Financial Accounting Report - Financial Statements Analysis

This financial accounting assignment provides a detailed exploration of financial accounting principles and practices. It begins with an introduction to financial accounting, defining its purpose and outlining relevant regulations, rules, and accounting principles. The assignment then delves into the practical application of these concepts through Task 2, which includes journal entries, ledgers, trial balances, and financial statements for various clients. The report covers the preparation and analysis of financial statements, including profit and loss statements and statements of financial position. It also addresses key accounting concepts such as consistency, materiality, and the purpose and methods of depreciation, as well as bank reconciliation statements. The assignment offers a comprehensive overview of financial accounting, providing valuable insights into the practical application of accounting principles.

Financial Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Definition of financial accounting..........................................................................................1
2. Regulations related to financial accounting............................................................................1
3. Accounting rules and principles..............................................................................................2
4. Convention and concepts related to consistence and material discloser.................................3
TASK 2............................................................................................................................................4
CLIENT 1....................................................................................................................................4
CLIENT 2..................................................................................................................................14
CLIENT 3..................................................................................................................................16
CLIENT 4..................................................................................................................................18
CLIENT 5..................................................................................................................................21
CLIENT 6..................................................................................................................................22
CONCLUSION..............................................................................................................................24
REFERENCES..............................................................................................................................25

INTRODUCTION
Financial accounting can be defined as process in which all the final accounts such as
balance sheet, income statement and cash flow are prepared, analysed and summarised in order
to evaluate liquid strength of an organisation. Internal as well as external stakeholders may
assess the actual position and performance of the company with the help of financial statements
(Beatty and Liao, 2014). Main aim of this project is to enhance knowledge about financial
accounting and its components. In this report various topics are discussed such as regulations,
rules, principles, conventions that are related to financial accounting. Formulation of journals,
ledgers, trial balance, bank reconciliation statement, final accounts, sales and purchase ledger
control, suspense account etc. are also been covered under this assignment.
TASK 1
1. Definition of financial accounting
Financial Accounting: It is the field of accounting that keeps record of company's
transactions by using standardized guidelines. The transactions are recorded, summarised, and
presented in a financial report or financial statement. Financial accounting is the summary of
company's revenues, expenses, assets, liabilities, balance sheet, and statement of cash flows. In
order to understand the concept of financial accounting Talent Plus has been taken. This
Company prepares financial accounts after analysing the accounting reports and all the needed
information. This is a consultancy firm which helps to find out and optimise a person's full
potential, so that the individual, team, and the company can thrive.
Purposes of financial accounting :
The main purpose of financial accounting is to provide financial information to the
company for decision making and financial report provides company's performance report to
the external parties such as investors, creditors, and tax authorities. Such types of informations
helps to make better decisions for the company and get the accurate profit and loss statements
(Henderson and et.al., 2015).
2. Regulations related to financial accounting
The Accounting standards board (ASB) taken from the Accounting standard committee
(ASC) in 1990. The ASB has power to issue its own standards, the motive being to increase the
quality of standard and increase speed.
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The accounting standards established by the ASB are called 'Financial Reporting
standards' (FRS). Accounting standards are authoritative statements which includes how
particular types of transaction should be recorded in financial statements and accordingly
compliance with accounting standards will normally be needed for financial statements to give
true and fair view.
Development of Accounting standards :
The ASB defines points that become the subject of FRSs, either from own research or
external sources. once the issues have been identified, the ASB produces a discussion draft
which is circulated to any parties who have registered in their interest. All the relevant
information is available on the ASB website and interested parties can make comments on
proposals by e-mail (Hoyle, Schaefer and Doupnik, 2015).
International Accounting standards board:
The International Accounting standards boards (IASB) was formed in April 2001 in
London. IASB foundation is an independent organisation having two main bodies, the Trustees
and the ISAB. The ISAC trustees appoint the ISAB members, and raise the funds needed, but the
ISAB has an responsibility for setting Accounting standards.
3. Accounting rules and principles
Accounting rules are the statement that establishes to record transactions. All the
transactions should be recorded in the books of company using double entry method. Double
entry account6ing method means each transaction involved two or more account, one is debit
and next is credit with the same amount.
Golden rules of Accounting:
 Debit the Receiver, credit the giver – This principle is used in case of personal accounts
which relates to persons with whom a business keeps dealings.
 Debit What comes in, credit What Goes out -This principle is used in case of real
accounts. Real accounts include tangible assets such as machinery,land &building etc. Debit All Expenses and losses, credit All incomes and gains – This rule is applied in
case of nominal account which relates to business expenses, loss should be debit and
incomes and gains should be credit.
Accounting Principles:
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Accounting principles are the set of uniform practices which entities follow to record,
prepare and present financial statements. These principles helps to present true and fair view of
affairs of entity.
 Going concern principle : It assumes the business will continue to exit and function with
no defined end date. A business never exit whether employees and owner of the company
exit and if an accountant is concerned the business should be liquidate, they have to
disclose this GAAP principles.
 Full Disclosure principle : It is generally accepted accounting principle that requires to
disclose all the information which relates to business and financial statements.
 Cost principle : The cost principle highlights the cost of an item shouldn't change. It
states that A business should use the historical cost of an item in books, not the resell
cost.
 Matching principle : This principle states that each item of revenues should match with
an item of expenses.
 Materiality principle : This principle defines that the accountant should use their best
judgement in order to record a transaction or addressing an error also use their
professional opinion.
 Conservatism : This principle defines that the accountant use their best judgement in a
situation . When there is more than one option to record transaction then the accountant
should select best option for running the business.
 Revenue Recognition principle : This principle helps to reported revenues when its
earned, regardless payment for the product is actually received.
 Monetary unit : This principle dictates all transactions be recorded in same currency.
Inflation shouldn't be considered in financial reports (Kieso, Weygandt and Warfield,
2016).
4. Convention and concepts related to consistence and material discloser
Accounting concept defines the assumptions on the basis of which financial statements of
any entity are prepared. Concept provides a unifying structure and internal logic to accounting
process. In order to maintain uniformity and consistency in preparing and keep record of book of
accounts, certain principles and rules have been followed. These rules/ principles are classified
as concepts and conventions which helps to maintain accounting records.
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Consistency: According to this convention accounting policies should remain unchanged
from one period to another. The rules, practices, concepts and principles used in accounting
should be observed continuously. It states that whenever any organisation has selected a method
for the accounting treatment of an item, all similar items should be treated in the same day, year
to year or period to period. It helps in comparison of financial performance on yearly basis.
Materiality: This concept is the exception of “full discloser concept” material
information and its misstatement influence the economic decisions of organisation which is taken
on the basis of financial information. Whenever decisions are required regarding the
appropriateness of a particular accounting judgement then materiality concept suggests (Libby,
2017).
TASK 2
CLIENT 1
Journals entries:
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5

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Ledgers:
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8

9

10

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Trial balance:
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CLIENT 2
Statement of profit and loss:
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Statement of financial position:
Particulars
Amount
(Figures in £)
Current Assets
Inventory 101640
Prepaid advertisement expense 8470
Trade receivables 106960
Cash in hand 2440
Total current assets 219510
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Free Hold Premises 270000
Equipments 172500
Vehicle 28000
Total non current assets 470500
Total assets 690010
Liabilities and equities:
Current liabilities
Trade payable 76910
Bank overdraft 11290
Out standing salary 1220
Accumulate Depreciation(42150+105000+16800) 163950
Total current liabilities 253370
Capital 332120
Add: Net Profit 147160
Less :- Drawings (42640) 436640
Total equities and liabilities 690010
CLIENT 3
A. Statement of profit and loss:
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B.
B. Statement of financial position:
Assets Amount Liabilities Amount
Current Assets Current liabilities
Inventory 18000 Trade payables 14000
Trade receivables 24000
Outstanding expenses
administration cost 2000
Rent Expenses in advance 3000 Tax provision 37000
Cash at bank -15000 Corporate Tax 4000
Total current assets 30000 Total liabilities 57000
Non Current Assets: Shareholder's Equity
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Building and Land 60000 Equity stock @ £1 each 50000
Machineries and plant 65000 Equity premium reserve 20000
Total non current assets 125000 Retained earnings 22000
Earnings 6000
Total equity 98000
Total assets 155000
Total equities and
liabilities 155000
C. Accounting concept of prudency and consistency:
Consistency: This contains behaviour, treatment, stability, constancy, uniformity and
togetherness. It helps to maintain consonant and human mental relations to avoid inconsistency
and tension.
Prudency: This contains great careful judgement at the time of handling problems. It
helps to make well thought decision or human action. It shows best decision in avoiding risk and
uncertainties.
D. Purpose of depreciation and its methods:
Depreciation: It is an accounting method which helps to reduce in the value of fixed assets due
to wear and tear. Fixed assets such as machinery, land and building, furniture etc.
Purpose: To allocate the cost of a tangible assets over a useful life and also used to
account for decrease in value. It also helps to depreciate long term assets for accounting and tax
purpose (Macve, 2015).
Depreciation method:
It can be calculated by two method-
Straight line method: it means amortization by dividing the difference between assets
price and its usage value by number of years.
Written down value: This is measured at a certain fixed percentage every year on the
decreasing value of an assets.
CLIENT 4
A. Bank reconcilliation statement and its purpose:
Bank Reconciliation: It is known as the process of matching and comparing figure of a
cash account with bank account. It shows the difference between cash book and bank pass book.
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The aim of this procedure is to determine the difference between two, and book changes to the
accounting records as appropriate. It is a document which helps to match the cash balance in the
company's books to the bank statements (Nobes, 2014).
Purpose of Bank reconciliation:
A bank reconciliation has been used to compare cash records to the bank records. If there
is any difference between the amount of money and the amount of bank then results could be an
overdrawn bank account, bounced cheques, and overdraft fees. The main purpose of this to
carried out uncover and correct any errors in the recording of payments made by the bank
account. It also highlights that transaction which have not yet been recorded in the accounting
records. In order to understand the concept of bank reconciliation statement to Durrell has
taken . These are essential for Durrell to be performed on monthly basis. Following points are
covered to realise its importance-
 Compare accounting records with bank record: BRS are important to compare the
bank records with cash records. If Durrell maintain BRS then it would be easy to know
the records to what is actually in the bank.
 Helps to make financial choices: It would be very convenient for Durrell to get accurate
information about cash amount in account hence, it can make exactly financial choices.
 Helps to solve clerical error: It helps to make sure that Durrell is being charged the
accurate sum of money on things for which he paid. So by using this can get correct
information about not overpaying for something because of clerical error.
 Regular monitoring of cash flow: It helps to assist in regular observation of cash flows
of a business hence, Durrell should be prepare bank reconciliation on monthly basis.
B. Areas which may cause record to vary from the bank records:
There are various reason which may cause cash record to vary from bank accounts-
 Unrealised cheques: Bank check deposited in to bank are debited by the organisation
which increase their bank balance hence, Durrell can gets reason for difference in their
balance.
 Dishonour of cheques: Organisation credits its account as when it deposits a cheque to
bank. Durrell gets the information of cheque being dishonoured if its received later by
the organisation.
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 Recording errors: Durrell or bank may have recorded a cheque or deposit incorrectly or
missed other important transaction. As a result differences in their records.
 Not sufficient funds: The bank may have rejected some of company's deposited cheques,
because of insufficient balance in their accounts hence, Durrell can see difference in bank
records and cash records because he has debited.
 Unrepresented cheques: If cheques are issued by the Durrell for payment, they are
entered on the credit side of bank column of the cash book .whereas, receiving people not
presented this cheques on the same date hence, there would be a difference in Durrell and
bank's records (Wang, 2014).
C. Bank reconciliation statement:
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CLIENT 5
A. Formulation of sales and purchase ledger control account:
Sales ledger control account: It states the total number of trade debtor of an
organisation at a granted certain time. This is also known as “Trade debtor control A/C” which
includes balance sheet and short term assets. It helps to define the total sum of money owned to
a business by its clients at a fixed period of time (Khan, 2015).
Purchase ledger control account: It states the total number of trade creditors of an
organisation at a granted certain time. This is also known as “Trade creditors control A/C” which
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includes balance sheet and short term liabilities. It helps to define the total business owes by its
suppliers. All transactions related to individual are posted in supplier ledger.
B. Control account: It contains only summary account in the General Ledger and its
motive to keep this, provide neat and fair details, also helps to show correct balance (Control
account, 2013). Henderson should maintain this account to show clean details and to control all
subsidiary accounts. Following points are covered to understand this-
 It would be beneficial for Henderson to give neat and clean details.
 It also provide accurate balance which is used in financial statement.
 Helps to identify errors in subsidiary ledgers.
CLIENT 6
A. Suspense account: It is a general ledger account which includes temporarily records.
This is used to analysis doubtful entries and cover the unknown transactions. It maintains
monetary transactions which is entered with invalid account number (Weygandt, Kimmel and
Kieso, 2015).
B. Trial balance:
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C. Journal entries to clear
suspense account:
D. Difference between suspense and clearing account:
Suspense Account Clearing Account
This means to contains amounts which are
recorded on temporarily.
This means to contain cost or amounts that to
be transferred to other account.
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This is used to hold transaction for later
posting and provide correct and complete
information.
This is used whenever problem occurred and
recorded until the problem is resolved.
CONCLUSION
From the above project report it has been concluded that it is very important for all the
business entities to conduct financial accounting every year in order to evaluate financial status
of the company. External stakeholders such as investors, creditors, customers etc. may form
strategic decisions regarding making investment and providing credit with the help of
appropriate records of the business entity. Managers and other executives use financial
statements to make effective judgements for the betterment of the enterprise. Various types of
accounts and statements are formulated by the accountants that may help to evaluate actual
position of an organisation. These are journals, ledgers, trial balance, profit and loss account,
balance sheet, bank reconciliation statements etc.
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REFERENCES
Books and Journals:
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics. 58(2-3). pp.339-383.
Henderson, S. and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hoyle, J. B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Kieso, D. E., Weygandt, J. J. and Warfield, T. D., 2016. Intermediate Accounting, Binder Ready
Version. John Wiley & Sons.
Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to
Behavioural Accounting Research (pp. 42-54). Routledge.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Wang, C., 2014. Accounting standards harmonization and financial statement comparability:
Evidence from transnational information transfer. Journal of Accounting Research.
52(4). pp.955-992.
Weygandt, J. J., Kimmel, P. D. and Kieso, D. E., 2015. Financial & managerial accounting.
John Wiley & Sons.
Online
Control account. 2013. [Online]. Available through:
<https://strategiccfo.com/control-account/>
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