Financial Accounting Report: Principles, Conventions, Client Analysis

This report delves into the core concepts of financial accounting, emphasizing its significance in providing insights into an organization's financial performance. It explores the preparation of financial statements, including the Profit & Loss account, Balance Sheet, and Cash Flow statement, adhering to accounting principles and regulations. The report covers key aspects such as accounting rules, principles (conservatism, cost principle, going concern, monetary unit, full disclosure, matching principle, revenue recognition, materiality, time period assumption, and economic entity assumption), and accounting conventions (materiality and disclosure). It includes practical examples, such as client analyses, showcasing the application of these principles in real-world scenarios. The report also touches on the regulations associated with financial accounting, including the role of IASB. Furthermore, the report provides practical examples through the analysis of six clients' financial transactions, illustrating bookkeeping, ledger accounting, and the double-entry system. Through the analysis of these elements, the report aims to provide a comprehensive understanding of financial accounting and its practical implications.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
BUSINESS REPORT......................................................................................................................1
1: Financial accounting and its purpose......................................................................................1
2. Regulation associated with financial accounting ...................................................................2
3: Accounting rules and principles..............................................................................................3
4. The conventions and concepts relating to
consistency and material disclosure...........................................................................................5
CLIENT 1........................................................................................................................................6
CLIENT 2......................................................................................................................................14
........................................................................................................................................................16
CLIENT 3......................................................................................................................................16
CLIENT 4......................................................................................................................................18
CLIENT 5......................................................................................................................................20
CLIENT 6......................................................................................................................................22
CONCLUSION..............................................................................................................................24
REFERENCES..............................................................................................................................25

INTRODUCTION
Financial accounting is necessarily requirement of an organisation which enables them in
acquiring knowledge about its actual financial performance or position at current time period
(Zeff, 2016). It can be done through preparing financial accounts such as Profit & Loss a/c,
Balance sheet, Cash Flow statement etc. on specific time period. It is mandatory for all
organisation to prepare such financial reports. The accountants of an organisation are held liable
to follow all such principles and rules associated with preparation of financial reports so that an
accurate and reliable information can be available for the parties outside of an organisation such
as creditors, suppliers, investors etc. The present assignment report is based on the accounting
principles and its role in preparation of financial reports. The project includes brief description of
financial accounting along with its purpose. The project also describes conventions and concepts
related with consistency and material disclosure. In addition, with this, Book-keeping system,
ledger accounting, double entry system etc. are explained under this report. Apart from this
financial reports which includes income & expenditure, balance sheet is also practically
evaluated following all accounting concepts and principles.
BUSINESS REPORT
1: Financial accounting and its purpose
Financial accounting: It is a method of identifying actual financial performance of an
organisation through making of various financial reports. It is mandatory for all organisation to
maintain financial accounts on timely basis as it is more useful for external parties of an
organisation such as investors, creditors, suppliers etc. to make decision regarding giving an
appropriate support in achieving growth and expansion in competitive market.
There are various accounting principle and rules are formulated which need to be comply
by an accountant while preparing financial statements of an organisation (Stice and Stice, 2013).
Therefore, if not allowed then the chances of errors or mistakes are more in financial reports due
to which it may difficult for interested parties to interpret and understand in better manner. Such
financial reports include:
Cash Flow statement: It is a statement prepare with a motive of identifying cash
generation and cash expenditure in business activities on specific time period such as monthly,
quarterly or yearly. Such statement consists of three headings which includes cash flow from
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operations, investment and finance. It includes all those transactions which are transacted in
monetary terms.
Income and expenditure account: It is a statement also called as profit and loss a/c
showing all details related with income earned and expenditure incurred in business operations.
It is prepared to ascertain surplus or deficit of income over expenditures for a specific time
period. It is prepared on accrual basis which means all incomes and expenses incurred during an
accounting year whether it has been actually paid and received or not are taken into
consideration (Skogstad and et. al., 2011).
Financial position statement: It has another name called as Balance sheet which shows
the exact financial position of company towards the external parties of an organisation. It is
similar to the basic accounting equation such as Assets= Liabilities + Net assets. Such statement
reflects the basic accounting principles and guidelines which includes cost, matching, and full
disclosure principle. It plays an important role in finding out the investors in market through
representing their actual financial position with their assets and liabilities in figures.
Change in equity statement: Such statement is a reconciliation of the beginning and
ending balances associated with company equity capital during a reporting period. It is more
useful in finding out the fluctuations in equity and share capital of company. As it is not
considered as essential part of monthly financial statement thus it is most likely of all the
financial statements not to be issued (Scott, 2015). The calculation structure of the statement is
under as given:
Beginning equity + Net income – Dividends +/- Other changes
2. Regulation associated with financial accounting
Rules and regulation are very important to follow in every business organisation. So each
accountant is bounded to follow necessary regulation that are made by concern agencies of board
to record every single transaction in correct manner.
 IASB- The international accounting standard board is an independent, private sector
body that is develop for the purpose of controlling and management for recording
necessary records. The IABS framework have been approved by the IASC Board in April
1989. Basic purpose of this body is to provide proper guidance and knowledge for
development of new and effective standard that can be further applied in preparing
financial statement.
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Some of the basic conceptual framework of IASB are such as:
 helps board in developing future international financial reporting standard and review
report.
 Helps board of directors in establishing the concepts of regulation, accounting standard,
procedure and method related to the formation of financial statements
 helps the national committee in formation of national standard
 helps the auditor to give their opinion on the statements whether IFRS standard have
complied while preparing statement.
 Help the creditor, investor employee etc. of the statement
3: Accounting rules and principles
Accounting rules: It is such a guidelines formulated by different international bodies
such as FASB and IASB in order to maintain accounting practices in more consistent way that
will bring easiness for interested parties to an organisation to understand in more effective
manner (Simnett and et. al., 2011). It directs an accountant to record all business transactions in
financial reports following all prescribed rules and regulations so that it brings meaningful
information towards external as well as internal parties. Such accounting rules are given as
under:
Debit the receiver, credit the giver: It is the rule which states that when an individual
receives or collects resources called as debtor will be recorded as debit transaction whereas an
individual pays or give something called as creditor will be recorded as credit transaction. This
rule is taken personal accounts into consideration (Oulasvirta, 2014).
Debit all expenses and losses, credit all income and gains: It is the rule which states that
all expenses and losses of company are debiting the transactions in financial statements whereas
income earned and gains by company are required to credit the transaction. In this rule, nominal
account is taken into consideration.
Debit what comes in, credit what goes out: This is the rule which states that if company
acquire any assets then such transaction will be recorded as debit whereas selling or transferring
of assets will be recorded as credit under the financial statements. In this rule, real accounts are
taken into consideration.
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Accounting principles:
Principles of conservatism: It is such a concept which determines that expenses and
liabilities of company are recorded in books of accounts when it has been recognised not when
outcomes have been actually received. While the assets and revenues of company will be
recorded in financial statements when it has been actually received or collected.
Cost principle: According to such principle, all assets, liabilities and equity capital
investment will be recorded at their purchasing price and avoid market price. Due to this, it is all
called as historical cost principle (Openshaw, 2013). For an instance, the cost of price of
machinery is 200000 in the year 2010 which increased to 250000 in the year 2018 thus while
accounting of such asset the historical value should be considered i.e. 200000.
Going concern: Such principle is based on the assumption that an organisation will be
able to continue its business operations for a period of time which may sufficient to fulfil all
commitments, obligations, desired objectives etc. In other words, an organisation if seen in
future that there is no chance of liquidation in the foreseeable future is considered as going
concern concept (Narayanaswamy, 2017).
Monetary unit: This is the principle which states that an accountant must record
transactions which are made in monetary terms as quick as possible so that cash outflow and
cash inflow within an organisation are easily identified. For example, acquiring raw materials for
the production process in exchange of cash payment. Thus, transactions done in other form of
payment which includes barter system are required to be ignored.
Full disclosure: It states that any transaction made by company should be recorded in
financial statements with necessary information which facilitates people to understand and make
effective decisions for the betterment of an organisation. GAAP directs management to provide
all details and information about the company to external users in order to assist them in making
valuable decision (Mulford and Comiskey, 2011).
Matching principle: It states that all expenses and revenues should be recognized
together in the same period. In other words, such principle requires that an organisation must
record expenses in the period in which related revenues are earned. It is considered as the heart
of accrual basis of accounting. It is essential to match expenses with revenues due to net income.
If expenses are not recorded properly in the correct period then net income may be either
overstated or understated (May, 2013).
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Revenue recognition principle: It states that revenues must be recognised at the time
when they are identified rather at the period of receiving. For an instance, revenue will be
recorded at the time of selling goods and services and not when the payment has been received
actually or not.
Materiality: It states that an accountant should consider relevant and material
information and record it in financial statements so that meaningful information are given to
external parties of an organisation. Irrelevant and immaterial information should be ignored
(Liao and et. al., 2014).
Time period assumption principle: According to such concept, an organisation must
report their financial results of their activities over a standard period of time which may either
monthly, quarterly or annually. As per the guidelines of GAAP, the management are required to
record transactions within each period of time when it occurred.
Economic entity assumption: It is based on assumption that an organisation and owner
of business are distinct and separate from each other thus both are not liable to pay each other’s
liabilities (Kieso and et. al., 2015).
4. The conventions and concepts relating to consistency and material disclosure
Conventions are considered as a culture and trends which are followed from past decades
and time in general context. In accounting context trends and costumes are considered as
developments which are followed in accounting (Accounting conventions, 2018).
Convention of materiality: This convention stands for disclosure of all the relevant
information and aspects associated with facts and elements used in organisational context. It
implies that all the material information is taken in consideration to make viable and reliable
accounting records form stakeholder’s perspective. Material information regarding the policies
and procedures followed for effective operation and management are considered to elaborate and
execute the information in a single format.
Convention of Disclosure: This convention stands for the accounting practices and
orders followed by organisation to incorporate and consolidate information. As per this
convention it is considered that an accounting procedures and policies which are followed by
organisation must be trailed by the organisation in longer run. There should be consistency
retained by the organisation for effective accounting (Jones, ed., 2011).
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CLIENT 1
a) Book of primary entries
Date Particular Dr Cr
01/07/18 storage cost 800
to bank 800
02/07/18 purchase a/c 7310
to accounts payable 7310
03/07/18 accounts receivable 10740
to sales 10740
04/07/18 expenses 1170
to cash 1170
07/07/18 Drawing a/c 2500
to cash 2500
09/07/18 accounts receivable 3390
to sales 3390
11/07/18 sales a/c 1780
to J Wilson 870
to F syme 910
14/07/18 van a/c 28500
To Abel motor ltd 28500
16/07/18 bank a/c 1330
sales discount 70
to P games a/c(5% discount) 1400
16/07/18 bank a/c 2945
sales discount 155
to F steel(5% discount) 3100
16/07/18 bank a/c 807
sales discount 43
to J Wilson (5% discount) 850
16/07/18 bank a/c 1586
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sales discount 84
to F syme (5% discount) 1670
19/07/18 R foot 500
to purchase 500
20/07/18 purchase a/c 3740
to accounts payable 3740
24/07/18 S Lyle a/c 3600
to purchase discount(10% discount rec) 360
to bank 3240
24/07/18 J brown 4600
to purchase discount(10% discount rec) 460
to bank 4140
24/07/18 R foot 1400
to purchase discount(10% discount rec) 140
to bank 1260
27/07/18 salary a/c 4800
to bank 4800
30/07/18 business rate a/c 1320
to bank 1320
31/07/18 Abel motor a/c 20500
to bank 20500
b) Ledger posting
Storage cost
Date Particular Amount Date Particular Amount
01-05-16 To bank 800 01-05-17 By balance c/d 800
800 800
Sales a/c
Date Particular Amount Date Particular Amount
03-05-16 By J. Wilson 1520
By T. Cole 1940
By F. Syme 2980
By J. Allen 1110
By P. White 2420
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By F. Lane 770
09-05-16 By T. Cole 1480
By J. Fox 1910
20-05-16 By L. mole 1830
01-05-17
To Balance
C/d 17870 by W. Wright 1910
17870 17870
Bank a/c
Date Particular Amount Date Particular amount
16/07/18
31/07/18
To P Games a/c
To F Steel a/c
To J Wilson a/c
To F Syme a/c
To balance c/d
1330
2940
810
1590
29390
01/07/18
24/07/18
27/07/18
30/07/18
31/07/18
By storage cost a/c
By S Lyle a/c
By J Brown a/c
By R Foot a/c
By salaries a/c
By business rates a/c
By Abel motors a/c
800
3240
4140
1260
4800
1320
20500
36060 36060
Purchase a/c
Date Particular Amount Date Particular amount
02/07/18
20/07/18
To S Lyle a/c
To D Rain a/c
To W Sone a/c
To R Foot a/c
To L Mole a/c
To W Wright a/c
1850
2860
990
1610
1830
1910
30/07/18 By balance c/d 9440
9440 9440
Salaries a/c
Date Particular Amount Date Particular amount
27/07/1 To bank a/c 4800 31/07/18 By balance c/d 4800
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8
4800 4800
Motor exp a/c
Date Particular Amount Date Particular amount
04/07/1
8
To cash a/c 1170 31/07/18 By balance c/d 1170
1170 1170
Cash a/c
Date Particular Amount Date Particular amount
31/07/1
8
To balance c/d 3670 04/07/18
07/07/18
By motor expenses a/c
By drawing a/c
1170
2500
3670 3670
Business rates a/c
Date Particular Amount Date Particular amount
30/07/1
8
To bank a/c 1320 31/07/18 By balance c/d 1320
1320 1320
S Lyle a/c
Date Particular Amount Date Particular amount
24/07/18 To bank a/c
To discount a/c
3240
360
02/07/18
31/07/18
By purchase a/c
by balance c/d
1850
1750
3600 3600
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