Financial Accounting Principles and Regulations Report for Airdri

This report provides a comprehensive overview of financial accounting principles, regulations, and their practical application, with a specific focus on the company Airdri. It delves into the purpose of financial accounting, the importance of financial statements (income statement, balance sheet, and cash flow statement), and the relevant regulations such as IASB and IFRS. The report also covers key accounting principles like the business entity concept, money measurement, dual aspects, going concern, cost principle, accounting year, matching principle, and realization principle. Furthermore, it explains the accounting rules related to personal, real, and nominal accounts. The report also discusses accounting conventions, including consistency and material disclosure. It analyzes how these principles and regulations are applied in the context of Airdri, providing valuable insights into the company's financial practices and reporting.

Financial Accounting
Principles

Table of Contents
INTRODUCTION...........................................................................................................................1
BUSINESS REPORT......................................................................................................................1
1.) Financial accounting and its purpose................................................................................1
2.) Regulations relating to financial accounting.....................................................................3
3.) Accounting Principles and Rules......................................................................................4
4.) Accounting conventions relating to concepts of consistency and Material disclosure are:5
CLIENT 1........................................................................................................................................7
CLIENT 2......................................................................................................................................10
CLIENT 3......................................................................................................................................12
........................................................................................................................................................13
CLIENT 4......................................................................................................................................15
CLIENT 5......................................................................................................................................17
CLIENT 6......................................................................................................................................18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Finance is an element which is required to execute operational activities of an
organisation. Financial accounting is a technique which is used to record all the transactions that
are related to the operational activities of an organisation. It is a summary of various proceedings
of a company. Various principles, rules and regulations are followed by an accountant to
formulate transparent financial statements (Arnold, 2012). Purpose of financial accounting is to
provide organisation's information to existing and potential stakeholders and used them to make
strategic and investment decisions. The company chosen for this project report is Airdri which is
mainly UK based organisation. Main aim of this report is to get detailed information of use of
financial accounting principles while formulation of financial statements.
This project report is focused on double entry book keeping system, use and formulation
of trial balance, preparation of final accounts that are trading account, profit and loss account and
balance sheet, creating a bank reconciliation statement, use of suspense account and way in
which it can help to ignore errors in trial balance.
BUSINESS REPORT
1.) Financial accounting and its purpose
Financial accounting: It is a method which is used by various companies to record,
analyse, monitor and control various transactions that are the result of business transactions. In
financial accounting different statements are generated such as trading and profit and loss
account, balance sheet and cash flow statement which is provided to external stakeholder to
analyse organisation's performance. It helps Airdri to attract more investors toward organisation
by providing them accurate information of organisational operational activities. It is very
important for Airdri to generate financial statements as it a summarize form of all the finance
related transactions. An observer can get all the required information in such statements. It is
vital for companies to analyse their financial strength which is required to fulfil all the
requirements of external stakeholders. It also direct executives of the company to make valuable
decisions that can help to attain predetermine organisational goals. There are different types of
financial statements that are essential for an organisation to formulate. All of them are explained
below:
1

Income statement: It is a statement which is generated to analyse revenues and
expenditures of a company for a specific period of time. Income statements are formulated on
yearly basis (Income statement, 2017). It helps accountants to examine that Airdri is gaining
profits or facing losses. All the transactions related to operating and non-operating activities are
recorded under this statement. It is very important for a company to keep a detailed information
of its revenues to pay different expenses such as interest, taxes etc.
Purpose of Income statement:
 Main purpose of generating income statement figure out that company is earning profits
or loss in a reporting period. It is formulated to get the information of actual financial earning in a financial year.
Balance sheet: It is a statement that reflects exact financial position of an organisation to
its shareholders, investors, suppliers, customers and other external stakeholders. All the assets,
liabilities, shareholder's fund and capital of a business are recorded in this statement. External
parties of a Airdri can get broad information of organisation's performance and available
financial resources with the help of balance sheet. All the gathered data is used to calculate rates
of return and organisation's capital constitution (Bodnar and Hopwood, 2012).
Purpose of balance sheet:
 Balance sheet is mainly generated to examine financial position and status of a company
for a specific period of time. It is created to get information of actual payable and receivables of a company.
Cash flow statement: It is statement which is used to record all the cash related
transactions that are done by a company in a financial year. It is used to reflect the changes in
cash and cash equivalents that are affected by the changes in balance sheet. Accountant of a
company is liable to record all the cash related transactions in cash flow statement to analyse the
use of cash and cash equivalents.
Purpose of cash flow statement:
 Purpose of cash flow statement is to provide information of gross payments and receipts
of a company to its managers and other concerned persons for a specific period of time.
 It is used by the companies to calculate available monetary resources at the end of
financial year.
2

2.) Regulations relating to financial accounting
Various rules, regulations, standards and principles are developed for the companies that
needs to be followed by them while formulating their financial statements. These regulations
help organisation to maintain their financial accounts in a proper way. Airdri is following all of
the regulations. It provides guidance to investor who are observing income statements, balance
sheet and cash flow statement of Airdri (Botzem, 2012). These regulations are formed by
regulatory authority of a country. Different standards are mainly developed to direct accountant
while recording information to financial statements of an organisation. It is not possible to get
accurate information if it is not recorded properly in respective statement. Few of the reliable
regulations are discussed below:
IASB: It stands for International Accounting Standards Board. It is a regulatory authority
who is liable to introduce and develop various international financial accounting standards for
end number of companies that can direct them while recording transactions into financial
statements. It has introduced IFRS that are formulated to guide organisations while generating
their final accounts.
IFRS: Full form of IFRS is International Financial Reporting Standards. It was
introduced to set a world wide language for companies so that their accountants and managers
can try to expand their business globally. It is continuously replacing various accounting
standards (Caria and Rodrigues, 2014). Here are mentioned some of IFRS standards that are
explained below:
IFRS 9: It is related to the accounting of financial instruments in different statements. It
guides companies to the way in which all the financial assets are identified and measured.
IFRS 10: It is related to the consolidation that direct those companies who are combined,
to formulate their financial statement in consolidated form so that all the assets of the group can
measured properly. It is mainly formulated for the parent entity which is responsible to control
its subsidiaries.
Both the IFRS are vital for the organisations and have to followed as it can guide them to
formulate financial statements in effective manner and also provide direction for proper
maintenance of final accounts. These are introduced to reduce the frauds in financial statements
of business entities.
3

3.) Accounting Principles and Rules
Principles of accounting means a set of some guidelines which a company have to follow
while preparing the book of accounts. The principles defines accounting criteria under which a
company have to maintain the all economical transactions in their books of accounts. Some of
the accounting principles are as follows:
 Business entity concept: The business entity principle defines that entity which is
incorporated by a legal procedure in which the entity will treated as separate legal entity
distinct from its members. Means company can carry the transactions by its own name
and joining and leaving of its members will not effects the existence of company.
Moreover, company can sue and can be sued by its own name (Chiang, Nouri and
Samanta, 2014).
 Money measurement concept: The principles of money measurement states that only
those transactions are to be recorded in the books of accounts which can be expressed in
monetary terms.
 Dual Aspects Concepts: The principle of dual aspects defines that in single entry
system, every business transactions has only its one aspect in book entry and it leads to
irrelevant information. In order to avoid this problem, financial accounting ensures that
every transactions has its two aspects and dual aspects also known as duality principle.
 Going concern concepts: According to this principle in accounting, the business is
expected to continue for longer period as entity is separate. It does not depend on its
members which is why accounts are prepared on the basis that business will continue for
very long time in future.
 Cost principle: The principle of cost defines that the fixed assets of business recorded at
their acquisition cost (which includes the purchasing cost of asset and its installation
costs) at the time of its purchase or acquisition in a financial period. From next financial
year, the asset will recorded after deducting depreciation per year in books of accounts.
The concepts applies to fixed assets only.
 Accounting year principle: According to this principle, each business entity select a
specific time to complete or close the cycle of accounting process i.e. monthly, quarterly
or yearly basis (Donelson, McInnis and Mergenthaler, 2012).
4

 Matching principle: The principle of matching dictates that if every transaction of
expense are recorded in a given accounting period then equal a revenue transaction are to
be recorded in same accounting period. It means expenses and revenue recorded in books
of accounts must be of same accounting year.
 Realisation principle: This principle of accounting avoids the overstatement of profit,
means profit will recorded only when it is earned. An advanced payment must not be
considered as profit until the goods and services are rendered for that.
Accounting Rules: Accounting pertains three rules in order to prepare the business
transactions according to double entry book keeping as each transactions has its two effects. The
accounting pertains three types of accounts for the proper classification of transactions namely
Personal account, Real account and Nominal account. The most important and basic rules of
accounting are as follows;
 Debit the receiver and credit the giver: First rule of accounting is applicable on
personal accounts. When a customer is providing any monetary consideration to
company, then it will treated as inflow and will be credited in books of accounts. On the
other hand, company debited the customer's account.
 Debit what comes in and credit what goes out: Second rule is used for real accounts. It
involves the transactions mainly regarding the purchase of assets or raw material etc. as
company debited the assets which comes in and credited what goes out i.e. account
balance or cash (Oulasvirta, 2014).
 Debit all expenses and credit all incomes: Third rule is applicable in Nominal account.
This rule is regarding with the capital of company as capital has the liability of company
that is why it has credit balance and when company earns incomes and gains then it
increases the profit as well as capital then shows on credit side. Along with this, expenses
and losses decreases the capital that is why shows on debit side.
4.) Accounting conventions relating to concepts of consistency and Material disclosure are:
Consistency convention: This convention of accounting dictates that the practices and
policies follows to maintain the books of accounts that must be consistent or same in subsequent
financial periods. Although, changes in accounting policies lead to changes in accounting results.
Hence, consistency concept ensures that method, policies and practices of preparing the financial
statements must be same because it helps in easy comparison of financial informations of past
5

years. Internal and external stakeholders of Airdri analyses the financial information of
preceding years to make investment decisions. Consistency ensures comparability that is why
mainly the auditors concerned with their client to follow the principle of consistency so that
reported results from one period to another will be comparable.
For example, a company follows the written down value method to depreciate its assets,
for last ten years know company changed the method of depreciation in current financial year
then, this will results in changes in depreciated amount and makes the results different and
violates the consistency principle. In this case, changes must be immediately reported to the
financial statements (Tsalavoutas, André and Evans, 2012).
Material disclosure convention: The convention of full material disclosure dictates that
all material and relevant facts of annual reports depicts the financial performance of business
which must be disclosed fully to its users. IFRS7 also states that disclosure of financial
information of preceding financial year must be fully disclosed to its users. The users includes
internal and external user. Internal users includes Board of directors, middle level managers,
equity owners etc. On other hand, external users includes suppliers, tax authorities, financial
institutions (provides loan for industrial growth) and potential investors and many more.
Disclosure of financial information enable the users to make correct assessment about the
profitability and financial performance of entity and it helps them to make decisions.
6

CLIENT 1
Double entry system:
Journal Entries of Amstel D
( Amount in £)
Date Particulars Dr. Cr.
01-
01-
18
Storage Expenses
A/c Dr. 800
To Bank A/c 800
(Being Storage expenses paid by cheque)
02-
01-
18 Purchase A/c Dr. 7680
To S. Hamid A/c 2450
To D Main A/c 2560
To W Tag A/c 1060
To R Foot A/c 1610
(Being Goods Bought on credit)
03-
07-
18 J Wilson A/c Dr. 2020
T Cole A/c Dr. 1840
F Seema A/c Dr. 2380
J Allen A/c Dr. 990
P White A/c Dr. 2820
F Lane A/c Dr. 1170
To Sales A/c 11220
(Being Goods sold on credit)
04-
07-
18 Motor expenses A/c Dr. 670
To Cash A/c 670
(Being motor expenses paid)
07-
07-
18 Drawings A/c Dr. 2000
7

To Cash A/c 2000
(Being cash withdrawn by owner for personal
use)
09-
07-
18 T Cole A/c Dr. 1280
J Fox A/c Dr. 2310
To Sales A/c 3590
(Being Goods sold on credit)
11-
07-
18 Sales Return A/c Dr. 680
To J Wikson A/c 370
To F. seema A/c 310
(Being Goods returned by Customers)
16-
07-
18 Bank A/c Dr. 7150
To Discount A/c 80+160+44+73.5 357.5
To P. Mole A/c 1520
To F. Lane A/c 3040
To J. Wilson A/c 836
To F. Seema A/c 1396.5
(Being cheque received from P Games and
discount of 5% given)
19-
07-
18 R. Foot A/c Dr. 110
To Purchase Return
A/c 110
(Being Goods returned to R. Foot)
20-
07-
18 Purchase A/c Dr. 3140
To L Mole A/c 1330
To W Wright A/c 1810
(Being Goods Bought on credit)
8

24-
07-
18 S Hamid A/c Dr. 2340
J. Brown A/c 2970
R. Foot A/c 1440
To Bank A/c 6000
To Discount
Received A/c 750
(Being cheque issued to S. Hamid, J. Brown and
R. Foot and 10 % discount received)
27-
07-
18 Salary A/c Dr. 14500
To Bank A/c 14500
(Being cheque issued towards salaries)
30-
07-
18 Business Rates A/c Dr. 2220
To Bank A/c 2220
(Being cheque issued towards business rates)
Total 60510.00 60510.00
Ledger:
Ledgers
Bank Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
01-
07-18
01-
07-18
By Storage
Cost A/c 800
To Trade
Receivables :
24-
07-18
By Trade
Payables:
P. Mole
A/c 1520
S Hamid
A/c 2340
F. Lane
A/c 3040
J. Brown
A/c 2970
J. Wilson
A/c 836
R. Foot
A/c 1440
9

F.
Seema
A/c 1396.5
27-
07-18 By Salary A/c 14500
30-
07-18
By Business
Rates 2220
31-
07-18
To balance C/d 17477.5
31-
07-18
Total 24270 Total 24270
Cash Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
01-07-18
To Balance
C/d 2670
By Motor
Expenses 670
By Drawing
A/c 2000
31-07-18
Total 2670 Total 2670
Trade Receivable A/c
Dr. Cr.
Date Particulars Amount Date Particulars Amount
01-07-
18 L Mole A/c 1330
01-07-
18 By Sales return A/c
W Wright A/c 1810 J Wikson A/c 370
F. seema A/c 310
03-07-
18 To Sales A/c :
J Wilson A/c 2020
16-07-
18
By
Bank
T Cole A/c 1840 P. Mole A/c 1520
F Seema A/c 2380 F. Lane A/c 3040
J Allen A/c 990 J. Wilson A/c 836
P White A/c 2820 F. Seema A/c 1396.5
F Lane A/c 1170
09-07-
18 To Sales A/c :
16-07-
18 By Discount A/c
T Cole 1280 P. Mole A/c 80
J Fox 2310 F. Lane A/c 160
10