Financial Accounting Assignment: Ledgers, Trial Balance, Depreciation

This financial accounting assignment delves into the core principles of financial reporting, using Marks and Spencer as a case study. It begins with an introduction to financial accounting, its purpose, and the various stakeholders involved, both internal (managers, owners) and external (investors, government, suppliers, auditors), and their respective interests in financial statements. The assignment then progresses to practical applications, including journal entries, ledgers, and a trial balance for a client. It covers key accounting concepts like consistency and prudence, explaining their significance. Furthermore, it explores the purpose and methods of depreciation (straight-line method), differences between sole traders and limited companies, and the preparation of a bank reconciliation statement. The assignment is structured around five clients, each presenting specific accounting tasks, demonstrating a comprehensive understanding of financial accounting practices. Finally, it concludes with a summary of the key takeaways and a list of references.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1) Financial accounting and its purpose......................................................................................1
2.Internal and external stakeholders in relation with their interest in financial statements........2
CLIENT 1........................................................................................................................................3
2. Ledgers....................................................................................................................................7
3. Trial balance..........................................................................................................................13
CLIENT 2......................................................................................................................................14
3. Accounting concepts.............................................................................................................15
4. Purpose and methods of depreciation...................................................................................16
5. Difference between sole trader and limited company...........................................................17
CLIENT 3......................................................................................................................................18
a) The purpose of preparing bank reconciliation statement......................................................18
b) Reasons for variation in bank records with that of cash book..............................................19
c) Explanation of term “ Imprest”.............................................................................................19
d) Bank reconciliation statement...............................................................................................20
CLIENT 4......................................................................................................................................21
CLIENT 5......................................................................................................................................22
CONCLUSION..............................................................................................................................23
REFERENCES..............................................................................................................................25

INTRODUCTION
Financial accounting refers to a system which is used to maintain the record of the
financial transactions of company. It consist of elements such as income statement , balance
sheet and cash flow statement which include the information regarding different transaction on
the basis of their nature. In this study, Marks and Spencer will be considered for completing the
task. This a global company operating in a retail sector in different regions. Furthermore, the
assignment will provide understanding about purpose of financial accounting. Moreover, it
consist the information regarding different stakeholders of Marks and Spencer. It will also
provide understanding about consistency and prudence concepts of accounting.
1) Financial accounting and its purpose
Financial accounting is a system which is used by companies in order to record the
various financial transaction in order to determine the profitability of firm. The financial la
information is recorded by companies to identify the performance of firm on the basis of past
recorded data. The financial accounting main purpose is to provide financial information to its
users which assist them in making economic decision. It includes preparing various statement
such as income statement which consist of information about incomes and expense for the
period.
This statement is prepared in order to determine the profitability of firm. The another
statement which is used by stakeholders is balance sheet which provide understanding about the
liquidity position of firm and contains components such as assets and liabilities (Kimmel and
et.al., 2016). The purpose of financial accounting is provide clear understanding to its users
regarding the company's performance so that they are able to make decision regarding their
investment and other economic decision. The financial statement contain the information about
day to day operations performed by organisation.
The users of financial information are stakeholders of enterprise. With the help of
financial accounting company is able to make budgets for its future which assist in reducing their
expenses for future to increase the future profitability. It informs readers about the current status
of company so that they are able to make effective decision. The financial accounting is related
to the financial information which regarding day to day operations of firm.
The purpose of financial statement is to provide accurate information regarding the firm's
operations so that the users are able to make the right decision by comparing the financial
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statement of company with that of other company. With the help of financial accounting the firm
is able to prepare various budgets which consist of cash, sales, operating etc. on the basis of past
record of company to identify the changes in the profitability of company by comparing the
actual performance with that of forecasted (Mullinova, 2016). The purpose of financial
accounting is to maintained the accurate information about the day to day operations of business.
Moreover, it contained information to present the information so that it is useful for the
stakeholders to understand in a better way regarding the profitability and performance of the
company with that of its competitors .
2.Internal and external stakeholders in relation with their interest in financial statements
Internal stakeholders are the entities who are present within the organisation. The two
internal stakeholders are-
Managers- they manage the internal functioning of the company and requires accounting data
for the preparation of the budget effectively and to review the performance of the firm by
comparing the standard plan with the actual results (Narayanaswamy, 2017). They need financial
data to plan and to make decisions regarding the allocation of the human, capital and financial
resources adequately so that higher profits can be generated in the business.
Owners- for the assessment of the performance of their business they need the financial
statements that facilitates the information in relation to the overall profitability and the financial
position of the company in the market. It also helps the owners in knowing about the stability
and the riskiness in their business and how the changes in the economy has affected their
working. The accounting information also assist them in making decisions regarding the
expansion and investment.
External stakeholders are the entities that not present within the organisation but are
affected by the performance of the business. The four external stakeholders are-
Investors- As they invest in the equities and other convertible debentures of the corporate so for
knowing the performance of their investment they make use of the financial information so that
they could be able to determine that the investments made by them is going good or not or
whether they sell it or purchase more.
Government- government monitors the accounting information and ensure that all the
disclosures made are as per the rules and regulations to prevent the stakeholders interest who
make decisions on the basis of such information.
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Suppliers- for analysing the credibility of their customers they need accounting information so
that they could determine that the goods can be offered on credit or not. They also uses
accounting data of its customers to assess the soundness of their business which is very
important for the growth of the business.
Auditors- external auditors make examination of the statements to prepare an effective audited
statements and can frame audit opinion regarding the accuracy and fairness of the fiancial
statements.
CLIENT 1
Journal entries in the books of Alexandra for January are as follows
Date particulars Debit Credit
1st jan 2019 Storage exp.A/c Dr 450
To bank A/c
2nd jan 2019 Purchase 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
3rd jan 2019 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 F. Lane A/c Dr 2520
F. lane A/c Dr 980
To sales A/c 9470
4th jan 2019 Motor Exp. A/c Dr 470
To cash A/c 470
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7th jan 2019 Drawing A/c Dr 1500
To cash A/c 1500
9th jan 2019 T. cole A/c Dr 680
J. Fox A/c Dr 1310
To sales A/c 1990
11th jan 2019 Sales return A/c Dr 680
To J. wilson 270
F.syme 410
16th jan 2019 Cash A/c Dr 7020
To P. Mullen A/c 1400
To F. Lane A/c 3100
To J. Wilson 850
To F. Shyme 1670
19th jan 2019 R. foot A/c Dr 50
To Purchase return A/c 50
22st 2019 Purchase A/c Dr 3740
To L.Mole A/C 1830
To W. Wright 1910
24th jan 2019 S. Hood A/c DR 3600
J. Brown A/c Dr 4600
R. Foot A/c Dr 1400
To Bank A/c 9600
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27th jan 2019 Salary A/c Dr 4800
To bank A/c 4800
30th jan 2019 Business rates A/c Dr 1320
To bank A/c 1320
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2. Ledgers
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8

9

10

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3. Trial balance
Trial balance for the month ended January
Particular Debit Credit
S. Hood 10000
J. Brown 12000
D. Main 2060
R. foot 160
W. Tone 960
L. Mole 1830
W. Wright 1910
J whilson 80
F. syme 20
T.cole 2330
J. Allen 1020
P white 2520
F.lane 3980
J.fox 1310
P.mullen 3000
Sales 11460
Purchase 9820
purchase return 50
sales return 680
storage cost 450
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Motor expense 470
salary 4800
drawings 1500
business rates 1320
capital 389000
premise 240000
van 51250
Fixtures 8100
inventory 23900
Cash in hand 13630
Cash at bank 59250
429430 429430
CLIENT 2
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3. Accounting concepts
Accounting concept refers to the principles and methods that are adopted by the business
on the basis of which the recording of transactions of the business are made and the accounts are
prepared. Some accounting concepts are-
Consistency concept- this concept states that the accounting method once adopted to be
consistently followed in future periods of accounting. Change should be made only when the
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new method makes improvement in the financial results (Stockenstrand, and Nilsson, 2017).
Auditors recommend this principle so that the generated results can be compared from one
period to another. If there is consistency then the auditor while auditing can examine the gap or
issue if any in contrast with the past years
That will help the management in knowing the reason of the gap and they could take the
necessary measures. This principle is ignored by the managers when they look for generating
more revenues and increased profits.
For example-If the company adopts straight line method for charging depreciation in the first
year and in the second year it follows the written down value method for charging depreciation
and then again it uses straight line method in the third year, it will lead to an incorrect evaluation
of depreciation and the resulted balance sheet will show the incorrect results.
Prudence concept- it states that provide for all the possible losses and realized profits with
reasonable certainty are recognized in the profit and loss account. The provisions are made for all
known expenses and losses whether the amount is known for certain or just an estimation. This
treatment minimizes the reported profits and the valuation of assets (Shen, and Han, 2019 ). It bis
also known as conservatism principle.
For example- provision for bad debts, contingent liabilities, and bad debts expenses etc.
4. Purpose and methods of depreciation
Purpose: charging depreciation helps in ascertaining the true and fair profits and shows the asset
at its proper value. It makes arrangement of funds for replacement of fixed asset and assess the
accurate cost of production. It also facilitates to comply with all the legal provisions and tax
benefit can be availed.
Methods of depreciation:
Straight line method- in this method same amount of depreciation is been charged every year.
The book value of the fixed asset decreases uniformly over its useful life. As the expense of
depreciation charged is recorded in the income statement every year with the same charge so the
carry forward amount of asset decreases in the straight line on the balance sheet. It is the most
simple and common method of charging depreciation. It is calculated as amount of depreciation
minus scrap value divided by useful life of the fixed asset. It is calculated on the original cost of
the asset over the lifetime of the asset. The limitation of this method is that the depreciation does
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not relate to the usage factor which means it ignores the fact that in the future the life and
efficiency of the asset declines and the loss of interest on the investment made in the asset is not
accounted for in this method.
Written down value method- In this method the amount of depreciation goes on declining over
the useful life of the asset. It is also known as diminishing method of depreciation. A fixed
percentage of depreciation is charged on the book value. Depreciation amount reduces with
reduction in the book value over the years (Wen, and Nan, 2019). It poses the balanced effect on
the income statement in different years and the calculation also gets easy by applying this
method. This method is considered as the logical method and suitable for those assets having
long life. It is the approved method by income tax authorities. The limitation of this method is
that the value of the asset does not reduce to zero and the rate of depreciation is high.
5. Difference between sole trader and limited company
Sole trader Limited company
Auditing The auditing of the financial
statements of the sole trader is
not mandatory.
It is mandatory for the limited
company to get its financial
statements audited.
Financial statements Preparation of financial
statements as per GAAP and
IFRS for a sole trader is not
compulsory.
Limited company need to
frame its statements as per the
GAAP AND IFRS.
Rules and regulations No rules and regulations has to
be followed other than general
law and activity specific
licensees.
The limited company are
subject to strict rules and
regulations and need to submit
annual returns to chief risk
officer.
liability Sole trader has unlimited
liability that means he is liable
for the full amount of his debts
and at times of liquidation he
The liability on members of
limited company is limited that
means they are not responsible
or liable personally at the time
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is liable for its personal assets
as well.
of liquidation, they are only
liable upto the non-paid value
for their shares
Formalities Not any formalities has to be
complied by the sole trader.
Limited company requires
fulfilling of all the formalities
regarding the financial
statements, annual returns and
the audit from the qualified
auditors (Warren, and Jones,
2018).
Tax liability Profit and losses are combined
with other income for taxation.
It files and pays the taxes and
can set up costs but with well
justification.
Ownership Ownership lies with them and
owns the assets and liabilities.
Ownership does not lie with
the company and shareholders
hold ownership limited to their
holding in the share capital of
the corporation.
CLIENT 3
a) The purpose of preparing bank reconciliation statement
Bank reconciliation statement is prepared in order to identify the difference between the
records of cash books with that of bank book (Macve, 2015). It is prepared on periodical basis
for checking the bank related related transaction to identify if they are recorded properly or not in
cash books bank column. It assist in detecting errors in recording transactions and determining
the exact balance on a particular date. Bank reconciliation statement provide understanding about
the errors in recording the transaction by comparing the cash book with that of bank book to
understand the errors and make changes accordingly to balance with the bank book. This
statement assist in detecting fraud and avoiding the errors (Buchanan and Davis, 2018 ). The
reason for preparing the bank reconciliation on monthly basis is to identify the verify the data
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recorded by bank with the cash book maintained by business in order to detect the information
which is not entered and assist in rectifying the errors by making the changes which are required
for balancing the bank and cash book.
b) Reasons for variation in bank records with that of cash book
There are various reasons due to which there is difference in record maintained by bank
and the records maintained by company in of of cash book. The following are the reasons for
their difference :
 Cheque issued but not presented in bank
 Interest allowed by bank not recorded in cash book
 outstanding checks
 bank service charges
 Direct payment through bank
The above are the reasons which cause the difference between the bank records and cash
book due to which there are errors in recording the transaction some transaction are recorded by
bank which are not recorded in cash book due to which there are deviations in the records which
are rectified by preparing the bank reconciliation account (Warren and Jones, 2018). There are
some transaction such as bank service charges which are recorded by bank but are not recorded
in the cash book because they are directly debited from the bank recorded for providing the
banking services to the clients. when the cheque is issued by customer but is not p[resented in the
bank there is no entry in the bank record due to which there is difference in the recording of bank
and cash book.
c) Explanation of term “ Imprest”
Imprest system of petty cash book is a accounting system for paying out small and
routine expenses. It is a petty cash account which is maintained by company for maintaining the
record of small and routine expenses (Henderson and et.al., 2015). The fixed balance is
maintained in this account for paying the expenses which are related to small daily routine
expenses. The imprest system include petty cash book which is used by companies and the
minimum amount is present in this account for the routine expenses. It is recorded as separate
account in the general ledger account. The fixed amount is reserved which is used by company in
future when the situations or circumstances arises.
d) Bank reconciliation statement
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CLIENT 4
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CLIENT 5
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CONCLUSION
By summing up this report, it can be concluded that business units require to follow
accounting principles and concepts while preparing final accounts. It can be seen in the report
that significant difference takes place in the financial statements prepared by sole trader and
limited companies. It can be summarized from the evaluation that WDV is the best method of
depreciation which in turn helps in presenting fair value of asset. Besides this, it has been
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articulated that suspense account helps in matching trial balance and thereby helps in preparing
final accounts.
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