Financial Accounting Principles: Client Cases and Analysis

This comprehensive report delves into the core principles of financial accounting, providing a clear understanding of its purpose and regulatory framework, including GAAP, IFRS, and IASB. It explores fundamental accounting concepts, such as the economic entity, monetary unit, time period assumptions, and the cost principle, alongside conventions like disclosure, materiality, and consistency. The report presents practical applications through detailed examples and solutions for various client cases, covering journal entries, ledger accounts, income statements, statements of financial position, bank reconciliation, and depreciation methods. It also analyzes the significance of consistency and prudence in financial reporting, alongside the purpose and methods of depreciation. The report concludes with a discussion of suspense accounts and trial balance preparation, offering a complete guide to financial accounting practices.

Financial Accounting
Principles

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Purpose of financial accounting.........................................................................................1
2. Regulation relating to financial accounting........................................................................2
3. Accounting rules and principles.........................................................................................2
4. Conventions and concepts..................................................................................................3
CLIENT 1........................................................................................................................................4
A. Journal entries....................................................................................................................4
B. Ledger Accounts................................................................................................................5
CLIENT 2......................................................................................................................................22
A Drafting an income statement...........................................................................................22
B. Preparing a Financial statement of financial position......................................................22
CLIENT 3......................................................................................................................................23
A. Preparing an Income Statements.....................................................................................23
B. Statement of Financial Position.......................................................................................24
C. Consistency and prudence...............................................................................................24
D. Purpose of depreciation and its methods.........................................................................25
CLIENT 4......................................................................................................................................26
A. Bank Reconciliation Statement.......................................................................................26
B. Reasons for mismatch......................................................................................................27
C. Preparing the cash book (bank only) for Kedal Ltd.........................................................28
CLIENT 5......................................................................................................................................29
A. Drafting and Balancing Accounts....................................................................................29
B. Control accounts and need to prepare it...........................................................................30
CLIENT 6......................................................................................................................................31
A. Suspense account.............................................................................................................31
B&C. Drafting The Trial Balance with Suspense account...................................................33
D. Difference between suspense accounts and clearing accounts........................................33
CONCLUSION..............................................................................................................................34
REFERENCES..............................................................................................................................35

INTRODUCTION
Financial accounting is regarded to be an important operation that has an effective role in
every business. There are various tools and methods which are used for evaluating financial
aspects of a company which is used in making strategies for a stable financial growth. Apart
from this, it includes a systematic keeping of various records that are essential for acquiring
information resulted to many commercial transactions which has been done. It is very useful for
firm in many ways.
This report includes several methods of recording various business transactions with the
use of double entry book keeping and from that a trial balance is extracted for further usage. It
comprises of preparing final accounts for all sole traders, limited companies as well as
partnerships in accordance to several accurate principles, standards and conventions. Also,
reconcile control accounts and associated shift records has been provided from suspense
accounts to right one.
1. Purpose of financial accounting
Financial Accounting is directly concerned with Summarising, analysing and reporting of
financial transactions related to a business entity. It involves preparation of financial statements
and is governed by both local and international standards. Accountants follow some specific
rules and guidelines in summarising, analysing and recording of financial transactions in
financial statements (Weil, Schipper and Francis, 2013). GAAP, IFRS and IASB are some
accounting principles that are used in United Kingdom.
Purposes of preparing financial accounts are as follows:
Score Keeping: Score keeping function is one of the most primary purpose of preparing
financial accounts. This function shows financial health of organisation by answering several
questions; some of them are: How are we doing? Good, bad or different? etc.
Attention directing: This function inculcates a sense and of taking any decision by the
user of accounting information. It directs the attention of user to focus on deviations, variances
of budgets.
Problem Solving: This function provides manager with such information which enables
him to find solutions to the problems. There are many problems which are highlighted by
accounting information and could provide solutions to these problems. There are solutions such
as buying and selling decisions, drop decisions with respect to product lines leasing.

2. Regulation relating to financial accounting
Financial Accounting Regulations are; GAAP, IFRS, IASB, which govern the financial
accounting of UK.
Generally Accepted Accounting Principles (GAAP): It refers to a set of accounting
principle, procedure and standards that is to be followed by every company while compiling their
financial accounts. It must be followed when a company distributes its financial statements
outside the company (Sharma and Panigrahi, 2013). Revenue recognition, balance sheet
classification, outstanding share measurements, such things are covered in GAAP.
International Financial Reporting Standards (IFRS): These are set of international
accounting standards which states ways of reporting each particular type of transaction in
financial statements. This allows any business or individual investors to make healthy decisions,
as they are able to see what is happening with company in which they wish to invest. Main aim
of IFRS is to maintain stability and transparency across the world.
International Accounting Standards Board (IASB): These are older accounting
standards which were replaced by IFRS, issued by IASB. It was the first set of accounting
standards that was issued by International Accounting Standards Committee. The goal was to
compare business around the globe in an easier way. Through this there was an increase in
transparency and trust in financial reporting.
3. Accounting rules and principles
Basic accounting principles are as follows:
11 Economic Entity Assumption: For accounting purpose, sole proprietor and its owner are
considered as two separate entities but for legal purposes and they are considered as the
same. Accountant keeps all business transactions separately from that of personal
transactions of business owner.11 Monetary Unit Assumption: Only transactions that can be expressed in U. S. dollars are
expressed. Due to this principle it is assumed that dollar purchasing power has not yet
changed over the time. As an outcome accountants prevent recording of such transactions
which include effects of inflation.11 Time Period Assumption: This principle of accounting assumes that, reporting of
complex and ongoing activities of a business entity is possible in comparatively short
intervals.

11 Cost Principle: From an accounting point of view, cost refers to the value of or amount
spent on purchasing of any product when that item was originally received irrespective of
its time period (Lovell and et.al. 2013).11 Full Disclosure Principle: If any information which is important to know for the
investor or lender using financial information, then that information should be provided
or mentioned within the statement or in notes of statements.11 Going Concern Principle: This principle assumes that, a company will exist for a very
long enough to carry out its business transactions and objectives and will not liquidate in
the foreseeable future. In a situation if accountant believes that business will no longer be
able to survive, the accountant is required to disclose this assessment.11 Matching Principle: This principle requires that expenses should be matched with
revenue incomes. Accrual basis of accounting is the requirement for this principle.11 Revenue Recognition Principle: Under accrual basis of accounting, incomes or
revenues are recognized as soon as the transaction takes place or there is sell of goods
and services, irrespective of when the actual money is received.11 Materiality: This principle allows an accountant to violate another principle if an amount
is insignificant.
111 Conservatism: In a situation where two acceptable alternatives are present to report an
item, conservatism directs the accountant to choose the alternative that will result in less
income or less asset amount.
4. Conventions and concepts
Accounting conventions relating to materiality and consistency are as follows:
Convention of disclosure: It is very important to disclose every significant information
in accounting conventions. It suggests that accounts should be prepared in such a way that each
materialistic information is disclosed to the reader. It only implies to disclosure of material trust
with proprietors, investors, creditors, etc.
Convention of Materiality: This convention states that only important information
should be recorded in the books and insignificant should be ignored. If this is not done, then it
will become a burden on everyone reading information with per minute details. There is practical
formula for measuring information, it is the judgemental decision of accountant to take decision

of important and unimportant materials. It is possible that an item is material this year, may not
be a material in next year.
Convention of consistency: This states that any accounting practice should be free from
charge from one period to another (Horngren and et.al. 2012). For example; depreciation is
charged on any fixed asset by method of diminishing balance, it should be charged again year
after year. It does not mean inflexibility, if some changes become necessary its changes and
effects should be stated clearly.
CLIENT 1
A. Journal entries

B. Ledger Accounts
Purchase Ledger

Sales Ledger