Financial Accounting for Corr: Financial Statements and Concepts

This assignment focuses on the financial accounting practices of Corr, a sole trader, and the application of accounting principles. The student prepared journal entries, ledgers, a trial balance, an income statement, and a balance sheet for Corr. The assignment also assesses the usefulness of financial information, specifically examining assets, liabilities, and equity, by analyzing Domino's Pizza's annual accounts. Furthermore, it explores the application of accounting concepts such as prudence and accruals in constructing financial statements. The solution demonstrates the student's understanding of financial statement preparation and the importance of accounting principles in financial reporting.

Introduction to financial accounting
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Table of Contents
INTRODUCTION................................................................................................................................3
Preparation of accounting records and financial statements for Corr, a sole trader........................3
Final account with adjustments........................................................................................................8
Explain the usefulness of information provided on assets, liabilities and equity............................9
Explain the prudence concept and accruals concept and assessing its application for Domino
Pizza...............................................................................................................................................11
CONCLUSION..................................................................................................................................12
REFERENCES...................................................................................................................................13
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INTRODUCTION
The art of recording, classifying, summarizing and interpreting or evaluating monetary
transaction of an enterprise is called financial accounting. It is regarded as the process of keeping
systematic records so as to ascertain business profitability and financial position at the end of
accounting year. It is very important for the managers in order to make proficient and accurate
decisions to reach success in the future. The aim of the present assignment is to prepare journal,
ledger, trial balance, income statement and balance sheet for Corr, a furniture merchandiser. In
addition to this, report will also lay emphasizes on assessing the usefulness of information reported
in Domino Pizza’s annual accounts such as assets, liabilities and equity. Furthermore, companies
prepare all the necessary accounts by complying with several concepts such as accrual, prudence
and so on. Henceforth, the report will guide the accounting principles and concepts for constructing
annual accounts.
Preparation of accounting records and financial statements for Corr, a sole trader
As per the scenario, Corr is a small sole proprietor who kept accounting records for the first
11 month ending on 31st August 2016. Its financial statement can be prepared by using following
steps, enumerated hereunder:
Journal: At the beginning stage, every monetary transaction needs to be record in journal
following dual accounting concept. It states that each transaction must be recorded in both the debit
and credit side complying with the accounting rules of personal, real and nominal accounts.
Ledger: It classify all the transactions into sub-parts, every ledger summarizes all the
transactions associated with a given element.
Trial balance: It consolidates results of all the ledger accounts either by balance or total
balance. In the former, only balance is reported in trial balance whereas later method report total of
both the debit and credit into trial balance.
Income statement: It report about total revenues and expenditures incurred by Corr in a
given duration prepared to determine net operational results either profit or loss. This statement has
two sides such as income and expenses. It provides deeper insight about the revenue generated by
the firm during the accounting year over the expenses. Income side of profitability statement
renders information about dividend and interest received during the year. On the other side,
expenses include electricity, miscellaneous expenses etc. Hence, by preparing the income statement
business unit can assess its profitability aspect.
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Balance sheet: It summarizes three elements assets, liabilities and equity as well mainly
prepared to determine financial status. Assets include fixed as well as non-current assets whereas
liabilities include short-term as well as long-term liabilities. However, excess of total assets over
total liabilities is called stockholders equity.
Journal entries
Particulars L.F. Debit Credit
Cash a/c Dr. 24500
To sales a/c 24500
(6 event sales has been made on cash basis)
Debtors a/c Dr. 6500
To sales a/c 6500
(5 event sales has been made on credit)
Sales return a/c Dr. 5000
To debtors a/c 5000
(2 event sales has been returned by debtors)
Cash a/c Dr. 3000
To trade receivables a/c 3000
(credit sales of 2 event has been received from receivables)
Purchase a/c Dr. 40000
To cash a/c 40000
Purchase a/c Dr. 6125
To creditor a/c 6125
Creditors a/c Dr. 550
To Purchase return a/c 550
Trade payables a/c Dr. 1500
To cash a/c 1500
Cariage inward 200
To cash a/c 200
Discount allowed a/c Dr. 1225
To sales a/c 1225
Purchases a/c dr. 1200
To discount received a/c 1200
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Drawing a/c Dr. 1000
To cash a/c 1000
Cash a/c Dr. 20000
To bank loan a/c 20000
Equipment a/c Dr. 20000
To cash a/c 20000
Wages a/c Dr. 4000
To cash a/c 4000
Electricity a/c Dr. 1000
To drawings a/c 1000
Wages a/c Dr. 800
To outstanding wages a/c 800
Prepaid rent a/c Dr. 3200
To cash a/c 3200
Rent a/c 3200
To prepaid rent 3200
Depreciation a/c Dr. 3167
To equipment a/c 3167
Debtors a/c Dr. 800
To PBDD A/c 800
Total 147967 147967
Posting from journal into ledger:
Sales Account
Date Description Dr Date Description Cr
By bal.b/d 277460
By cash a/c 24500
By debtors 10000
To bal. c/d 313185 By discount
allowed
1225
313185 313185
Purchases Account
Date Description Dr Date Description Cr
To balance b/d 131300 By balance c/d 177125
To cash 40000 by discount
received
300
To creditors 6125
177425 177425
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Sales return a/c
Date Description Dr Date Description Cr
To debtors 5000 By balance c/d 5000
0
5000 5000
Trade receivables
Date Description Dr Date Description Cr
To balance b/d 45860 By sales return 5000
To sales 10000 By bank a/c 3000
To PBDD 800 By balance c/d 48660
56660 56660
Purchase return
Date Description Dr Date Description Cr
By bal b/d 5450
To balance c/d 6000 By creditors 550
6000 6000
Bank account
Date Description Dr Date Description Cr
TO balance b/d 32880 By purchase 40000
To sales 24500 By drawing 1000
To trade receivables 3000 By equipment 20000
To bank loan 20000 By wages
account
4000
by carriage
inward
200
by prepid rent 3200
By balance c/d 11980
80380 80380
Creditors/trade payables account
Date Description Dr Date Description Cr
To purchase return 550 By balance b/d 25900
To cash 1500 By purchase 6125
To balance c/d 29975
32025 32025
Discount allowed a/c
Date Description Dr Date Description Cr
To sales 1225 By balance c/d 1225
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1225 1225
Discount received a/c
Date Description Dr Date Description Cr
By balance c/d 300 By purchases 300
300 300
Drawing account
Date Description Dr Date Description Cr
To balance b/d 5000 By electricity 1000
To bank 1000 By balance c/d 5000
6000 6000
Bank loan
Date Description Dr Date Description Cr
To balance c/d 50000 By balance b/d 30000
By bank a/c 20000
50000 50000
Equipment
Date Description Dr Date Description Cr
To balance b/d 170000 By
depreciation
3167
To bank 20000 By balance c/d 186833
190000 190000
Wages a/c
Date Description Dr Date Description Cr
To balance b/d 52390 By balance c/d 57190
To bank a/c 4000
To outstanding wages 800
57190 57190
Electricity a/c
Date Description Dr Date Description Cr
To balance b/d 16100 By balance c/d 17100
To drawing 1000
17100 17100
Outstanding wages a/c
Date Description Dr Date Description Cr
To balance c/d 800 By wages 800
800 800
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Carriage inward a/c
Date Description Dr Date Description Cr
To balance b/d 1300 By balance c/d 1500
To cash a/c 200
1300 1500
Allowances for receivables account
Date Description Dr Date Description Cr
To balance c/d 3800 By balance b/d 3000
By debtors 800
3800 3800
Items Dr Cr
Sales 313,185
Purchases 177,125
Carriage inwards 1,500
Returns Outwards 6,000
Wages 57,190
Rent 37,580
Electricity 17,100
Closing inventory 62000
Loans 50,000
Trade Receivables 48,660
Allowance for receivables at 1 October 2015 3800
Trade Payables 29,975
Outstanding wages 800
Equipment 186,833
Depreciation of equipment at 1 October 2015 37,167
Bank 11,980
Drawings 5,000
Capital at 1 October 2015 169,966
Discount allowed 1,225 _______
discount receivables 300
Sales return 5000
Total 611193 611,193
Final account with adjustments
Trading account
TO opening stock 51600 By net sales 304685
To purchase 177125 Sales 309685
less: Purchase return 6000 171125 Sales return 5000
TO carriage inward 1,500 By closing stock 62000
To wages 57190 By gross profit -84470
Add: Outstanding wages 800 57990
Profit and loss account
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To rent 37580 37580 By gross profit 57990
To electricity 17100 By discount received 300
To drawing 1000 By net loss 1782
To discount allowed 1225
To depreication 3167
60072 60072
Balance sheet
Liabilities Amount Assets Amount
Capital 169,966 Current assets
Less: Net loss 1782 Trade receivables 48,660
Less: Drawing 1000 Inventory 62000
Net capital 167,184 Bank 11980
Prepaid rent 3200
Non-current liabilities Total current assets 125,840
Bank loan 50000 Non-current assets
Equipments 190000
Current liabilities Less: depreciation 3167 186833
Trade payables 29,975
Outstanding wages 800
Suspense 64,714
312,673 312673
Explain the usefulness of information provided on assets, liabilities and equity
Domino Pizza Group is a public company traded on London Stock Exchange, constituents
of FTSE 250 Index and founded in the year 1957. It provides franchise for delivering fast food
pizza across global market. Company prepare their annual accounts according to calendar year
ended on 27th December of every year. It prepares three main statement that are income statement,
balance sheet and cash flow statement. Income statement provides information about source of
revenues (sales) and incurred expenditures in formal course of activities and operations such as cost
of sale, distribution, marketing, administration and many others. However, balance sheet gives
information about total assets, liabilities and stockholders’ equity whereas cash flow statement
inform source of cash and its disposal in operating, financing and investing activities.
Balance sheet delivers useful information to the business managers as well as investors to
make reliable and accurate decision. It is prepared to measure the financial status of the company by
determining their short-term as well as long-term payment capability and efficiency to use corporate
assets (Averkamp, 2016). Assets indicate Domino’z ownership and may includes physical and
intangible item. It deliver value to the company and available to meet its financial commitment,
debts and legacies. It is a source of revenue generation in the future period. With reference to
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Domino’s balance sheet for the year 2015, it owned total assets worth £185,446m higher than
earlier year of £165,989m. Out of these, value of current assets reported is £89718 more than
previous year of £74,402m comprises inventories, prepaid expenses, trade receivables, cash & its
equivalent and assets held for sale as well. However, fixed or non-current assets valued at £95728m
which was earlier reported to £95,587m in 2014. It comprises intangible assets, PP&E, lease,
receivables, investment in associated and joint venture and many others.
On the other hand, total liabilities has been reported to £87,771m less than previous year of
£92,591m which is good as it indicates that in this year, Domino’s decreased their obligations and
financial commitments. It is further bifurcated into two subcomponents that are non-current
liabilities and current liabilities reported at £16,430m and £71341m. However, in the historical year
2014, it was reported at £14,247m and £78,344m. Surplus of total assets over total liabilities
(£185,446 - £87,771) is £97,675 represent equity. It consists of share capital worth £2606m,
premium of £29,155m, capital redemption reserve of £425, capital reserve worth (£2238m),
currency translation reserve of (£280m) and retained profit of £68,007m. On the contrary to this, in
the previous year, total shareholder’s equity invested in Domino’s was £73,398m. It indicates that in
this year, company generated more fund through issuance of equity shares to meet their financial
requirement (Ratio analysis, 2013).
All the information delivers useful information to the lenders, managers, shareholders and
creditors as well. For instance, suppliers demand timely payment of their supplied credit henceforth,
they use information about availability and sufficiency of short-term assets and evaluate its
relationship with current liabilities. With reference to Domino’s, in 2015,
Items Amount (In £000) Amount (In £000)
CA 89718 74402
CL 71341 78344
Current ratio 1.26 0.95
Improved CR in 2015 to 1.26:1 indicates that Domino’s maximized its short-term resources
i.e. inventory, receivables, and cash and so on to repay suppliers within decided timeframe. It is
because; in balance sheet, CA got improved to £89,718m from £74,402m, however, CL dropped
down from £78,344m to £71,341m. It is a clear sign of improved liquidity position to make deferral
payments right time.
However, lenders and investors are more concern about risk inherited in connection to their
invested money. Henceforth, they evaluate long-term financial risk by assessing capital structure
(mix of both the debt and equity).
Debt 11450 6731
Equity 97675 73398
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Debt to equity 0.12 0.09
As per the table, it can be seen that in 2015, Domino’s D/E ratio enhanced to 0.12 because of
higher percentage increase in debt to 70% as compare to increase in equity capital to 33%. Although
high use of debt is a sign of more risk, but still, it is less than ideal ratio of 0.5:1 because the
composition of equity resources is comparatively higher than debt funds indicates acceptable
financial risk. Managed risk will enable investors to generate additional money at the time of actual
requirement to meet their financial need.
Explain the prudence concept and accruals concept and assessing its application for Domino Pizza
Prudence Concept: It is also known as conservatism which focuses on recording of all
liabilities and expenses as and when they occur but revenues only when they are assured or realised.
Amount of liabilities and expenses should be reliably estimated based on past experience .Intensive
care, judgement and wisdom should be applied while applying prudence concept. Domino Pizza
should judicially apply the concept of Prudence while estimating the group liabilities and creating
provisions arising from the management’s decision for a year. Also in case of any discontinuing
operations restructuring or terminating costs associated should be wisely accounted and provided
for in accounts based on future outcome of any commercial negotiations entered into by Domino's
for exiting from German business through disposal of stores and closure of residual infrastructure
facilities apportioned. Domino should create provisions based on prudence for redundancy costs
associated with restructuring and in case of irrecoverable debtors. Also in case of onerous lease
provisions rational provisions should be created to depict a clear picture of future rental
commitments in case of future operating losses. Following the concept of prudence provisions in
current year (GBP 73280000) arose to two folds as compared to previous year (GBP 3270000). Tax
provisions prepared are also based on concept of Prudence as it is future liability of business in
upcoming assessment year. As per this concept everything that is important and useful should be
disclosed as part of Financial Statements however materiality should be considered to assess the
difference it makes to user of Financial Information. Since Domino's follows prudence its accounts
are more reliable and investors feel contented and satisfied about their investment and also it can
strive competition.
Accrual Concept: Accrual is one of the basic concept of According to accrual concept of
Accounting revenue and expenses should be recognised and recorded in books of accounts as and
when they occur irrespective of whether the cash is received or not. However once the entity
receives or make cash payments it reverse the accrual accounting entries and records the cash
transactions. Domino being such a large joint it should adopt the accrual concept in its accounting
system ignoring cash .Advances received against rentals from franchises should form part of current
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period as cash received in advance related to current year should form part of financial statements
of relevant period. Accrual concept should be used by Domino's even in statutory dues such as
pension payments, royalties, franchise fees, rental income and also franchisee rebates should be
recognised on accrual basis on expected entitlement which has been earned up to the balance sheet
date. Following a accrual concept of accounting it gives Domino's a advantage that the financial
statements reflect all the expenses associated with related revenues for a particular accounting
period which depicts a clear picture to investors and potential investors who rely on financial
information to generate best outcome of their investments. Domino's being largely into retail
business do not promote or accept credit for their products delivered to customers therefore accrual
is necessary to be followed n every transaction an organisation undertakes. As and when the invoice
is sent to customer transaction is to be recorded by Domino whether the cash is immediately
received or not. It will help management to make better decisions Accrual should always be used in
combination with various other accounting policies. It ensures that Financial statements fairly
present the each year's activity with the help of matching concept of revenues and related expenses.
Profits generated for Domino's are mixture of both cash as well as accrual transaction entered into.
CONCLUSION
From the above report, it has been concluded that financial reports provide deeper insight to
stakeholders about the financial health and performance of an organization. Besides this, it can be
inferred from the report that accounting principles and concepts help manager in recording the
business protractions in the best possible. Further, it can be inferred that reports which are created
according the global accounting principles facilitate better transparency and comparison. It can be
seen in the report accrual concept helps in presenting the fair view of the statements in front of the
stakeholders.
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