Financial Accounting Principles - Task Solutions Report

This document presents a comprehensive solution to a financial accounting assignment. It begins with journal entries for various transactions, followed by the preparation of ledgers and a trial balance. The solution then drafts a profitability statement and a statement of financial position, providing insights into Peter Pipe's financial performance. Task 3 delves into Raintree Ltd's profit generation, balance sheet, and the accounting concepts of consistency and prudence, alongside an evaluation of depreciation methods. The assignment also covers bank reconciliation statements, sales and purchase ledgers, and control accounts. Finally, it addresses suspense accounts, trial balance rectification, and the distinction between suspense and clearing accounts. The solution includes detailed calculations, explanations, and financial statements to provide a thorough understanding of financial accounting principles.

Financial Accounting Principles

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
a. Journal Entries.........................................................................................................................3
b. Preparation of ledgers account.................................................................................................5
c. Drafting trial balance...............................................................................................................6
TASK 2............................................................................................................................................7
a. Drafting profitability statement................................................................................................7
b. Presenting statement of financial position...............................................................................8
TASK 3..........................................................................................................................................10
a. Giving information about profit generated by Raintree Ltd..................................................10
b. Presenting balance sheet of Raintree Ltd...............................................................................11
c. Defining the accounting concept of consistency and Prudence.............................................12
d. Evaluating the two methods that help in assessing the amount of depreciation....................12
TASK 4..........................................................................................................................................14
a. Purpose of preparing bank reconciliation statement..............................................................14
b. Explaining the reasons why balance cash and pass book vary from each other....................14
c. Preparing bank reconciliation statement and updated cash book..........................................15
TASK 5..........................................................................................................................................15
a. Framing sales and purchase ledger of Henderson Books......................................................15
b. Explaining the meaning of control account...........................................................................16
TASK 6..........................................................................................................................................17
a. Suspense account and its features..........................................................................................17
b. Presenting trial balance and use of control accounts.............................................................17
c. Rectifying accounting entries................................................................................................18

d. Distinguishing suspense and clearing account......................................................................18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20
APPENDIX....................................................................................................................................21
Appendix 1: Ledger account......................................................................................................21

INTRODUCTION
Financial accounting is highly concerned with recording, summarizing and evaluating
monetary information in a highly structured way. Now, each business organization such as sole
trader as well as public and private business focuses on preparing final accounts at the end of
accounting year. Hence, by preparing final accounts business entity can make evaluation of
profitability, liquidity and solvency aspect. In this, financial accounts are highly significant
which in turn aid in effectual decision making and assists in framing competent framework. The
present report is based on varied case scenarios which in turn provide deeper insight about
bookkeeping and double entry system. Further, it will also develop understanding about
suspense, control and clearing account. Along with this, report will also depict the manner
through which profitability and monetary position can be identified through the means of final
account preparation.
TASK 1
a. Journal Entries
Alex Study’s Journal for the month of May 2016 is enumerated below:
Particulars Debit Credit
1. Storage expenses a/c Dr.
To bank a/c
400
400
2. Purchase a/c Dr.
To S. Hood a/c
To D. Main a/c
To W. Tone a/c
To R. Foot a/c
6080
1450
2060
960
1610
3. J Wilson a/c Dr.
T. Cole a/c Dr.
F. Syme a/c Dr.
J. Allen a/c Dr.
P. White a/c Dr.
1120
1640
2080
910
2420

F. Lane a/c Dr.
To sales a/c
770
8940
4. Motor car expenses a/c Dr.
To cash a/c
470
470
7. Drawing a/c Dr.
To cash a/c
1500
1500
9. T. Cole a/c Dr.
J. Fox a/c Dr.
To sales a/c
680
1310
11. Sales return a/c Dr.
To J. Wilson
To F. Syme a/c
680
270
410
14 Van a/c Dr.
To Abel Motors Ltd
28500
28500
16 (a). Bank a/c Dr.
Discount allowed a/c Dr.
To P Mullen
(b)
Bank a/c Dr.
Discount allowed a/c Dr.
To F. Lane
(c)
Bank a/c Dr.
Discount allowed a/c Dr.
To J. Wilson
(d)
Bank a/c Dr.
Discount allowed a/c Dr.
To F. Syme
1330
70
2945
155
807.5
42.5
1586.5
83.5
1400
3100
850
1670
19 R. Foot a/c Dr.
To purchase return a/c
50
50
22 Purchase a/c Dr.
To L. Mole a/c
3740
1830

To W. Wright a/c 1910
24 a.
S. wood a/c Dr.
To Bank a/c
To Discount receive a/c
b.
J. Brown a/c Dr.
To Bank a/c
To Discount receive a/c
c.
R. Foot a/c Dr.
To Bank a/c
To Discount receive a/c
3600
4600
1400
3240
360
4140
460
140
1260
27 Salaries a/c Dr.
To bank a/c
4800
4800
30 Business rates a/c Dr
To bank a/c
1320
1320
31 Abel motors Ltd. a/c Dr.
To bank a/c
20500
20500
b. Preparation of ledgers account
Mentioned in appendix 1.

c. Drafting trial balance

TASK 2
a. Drafting profitability statement
Income statement serves information regarding the profitability generated by firm over
expenses. One of the main objectives of the firm is to attain high returns by reducing the level of
expenditure. In this, by preparing profitability statement firm get information about profit margin
which it has after making payment of all the expenses (Schroeder, Clark and Cathey, 2016).
Hence, by using current profitability statement and comparing it with past years business entity
can frame highly strategic competent and policy framework.
Peter Pipe’s Income statement for the year ended at 31st December 2016 is as follows:
Particulars Amount (in £)
Sales 1215000
Closing stock 101640
1316640
Less:
Opening stock 82200
Purchase 778800
Wages and salaries 177500
Add: Outstanding salaries and
wages 1220 178720
1039720
Gross profit 276920
Less: Indirect expenses
Motor expenses 87400

Administration expenses 17650
Heating and lighting 4950
Advertising expenses 13280
Less: prepaid expenses 8470 4810
Depreciation on premises 5400
Depreciation on equipment 17250
Depreciation on motor vehicle 2800
Total indirect expenditure 140260
Net profit 136660
b. Presenting statement of financial position
Balance sheet furnishes information about liquidity and solvency position as well as
performance of firm. Assets and liabilities are the main two elements of balance sheet which in
turn helps in evaluating the business performance and positions. Further, assets side can be
distinguished into two sides such as fixed (land & machinery, land & building) and current (cash,
bank, debtors etc). On the other side, sub elements of liabilities include shareholders equity, long
term dent and current obligations. Thus, by preparing such statement business unit can assess
whether it has enough fund to meet monetary obligations or not. Thus, such statement aid in the
strategic planning to a great extent and thereby makes contribution in attainment of goals.
Statement of financial position of Peter Pipe for the year ended at 31st December, 2016
Particulars Amount (in £)
Current assets

Closing inventory 101640
Prepaid advertising 8470
Bills receivables 106960
cash in hand 2440
Total current assets 219510
Fixed assets
Freehold premises 270000
Less depreciation on
premises: 42900 227100
Equipment 172500
Less: Depreciation on
equipment 114750 57750
Motor Vehicles 28000
Less: Depreciation 16800 11200
Total fixed assets 296050
Total assets 515560
Liabilities
Current liabilities
Bills payables 76910
Outstanding salaries 1220

Bank overdraft 11290
Total current liabilities 89420
Capital 332120
Add: net profit 136660
Less: Drawing 42640 426140
Total liabilities 515560
TASK 3
a. Giving information about profit generated by Raintree Ltd
P&L of Raintree Ltd. For the financial year ended at 30th September 2016
Particulars Amount (in £)
Sales revenue 107000
Less: return inward 2000 105000
Closing stock 18000
123000
Opening inventory 17000
Purchases 32000
49000
Gross profit 74000
Depreciation on building 1000
Depreciation on plant and machinery 10000
Administration cost 28000
Distribution cost 22000
Less: Prepaid rent 3000
Add: Outstanding salaries 2000 21000
Corporation tax 4000
64000

Net profit 10000
b. Presenting balance sheet of Raintree Ltd
Raintree Ltd Balance sheet for the year ended at 30th September 2016 is as follows:
Particulars Amount (in £)
Current assets
Trade receivables 24000
Prepaid rent 3000
Closing stock 18000
45000
Fixed assets
Land and building 60000
Less: Depreciation on building 8000 52000
Plant and machinery 65000
Less: Depreciation @ 20% 25000 40000
92000
Total assets 137000
Liabilities
Current liabilities
Trade payables 14000
Outstanding salaries 2000
bank overdraft 15000
Corporation tax 4000
Total current liabilities 35000
Shareholders’ equity 50000
share premium 20000
Retained earnings 22000
Net profit 10000
Total shareholders’ equity 102000
Total liabilities 137000