Comprehensive Financial Accounting Report: Concepts and Application

This report delves into the core concepts of financial accounting, examining its definition, purpose, and application within the context of Fathom Financial Consulting. It elucidates the process of recording and summarizing financial transactions to produce financial statements, including the profit and loss account, balance sheet, and cash flow statement. The report also explores the roles of internal and external stakeholders, the double-entry system of bookkeeping, and the differences between financial reporting and financial statements. Furthermore, it analyzes various business transactions, the application of debit and credit recording, and provides examples to illustrate these concepts. The report includes a detailed ledger of transactions. The report aims to provide a comprehensive understanding of financial accounting principles and their practical application.

Financial Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Part (a).........................................................................................................................................3
Part (b).........................................................................................................................................6
CONCLUSION..............................................................................................................................27
REFERENCES..............................................................................................................................28

INTRODUCTION
Financial accounting is a specific branch of accounting which assist the company in
recording and summarising the financial transactions (Trucco, 2015). It is the process of
recording, summarising and reporting the business transactions resulting from several business
operations for a period of time. Company prepares its financial statements by implementing the
financial accounting system which includes profit and loss account, balance sheet, cash flow
statement and so on. For understanding of financial accounting, a company named Fathom
financial consulting is chosen which is engaged in consultancy services. This report provides
the meaning of financial accounting and its several purposes and it also explains various
stakeholders of an organisation both internal as well as external. Apart from this, it defines the
double entry system of recoding the financial transactions which helps in preparing the financial
statements. This report further explains the concepts of suspense account, control account, bank
reconciliation account and book keeping as well as it provides the differences between financial
reporting and financial statements.
MAIN BODY
Part (a)
1. Definition and meaning of financial accounting.
Financial accounting
Financial accounting is a scientific method of recording and preparing the financial
statements of an organisation (Liao, Kang, Morris and Tang, 2013). These financial statements
shows the financial health of the company which is used by the stakeholders associated with the
business to make an informed decision. Financial accounting works in contrast with the
managerial accounting . The primary financial statements prepared with the help of financial
accounting principles are profit & loss statement, balance sheet, cash flow statement and
statement of retained earnings. It is a culmination of science and art in preparing financial
accounts. They are prepared on the lines of accounting standards like IFRS , IAS, GAAP etc. all
over the world. Financial accounting uses the principle of double entry system to record its
statements. The principle is the heart of the system. Financial accounting doesn't report the
overall value of the firm , rather it provides functional financial health of the business to support

the investors in making an opinion about the firm. It is an integral part of any business. The
purpose of making financial statements are described here in as under :
 Cash flow analysis : Financial statements manifest the true liquid position of the
business , primarily through cash flow statement. It helps the investors to ascertain the
liquid position of the company. It gives an assurance to the creditors that company is
solvent enough to repay their debts at any time. It assures the creditors about company's
ability to repay them at any day.
 Taxation policy : Preparing financial statements based on the principles of accounting
standards and norms helps the firm in ascertaining the accurate tax liability of the
business (Whittington, 2016). It also helps the business in ensuring flow of taxes and
identify potential sources through which it can secure tax rebates. It also helps the
business from tax evasion saving it from the legal troubles.
 Helps in building strategy framework : Financial statements provides quantitative as well
as qualitative data set to the management which helps them to devise future strategies.
With the help of Financial data in the hand , the management would be able to decipher
the information into valuable inputs about the target areas to focus on. And the areas
which are profitable to a business, hence designing strategies accordingly.
 Beneficial to stakeholders : Through financial statements of the company its stakeholders
can analyse its profitability and potential future position. On the basis of this information
they can decide whether to invest further or withdraw their money. Its also helpful to the
government to ascertain whether the company is liquid or is walking towards sickness.
 Track financial performance : A business firm through a comparison between its current
financial position and past performances can evaluate its overall performance over the
years . Keeping a track on the financial performance year to year helps the business to
identify key factors which daunted the business in the particular year and restructure that
loophole to perform better in the future.
2. Different types of internal and external stakeholders.
Stakeholder- The stakeholders can be defined as those individuals who have their interest
in the activities and functions of other companies (Trotman and Carson, 2018). Basically,

objective of these stakeholders is to earn profits and revenue. There are two types of stakeholders
which are as follows:
 External stakeholder.
 Internal stakeholder.
These two stakeholders keep an extra site of eyes on the activities of other companies.
Description of these stakeholders is mentioned below:
 External stakeholders- These stakeholders can be defined as kind of stakeholders who are
not involved in the daily activities and functions. As well as do not have any other rights
like other members of companies. These stakeholders includes government, supplier,
customer, creditors etc. The objective of all these stakeholders is common which is to
earn return on the invested capital. Herein, below some types of external stakeholders are
mentioned such as:
1. Investors- These stakeholders are associated with the investing money in the operations
and activities of business (Hiebl, 2014). The aim of these stakeholders is to get maximum
return on the invested income. For this purpose they show their interest in the financial
information of companies so that they can take decision about whether they should invest
or not. In the absence of checking the financial information of companies it can be
difficult for them to take the investment decisions.
2. Government- In different countries, the government act as important external stakeholder.
They establish some rules and regulations which are needed to be followed by the
companies. Eventually, the government shows the interest in the financial information of
companies for the purpose of determining about how much tax should be taken.
3. Suppliers- The suppliers provide raw material and other needed things to the companies.
They make transactions with the companies in both ways including on credit and cash.
The credit transaction depends on the reputation of firms and it is evaluated by the
financial transactions. For this purpose the suppliers show their interest in the financial
information of companies. If financial condition is weak of any company then they will
not be willing to make transaction on credit basis.
4. Creditors- These are kind of stakeholders who provide financial assistance to the
companies when they need. In return they get the interest on borrowed amount. Herein, it
is important for the creditors to evaluate the financial condition of company before giving

the financial services. This ensures them that any particular company will return the
borrowed amount in given time with interest.
 Internal stakeholder- The internal stakeholders are those stakeholders who are available
in daily activities and operations of organisation (Lanen, Anderson and Maher, 2013).
Some common examples of these stakeholders are employees, managers etc. which are
mentioned below broad sense:
1. Employees- The employees are those who perform company's operations and activities
and get wages, salary in return. Any company's financial condition depends on the
performance of these stakeholders. The employees show their interest in the financial
information of the companies so that they can ensure about financial position of
organisation because their growth and development is linked with this.
2. Board of director (BOD)- The board of director are very important internal stakeholders
in any kind of business. This is why because they are responsible for preparation and
formulating the strategies. They show their interest in financial information of the
company, so that they can make their future plans and policies accordingly.
Part (b)
Client 1.
Business transaction- In business, there are wide range of transactions such as:
 Sales- It can be defined as transfer of goods and services from seller to buyer. In return
seller get money from the buyer.
 Purchase- This can be defined as acquiring goods and services from seller.
 Receipt- It can be defined as a document that contains information about date of purchase
and acknowledging to person who has received money.
 Payments- In general the payment means trade of value from one person to another for
products and services.
Double entry:
 Manual system- This system of keeping the financial transactions of companies by hand.
Eventually, this accounting system is being used by the small business organisations.
They use this accounting system because of there small business area and transactions.

 Electronic system- This system is related to the regulating the accounting functions,
research and recording of transactions by use of computer based accounting tools (Adler,
2013). This system is used when there is huge number of transactions. It removes the
complexity from the accounting.
 Debit & credit recording- There are various kind of rules and regulations to record the
debits and credit amount. In the context of double entry book keeping system, debit and
credit should be equal. As well as for each transaction total amount entered in left side
must be entered in right side.
Herein, below double entry with ledgers on the basis of given data is mentioned:

Date Particulars Debit Credit
01/01/19 Premises account 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 1250
To J Brown 16600
To Capital account (Balance in figure) 389000
(Being owner's capital is calculated)
So, Alexendra Study's capital at 1st January :
389000
417750 417750
Date Particulars Debit Credit
01/01/19 Storage cost A/c Dr 450
To bank 450
(Being storage cost is paid)
02/01/19 Purchases account 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 purchase on credit from different
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
To sales A/c 9470
04/01/19 Motor expenses A/c Dr 470
To cash A/c 470
(Being motor expenses is paid)
07/01/19 Capital A/c Dr 1500
To cash A/c 1500
(Being cash withdrawal by owner himself)
09/01/19 To Cole A/c Dr 690

J fox A/c 1310
To sales A/c 1990
(Being goods purchase on credit from different
parties)
11/01/19 Sales return A/c Dr 680
To J Wilson A/c 270
To F. Syme A/c 410
(Being goods are returned back by parties)
16/01/19 Bank A/c Dr 7020
To P. Mullen A/c 1400
To F Lane A/c 3100
To J Wilson A/c 850
To F Syme A/c 1670
(Being payment received from parties)
19/01/19 R Foot A/c Dr 50
To purchase return A/c 50
(Being goods return to creditors)
22/01/19 Purchase A/c Dr 3470
To L Mole A/c 1830
To W Wright A/c 1910

(Being goods purchased on credit)
24/01/19 S Hood A/c Dr 3600
J Brown A/c Dr 4600
R Foot A/c Dr 1400
To Bank A/c 9600
(Being payment is made to creditors)

Trail balance as on 31st January 2019:
Trial Balance for the month of July....
Particulars Debit Credit
Storage Cost 450
Purchase 9820
Sales 11460
Motor Expenses 470
Cash At Bank 59250
Cash In Hand 13630
Payables:
S. Hood 10000
J. Brown 12000
W Tone 960

R Foot 160
L Mole 1830
W. Wright 1910
D Main 2060
Premises 240000
Van 51250
Fixtures 8100
Inventory 23900
Receivables:
P Mullen 3000
F Lane 3980
J Wilson 80
T Cole 2330
F Syme 20
J Allen 1020
P. White 2520
J Fox 1310
Sales Return 680
Purchase Return 50
Salaries 4800
Business Rates 1320
Capital 389000
Total 429430 429430
Trial balance- The trial balance is produced after entering all the financial transactions in the
accounting journals and summarising them in general ledgers (Kotas, 2014). It identifies the
errors by checking debit amount equal to credit amount. The components of trial balance
includes title of account, columns of debit and credit as well as total.

Client 2
Difference between financial reports and statements:
Basis of
difference
Financial reports Financial statements
Nature The financial reports are being used
for providing the information that
become basis of decision-making.
On the other hand, the financial
statements are prepared on the basis
of financial reports.
Time period There is no specific time period to
prepare the financial reports.
While the financial statements are
produced at the end of time period.
Example Some example of financial reports
are like bank statement, debtors
analysis report etc.
It includes statement of cash flow,
statement of financial position etc.
Financial reports- These reports are being prepared with the use of financial information of
prepared financial statements. The purpose of these reports is to evaluating the prepared financial
statements and to take futuristic decisions. As well as there is no specific time to produce the
financial reports. These reports are prepared whenever companies need it.
Financial statement- The financial statements are produced with the help of financial information
and transaction of any company (Rutherford, 2013). The main objective of these statements to
assessing the financial position of company. Along with the financial statements are prepared at
the end of any particular financial year which is considered generally of one year.
Different types of financial statements: Basically, there are three kind of financial statements
which are as follows:

 Balance sheet- It can be defined as a statement of assets and liabilities of any organisation
during a particular time period. Eventually, the balance sheet covers detailed information
about firm's assets, liabilities and on the basis of it financial position can be assessed.
 Income statement- It is also known by the profit & loss account. This is a kind of
statement that shows company's income and expenses during a particular time period.
This statement covers about how total revenues are transferred into the net income. As
well as provide information about activities which ones are profit generating and which
ones are not.
 Cash Flow Statement- This is also known by statement of cash flow. It is a kind of
financial statement which indicates about change in the balance sheet and income that
effects to cash & cash equivalents. Basically, this statement covers majorly three kind of
activities which are operating, financing and investing. All these activities include those
transaction that shows about cash generating transaction and cash outing transactions.
Types of accounts:
Sole traders- The sole traders are those who own the business individually and make all the
financial statement without help of any accountant. They consist various kind of final accounts
which are as follows:
 Income statement
 Balance sheet
These statements are not prepared as per any accounting rules and concept as well as without any
accounting time period.
Limited companies- The limited companies operates the final accounts in different manner. As
well as these final accounts are prepared by accountant. Eventually, the limited companies
prepare the below mentioned final accounts:
 Trading account
 P&L account
 Balance sheet
 Cash flow statement

 P&L appropriation account
Principles and conventions:
Accounting rules and principles- There are various kind of accounting rules and principles which
are as follows:
 Debit the receiver and credit the giver- This principle is applicable in the personal
accounts (Edwards, 2014). As per this rule when a person gives anything to company
then it becomes an inflow and that person should be credited in the books of accounting.
 Debit what comes in and credit what goes out- This rules is applicable in the real
accounts. The real account includes land & buildings, plants etc. As well as their balance
is debit by default. Debit all expenses and losses, credit all incomes- This rule of accounting is applied in the
nominal accounts. As per this rule, all the expenditures should be debited in the
accounting books.
Concept and conventions of accounting-
 Consistency- As per this conception of accounting it is essential for the organisations to
follow an equal method or principle of accounting in any particular accounting time
period. Eventually, it is important because if companies will not follow this then it can be
difficult for them to make compare of previous year financial statements.
 Materiality- This principle states that an accounting standard can be ignored only in a
condition wherein, its impact on the financial statement is very small (Leung, 2016). Full discloser- As per this convention of accounting it is necessary for an organisation to
present all the information in financial statements to any person who has interest.
P&L account for Munteanu limited for year ending 31st december, 2018
Revenue w1
Cost of sales w2
Gross profit
Distribution cost w3
Administration costs w3
135000
-55300
79700
-36000
-36000

Operating profit
Finance cost
Profit before tax
Tax payable
7700
-1500
6200
-2000
Profit for the year 4200
Mauteanu's plc Statement of change in equity for year ended 31st December 2018
Ordinary share
capital
Share premium Retained earnings Total
£ £ £ £
Balance b/d
Profit of the year
40000 20000 22000
4200
82000
4200
40000 20000 26200 86200
Mauteanu's plc Statement of financial position for year ended 31st December 2018
ASSETS
Non current assets
Property, plant and equipments w4
Current assets
Inventory note (I)
Trade receivable
Prepayments note (iii)
Total current Assets
TOTAL ASSETS
81200
20000
26000
3000
49000
130200
EQUITY AND LIABILITIES

Equity
Ordinary share capital @ 1 each
Share premium
Retained earnings
Total equity
Current liabilities
Trade payables
Accruals note (iii)
Tax payable note (iv)
Bank overdraft
Total current liabilities
TOTAL EQUITY AND LIABILITIES
40000
20000
26200
86200
22000
2000
2000
18000
44000
130200
Working Note:
w1
Revenue
Sales 138000
Less- Return inwards -3000
Revenue 135000
w2
Cost of sales
Opening stock 15000
Add- Purchases 61000
Less- Return outwards -1500 59500
74500
Less: closing stock (I) -20000
54500
Add- Depreciation on buildings 800
55300

w3
Admin cost DIST costs
TB 30000 35000
Depreciation on plant and machinery 4000 4000
admin salary accrued 2000
rent prepaid -3000
36000 36000
w4 PPE
L and B P and M
as per TB cost/ valuation 60000 60000
acc. Depreciation @ 1 January 2018 -10000 -20000
Note (ii) Current year depreciation -800 -8000
Carrying value @ 31st December 2018 49200 32000
Client 3.
Bank reconciliation- This can be defined as a process of matching the balance of cash account
with the bank statement (Richardson, 2013). Eventually, it is prepared by those organisations
who make day to day large transaction with the banks.
This is needed to find out the difference between the bank accounts and cash book. As well as it
helps in detecting the faults in the books as well as to update the cash books.
The bank reconciliation is required by all the companies.
Process of bank reconciliation- Herein, below some steps of bank-reconciliation are as follows:
 Identifying the variation between cash book and bank statement- This is the first step of
the bank reconciliation process. In this firstly the difference is identified between the total
balance of cash book and bank statement.
 Tick cash book entries which are not in the bank statement- Another step of the bank
reconciliation is that marking those entries which are not in the bank statement. Due to
this companies can be able to find out easily about actual reason of difference.
 Adjust the cash book with items that are on the bank statement but not in cash book- In
this step, items are added in the cash book with the help of bank statements. Eventually,

some times there are some transactions which are done by bank without awaking to the
companies. Like credit of interest on deposited amount. Preparation of bank-reconciliation that indicates the remaining difference between cash
and bank statement- It is the last step of the bank-reconciliation making process in which
those items are showed in the account which are not matched.
Difference:
Difference between balance in cash book and bank statement:
Cause of difference Cash book Bank statement
Issued cheque but
not presented
In this book, entry is made. While in the bank statement, no
entry is made until the presentation
of cheque.
Interest allowed by
bank
In this book no entry is made until
checking of pass book.
On the other hand, entry is made
with increasing the balance.
Cheque paid in bank
but not cleared
In this book, entry is made by
increasing the balance.
No entry is done until the clearness
of cheque.
Identifying the variances through bank reconciliation- The bank-reconciliation helps in
identifying the difference between the cash book and bank statement. This is why because it
provide a framework to check the items of both the books and informs to the companies about
actual difference.
Cash book for Burcu limited for September, 2018
Dr Cr.
Date Receipts Amount Date Payments Amount
01/09/18 Balance b/d 515 09/09/18 M Potter 251
07/09/18 Cash sales 62 10/09/18 C Lyons 87
12/09/18 M Pointer 26 14/09/18 C Hallern 89

17/09/18 Cash sales 171 20/09/18 C David 122
24/09/18 Cash sales 103 28/09/18 S Leening 116
30/09/18 Balance c/f 214
879 879
30/09/19 Balance b/d 214
Corrected cash book (bank only)
Dr. Cr.
Date Receipts Amount Date Payments Amount
30/09/19 Balance b/d 214 17/09/19 Direct debit 105
30/09/19 Bank charges 36
30/09/19 Balance c/f 73
241 241
30/09/19 Balance b/d 73
Bank reconciliation statement as on 30 September 2018
Details Amount
Balance as per bank statement
Add: Outstanding
Less: Unrepresented cheques (187+122+116)
Balance as per corrected cash book
398
0
398
(325)
73
Client 4.

Control account- The control account can be defied as a kind of account which is being used for
recording only summary amounts (Stechemesser and Guenther, 2012). As well as description of
each control account can be found in a separate subsidiary ledger. This account includes the
general ledger free of details.
The control accounts are beneficial to find out the errors in the subsidiary ledgers and it helps to
the companies in additional support. Along with this account minimise the need of detailed
information in the general ledgers.
The control account is useful in supporting the effective financial management. This is why
because it manages the general ledgers clean with less details. By this complexity removes in the
preparation of financial statements. Thus the control account is beneficial in effective financial
management by helping in the preparation of financial statements easily.
Sales ledger control account for January, 2018
Purchase ledger control account for January, 2018

Client 5.
Suspense account- The suspense account can be defined as an account in which amounts are
temporarily entered (Peterson, 2012). In other words, this account contains only those
transactions which are doubtful.
Difference between control and suspense account:
Basis of difference Control account Suspense account
Nature This account is the summary of
accounts.
On the other hand, this account is a
kind of temporary account.
Use This account is useful in keeping
the ledgers clean.
While it is beneficial in carrying the
doubtful entries.
Role of suspense account- This account is useful in providing information about those
transactions and their entries which are doubtful. Due to this company's financial statements
become reliable and accurate.
Need of reconciliation- The reconciliation is needed because it helps in inspecting the fraud
activities and keeps the financial statements error less. Same as in the suspense and control
account, the reconciliation is needed to keep the financial activities smooth and accurate.

Conducting the reconciliation: The reconciliation is done by following a pattern of steps which is
to fist identifying the difference between total of control and suspense account. After that finding
the exact reason of difference and create the reconciliation account.
Role of debtors and creditors account:
Debtors account- This account includes information about those who made credit transaction
with the organisation and amount is due. The main role of this account is to informing to the
companies about total amount which they need to collect from the debtors. As well as it consist
the information about the date on which credit transaction is done, due to this interest can be
calculated easily on due amount.
Creditors account- This account provides information about credit purchase or financial loan
taken by organisation (Hilton and Platt, 2013). So it plays an important role to the companies in
finding about how much amount is needed to be paid by them to their creditors.
Trial balance
Preparation of journal entries:

CONCLUSION
From the above report it is concluded that financial accounting system is important part
for any business organisation for recording, summarising and thereafter reporting of its business
operations. A company shall required to follow various standard, regulation and principles of
accounting. This assist in providing the company a way to represent its financial information in
better manner and it helps in enhancing its profitability. A suspense account can be used by the
company in case of any financial transactions in the absence of any party to the transaction. It is
further concluded that a company shall be required to use its bank reconciliation statements for
matching its cash book entries with its pass book entries which is provided by its bank. Bank
reconciliation statement will assist the company in identifying any error either in passbook or in
cash book.