Financial Accounting Homework: Scenario Analysis and Principles

This assignment solution covers key concepts in financial accounting, addressing two scenarios. Scenario 1 explores business transactions, including single and double-entry systems, journal entries, ledger accounts, trial balances, and the differences between financial statements and reports, alongside fundamental accounting principles. Scenario 2 delves into Bank Reconciliation Statements (BRS), control accounts, suspense accounts, and the distinctions between various banking transactions like standing orders and direct debits. The solution provides detailed explanations, journal entries, and analyses to enhance understanding of these core accounting principles and practices.

Financial Accounting

Table of Contents
Scenario 1.........................................................................................................................................4
Question 1........................................................................................................................................4
Stating different kinds of business transaction along with explaining single and double entry.
Explaining the term trial balance and its significance............................................................4
Question 2........................................................................................................................................5
1. Journal entry.......................................................................................................................5
2. Ledger accounts..................................................................................................................6
3. Trial balance.......................................................................................................................9
Question 3......................................................................................................................................10
Explaining difference between the financial statement and the report and stating the reason for
which this report are required by different users..................................................................10
Question 4......................................................................................................................................11
Explaining the fundamental principles of the accounting....................................................11
Question 5......................................................................................................................................14
Scenario 2.......................................................................................................................................16
Question 1......................................................................................................................................16
Explaining the meaning of BRS and the reason behind preparing the BRS along with its
format and importance..........................................................................................................16
Question 2......................................................................................................................................17
Explaining the meaning of control accounts and role of the control accounts in FM..........17
Question 3......................................................................................................................................18
Explaining the meaning of suspense account and the reason behind drafting suspense accounts
..............................................................................................................................................18
Question 4......................................................................................................................................19
a. Explaining the difference between standing order, direct debit, bank charges and Dishonor
of cheque..............................................................................................................................20
Question 5......................................................................................................................................21
a............................................................................................................................................21
b............................................................................................................................................23

REFERENCES..............................................................................................................................24

Scenario 1
Question 1
Stating different kinds of business transaction along with explaining single and double entry.
Explaining the term trial balance and its significance
Types of business transactions
 Purchase of materials and goods: It refers to the procedure which is involved in a
purchase of material of goods in which owner has to approve the invoices and verify the
goods received as per the requirement or not.
 Purchasing non-current assets: It means that the assets which are use longer than a year
and owner is not see the complete value in the current accounting year.
 Paying wages and salaries: In this, business transaction types, company have to pay
salary at monthly basis to the define employees.
 Sales: It means that the amount which company get while sell the product and services to
their customers with an aim to increase the financial performance of a company.
Single entry- Under this system each and every accounting transaction with single entry
is recorded and centred on results of business which are reported in income statement. This type
is quite simply and that is why, anyone can maintain this system easily if the person do not have
enough knowledge with regards to the same. But under this, limited account are to be opened and
all the transaction are related to personal accounts not the real and nominal accounts.
Double entry- It means that for each transaction, amount need to be recorded in
minimum of the two accounts (Sunarya, Nurhaeni and Haris, 2017). It also requires that for all
the transactions, an amount entered as the debit must equate to amount entered as credit.
Through this entry system, both personal as well as impersonal accounts are maintained and
these are recorded as well because it helps to minimize frauds and error can be checked and
rectified easily. Moreover, it is also assist to make sure the arithmetical accuracy of a books of
account in order to reduce the chances of error and generate the exact outcome.
Trial balance- It is the statement that shows credits and debits in double entry books of
account with any of the disagreement reflecting an error. The purpose is to ensure that all entries
made into an entity's general ledger are properly been balanced. Further, the trial balance is also
used to prove that the value of all the debit values balance is equal to the credit balance column
and if not, then it shows the error between the nominal ledger account as well.

Question 2
1. Journal entry

2. Ledger accounts

3. Trial balance

Question 3
Explaining difference between the financial statement and the report and stating the reason for
which this report are required by different users
Difference between Financial statement and Financial reports
Financial document are the small document in the organization which used to present the
income information of the company at a given point of the time in the organization. At the same
time financial reports in the general are the large collection of the document in the organization
which used to summarize the overall financial spending and earning of the business over the
period of the one year (Financial statement vs Financial report, 2018). In addition to this,
financial report collect important financial information for distribution to the public. With the
help of financial report, owner of a company make better decision which take a business towards
right direction and also maintain or compliance with the reputation within an industry. Thus, a
good financial report solution should be fast, easy to use and always accurate because it present
the financial structure of a company. While on the other hand, the purpose of a financial
statement is to provide the information related to financial position, cash flows and the results of

business operations. Beside this, with the help of financial statement, company make decision
regarding allocation of resources.
A financial statement in the organization used to show the current balance sheet of the
company with regard to the income of the company change in the worth or the value of the
company by looking at the income. Also, it is used to report on current status of a business and it
also estimate the things such as liquidity, debt position as well as funding of a company. The
cash flow statement of the company which used to highlight the flow or the route which is
flowing funds in the organization. Moreover, this statement is used to show the nature of cash
receipts and disbursement as well. Even cash flows do not match revenue and expenses which
was earlier shown in the income statement chart which is another useful financial statement. Last
is income statement which informs capability of a business in order to generate profit and also
determine the volume of sales and nature of various expenses as well. Overall, this is used to
determine or analyze trend within a business and make decision accordingly.
At the same time the financial report of the company used to combine the earning of the
company statement with the over all look of the net worth of the company in the context of the
different expenses and spending which is done by the company, also used to show all the thing
with a great detail with the help of evidence of different reports. Evidence document can be any
formal statement made by the management of the company in the long run such as the letter of
the CEO or the owner in the organization or can be any short prediction plan which is targeted to
increase the profit or the worth value of the company in the long run.
A financial statement of the company do not include the information in regards of the
expenses or the purchase of the item in the organization. This is not the case in the Financial
report as financial report used to show the different type of the expenses occur and different sort
of purchases which has been done in the year (YE, XU and FENG, 2016). So it is stated that the
three most common financial statement which include income statement, balance sheet,
statement of cash flows. Each statement have their own importance and that is why, there is a
need to have both the document within the report in order to make better decision.
Question 4
Explaining the fundamental principles of the accounting
Accounting principles refers to the guidelines that is been issued by IFRS and GAAP which
needs to be followed by all the organization in order to function diligently. Thus, GAAP is also

required for all the publicly traded companies and it is also implemented by non- publically
traded companies as well. There are various fundamental principles of accounting that are as
follows-
Monetary unit- Accounting require all the values that needs to be recorded in terms of the
single monetary units. It could not account for the goods such as barter system and relates to
assigning values to the items and the goods, therefore, it becomes as the problem since it is
counted as subjective (Gilfriche and et.al., 2018). On the other side, accounting has the
prescribed rules in dealing with the same. Under this principle, it is stated that business
transaction should be recorded only when they can be expressed in the term of a currency or else,
when it is non- quantifiable then it did not recorded within a business financial accounts. Thus, it
is analysed that it is generally accepted accounting principle under which a firm report their
financial position to the shareholder and it is also done in accordance with the transaction which
are expressed in better manner. Hence it is analysed that these principle will help to make
decision better and also reflect the correct financial position too.
Going concern principle- It states that the company is seen to have eternal existence
which means that once it is been formed, only manner for ending it is by the dissolution. It does
not die with a natural death as the human do. Hence, accountants assumes the principle of going
concern which implies that an entity would continue for doing the business as usual till end of
another accounting period and that there is not any information to contrary. This principle
reflects that an entity function on the credit, account for the accounts receivables and the
payables that intend in paying or receiving in future & charging depreciation by assuming that an
equipment would be used for several years.
Conservatism principle- Accountants are seen as very conservative by its nature, and so
they desire to hope for best and prepared for worst. It is been displayed in rules that they had
created for their own profession. One of central tenets of an accounting is the conservatism
principle which depicts that when there is any doubt about an amount of an expected outflow &
inflows, an organization must state for lowest possible sales and highest chances of cost (Dignath
and et.al., 2019). In fact, it could be seen that an accountant values inventory at the lower cost or
the market price . On the other side, it helps an entity in getting prepared for any type of
uncertainty or financial crises in the future.

Cost principle- It closely relates with conservatism principle and advocates that the form
should list for everything on final report at cost price. Usually the assets such as gold, building
and land appreciates or increases, however an accountant would not allow such appreciation to
be indicated on final accounts of the firm till it is been realized.
Matching principle- It seems as basic underlying guidelines in the accounting that directs
the firm for reporting an expense on its profit and loss statement within the period in which the
relates sales are earned (Schöpper and et.al., 2019). Further, it is associated with accrual basis of
an accounting and the adjusting entries. Hence, its main concept is to recognize revenue and then
relate the same with an expenses during a same accounting period.
Full disclosure principle- It is an accounting concept that needs a business for reporting
all the necessary information about final report and the other important information that any of
the persons who are been accustomed to reading such information.
Revenue recognition principle- It is the feature of an accrual accounting which requires
that the revenues are been recognized on income statement in a period when it is realized or
earned and not when the cash is been received.
Economic entity assumption- This principal advocates that activities of an organization
need to be kept as separate from activities of their owners and all the other types of economic
activities (Lomas and et.al., 2017). It reflects that recorded activities of business must be kept
separate from recorded activities of their owners as both are counted as different from each other.
Accrual Principle: It is the feature of an accounting in which revenue and expenses are
recorded whenever a transaction occur. Instead of payment is received or made. Hence, this
principle is also follows matching principle and further stated that both revenue and expenses
should be recognized in same period (Ciullo and et.al., 2019). Also, this principle is further based
upon two main principle such as revenue recognition principle and matching principle.
Consistency Principle: This principle is also stated that when the company start indulging
within an accounting method then, they must stick with the same and consistently follows the
same principle throughout the period. The only thing which can be change is an accounting
principle or a method when a new version is found in order to improve the financial results.
Moreover, through this concept which enables the investor and other users of financial statement
in order to compare the financial statement of a company to analyse the action which need to be
taken.

Materiality Principle: This principle stated that an accounting standard can be ignored if
the net impact of doing it, influence the financial statement in very minutely so that a reader
while reading financial statement would not be misleads, otherwise it may affect the results in
negative manner as well (Penman, 2016). That is why, there is a need to starting as well as
maintaining solid professional accounting practice is consider an essential for a growth of a
business and this will also lead to generate best outcome as well. Hence, in order to run
accounting within a business, there is a need to make sure that all the principles must be
complied in better manner.
Question 5

Scenario 2
Question 1
Explaining the meaning of BRS and the reason behind preparing the BRS along with its format
and importance
It refers to the summary of business activity & banking that reconciles bank account of
the firm with their financial records. It is the statement that highlights the withdrawals, deposits
and the other activities that affects bank account for the particular period. It is the useful
financial internal control technique that is been used to correct the mismatch balance of cash
book and pass book (Li, Bramley and Gureckis, 2019). This statement is been prepared for
ensuring the payments that have been processed and the cash collections have been deposited

into bank. It helps in determining the difference between bank and book balance for the purpose
processing necessary corrections or the adjustments. An accountant mainly processes the
reconciliation statements once in a month. It summarizes the banking and the business activity
by reconciling an enterprise bank account with that of its financial record. It confirms that
payment has been processed and collection of cash had been deposited into bank account. All the
fees charged on account by the bank need to be accounted for on the reconciliation statements.
After all the adjustments, balance on BRS must equate ending balance of bank account.
Completing the BRS needs use of current as well as previous months' statement involving
losing balance of an account. An accountant formulates the BRS statement by making use of all
the transactions through past days as the transactions might currently be occurring on actual
statement date (Delatorre and et.al., 2018). Accountant prepares BRS by two-way either by
adjusting the balance as per pass book and cash book. The balance as per the bank statement is
been adjusted for reflecting the outstanding withdrawals or the checks. Under such transaction,
the payment is been en route but cash had not deemed to be accepted by recipient. However, the
balance of cash account in company's financial records might require adjustment as well. For
example- Bank might charge fees for opening the account and withdraws or processes fees
automatically from bank account. Therefore, when framing BRS, any charges or fees taken from
an account need to be accounted by preparing the journal entry.
Other item that is requires an adjustment is interest earned where amount of interest is
automatically deposited in bank account after the certain period of the time (Tan and et.al.,
2020). Thus, accountant might require preparing for an entry that increases the current cash
presented in final records. After all the adjustments made to books, balance should match with an
ending balance of a bank account. If figures seems as equal, successful BRS has been framed.
Question 2
Explaining the meaning of control accounts and role of the control accounts in FM
Control account means as the controlling account is considered as the general ledger
account which summarizes & combines all subsidiary accounts for particular type. It is a
summary account that equates sum of subsidiary account and is utilized for simplifying &
organizing general ledger (Lindgreen, and et.al., 2018). In other words it is the account that

summarizes or sums up the subsidiary accounts which is said to control balances which are
reported in ledger.
Role of control account
 It provides the summary of the transactions that is been recorded in various subsidiary
ledger. Hence, these are seen as very useful to the management in the formulation of
policy.
 It makes possible for division of the accounting work among the ledger keepers and
thereby resulting specialization in the work.
 This account plays a crucial role in facilitating prompt formulation of the profits & loss
account and the balance sheet at ending of each accounting period through providing the
stock figures on a quick basis.
 It facilitates an internal check leading to the greater accuracy of the records.
 This type of account plays a vital role in providing the basis for a reconciliation of
financial and cost accounts.
Question 3
Explaining the meaning of suspense account and the reason behind drafting suspense accounts
It is a account that is been used for temporarily storing the transactions for which there is
an uncertainty about where they must be recorded. Once an accounting staff clarifies &
investigates purpose of such kind of transactions, the transactions are been shifted out of
suspense account and into correct accounts (Tarrant, 2017). It found as useful to open suspense
account instead not recording all the transactions at all until there is an adequate information
available for creating an entry to correct the account. For instance- A customer sends in the
payment for $1000 but not have specified which open bills or invoices it intended to pay. Till an
accounting staff could ascertain which type of bills to be charged, it temporarily parks for $1000
in suspense account.
Suspense account is framed for identifying the payment received with inaccurate account
information, unclear information in which the invoice payments must be applied or the other
kinds of issue that prevents their normal posting. It is used under in-transit transactions where the
money is been transferred to the supplier bank but not been deposited into account, or where the
money is been received before contract or the policy is been written.

Question 4

a. Explaining the difference between standing order, direct debit, bank charges and Dishonor of
cheque
Standing order- It refers to an instruction that is been given to the bank for paying a
specific amount of the money at the regular interval of time from the bank account to other bank
account. It is an automated method of payment that is been set up by the customer through their
bank. It automatically sends the fixed amount of the money on regular basis, and they could be
used for sending money to other person, bank account and the organization. The common
grounds in setting up the standing order involves paying the rent, utility bills and putting up the
money into the savings account (Penman and Yehuda, 2019). It is the order that is set up by
customer through their bank and it means that an individual who could set up or control the
standing order is a person who send money, an organization or an individual who receives
money could manage or set up standing order in any manner. It needs to be set up in the branch
but with an introduction of the mobile banking, it is been common for setting up standing order
by way of banking website or app.
Direct debit- It means the payment method within which the third party is been granted
permission for taking payments from bank account. In setting up the transaction under direct
debit, authorization need to be given for the purpose of permitting party in seeking the payments
for making withdrawals from the account. It had become as the most common form of the
transaction in may of the countries across the world. It could be used in different transactions
conditions and is counted as convenient, secure & cost effective (Bailey and Sawers, 2018).
Often, it is been used for the recurring payments such as utility bills, rent payments, subscription
payments and software. Through automating payments by direct debit, an individual could
decrease possibility of delayed payments or the payment errors. It also helps in avoiding hassle
of manually processing payment for every month.
Bank charges- A fee that is been levied on account by banking institution and could result
from an account holder who does not maintain minimum balance for overdrafts or from wide
variety of the other banking actions or activities (Iyer and et.al., 2019). These charges are not
been recorded by business till bank facilitates bank statement at month end and sue to this the
balance as per the bank report might be lower than balance of cash book.
Cheque dishonour- It is a condition within which the bank refuses to make payment
through cheque to payee. It happens when the bank is having insufficient funds, overwriting,

signature mismatch or the stale date. In accordance to section 138 of Act, dishonour of cheque is
considered as criminal offence & is punishable with an imprisonment up-to 2 years or with
penalty. In case the payee decides for proceeding legally, drawer should have given chance of
repaying cheque amount quickly (Ahmed, 2016). It is referred as those cheques which refused
the payment by bank because they are not seen in order or there is not enough fund in account of
drawer.
Question 5
a.

b.

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