Financial Accounting Principles Assignment - Comprehensive Solution

This assignment solution provides a comprehensive overview of financial accounting principles. It covers key concepts such as financial accounting regulations, accounting rules and principles, and conventions. The solution includes detailed examples and practical applications through various client scenarios. These scenarios involve the preparation of books of prime entry, double-entry recordings in ledgers, trial balances, statements of profit and loss, statements of financial position, bank reconciliation statements, sales and purchase ledger control accounts, and suspense accounts. The document also explains accounting concepts like consistency and prudence, and methods of depreciation. Furthermore, it includes journal entries for rectifying errors and clarifying the use of control accounts. The assignment aims to provide a thorough understanding of financial accounting and its practical applications.

FINANCIAL ACCOUNTING
PRINCIPLES

Table of Contents
INTRODUCTION...........................................................................................................................5
A. (i) Financial accounting...........................................................................................................5
A. (ii) Explain the regulation relating to financial accounting....................................................6
A. (iii). Describe accounting rules and principles........................................................................8
A. (iv) Explain the conventions and concepts relating to consistency and material disclosure...8
B. CLIENT 1...................................................................................................................................9
(i) Books of prime entry...............................................................................................................9
(ii) Complete double entry recording in ledgers........................................................................11
(iii) Trial balance to check arithmetical accuracy......................................................................25
CLIENT 2......................................................................................................................................26
(A). Preparation of Statement of profit and loss acount............................................................26
(B). Preparation of Statement of Financial Position..................................................................27
CLIENT 3......................................................................................................................................28
(A). Preparation of statement of profit & Loss..........................................................................28
(B). Preparation of statement of SOFP, balance sheet...............................................................29
(C). Explaining the consistency and prudence accounting concepts.........................................30
(D). Briefly presenting the aim of depreication and two depreciation methods........................30
CLIENT 4......................................................................................................................................31
(A). Explaining the purpose of bank reconcilation statement....................................................31
(B). Listing several areas which may vary Cash book (bank column) & pass book balances. .31
(C). (i) Preparation of bank reconcilation statements on 1st December 2016............................32
(ii). Preparation of Kendal Ltd’s updated cash book for December 2016.................................32
(iii) Preparation of bank reconcilations statement as at December 2016...................................32
CLIENT 5......................................................................................................................................33

(A). (i). Preparation of Sales Ledger Control Account..............................................................33
(A). (ii). Preparation of purchase Ledger Control Account.......................................................33
(B). Explaining the term “control Account” & its uses.............................................................34
CLIENT 6......................................................................................................................................34
(A). Describing the term “suspense account” & its main features.............................................34
(B) Drafting a trial balance........................................................................................................35
(C). Prepration of Journal entries to show corrections & clear the suspense account...............35
(D). Differentiate between Suspense account and Clearing Account........................................36
CONCLUSION..............................................................................................................................37
REFERENCES..............................................................................................................................37

List of Tables
Table 1 Journal entry in Books of Alex for Month of May 2016...............................................................11
Table 2 Trial Balance of Alex...................................................................................................................25
Table 3 Statement of profit and loss acount of Peter Piper for the year ended 31st December 2016..........27
Table 4 Calculation of cost of goods sold..................................................................................................27
Table 5 Statement of financial position of Peter Piper as on 31st December 2016....................................27
Table 6 Statement of P&L of Raintree ltd for the year ended 30th September 2016.................................28
Table 7 Statement of SOFP of Raintree ltd as on 30th September 2016....................................................29
Table 8 Bank reconcilation statement of Kendal Ltd on 1st December 2016............................................32
Table 9 Kendal Ltd’s updated cash book for December 2016...................................................................32
Table 10 Bank reconcilations statement of Kendal Ltd as at December 2016...........................................32
Table 11 Sales Ledger control a/c of Henderson.......................................................................................33
Table 12 purchase Ledger Control Account of Henderson........................................................................33
Table 13 Trial balance...............................................................................................................................35
Table 14 Journal entries for rectifying errors.............................................................................................35
Table 15 Preparation of Suspense a/c........................................................................................................36
Table of Figures
Figure 1 Regulatory framework of financial accounting................................................................6
Figure 2 International standards of accounting..............................................................................7

INTRODUCTION
Businesses carry out number of transactions in a given reporting year, such activities held
during a year is recorded in a coherent and logical manner in the financial statements of the
enterprise. Financial Accounting (FA) is a process whereby accountant record the monetary
activities in the annual accounts, such as profit and loss statement, balance sheet and cash flow
statement to examine their return and financial health. It follows various concepts like accural,
double-entry, consistency, matching, monetary measurements and accounting standards i.e. UK
GAAP, IAS & IFRS. The current project mainly targeted at the preparation of various accounts
like P&L a/c, balance sheet, trial balance, rectification entries, control account & Bank
reconcilation statement (BRS) as well following the relevant accounting standards and
guidelines.
A. (i) Financial accounting
Financial accounting is the field of accounting that is concerned with the analysis,
examination, summarizing and reporting of the financial transactions conducted during the
business operations. It involves the construction of annual accounts, also called financial
statements i.e. statement of comprehensive income (SOCI), statement of financial position
(SOFP, balance/sheet), statement of cash flow (SOCF), statement of changes in retained earnings
along with the necessary notes representing the adopted accounting standards, conventions and
revenues and expendiure recognition principles (Deegan, 2013). The key aim behind the
financial accouting is to determine the net profitability and the financial status at te end of every
financial year. Such statements are created adopting accounting rules and standards such as UK
GAAP, IAS (International Accounting standards) & in the globalized era, multinational
companies publish their accounts in harmonized manner through following IFRS. Double entry
book-keeping system is followed by the establishments to prepare their accounts, wherein every
accounting activity is recorded in both the sides, credit and debit. It is essential to prepare
accounts because without arranging a proper record of the monetary activities held in the daily
operations, enterprise cannot examine their financial position i.e. solvency and liquidity as well
as organizational performance (Pratt, 2013). It not only helps the internal stakeholders such as
managers and employees but also assists outsiders such as government, shareholders, lenders,

creditors and other regulatory authority to gather required information for the rationalized
decision-making purpose. In UK, as per the Company Act, 2006, all the private as well as public
limited organizations are legally required to report their financial transactions in annual accounts
and publish it to communicate external users.
A. (ii) Explain the regulation relating to financial accounting
Figure 1 Regulatory framework of financial accounting
(Source: Deegan, 2013)
In UK, independent regulatory body, Financial Reporting Council (FRC) govern the
financial accounting practices by creating necessary rules and regulations. As per the regulations,
in UK, Generally Accepted Accounting Principles (GAAP) represents the local rules. it presents
the guidelines and accounting conventions which is required to be followed to report business
transactions in the annual accounts.

Figure 2 International standards of accounting
(Source: McAuley, 2015)
However, besides this, with the internationalization of the businesses, global accounting
standards, IAS and IFRS have been issued to ensure transparency in the system. Thus, as per
this, all the establishments who are working in more than one country must have to follow the
respective rules and standards while preparing their annual financial statements. The main aim of
this is to harmonize the accounting practices of multinational enterprise and build trust among
investors as they will be able to effectively examine the financial reports and made sound
investment decisions (Weil, Schippe and Francis, 2013). Company Act, 2006 also impose legal
requirement upon entities to construct SOCI, SOFP and SOCF using relevant standards and
guidelines and audit the statements by an independent auditor to make it sure that reported
information is truely correct and fair without any material misstatement. Apart from this,
organizations who are listed in recognised stock exchange like London Stock Exchange (LSE) is
require to follow the listing rules and as per this, they have to present their fianncial accounts to
the SE.

A. (iii). Describe accounting rules and principles
As said earlier that UK GAAP presents the conventions, principles and accounting rules
to guide accountatnts how the regular transactions will be reported in their financial statements.
The necessary rules and principles concerned with the accounting are mentioned here as follows:
Accural concept: This principles states that in the annual reports, transactions will be
record at the time of their occurence. There will be no effect of its cash generation or expenditure
occurence on the financial reporting. In other words, activities will be recorded when they held
irregardless of whether cash is received/paid or not (Saunders and Cornett, 2014).
Going concern: It assumes that business will continue its functions for long duration to
complete its committments and there is no probability of its liquidiation in foreseeable future.
This accounting principle allow the enterprise to defer several transactions like prepaid expense
and also amortize depreciation and others over a given period (Jollands and Quinn, 2017).
Matching principle: It matches the expenses incurred with the revenues because of
double-entry book keeping and accural accounting basis. For instance, sales commission must be
recorded at the time of sales instead of when the commission is actually paid to sales personnel.
Full disclosure: Corporations must record each and every information in their accounts
which are important for the stakeholders like lenders and investors in any way. Moreover, notes
also must be shown disclosing all the relevant principles and standards in footnotes to final
accounts, so that, investors can make better decisions (Gregory, Uys and Gregory, 2014).
Disclosing all the material statements or information is necessary otherwise, default person will
be penalised by fine and other lawsuit.
Monetary principle: In the financial statements, only those transactions are reported that
can be measured in monetary terms, GBP. Thus, it only provide quantitative results i.e. sales, and
cost and do not disclose any qualitative results and performance i.e. environmental performance
and others.
A. (iv) Explain the conventions and concepts relating to consistency and material disclosure
Accounting concepts postulates necessary assumptions upon which the entire accounting
and reporting is based. However, conventions represents customs that enable accountant to deal
with the practical accounting issue and problems. The consistency and material disclosure
concepts & conceptions are analyzed here as under:

Consistency: This principle state that the adopted accounting principles and methods will
be followed continually over the different finacial years untill and unless there is a sound reason
to use other standards and principles that will bring improvement in the current reporting system
(Giles, 2014). The most important benefit of this standard is it helps to compare performance
over the years.
Material disclosure: Accountants are allowed to exclude those items that are
insignificant, in this regards, whether an amount is material or immaterial will be decided on the
basis of professional judgement (Beatty and Liao, 2014). For instance, if a multinational entity
buys a printer costing 150GBP, as per the matching principle, it will be expensed over 5 year.
However, materiality principle here allows the accounatnt to violate the matching accounting
principle and charge thee entire cost in the same year instead of 5 year.
B. CLIENT 1
(i) Books of prime entry
Dr Cash a/c Cr
Date Particular Amount Date Particular Amount
01/05/16 To balance b/d 5600 04/05/16
Motor
expenses 470
07/05/16 Drawings 1500
31/05/16 By balance c/d 3630
5600 5600

Prime book entries shows the daily routine expenditures or income incurred in an entity
as this gives the actual expenses and income to be incurred in the business in a particular
financial year. Role of an entity gets increases when they prepare this compulsory kind of books
as this shows the overall performance of an entity within a given span of time (Beatty and Liao,
2014). The primary book entry includes sale ledger that records each and every sales in an entity
along with the purchases made by the firm. All these expenditures are managed with the help of
cash that maintains liquidity in the business in order to meet all kinds of problems imposed on an
entity.
(ii) Complete double entry recording in ledgers
Table 1 Journal entry in Books of Alex for Month of May 2016
Date Particular Debit Credit
May-2016
1th Storage a/c Dr 400
To bank a/c 400
(Being storage expenses paid by

cheque)
2nd Purchase a/c Dr 6080
To S.hood 1450
To D.Main 2060
To W.tone 960
TO R.Foot 1610
(Being goods Bought on credit)
3rd J.wilson a/c Dr 1120
T.Cole a/c Dr 1640
F.Syme a/c Dr 2080
J.Allen a/c Dr 910
P.White a/c Dr 2420
F.lane a/c Dr 770
To sales a/c 8940
(Being goods sold on credit)
4th Motor expense a/c Dr 470
To cash a/c 470
(Being motor expense paid by
cash)
7th Drawing a/c Dr 1500
To cash a/c 1500
(Being cash drawn by the owner
for its personal use)
9th T.Cole a/c Dr 680