Financial Accounting: Concepts and Stakeholders

This document provides an introduction to financial accounting, explaining its purpose and the stakeholders involved. It discusses the concepts of consistency and prudence in accounting practices. The document also includes practical examples of financial statements and the application of accounting principles.

Financial Accounting
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1. Financial accounting...............................................................................................................3
2. Stakeholder..............................................................................................................................6
TASK 2............................................................................................................................................8
Client 1........................................................................................................................................8
Client 2......................................................................................................................................12
Client 2......................................................................................................................................16
Client 4......................................................................................................................................17
Client 5......................................................................................................................................18
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INTRODUCTION
Financial accounting is a specialized branch of accounting whose focal point is on
tracking organization's financial transactions. Financial accounting is a routine schedule of every
organisation. It is a very important branch of accounting as mere doing business is not enough
for an organisation, to see, whether, the efforts are directed into right direction or not is also
essential (Baker and Burlaud, 2015). This check on the efforts of organisation and its employees
is done by the application of financial accounting. This involves preparation of financial
statements like profit and loss account for determining profits earned by company in current year
and it also includes balance sheet, which is a detailed statement of company's financial position.
This report is divided into two tasks. First task explains about concept of financial accounting
and its purpose. It also shows light upon stakeholders of a large organisation. Second part is
focused upon the practical part to develop an understanding of double entry accounting system
and preparation of final accounts. Further understanding of bank reconciliation statement and
suspense account is developed in this report.
TASK 1
1. Financial accounting
It is defined as the process of recording, classifying, summarizing, interpreting and
reporting of financial data of a business. This process utilizes different accounting principles
which are established by regulating authorities. Use of financial accounting makes accounting of
every organisation world wide common. The data used in financial accounting is categorized
under five different heads that are incomes, expenditures, assets, liabilities and capital (or
equity). There is different accounting treatment for every item which is in accordance of
established accounting principles and policies followed in organisation. The basic purpose of
financial accounting is to ascertain profits or losses of a specified period, to ascertain financial
position of business (Barker, 2015). From above explanation, following characteristics of
financial accounting can be drawn:
 Recording: This refers to the process of recording of transactions that can be measured
in monetary terms, soon after they are occurred in books of accounts. Transactions are
recorded in journal.
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 Classifying: It is concerned with the classification of the recorded data in a way that
similar nature of transactions are grouped under common head (Cooper, 2017).
 Summarising: It is focused on presentation of classified data in a manner that is useful
for users. This step of financial accounting involves preparation of financial statements
such as profit and loss account, balance sheet, cash flow statement, etc.
 Interpreting: After all above mentioned functions are performed, interpreting comes in
role, it means communication of results derived to managers after interpreting them.
This interpretation includes questions like (a) why it happened (b) what can happen in
coming time.
 Financial accounting is an art and science as well: Accounting is an art as some of
the decisions are based on the personal judgement of accountant and it is a science as,
universally, books of accounts are prepared in similar nature based on accounting
principles that are followed by every accountant.
There are various branches under accounting, but they all differ in their functions and roles. In
order to explain above statement, difference between financial accounting and management
accounting is given below (Drew and Dollery, 2015):
Basis Financial accounting Management accounting
Meaning It refers to the mathematical
operations carried on raw monetary
data, in order to present them in a
systematic and meaningful manner.
It refers to the steps and analysis
conducted on results of operation of
financial accounting. This is done with
the purpose of obtaining assisting
source for strategy formulation.
Users Both internal and external users have
access to financial accounting. This
is given in annual reports of
company.
This is done only for the use of
internal users, as, it assists them to
plan for future course of actions.
Purpose of financial accounting: To keep systematic records- Financial accounting is performed with basic purpose of
maintaining systematic records. If accounting is not performed, than it will create a huge
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burden on administration mind and in most cases it will lead to failure of business
operations. To protect business properties- Financial accounting provides safety to business
properties from unjustified use. This is possible because managers keeps a check in
particulars like amount of funds invested in business, amount of debt and credit on
organisation, various information like amount of fixed assets, cash in hand, WIP, amount
of finished goods, stock of raw material, activities that generate greater profits, etc. these
all information helps manager to assure that funds are not kept idle or underutilised (Fall
and Fournier, 2015). To determine amount of profit or losses- Main purpose of financial accounting is to
ascertain profits and losses of business. This function is performed by keeping a proper
record of incomes and expenditures relating to a specific period of time. If income
exceeds expenditures than it is profit on account of business and in the opposite case, it is
loss. This function is performed by preparing profit and loss account and this account
help managers, investors and every stakeholder to know about the profitability of
business. In case, there are losses for consecutive periods, than managers can take
required investigating steps in order to ascertain reasons for these losses. To ascertain financial position: Financial position refers to where the business actually
stands, what it owns and owes? This objective is served by Balance sheet. It is a detailed
statement of assets and liabilities of business on a particular date, generally, the last date
of specific period of time. It acts as barometer of financial health of organisation. Various
analysis tests are conducted on this statement only, which further leads to generation of
information which are useful for the task of strategy formulation. This is an important
task to perform as mere calculation of profit is not enough, as it can produce a vague
picture, and it can become clear only on preparation of Balance sheet (Flower and
Ebbers, 2018) . Facilitate rational decision making- Financial accounting serves as assistance tool for
managers in decision making, as, the results generated by final accounts are used as data
for comparing performance of firm with other firms in the industry. This comparison
makes it easy for managers to take decisions about future course of actions. If the
evaluation is not made proper, than results obtained will be vague, hence, decisions will
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not be taken in correct manner. These decisions relates to matters like, depreciation
policy, disposal of some obsolete asset, etc.
 Information system: Financial accounting play role of information system as well having
role of collecting and communicating information about organisation. This collected
information helps administration to take suitable and required decisions (García‐Sánchez
and Noguera‐Gámez, 2017).
2. Stakeholder
The main objective of financial accounting is to furnish users (inside and outside of
organisation) with information relating to financial transactions and position of business. Users
of this information can be classified into two categories i.e. internal and external users. These
users are often termed as stakeholders.
Internal stakeholders: These are persons or groups who are present within the
organisation. They are using this information for separate reasons, some of them are explained
below: Owners: They are prime users of accounting data, as they only provide funds for
operations of organisation, therefore, they need to know whether their money is being
properly utilised or not. They are interested in knowing about profitability and financial
position of business. As already discusses, it is main focus of financial accounting to
prepare final accounts of organisation, which generate related results (Keil, 2016).
 Management: Main task of management is to getting work done through others, and to
ensure that its sub ordinates are working properly or not. Financial accounting provides
an aid in this matter by providing them with monitoring performance of employees.
Actual performance is compared with desired performance that management was
expecting out of them. Important roles of management includes planning and controlling.
Planning is done with the help of preparation of various budgets. Controlling is
performed with assistance of calculation of variances between actual figures and
budgeted figures. Accounting information is useful in fixing appropriate selling prices.
Over/ under fixation of prices may lead to failure of product as, over fixation will not
attract customers and under fixation will lead to losses due to price not covering the cost
also. Thus, appropriate fixation of price is necessary.
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External stakeholders: These are group or persons who are outside the company but are
indirectly interested in its accounting information. Following are some examples of external
stakeholders. Investors: These are persons who invests in organisation and are interested in knowing
financial position of organisation to know that their money is in safe hands or not. They
are interested to know that whether the returns are in accordance of what they expected
or not. Future investment decisions are dependent upon accounting results of financial
statements like EPS, net profit, etc. Government: Central and state governments both are interested in accounting
information of organisation due to their own reasons. Some of the reason of interest are
taxation records. They also need accounting information due to compiling statistics
related to business which are needed for compiling national accounts. Creditors: Company owes some money to certain parties (eg.- supplier of raw material,
bankers, or other lenders of money). They are interested in accounting information due
to reason as they want to be ensured about creditworthiness of organisation. If prior
calculations and investigation is not done by creditors, than it may lead to their bad debts
as company does not hold that position in which it will be capable of returning debts. Society: Society as a whole wants to review accounting information of company, for
wanting to know whether that company is fulfilling its responsibility towards society or
not (Eg.- CSR). This will be an important tool in establishing good position among
society and targeted customers (Küpper and Pedell, 2016).
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TASK 2
Client 1
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Client 2
a.
Profit and loss a/c
for the period ending on 31st may 2020
Particulars (£) Particulars (£)
To opening stock 180000 By sales 1600000
To purchases 750000 By return outwards 20500
To return inwards 32000 By closing stock 20
To administration cost 250000
+ depreciation on plant and
250063 By net income 169241
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machinery + 61
+ outstanding salaries + 2
To distribution cost 214000
+ depreciation on plant and
machinery +61
- prepaid rent -03
214058
To depreciation on building 156
To taxation 2
To finance cost 25000
1620520 1620520
Balance sheet
as on 31st may 2020
Liabilities (£) Assets (£)
Share capital 450000 Trade receivable 320000
Share premium 250000 Bank 220000
Retained earnings 240500 Inventory 20
Net income 169241 Land and building 800000
Accumulated depreciation on
building
150000
add: depreciation 156
150156 Plant and machinery 850000
Trade payables 250000
Suspense a/c 680123
2190020 2190020
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c.
Concept of Consistency:
According to this principle of accounting, an organisations is compulsorily to follow
same policies and principals to maintain principal characteristic of accounting i.e. comparability.
Users need to compare different years accounting information in order to compute growth or
decline rate in performance of company. If different policies will be followed every year than
main characteristic if financial accounting i.e. comparability will not be there. This principle
holds so much of importance due to following reasons:
 Comparable financial information: By using consistent accounting policies every year,
financial reports will have a similar structure. This makes it easier for all stakeholders to
compare the required figures over different financial years.
 Familiarisation: Continuous use of same accounting method over the years make
managers and accountants well familiar with that method, therefore, no extra training will
be required and also chances of mistake will be almost zero. This will result into both
cost an time efficient.
Example for this concept: Use of same method of depreciation every year for say, written down
value method. This will help in correct valuation of assets.
Concept of Prudence:
This concept represents conservative approach of financial accounting. This means that
while recording process, assets should not be over estimated and liabilities should not be under
estimated. Another way of understanding this concept is that, revenues should only be recorded
when they are certain, but in case of expenses or liabilities, they should be recorded even when
they are probable. For example: inventory is always recorded on lower of net realizable value or
original cost.
This method helps in ensuring that business do not inflate revenue without uncertainty.
This method is directed towards achieving true and fair view of financial statements. Recording
of even probable losses ensures that business is prepared in advance for those losses by making
appropriate provisions. Presenting financial statements on a little downside than actual position
ensures that stakeholders do not have fake hopes (Kwan and et.al., 2016).
d.
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Depreciation
It is an accounting process which is used to allocate total cost of asset throughout its
useful life. Purpose of applying depreciation is to represents actual position of asset possessed by
business at the end of specific period of time. Charging of depreciation is in accordance with the
matching principle. It means that cost of productive asset is matched by the revenue earned by
that asset. There are various methods used for calculating depreciation, two of them are
explained below: Straight line method- This is the most simplest method of depreciation, according to this,
total cost of an asset is equally spread over number of useful life after making
adjustments of salvage value. This method is suitable for asset which have negligible
repairs expenses.
 Written down value method- According to this method, as the number of years for which
asset has been used increases, amount of depreciation declines. In this method, a fixed
percentage of depreciation is charged and not the fixed amount. This fixed proportion is
calculated on the remaining cost of asset. This means after calculating depreciation
amount, it is deducted from the cost of asset and the remaining cost is used for
calculating amount of depreciation. This method is suitable in case of fixed asset whose
expenses of repairs increase, as the asset gets older (Maynard, 2017).
e.
Difference between financial statements :
Sole Proprietorship Limited Company
Owner's equity is represented by only capital
a/c.
In this owner's equity consists of several
items like shareholder's fund, reserves and
surplus.
There is tax charged directly on owner's
income.
Tax is charged on company's income, as it
enjoys separate legal entity.
There are no regulations or rules governing
preparation of financial statements, just it
should be in accordance of principles.
There are regulatory framework and
accounting should be done in accordance
with them.
There is no obligation of audit for sole There are strict rules mentioned in related
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proprietor. acts, making it an obligation for companies
to conduct audits.
Client 2
a. Purpose of bank reconciliation statement: The basic purpose of BRS is to identify and
correct any mistake in the process of recording of payments made from bank account and
amounts. This is done to uncover any fraudulent activity if occurred.
b.
Reason for difference:
 Outstanding checks
 deposits in transit
 bank service charges and check printing charges
 electronic charges not yet recorded in company's cash book (Mook, and et.al., 2015).
c.
Imprest
It is a system in which petty cash book remains constant and all expenses will be
considered as imprest balance. As long as balance imprest balance is adequate for small
expenses, general ledger will never be debited or credited again.
d.
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Client 4
a.
Dr. Sales ledger control account Cr.
Particulars (£) Particulars (£)
Balance b/d 24800 Bad debts written off 2800
Credit sales 304350 Discount allowed 2560
Sales return 8620
Receipt from credit customers 245610
Transfer to purchase ledger 1040
Balance c/d 68520
329510 329510
Balance b/d 68520 68520
Dr. Purchase ledger control account Cr.
Particulars (£) Particulars (£)
Discount received 2050 Balance b/d 22060
Purchase return 6310 Credit purchase 266500
Payment to suppliers 169010
Transfer to sales ledger 1040
Balance c/d 110950 Refund from suppliers 800
289360 289360
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Balance b/d 110950
b. Control account
It is a reconciliation tool that is used by accountants to sum up balance in subsidiary
accounts. There are number of accounts and sub accounts in a general ledger, holding all these
account in one general ledger becomes a tedious task, thus, to make things workable, a control
account is used. Example, accounts receivable. These accounts provide a sum up of transactions
that are recorded in various subsidiary ledger. They play a important role in policy formulation.
It makes work easier for accountants. It also leads to easier preparation of final accounts by
providing figures quickly. It also leads to improved accuracy of records.
Client 5
a. Suspense account
This is a type of account that is opened to rectify previous year's one sided errors. It is
temporary in nature. After rectification of errors, this account disappears automatically. This
account is opened after preparation of trial balance, after passing rectification entries, balance of
this account gets nullify in its own (Nicholls, 2017).
Features:
 Temporary in nature
 Carry one sided errors
 Balance disappears on rectification.
b.
Treatment of suspense account
TRIAL BALANCE
for the period ending on ….
S. no. Name of accounts Amount
(Dr.) (£)
Amount
(Cr.) (£)
1 Purchases a/c 14000
2 Sales a/c 22000
3 Rent paid a/c 5000
4 Cash in hand a/c 16800
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5 Travel expenses a/c 3200
6 Receivable a/c 6400
7 Payable a/c 7000
8 Opening inventory a/c 4400
9 Capital a/c 14200
10 Control a/c (b/f) 3300
11 Suspense a/c 3300
Total 49800 49800
c.
JOURNAL
for the period ending on....
Particulars Amount
(Dr.) (£)
Amount
(Cr.) (£)
Control a/c Dr.
To suspense a/c
3300
3300
Simon's a/c Dr.
To Smith's a/c
4400
4400
Jones' a/c Dr.
To Suspense a/c
8400
8400
Suspense a/c Dr.
To White's a/c
15000
15000
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Suspense a/c
Particulars Amount Particulars Amount
To White's a/c 15000 By balance c/d 3300
By control a/c 3300
By Jones' a/c 8400
15000 15000
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REFERENCES
Books and journals
Baker, C.R. and Burlaud, A., 2015. The historical evolution from accounting theory to
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Barker, R., 2015. Conservatism, prudence and the IASB's conceptual framework. Accounting
and Business Research. 45(4). pp.514-538.
Cooper, S., 2017. Corporate social performance: A stakeholder approach. Taylor & Francis.
Drew, J. and Dollery, B., 2015. Inconsistent depreciation practice and public policymaking:
Local government reform in New South Wales. Australian Accounting Review. 25(1).
pp.28-37.
Fall, F. and Fournier, J.M., 2015. Macroeconomic uncertainties, prudent debt targets and fiscal
rules.
Flower, J. and Ebbers, G., 2018. Global financial reporting. Macmillan International Higher
Education.
García‐Sánchez, I.M. and Noguera‐Gámez, L., 2017. Integrated reporting and stakeholder
engagement: The effect on information asymmetry. Corporate Social Responsibility
and Environmental Management. 24(5). pp.395-413.
Keil, J., 2016. Depreciated Depreciation Methods? Alternatives to Sraffa’s Take on Fixed
Capital. Review of Political Economy. 28(4). pp.566-589.
Küpper, H.U. and Pedell, B., 2016. Which asset valuation and depreciation method should be
used for regulated utilities? An analytical and simulation-based comparison. Utilities
Policy. 40. pp.88-103.
Kwan, C.Y. and et.al., 2016. Organization and reporting of public financial accounts: insights
and policy implications from the Singapore budget. Australian Journal of Public
Administration. 75(4). pp.409-423.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Mook, L. and et.al., 2015. Turning social return on investment on its head: The stakeholder
impact statement. Nonprofit Management and Leadership. 26(2). pp.229-246.
Nicholls, J., 2017. Social return on investment—Development and convergence. Evaluation and
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