
Local business advice

date particular Amount date particular Amount
By cash 50
to balance c/d 50
Waste management Ltd
date particular Amount date particular Amount
TO cash 20000 by balance cld 20000
wages
date particular Amount date particular Amount
TO cash 500
by balance cld. 500
rent
date particular Amount date particular Amount
TO cash 500
by balance cld. 500
cash account
date particular Amount date particular Amount
To ealing service 10000 by ealing service 10000
To local business 50
By waste management
ltd 20000
By wage 500
to balance cld. 20950 By rent 500
31000 31000

Trial balance for Drury Down
particular Debit Credit
Local business advice 50
waste management ltd 20000
wages 500
rent 500
cash account 20950
Total 21000 21000
QUESTION 2
a) Balance sheet
Balance sheet for Malachi Ltd for 31december 2018
Particular Amount Amount
Assets
Cash 23000
Inventory 54000
Gross accounts receivable 40000
- allowance for bad debts 2000
38000
Fixed assets
Gross fixed assets 486000
-accumulated depreciation 51000

435000
total assets 550000
Liabilities
Current liabilities
accrued expenses 8000
Current portion of Lt debts 6000
Account payable 39000
short term debts 18000
non current liabilities
long term debts 210000
capital
retained earning 138000
common stock 45000
addition paid up capital 86000
Total liabilities 550000
b) 5 users of accounting information
The accounting information users consist of internal and external users which are as
follows :
Internal stakeholders : They are present in the organisation which uses the accounting
information for various purposes. It consists of management and employees. Management : The managers in the organisation uses the financial information for
making the decision regarding improving the financial performance and profitability of
the firm.

 Employees : The employees of the firm uses the accounting information to identify the
growth of the firm to decide their career opportunities and security of the job (Wolfson,
2017).
External stakeholders : It consists of the stakeholders which are present out of the organisation
and have interest in identifying the profitability and performance of the firm. They are ; Shareholders : They use the financial information to identify about the firm profitability
in order to determine their return for the investment made by them. Government: The government for instance the tax authority uses the financial data of the
company to identify their tax liability sot hat the firm pay the right amount of tax.
 Customers : They have interest in knowing the company performance in order to
compare with that of its competitors for their buying preference and identifying which
commonalty is best (Wilson, Kacer and Wright, 2018).
The financial information provided by the financial statement such as income statement,
balance sheet, cash flow statement and statement of retained earnings. With the help of this
information management of the company is able to formulate strategies and policies to improve
the performance and profitability of the organisation.
QUESTION 3
a) Income statement
particular Amount Amount
Sales 56490
-return inward 321 56169
-COGS 26544
Gross profit 29625
Operating expenses
general expenses 3190
maintenance 1340
wages 23000
office expenses 995
Total expenses 28525

1100
+commission received 2100
net profit 3200
working note
purchase 24654
-return outwards 450
24204
+Opening stock 8903
- closing stock 6563
b)
Balance sheet for 30 june 2017
particular Amount Amount
Assets
Current assets
inventory 10312
trade receivables 6545
bank 892

Fixed assets
Equipment 14500
Property 95000
Total assets 127249
Liabilities
current liabilities
trade payables 5999
Capital 102311
+ net profit 37118
- Drawings 18179
121250
Total liabilities 127249
QUESTION 4
1. Financial and management accounting
Basis of comparison Financial accounting Management accounting
meaning It is an accounting system
which main purpose is to
prepare the financial statement
to provide the financial
information to users (Storey,
2016)
It is an accounting system that
provide management with
information to formulate
various polices and making
internal business decision.
Objective To provide financial
information to internal and
external users
To provide management with
information for internal
decision making.
users Internal and external users Only internal management

Compulsory Yes No
2. Significance of financial statement
Financial statement are prepared in order to identify the financial profitability and
performance of the organisation by preparing various statement which covers the different aspect
of the financial information (Nawai and Shafii, 2017). Financial statement help in providing
reliable and accurate understanding to the users regarding the business performance and
profitability. The examples of significance of financial statement are :
 It provides financial information to the shareholders in order to attract more investors
towards the business.
 Financial statement provide information about the profits earned by the business and their
liquidity position which assist in preparing the budget for the future to enhance the future
profitability of the organisation.
 It is significant to use the financial statement because it provides help to management in
making effective decision regarding the business operation to improve the performance
of the business for the growth and success of organisation.
3. Reason for capital shown in liability side of balance sheet
Capital is the fund invested by the owner in their business which act as the loan for the
business which is to be repaid to the owner in the future point of time. The capital provided by
the business man is used for acquiring the assets and performing various business operation
through which the organisation is able to achieve profitability (Gitman, Juchau and Flanagan,
2015). Capital also include the share capital which is the money acquired by the business from
the public that is to be paid back in the future so for the business this capital act as loan so it is
shown on the liability side of balance sheet.
4. Difference between carriage inwards and carriage outwards
Carriage inwards Carriage outwards
It is the transportation cost which is related
to purpose of goods and services
Cost incurred by business for the transportation
and freight while selling goods and services.
It is shown on debit side it is shown on credit side
It is treated as direct expense (Malhotra, It is considered as indirect expense

2015)
Buyer is responsible to pay the charges seller is responsible for paying the charges
5. Effect of opening and closing account have on a trading account
Opening account and closing account in the trading account consist of opening and
closing stock. Opening stock provide information about the last years stock which was carried
forward to the present year on the basis of which the closing stock is identified by adding and
subtracting various expenses and incomes such as purchase, sales etc. It is required to have less
closing stock than the opening to have profitability (France, 2016). Trading account is affected of
the opening stock is less than the closing stock because it will affect profitability for the future
period.
CONCLUSION
From the above assignment it can be concluded about accounting information which is
provided by preparing the three statement which consist of income statement, balance sheet and
cash flow statement. It has included the information about the importance of preparing the
financial statement which is to provide accurate and reliable information about the firm
profitability and performance to the users for their decision making. This assignment has also
included the information about financial accounting and management accounting which has
provided that financial accounting is used to provide financial information to the internal and
external users whereas management accounting is used for internal decision making by
management.