Financial Accounting Principles: Stakeholders and Reporting Analysis

This report delves into the core principles of financial accounting, examining its role in collecting, analyzing, and presenting financial information through statements like the P&L account and balance sheet. The report focuses on a small accountancy firm, Brooks City Consultancy, and defines financial accounting's significance for internal and external stakeholders. It explores double-entry bookkeeping with ledgers, including a trial balance, and analyzes financial statements like a P&L account for Munteanu Limited. The report also covers key accounting concepts such as consistency and prudence, emphasizing their importance in ensuring the reliability and accuracy of financial reporting. The report then details various types of stakeholders and their specific interests in the financial information provided. The report concludes by outlining the purpose of depreciation in formulating financial statements.

FINANCIAL
ACCOUNTING
PRINCIPLES

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Part (a).........................................................................................................................................3
Part (b).........................................................................................................................................6
CONCLUSION..............................................................................................................................24
REFERENCES..............................................................................................................................25

INTRODUCTION
The financial accounting is a field of accounting which is aligned with the collecting,
analysing and presenting the financial information in the form of financial statements (Ebaid,
2016). As well as this accounting system is beneficial for interpreting the financial position of
companies in front of internal and external users. Along with this accounting system plays an
important role in the context of viewing the effort of all business activities in the terms of profit
or loss. Eventually, it contains various kind of financial statements and reports like P&L account,
balance sheet, income statements etc. In the project report, a small accountancy firm is selected
that is Brooks city consultancy. This firm provides accounting services at small level and it is
located in London. Apart from it, in this project report, term financial accounting is defined in
broad sense with its role in the companies. As well as internal and external stakeholders are
mentioned to evaluate their interest in the financial information. In another part of report various
tasks are completed on the basis of information of five clients.
MAIN BODY
Part (a)
1. Financial accounting and its purposes.
In general sense, the term financial accounting is a kind of accounting that is related to
the providing financial information to the external and internal stakeholders in the form of
financial reports (Nilsson and Stockenstrand, 2015). The main purpose of this accounting is to
informing to the companies so that they can make changes accordingly in their business
activities. Eventually, in the financial accounting the financial reports are presented at the end of
an accounting period. In the absence of this accounting system there can be various kind of
issues. In above chosen accounting firm, Brooks city consultancy they prepare different kind of
financial statements such as P&L account, balance sheet etc. Due to this they get the full
information about financial situation and on the basis of it their external stakeholders make
invest.
Herein, it is important to know about accounting principles and regulations of the
financial accounting. This is so because in the absence of these accounting principles, financial
statements will be considered invalid. Most common principle of financial accounting is GAAP
that is known as generally accepted accounting principle. These principles of financial

accounting make the statements and reports accurate. Below some purpose of financial
accounting are described such as:
 Preparation of financial reports- This is the main purpose of the financial accounting in
which companies make the financial reports (Mullinova, 2016). These reports help in
taking many crucial decisions for companies.
 Another purpose of financial accounting is that it helps in keeping the record of financial
records in a systematic manner.
 It summarise about the financial transaction of the organisations.
 Helpful in decision-making- Apart from above benefits, the financial accounting is also
useful for taking effective decision (Henderson, Herbohn and Howieson, 2015). For
example, if any company's financial situation is better than they will take decision to
expand the business. Hence, the financial accounting is useful for decision-making.
 Beneficial in making comparison- This is one of the key purpose of financial accounting.
In this companies can compare their previous year's profits and expenditures with current
year. Due to this companies can make changes in the plans and policies accordingly.
So these are the main purpose of financial accounting and due to this it is a mandatory
accounting system for the organisations.
2. Types of internal and external stakeholders.
Stakeholders- These are the group of person who are interested in the activities of any
business (McCarthy, Shelmon and Mattie, 2012). The aim of most stakeholders is to get the
profit. In general sense, the stakeholders are divided into two types:
 Internal stakeholder
 External stakeholder
Both the stakeholders are important for the companies because they have their interest in the
activities of business. Below these stakeholders are mentioned in broad sense:
 Internal stakeholder- The internal stakeholders are those take part in day to day activities
of business and aware about the objectives (Pratt, 2016). The plans and policies of
companies can impact to these stakeholders. Some common example of these
stakeholders are such as employees, BOD (board of director), managers etc. Herein,
below these stakeholders are mentioned in broad sense:

1. Board of director- The BOD is a panel of some group of people who deals in making
rules and policies (Tschopp and Huefner, 2015). As well as observe the implication of
these rules. Generally, they are being considered as upper level department. They show
their interest in the financial information of the company because on the basis of it they
prepare further strategies and plans.
2. Employees- The employees can be defined as a person or group of person who complete
various tasks and activities with an expectation to get the wages or salary (Fourie, M. L.,
Opperman, Scott and Kumar, 2015). Eventually, the employees play an important role in
the contribution of profit of organisation. For this purpose, they show the interest in the
financial position of the company to check whether company has enough fund to pay
their wages or not.
 External stakeholders- The external stakeholders are those stakeholders who do not take
part in the activities of business but show their interest on each activity (Kwok, 2017).
The main purpose of these stakeholders is to get the return on invested income. Some
common example of these stakeholders are customers, suppliers, creditors etc. These
stakeholders are mentioned below:
1. Suppliers- The suppliers make credit transaction with companies on the basis of their
financial condition (Ferran and Ho, 2014). In other words, suppliers provide material to
the companies on credit on the basis of goodwill. Basically, the suppliers show their
interest in financial condition so that they can sell the material. This is why because if
financial condition is not good then they will not sell the material on credit.
2. Investors- These are the group of many people who invest their funds in the share of
organisations to get return (Maynard, 2017). Before making such investment, they
evaluate the financial position of companies. So financial information is very beneficial
for them to evaluate the future return on the invested capital by them.
3. Creditors- The creditors are those who have claim on services of another party (Blake,
2013). In other words, it can be defined as a person to whom money is due. Eventually,
they show their interest in the financial position of the company for the purpose of taking
decision about whether they should provide financial assistance to any particular
company or not.

4. Government- Government is a kind of stakeholder which is different from rest of other
stakeholders (Libby, 2017). They set the rules, acts and laws which are essential to follow
by the companies. Eventually, they show their interest in the financial position of the
company to determine about the tax rate on the basis of total income.
So these are the external stakeholders of companies which shows the interest in the companies
for their own purpose.
Part (b)
Client 1.
(I) Double entry with ledgers:
Date Particulars Debit Credit
01/01/19 Premises a/c Dr. 240000
Motor van a/c Dr. 51250
Fixtures a/c Dr. 8100
Inventory a/c Dr. 23900
P mole a/c Dr. 4400
F lane a/c Dr. 6100
Bank a/c Dr. 68400
Cash a/c Dr. 15600
To S Hood a/c 12150
To J Brown a/c 16600
To capital a/c (Balancing figure) 389000
(Being owner's capital is calculated)
Therefore, Alexandra Study's capital at 1st January is of
389000

Date Particulars
01/01/19 Storage cost a/c Dr. 450
To bank a/c 450
(Being storage cost is paid)
02/01/19 Purchases 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
(Being goods purchases on credit from parties)
03/01/19 J Wilson a/c Dr. 1200
T. Cole a/c Dr. 1650
F Syme a/c Dr. 2100
J Allen a/c Dr. 1020
P White a/c Dr. 2520
F Lane a/c Dr. 980

R
R foot a/c
Date Particulars Amount Date Particulars Amount
19/01/18 To purchase return
account
50 02/01/19 By purchases account 1610
24/01/19 To bank account 1400
31/01/19 By closing balance
c/d
160
Total 1610 1610

(II) Trail balance as on 31st January 2019:

Client 2.
P&L account for Munteanu limited for year ending 31st december, 2018
Particulars Amount Particulars Amount
To op. Stock
To purchase- 61000
Less- Return- 1500
To GP
15000
59500
80500
By closing stock
By sales- 138000
Less- Return 3000
20000
135000
155000 155000
To administration expenditure
To distribution expenditure
To corporate tax
To finance cost
To depreciation on building
To Net profit
32000
32000
2000
1500
8800
4200
By net profit 80500
80500

(c) Various kind of accounting concepts:
Consistency concept- As per this accounting concept, companies should follow an equal
accounting concept once after implementation any concept (Kim and Wook Yoon, 2013). This is

so because due to this, financial statements of the companies become reliable and accurate. In
other words, companies should try to apply accounting concept same as the previous years. Due
to this organisation can make comparison easily from current year to past year. Eventually, in the
absence of this concept it will be difficult for the organisations to analyse the financial
statements in a systematic manner. Apart from it, the auditors also suggest to their clients that
they should apply a common accounting concept for all accounting time period. In the absence of
this accounting concept, auditors can ignore to give suggestion on the financial statements. In
general terms, the consistency concept of accounting is being ignored by the companies to show
the more profit in the financial statements.
Prudency concept- This accounting concepts refers to an business enterprises do not
overestimates its revenue along with underestimates the amount of expenditure (Pinnuck, 2012).
It is fundamental concepts of accounting system that generates more trusted information for the
reporting to management of the company. Prudence concepts generally exercise in setting up the
amount for doubtful debts or reserve on the outdated stock. Financial statements are based on the
International accounting standard (IAS). Financial statement and conclusion are more reliable
and trustworthy of the facts and figure that reported in the book of accounts by following this
method.
(d) Depreciation's purpose in formulating the financial statements.
Depreciation- It can be defined as decreasing in the value of any particular assets as
passing of time (Zeff, 2016). This is generally charged over the assets due to physical damage.
Additionally, the depreciation is beneficial in assigning the cost of assets during the life of assets.
Purpose of depreciation- Eventually, the main purpose of the depreciation is to find out
the actual value of assets. Herein, below some purpose are mentioned below:
 The first purpose of the depreciation is to find out the accurate working result.
 Another purpose of the depreciation is to analysing the actual value of the assets.
 As well as due to depreciation companies can know about actual financial condition.
 To know the value of obsolescence of fixed assets that occurs due to passing of time and
use of fixed assets.
Methods of calculating depreciation: There are various kind of methods to calculate the
depreciation. Herein, below some methods are mentioned:

 Straight line method- This method is also known by the fixed instalment method
(DeBerg and Chapman, 2012). It is a type of method that is being used to find out the
carrying value of any particular fixed asset during the entire life period. Eventually, this
method is common to use for calculating the depreciation. Along with this method is used
in the companies for those assets whose value is decreased quickly in useful life. Herein,
below steps of calculating the depreciation is mentioned such as:
- Analysing the initial cost of fixed assets.
- Then subtract the scrap value of fixed assets from book value of assets.
- Determining the estimated life of assets.
- After that multiply the depreciation rate and cost of assets.
So these are the steps to compute the depreciation of any fixed assets by this method. Eventually,
the formula of calculating the depreciation is as follows:
Depreciation- (Cost of assets- scrap value)/ Life of assets.
 Reducing balance method- This is a type of method to calculate the depreciation in that
amount of depreciation is calculated on a fix rate same as the straight line method (Giner,
2014). As well as in the reducing balance method, percent of rate is not computed on the
basis of cost of assets. In this, the rate is calculated on the book value of fixed assets.
Basically, this method is suitable for the assets like computer, motors etc. This method is
used in companies for those fixed assets that depreciate more times in initial years and
later years because of efficiency.
(e) Evaluation of difference between the financial statements of sole traders and of limited
companies:
Basis of
difference
Sole traders Limited company
Auditing In the financial statement of the sole
traders, there is no need to conduct
the auditing of the financial
statements.
On the other hand, in the financial
statements of the limited company, it
is essential for the companies to
conduct the auditing so that efficiency
of the prepared statements can be

evaluated.
Equity In the financial statements of sole
traders, the owner's equity consists
only one item that is owner's equity
account (Ruppel, 2017).
While in this, owner's equity contains
share capital, capital reserve, retained
earning etc.
Preparation of
financial
statements
Under this, the financial statements
and reports are prepared by the owner
of business.
In the companies, the financial
statements are prepared by accountant.
Amount of
transaction
Eventually, in the sole traders there
are less number of financial
transaction due to small size of
business.
On the other hand, in the limited
companies, there are a wide range of
financial and non financial
transactions.
Mandatory It is not necessary for the sole traders
to prepare the financial statements
(Wang, 2014).
While in this, it is essential for them to
prepare the financial reports to
evaluate the financial position.
Client 3.
(A) Purpose of preparation of bank-reconciliation accounts- The bank-reconciliation
accounts are those accounts which are being prepared for the purpose of matching the balance of
cash account in relation to the information of bank statement (Gheorghe, 2012). Eventually, an
organisation maintains cash book to record the business transaction. It is a particular statement
that is created to cross check the bank balance as per pass bank and cash book on the specific
date. It shows the differences between them if any have. The main purpose for generating it is to
discover frauds and errors in bank and cash book in order to justify them. Herein, below some
purpose of preparing the bank reconciliation account are as follows:
 To check the correctness- The prime purpose of preparing the bank reconciliation
account is to evaluating the accuracy of the cash book ( Raiborn and Sivitanides, 2015).
 Detecting the frauds- As well as another purpose of bank-reconciliation account is to
find out the frauds and errors in the cash books.

 Provide clarity- Additionally, the bank reconciliation account also helps providing the
clarity in the amount entered in cash books.
So these are the main purpose of preparing the bank-reconciliation account for all kind of
companies.
(B) The areas that become reason of difference of bank statements and cash books:
There are various kind of reason for difference between the bank statements and cash
books. Below some prime reason of variation between these two are as follows:
 Lack of awareness about bank charges- It is the main reason of difference between the
bank statements and cash books (Rossi, Caperchione and Brusca, 2016). This is why
because sometimes bank takes some amount as a charge due to service provided by them.
For this charged amount, bank does not inform to the customer and it becomes a reason
of difference.
 Direct debited interest by bank- This is also an another cause of difference in which bank
charges interest amount on the loan. In the absence of information, it is not entered in the
cash books (Canziani, 2014).
 As well as interest credited by bank is not entered in the cash books and becomes a
reason of difference.
 Amount charged by the as a security to act as a guarantor is also not entered in the cash
books.
 Uncleared cheques by bank also become reason of difference.
 Condition, wherein cheque is issued but not deposited in the bank to clear.
So these are some reason of variation between the bank statements and cash books of
organisations.
(C) Imprest- In general terms, the imprest can be defined as kind of fund that is being used by the
organisations for the purpose of mini expenses (Gray, Coenenberg and Gordon, 2013). As well
as this amount of fund is being restored by companies at a particular time period. So overall, it is
being applied by the companies with an objective to make payment transaction on a regular
basis.
(D) Cash book for Burcu limited for September, 2018:
Cash book
Date Receipts Cash Bank Date Payments Cash Bank

01/0
1/19
Balance b/d
P Mullen
F Lane
J wilson
F Syme
15600
15600
68400
1400
3100
850
1670
75420
01/01/19
4/1/19
7/1/19
24/1/19
27/1/19
30/1/19
31/1/19
Storage cost
Motor exp.
Drawings
S Hood
J Brown
R Foot
Salaries
Business rates
Balance c/f
470
1500
13630
450
3600
4600
1400
4800
1320
59250
31/0
1/19
Balance b/d 13630 59250 15600 75420
Client 4.
(a) Prepare and balance in the books of Hilly for January, 2018-
(I) Sales ledger control account:

(ii) Purchase ledger control account:
(b) Control account- The control account is a kind of account that is prepared if amount of single
ledger is not entered in the general ledger (Gupta, 2016). As well as this account keeps the
general ledger's free of details. The example of control account is general ledger account entered
to account receivables.
Client 5.
(a) Suspense account- The suspense account is a kind of account which is related to carrying
those transactions that are doubtful (Chhabra and Pattanayak, 2014). For example, in a
company's bank statement if any amount is credited without any information then it will be
considered in this account. This is why because it is not clear that amount is credited whether as
an interest amount or deposited by someone else. Herein, below some features of this account are
mentioned below:
 The suspense account can be used as a memorandum account by the organisations.
 It provides a basis for finding the error in trial balance.
(b) Trial balance:

(c) Preparation of journal entries:

CONCLUSION
As per the above project report, it can be concluded that financial accounting is essential
for the companies in the terms of external and internal stakeholders. Along with, both the
stakeholders have their interest in the financial information of the companies for their own
purpose. Apart from it, this is necessary for the companies to follow all the rules and regulations
form preparation of the financial statements.

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