Financial Accounting Principles Report - Analysis and Review

This report delves into the core principles of financial accounting, encompassing the processes, concepts, and theories essential for preparing accurate financial statements. It begins by defining the meaning and purpose of financial statements, emphasizing their crucial role in providing a clear picture of a business's financial health. The report then explores the significance of various stakeholders, both internal (owners, management) and external (creditors, customers, shareholders, government authorities), and their respective interests in financial information. It further examines key accounting concepts such as depreciation methods (straight-line and written-down value), the purpose of bank reconciliation statements, and the importance of control and suspense accounts. The report provides insights through different client examples, illustrating practical applications of these principles and their impact on business operations and decision-making.

Financial Accounting
Principles

Table of Contents
INTRODUCTION................................................................................................................................3
MAIN BODY.......................................................................................................................................3
LO 1......................................................................................................................................................3
Meaning and its purposes of financial statement-.......................................................................3
Two Internal Stakeholders-.........................................................................................................4
Four External Stakeholders-........................................................................................................4
3. Trial balance..........................................................................................................................13
Client 2...............................................................................................................................................14
b.................................................................................................................................................15
(c) Consistency and Prudency-.................................................................................................16
(d)Two methods of Depreciation are-.......................................................................................16
(e)Difference between Sole proprietorship and Limited Companies-......................................16
Client 3...............................................................................................................................................17
(a)Purpose of Bank Reconciliation Statement-.........................................................................17
(b)Some areas where differences are found between our records and bank records-...............17
(c)Meaning of term Imprest as used in petty cash book-..........................................................18
d.................................................................................................................................................18
Client 4...............................................................................................................................................19
a.................................................................................................................................................19
(b) Defining the meaning of control account............................................................................19
Client 5...............................................................................................................................................20
(a). Defining suspense account along with its key features......................................................20
b.................................................................................................................................................20
CONCLUSION..................................................................................................................................21
REFERENCES...................................................................................................................................22

INTRODUCTION
Financial accounting principles is related with the process of accounting procedures, concepts and
theories which are required to be followed at the time of preparing of financial and accounting
statements. It is very essential for every business organisation to provide accurate and correct detail
about the nature and position of the business especially financial health. The present report will
define the meaning and purpose of preparing financial statements. Also, it will discuss about
depreciation concepts along with its types. Further it will define meaning of Bank reconciliation
statements with its feature. Alt last, it will streamline about importance of control account and
suspense account for every business transaction.
MAIN BODY
LO 1
Meaning and its purposes of financial statement-
Financial Accounting means to record, summarize, analyse, report and interpret the various
financial transactions. These transactions are recorded for the preparation of financial statements.
Financial Accounting helps in the recording all the transactions related to revenues, expenses,
assets, liabilities etc. It helps in providing the information to the outsiders related to the financial
position of the company. It is helpful to internal managers to take the relevant decisions related to
the organisation for long term and short term. It can be done on the basis of two methods such as
Accrual method or cash method (Warren, and et.al., 2018). This depends on the company to
company which method they apply in their organisation.
Purposes of Financial Accounting are as follows:-
 The first and foremost function of the financial accounting is to gather all the information
and record all the financial transactions in the financial statements.
 Financial Accounting main purpose is to provide the data and information about the
financial position of the company to external and internal managers.
 The information helps in estimating the liquidity, funding and debt position of an
organisation (Kimmel, and et.al., 2016).
 Financial Accounting helps in taking decisions such as credit decisions, investment
decisions, taxation decisions etc.

Two Internal Stakeholders-
Owners of the company are one of the internal stakeholder who wants to know the financial
position of the organisation. Owners have invested their money in the company and they want to
know the returns on their investment. Owners also want to know that the investment done by them
are productively used by the company or not. Company is earnings profits or not and it is working
according to the rules or regulations.
Management is the second internal stakeholder of the company who use the financial
statements to know the financial position of the company. By using the information and data
management takes the important decisions for the organisation. Management also uses the relevant
information for achieving their personal goals through the growth of the company. They know that
if the company grows then their growth is simultaneously happens (Brunton and et.al., 2017).
Four External Stakeholders-
The first and most important stakeholder of the company is creditors. They are the ones who
are highly interested in the financial statements of the company. As they are the ones who are giving
loans to the company so they are want to know the real worth of the company. If the company is
capable of paying back their loans or not. The creditors also wants to know that the company will
be in the profitability condition even in the long time period.
Customers of the company are the stakeholders of the company. They are interested in
knowing that what are the new products or services which the company is going to launch in the
market. Many customers use the company's financial statements to know the financial position of
the company to know that what is the position of the company in the market. The customers are the
main stakeholder because company cannot survive without their customers (Korschun 2015). They
are always interested that company is coming with what new ideas and innovations.
Shareholders of the company are also the stakeholders of the company. Shareholders of the
company invest their money in the company so they are highly interested in knowing the financial
position of the company. They ware interested in knowing their returns on their investment. They
are interested that what are dividends company is going to give them every year and what will be
the earnings or profit on the capital investment of the company for the long term.
Government Authorities are the external stakeholders of the company. They are also
interested in the financial statements of the company because company pays taxes to the Govt. The
taxes are paid on the basis of profits earned by the company. Profits are taken from the financial

statements of the company. Govt. wants to know that whether the company is paying proper tax on
the profits earned by the company or not. Government are interested in financial statements of the
company because many times company gives grants to the organisation so they want to know
whether they are properly treating them in their statements or not (Korschun 2015).
CLIENT 1
1. Journal

2. Ledger

3. Trial balance

Client 2
(a)

Particulars Amount (in £)
Sales revenue 138000
Less: Return inward 3000 135000
Cost of goods sold (W.N.1) 54500
Gross Profit 80500
Depreciation charged on land & building 800
Depreciation on plant & machinery 8000
Administrative Expenditure 30000
Distribution expenses 35000
Less: Prepaid rent -3000
Add: Outstanding salaries 2000
Finance Cost 1500 74300
Corporation tax 2000
76300
Net margin 4200
Total
b.
Particulars Amount (in £)
Current assets
Debtors or bills receivable 26000
Prepaid rent 3000
Closing stock 20000
49000
Fixed assets
Land & Building 60000
Less: Accumulated Depreciation charged on L&B 10800 49200
Plant & Machinery 60000
Less: Depreciation @ 20% 28000 32000
81200
Total assets 130200
Liabilities
Current liabilities
Creditors or bills payable 22000
Outstanding salaries 2000
BO 18000
Corporation tax 2000
Total current liabilities 44000
Owners’ s fund 40000
share premium 20000
Retained earnings 22000
Net profit 4 2 0 0
Total shareholders’ equity 86200
130200 Total liabilities

(c) Consistency and Prudency-
Consistency Principle is the accounting Principle means that company will be following one
method on yearly basis. For example if any company is using Straight Line method for charging
depreciation and it is to be followed by the company from one year to another year. Company
cannot change its method in every year. Company can change only method in three conditions i.e.
change by law, change in accounting standards and change is made to better disclosure of financial
statements (Maffei 2016).
Under Prudency concept, company do not overestimate revenues recognized or
underestimate the amount of expenses. In this concept, company uses conservative approach of
providing provisions for losses or expenses which can occur in the future. For example Provision of
Bad and Doubtful Debts etc.
(d)Two methods of Depreciation are-
Straight Line Method charges the same amount of depreciation every year. Under this
method salvage value is deducted from the value of total asset and then the amount is divided by the
useful life of the asset.
Another method of Depreciation is Written Down Value Method in which the amount of
depreciation every year is different. Every Year some percentage has been charged to the residual
value of asset. The Percentage is charged on the value after deducting past year depreciation from
the value of the asset. (Maffei 2016).
(e)Difference between Sole proprietorship and Limited Companies-
Sole proprietorship Limited Companies
There is only one individual who runs the
business.
There can be unlimited number of owners who
runs the company.
This exist up till a sole proprietorship dies,
retires or decides to wind up the company
(Segal, and et.al., 2016).
In this company exist forever even after the
dearth of any one member, or after retirement of
any one member.
In this full control is done by owner himself. In this there are more than one owner and

business is manage by all members.
In this profits and losses are beard by owner
himself.
In this all the members bears all the profits and
losses in equal percentage by all the members of
the company (Floyd and et.al., 2015).
Client 3
(a)Purpose of Bank Reconciliation Statement-
 The main purpose of BRS is to find out all the errors in recording all the cash and bank
transactions at the time of payments and receivables cheques entries are passed.
 It also highlights all the transactions which are been recorded in the cash book but not yet
recorded in the bank statement.
 It also corrects all the errors occurred in the bank statement related to the omissions of the
entries, entering wrong amount of transactions.
 The other purpose of the BRS is to compare your records with those of your bank, and if
there are any differences found then corrective actions should be taken (Yahaya, and et.al.,
2015).
(b)Some areas where differences are found between our records and bank records-
 Cheques issued by the company but not delivered for payment-
If the payment is issued by the company and payment yet not done then their will be not
counted in the debit balance.
 Deposits entered in ledger but not stated in the bank statements-
It will make a difference because the deposit is not entered in a bank statement and depositor
will not be adding this entry.
 Bank statement shows the bank charges but it has not been shown in the company's ledger
account-
There will be difference between the cash book and bank statement because of not entering

charges amount in the ledger.
(c)Meaning of term Imprest as used in petty cash book-
Petty cash account is well known type of imprest. It is used for paying the small, routine
expenses. It is a form of financial accounting system. The basic characteristics of an imprest system
is to keep small fixed amount so that after certain period money was spent will be replenished. In
this, petty cash receipts, petty cash payments, small expenses etc. are recorded (Olouch 2016). For
example, Petty cash of £100 will report as debit balance of £100. This will be treated as imprest
balance as long as £100 is adequate for the company's small disbursements.
d.

Client 4
a.

(b) Defining the meaning of control account.
Control account is defined a general ledger account which has been prepared for
summarizing and combining all the accounting information of its subsidiaries of a specific and
particular type. This account assist in preparation of ledger and completion of accounting
procedures by keeping record of every subsidiaries accounts. It also helps in keeping a cross check
on recording process for mitigating the risk of omission and wrong entry (Stacey, 2016).
The main purpose of preparing controlling account is to have proper and accurate balance
for preparation of the financial statements and accounts depicting correct and true picture of the
company financial performance.
Client 5
(a). Defining suspense account along with its key features.
Suspense account is a type of general ledger account which is prepared for temporary basis
for making record of amount. This account is used in case when the general ledger account is not
determined at the time period in which that accounting transaction of the business was recorded.
Main features of suspense account are as follows:
1. It is an account which acts as a holding account for the business unless and until the error
made is not discovered or identified.
2. With the help of suspense account, amount related to the accounting entries or transaction
can be recorded for temporary basis (Wood, 2015).
3. When the suspense account is not closed at the accounting period ending, the balance
amount in the suspense account can be shown on the asset side of the balance sheet of the
company as per the nature of balance i.e. debit or credit.
4. Suspense accounts helps in avoiding the error to be made at the time of recording

transaction in the wrong accounts.
b.

CONCLUSION
From the above report it can be concluded that by adopting sound and proper financial as well as
accounting business principles in the working of business transaction, it helps in making
compliance of applicable rules. With the help of financial and accounting principles, every business
transaction of accounting as well as financial nature can be recorded properly and at the correct
place. The report has defined the meaning of financial statements which has to be prepared as per
the accounting standards and provision. It is very important for every business organisation to
depict correct and true financial picture in the financial accounts as it affects the decision making
process of number of stakeholders and investors.