Financial Accounting Principles Report - Junior Accountant Role

This comprehensive report delves into the core principles of financial accounting, crucial for understanding a company's financial position and performance. It begins with an introduction to financial accounting, emphasizing its role in preparing financial statements and aiding decision-making. The report then explores the significance of both internal and external stakeholders, illustrating their interests and influence on business operations. Detailed examples, including journal entries and ledgers, are provided to enhance understanding. Furthermore, the report examines the preparation of profit and loss statements and balance sheets, along with accounting concepts such as consistency and prudence. It also explains the purpose and methods of depreciation. Finally, the report contrasts financial statements prepared by sole traders and limited companies, offering a comparative analysis. This report is designed to provide a solid foundation in financial accounting, making it an invaluable resource for students and professionals alike.

FINANCIAL
ACCOUNTING
PRINCIPLE
1

Table of Contents
INTRODUCTION...........................................................................................................................3
BUSINESS REPORT......................................................................................................................3
1: financial accounting and its purposes......................................................................................3
2: Internal and External stakeholder............................................................................................4
Client 1.............................................................................................................................................7
Client 2...........................................................................................................................................11
Client 3...........................................................................................................................................16
Client 4...........................................................................................................................................18
Client 5...........................................................................................................................................18
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................21
Appendices....................................................................................................................................22
2

INTRODUCTION
Financial accounting principles are the set of rules and regulations that helps to
understand the financial position of the company and gives idea to take next step to run the
business (Edwards, 2013). Moreover, it is the rules and guidelines that enterprises should be
follow at the time of preparing financial statements. KPMG is a professional UK based
accounting service company that provides tax and audit services. It is auditors company that is
dealing in auditing, tax and other advisory services. As a junior accountant of the company,
financial accounting principles helps to understand the inflow and outflow of any organisation.
The main purpose of this report is make understand the importance of financial accounting and it
purposes. Accounting principles and concepts defines goals and objectives of any organisation
and helps to take corrective decisions by using this. This report also would contain internal and
external stakeholders, purpose of control accounts, bank reconciliation statement and explanation
about term imprest and suspense accounts and its main features.
BUSINESS REPORT
1: financial accounting and its purposes
Financial accounting is the process of accounting and preparing financial statements of
any organisation that helps to define the financial performance and position of company.
Financial accounting provides a broad and accessible information to business enterprise that can
be used to improve the decision making quality and take better financial decision (Ahn, Amiti
and Weinstein, 2011). For example , a business enterprise is running a business and prepares
financial statements such as income statement and balance sheet that shows company's profits
and loss situation by defining income, expenditure, assets and liabilities. Financial accounting is
used for recording the transaction and bookkeeping. In other words, it is the specific branch of
accounting that keeps records and maintain financial information. By using standardized
principles and guidelines an organisation can record of financial transaction, present and
summarize in a financial statement. Financial statements includes trading, profit and loss account
and balance sheet. These final accounts helps to understand the profits and loss and also shows
the assets and liabilities of the company. Financial information is used to make effective
decisions by external users like as creditors and investors. The main object of financial
accounting is to provide clean and clear information regarding company's financial position and
3

its performance that helps to make solid economic decisions. This also helps to take corrective
actions whether company need to run a business or not by seeking financial accounts. While
preparing final accounts an industry or company should follow GAAP (generally accepted
accounting principles) that is collection of accounting rules and principles for final reporting. It
is the duty of an accountant that follow rules and regulations which provides accurate and
relevant information it can be analysed. It provides a great methodology for recording monetary
transactions and impact on financial position of the enterprises. It has various purposes which are
as follows-
 The main purpose of financial accounting is to provide financial information which
includes income statement and balance sheet.
 To get true and fair data of final accounts of enterprises.
 To evaluate and analysis the fundamental financial statements.
 Financial accounting also helps to know the business's profitability situation as a result it
would be easy to make future plans and strategies for further growth of organisation.
 Its purpose is to accumulate and report on financial transaction and cash flows of a
business.
 This also helps to suggest that how to manages or control the business and organisation.
 To make effective and corrective economic decisions by using financial statements.
 It helps to give results of operations, cash flows and final position of the company.
 It maintains double entry system by using financial information.
 It provides a comparative data that helps to compare with past data and information.
 Financial information also helps to take taxation decision that is depend on business
income and assets.
 It also helps to give actual performance and business position of any business
organisation.
2: Internal and External stakeholder
Stakeholders means a person or group of people who has an interest in operations of the
company in order to make profits. In other words, it is the part of business who invests in the
organisation, participate in business activities and its decisions (Archer, Ahmed Abdel Karim
and Sundararajan, 2010). Stakeholders can affect by goals, objectives, actions and policies of
company. It helps to control external risk to improve business decision and outcomes. Every
4

large organisation includes two types of stakeholders such as internal and external stakeholders.
They helps take effective or corrective decision in order to make profitable organisation.
Internal stakeholders: Internal stakeholders means entities or person who has vital
interest within business and its functions (Dyreng and Lindsey, 2009). In addition, an
organisation has people who are ready to serve a business as a staff, volunteers, donors and board
members. They formulates tactics, strategies, and operations activities to make profitable
organisation. It involves managers, board of director and employees whose have interest in the
financial information of the company such as:
Employees: Employees means a person or group of person who are working in
enterprises for getting something in monetary term like: wages, salary, bonus, incentives etc.
Employees are interested in financial information because they can analysis the pay ability and
employees benefits of any organisation (Edwards, 2013). Moreover, financial data gives an idea
to employees whether they should work or not in an enterprises. They might be interested in
financial information to assess the company's career development opportunities and expansion
possibilities of business. Employees can take further decision to be stable or not by getting
financial information.
Board of director: Board of director is the corporate body or group of people who
establish rules and policies of any business and take effective decisions with the consent of all
members: Board of directors are interested to get financial information because they are
responsible and liable for setting the business policy and accountable to shareholders for
financial position of the company (Fraser, Ormiston and Fraser, 2010). By getting financial
information BOD can take effective decision in order to make profitable industry. Financial data
provides budget that helps to board of director to make policies and further budgets.
External stakeholders: External stakeholders means an individual or group of people
outside a business who are affected by its business performance. It includes customer, regulators,
government, investors,creditors and suppliers. They might be interested in financial information
such as :
Government: Government is the group of people who has authority to govern a country
or state and make policies in order to development of the country (Hillier and et. al., 2013).
Government is interested to get financial information because it helps in development of the
5

country by using tax amount. If financial position of the company would be good then it will pay
tax and this tax amount helps government authority to take development decision.
Investors: Investors means who invests money in the business of any organisation. They
are most interested person in financial information because it gives idea to investor for further
investment or not (Marshall, McManus and Viele, 2011). Investors also can measure the risk and
invest return in the company and also helps to assess the property of the company to pay the
invest amounts.
Creditors: Creditors means an individual or entity who lends money or give credit to
other person or enterprises (Needles and Powers, 2010). They are also interested in financial
information and statement in order to get back their credit money by assessing financial
information and wants to be full repay amount in certain period. Creditors may use financial
information to define business credit risk and company's ability to repay debt amount.
Suppliers: Suppliers means a person or enterprise who provides goods and services to
customer or others (Weil, Schipper and Francis, 2013). Suppliers might be interested in financial
information because they can see company's ability and stability to pay obligations or
compensation and check the profitability conditions of the company. In addition, Providers are
interested to get financial information to continue the purchasing system from organisation's
side.
6

Client 1.
a. Journal Entries and Ledgers in the book of Alexandra Study:
7

8

Books of accouting
9

10

Client 2.
Q. (1). Statement of Profit and Loss of Munteanu Ltd. For the year ended 31st December
2018:
11

Q.(2). Statement of financial position of Munteanu Ltd. As at 31st December 2018:
12

Consistency and prudence accounting concept
Accounting concept is the set of accounting rules that should be followed by an
organisation to preparing financial statements and all accounts that helps to make financial
decisions. These concepts are used to maintain uniformity in accounts of any business
organisation.
Consistency concept: This means any organisation should not be change its accounting
policy and regulations. It allows better representation of final accounts and accounting policies
that helps to be consistent for long time because changes in accounting policies
Prudence concept: This concept state that revenue amount should not overestimated and
expense amount should not be underestimated. Along with that asset or revenue transaction
13

should only be stated only if they are certain whereas, expense or liability needs to be recorded if
there is probability of future loss or liability.
d.
Purpose of providing Depreciation:
Business organisations are required to show its fixed assets at true value so it provides
depreciation on fixed asset (Nobes, 2014). Depreciation is amount that represent reduction in
value of asset due to effect of time or any other reasons like obsolescences, physical wear and
tear etc. To provide true and fair view of accounts and balance sheet depreciation is provided by
business entities. Reduction of depreciable amount from fixed asset make easy to asses actual
cost of fixed asset a particular date. Following are the most widely used method of depreciation:
Straight Line Method of Depreciation: This depreciation methods provides a fixed
amount of depreciation which is charged by business entity uniformly every year until value of
asset reaches to salvage value. Salvage value is scrap value that remain at the end of asset's
effective or useful life. This method is appropriate for lease asset and for assets having negligible
or minor amount of repair and maintenance expenses. Formula for calculation of depreciation
method is:
Amount of Depreciation = (Original Cost of Assets – Salvage Value)/ Estimated useful life of
asset.
Written Down value Method of Depreciation: Using this method, depreciation is charged on
book value of fixed asset and It continuously decreased by annual amount of depreciation.
Annual depreciation under this method depreciation is computed by applying a fixed percentage
of depreciation. This method is used for those assets whose repair and maintenance expenses are
increases year by year. Calculation of such fixed percentage is done by suing this formula:
Depreciation Rate= 100*[1- number of years*√(Salvage Value / Cost of Asset)]
e. D Evaluation of difference between financial statements prepared by the sole trader &
the limited companies:
BASIS SOLE TRADERS LIMITED COMPANIES
Maker In sole traders financial statements
are prepared by trader or owner.
In limited companies this is done by the
accountant.
14

Effect of P&L Sole trader's profit and loss account
indicates profit and loss to the trader.
While company's P&L account shows
the loss and profit to all members of
company and to investors.
Format They prepare statements without any
particular format.
Company makes financial statements
according to a particular format.
Types of
capital
account
Traders prepares only one capital
account in balance sheet which
belongs trader.
They prepares many capital account
which depends on the number of
company's members.
Information in
financial
statements
Financial statements of sole traders
includes only few information
because of small business area.
Their financial statements covers too
many information due to large area of
business.
Rules and
regulation
They prepares statements without any
accounting concept, rules and
regulation.
While company prepares according to
proper accounting rules and regulation.
Importance Importance of financial statements
are less in compare to company.
Financial statements are very important
for company.
Decision
making
They prepare financial statements
only to check profit and loss. They do
not consider it for decision-making.
Company makes financial statements for
many purpose like they make financial
decision on the basis of them as well as
financial statements shows financial
condition of company.
Records of
statements
Traders have no record of previous
years financial statements.
They have records many past years
statements.
Time of
prepare
They make statements without any
fix time.
While company makes financial
statements according to financial year.
Publication They don't publish their financial
statements for public.
Financial statements of company
publishes for public.
Cost Cost of making statements occurs low High cost occurs in preparation of
15

in compare to company. financial statements.
Compulsory Financial statements of traders are not
prepare each year.
They prepare financial statements each
and every year.
Effect of
statements
Financial statements effect only to
trader.
While their financial statements effect
many people like investors, company
members and shareholders etc.
Possibility of
errors
In the financial statements of traders,
there may be possibility of error.
Very less chance of error in statements.
Auditing There is no process of auditing of
financial statements.
Auditor audits the financial statements
like balance sheet, p&l etc.
Software Financial statements are prepared
without any software.
While company prepares statements
with the help of many software like
excel.
Form of
statements
They prepare statements only in
written.
Company prepares statements in both
way written and in digital form(pdf of
financial statements)
Client 3.
a.
Purpose of preparing the Bank Reconciliation Statement: Key purpose to prepare
bank reconciliation statement is to determine whether amount recorded in cash book of an
organisation is correct and changes according to bank statement is made by accountants in cash
book (Needles, Powers and Crosson, 2013). Also its helps to find any error or omission made in
recording any transaction in cash book. It also provide a systematic internal control over cash
management system of a business organisation.
b. Key reason due to which difference may arise in cash book and bank statement: These
are the main reasons which leads to difference in balance of bank column of cash book and bank
statement as follows:
11 Cheque issued by organisation but not presented by party in bank in time for
payment.
16

11 Bank charges charged by bank but client is unaware about the fact.11 Any amount is deposited by client directly into bank without communicating the
organisation.11 Difference may rise due to any deposit in transit.
c. Imprest: It is type of cash account used by business organisation for payment of its various
little or small amount of day to day expenses. In this account a fixed certain amount is
maintained by business organisation and after payment of these petty expense a sum is
transferred back to account to maintain same amount in account. Most widely and commonly
used imprest account is petty cash account. Imprest accounts are also assist in recording payroll,
dividends, bonuses and small travel expenses.
Q. (d) Bank-reconciliation Statement as at 30 September 2018:
17

Client 4.
Control Account: It refers to a general ledger that contains total or aggregate amount of account
balances of all the individual ledgers (Mullinova, 2016). It looks like a summary ledger which
provides a total amount of all other ledgers prepared by business organisation. It is prepared by
business organisation to re check the accuracy of amounts of ledgers. It provides a framework for
preparation of income statement and balance sheet by assessing value of stock quickly.
Q.(1)(a) Sales ledger control account in the books of Hilly:
Client 5.
(a) Suspense Account: It is a kind of general ledger account and temporary by nature, prepared
by business organisation to record doubtful or suspicious value or amount which can be income
or expense. Any difference in organisation's trial balance is transferred to this account on
18

temporary basis (Henderson and et. al. 2015). After analysis of this difference amount, it is
transferred back to trial balance and in respective ledger and entity close the suspense account.
Some time while recording a transaction appropriate account head cannot be determined by
accountants then such transaction amount is transferred to suspense account.
Features of Suspense account: Following are the main features of suspense account:
1. It act as summary account, which provide a summary of all unidentified or suspicious
transaction.
2. Error in only one side of trial balance can be easily traced by suspense account.
3. It act as memoranda account also which assist in remembering transaction with
unspecified heads.
4. It provide a systematic framework or groundwork for assessment of any kind of error or
commission.
5. Some times it also used to trace any unauthorised payment or unidentified source of
income.
Q. (ii) Trail Balance by using a control account as balancing Figure:
Q. (iii) Correction through journal entries:
19

CONCLUSION
From the above report it has been concluded that financial accounting plays a significant
role in tracking the financial statement. These financial statement are finally used by company to
prepare the income statement as well as balance sheet that depict the true position of company.
These statement are finally used by internal and external stakeholders to make further decision in
relation to company. For instance, investors makes the use of financial statement to make
decision regarding further investment or withdrawal of amount from particular company.
Moreover, financial accounting include some assumptions like accrual assumption, consistency
assumption, going concern assumption and so on which basically provide a structure to record
business transaction. Furthermore, company should adopt the guidelines specified in
International financial reporting standard (IFRS) to compare the financial statement of
companies across international boundaries. Thus, IFRS develop consistency as well as reliability
by developing common accounting technique from one company to another.
20

REFERENCES
Books and Journals:
Edwards, J. R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.
Ahn, J., Amiti, M. and Weinstein, D. E., 2011. Trade finance and the great trade collapse.
American Economic Review. 101(3). pp. 298-302.
Archer, S., Ahmed Abdel Karim, R. and Sundararajan, V., 2010. Supervisory, regulatory, and
capital adequacy implications of profit-sharing investment accounts in Islamic finance.
Journal of Islamic Accounting and Business Research. 1(1). pp. 10-31.
Dyreng, S. D. and Lindsey, B. P., 2009. Using financial accounting data to examine the effect of
foreign operations located in tax havens and other countries on US multinational firms'
tax rates. Journal of Accounting Research. 47(5). pp. 1283-1316.
Edwards, J. R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.
Fraser, L. M., Ormiston, A. and Fraser, L. M., 2010. Understanding financial statements.
Pearson.
Hillier, D., and et.al., 2013. Corporate finance (No. 2nd Eu). McGraw Hill.
Marshall, D. H., McManus, W. W. and Viele, D. F., 2011. Accounting: what the numbers mean.
McGraw-Hill/Irwin.
Needles, B. E. and Powers, M., 2010. Financial accounting. Cengage Learning.
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2009. Financial accounting theory and
analysis: text and cases (p. 82). John Wiley & Sons.
Weil, R. L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Needles, B. E., Powers, M. and Crosson, S. V., 2013. Principles of accounting. Cengage
Learning.
Mullinova, S., 2016. Use of the principles of IFRS (IAS) 39" Financial instruments: recognition
and assessment" for bank financial accounting. Modern European Researches. (1). pp.60-64.
21

Appendices
Ledgers:
Purchases ledger A/c
Date Particulars Amount Date Particulars Amount
02/01/19 To S Hood A/c 1450 31/01/19 By Trading and P&L
A/c
9820
To D Main A/c 2060
To W Tone A/c 960
To R Foot A/c 1610
22/01/19 To L Mole A/c 1830
To W Wright
A/c
1910
Total 9820 Total 9820
Bank A/c
Date Particulars Amount Date Particulars Amount
01/01/19 To Opening
Balance (B/f)
68400 01/01/19 By Storage cost A/c 450
16/01/19 To P Mullen A/c 1400 24/01/19 By S Hood A/c 3600
To F Lane A/c 3100 By J Brown A/c 4600
To J Wilson A/c 850 By R Foot A/c 1400
To F Syme A/c 1670 27/01/19 By Salaries A/c 4800
30/01/19 By Business Rates A/c 1320
31/01/19 By Closing Balance
C/d
59250
Total 75420 Total 75420
D Main A/c
Date Particulars Amount Date Particulars Amount
31/01/19 To Closing 2060 02/01/19 By purchases A/c 2060
22

Balance A/c
Total 2060 Total 2060
By Purchases Return A/c
Date Particulars Amount Date Particulars Amount
31/01/18 To Trading and
P&L A/c
50 19/01/18 By R foot A/c 50
50 50
R Foot A/c
Date Particulars Amount Date Particulars Amount
19/01/18 To Purchase
Return A/c
50 02/01/19 By purchases A/c 1610
24/01/19 To Bank A/c 1400
31/01/19 By Closing
Balance C/d
160
Total 1450 Total 1610
T Cole A/c
Date Particulars Amount Date Particulars Amount
03/01/19 To Sales A/c 1650 31/01/19 By Closing Balance
C/d
2330
09/01/19 To Sales A/c 680
Total 2330 Total 2330
J Allen A/c
Date Particulars Amount Date Particulars Amount
03/01/19 To Sales A/c 1020 31/01/19 By Closing Balance
C/d
1020
Total 1020 Total 1020
F Lane A/c
23

Date Particulars Amount Date Particulars Amount
01/01/18 To Opening
Balance (B/f)
6100 16/01/19 By Bank A/c 3100
03/01/18 To Sales A/c 980 31/01/18 To Closing Balance C/d 3980
Total 7080 Total 7080
Cash book
Date Particulars Amount Date Particulars Amount
01/01/19 To Opening
Balance (B/f)
15600 04/01/18 By Motor Expenses A/c 470
07/01/19 By Capital A/c 1500
31/01/19 By Closing Balance
C/d
13630
Total 15600 Total 15600
Sales Return A/c
Date Particulars Amount Date Particulars Amount
11/01/19 To J Wilson A/c 270 31/01/19 By Trading and P&L
A/c
680
To F Syme A/c 410
Total 680 Total 680
L Mole A/c
Date Particulars Amount Date Particulars Amount
31/01/19 To Closing
Balance C/d
1830 22/01/19 By Purchases A/c 1830
Total 1830 Total 1830
W Wright A/c
Date Particulars Amount Date Particulars Amount
24

31/01/19 To Closing
Balance C/d
1910 22/01/19 By Purchases A/c 1910
Total 1910 Total 1910
J Brown A/c
Date Particulars Amount Date Particulars Amount
01/01/19 By Opening Balance
b/f
16600
24/01/19 To Bank A/c 4600 31/01/19 By Closing Balance
C/d
31/01/19 To Closing
Balance C/d
12000
Total 16600 Total 16600
Business Rates A/c
Date Particulars Amount Date Particulars Amount
30/01/19 To Bank A/c 1320 31/01/19 By Trading and P&L
A/c
1320
Total 1320 Total 1320
Storage Cost A/c
Date Particulars Amount Date Particulars Amount
01/07/19 To Bank A/c 450 31/07/19 By Profit & Loss A/c 450
Total 450 Total 450
Sales A/c
Date Particulars Amount Date Particulars Amount
31/01/19 To Trading and
P&L A/c
11460 03/01/19 By J Wilson A/c 1200
25

By T. Cole A/c 1650
By F. Syme A/c 2100
By J .Allen A/c 1020
By P .White A/c 2520
By F .Lane A/c 980
09/01/19 By T .Cole A/c 680
By J fox A/c 1310
Total 11460 Total 11460
S Hood A/c
Date Particulars Amount Date Particulars Amount
24/01/19 To Bank A/c 3600 01/01/19 By Opening Balance
(B/f)
12150
02/01/19 By purchases A/c 1450
31/01/19 To Closing
Balance C/d
10000
Total 13600 Total 13600
W Tone A/c
Date Particulars Amount Date Particulars Amount
31/01/19 To Closing
Balance C/d
960 02/01/19 By purchases A/c 960
Total 960 Total 960
J Wilson A/c
Date Particulars Amount Date Particulars Amount
03/01/19 To Sales A/c 1200 11/01/19 By Sales Return A/c 270
16/01/19 By Bank A/c 850
31/01/19 By Closing Balance 80
26

c/d
Total 1200 Total 1200
F Syme A/c
Date Particulars Amount Date Particulars Amount
03/01/18 To Sales A/c 2100 11/01/19 By Sales Return A/c 410
16/01/19 By Bank A/c 1670
31/01/19 By Closing Balance
c/d
20
Total 2100 Total 2100
P White A/c
Date Particulars Amount Date Particulars Amount
03/01/19 To Sales A/c 2520 31/01/19 By Closing Balance
c/d
2520
Total 2520 Total 2520
P Mullen A/c
Date Particulars Amount Date Particulars Amount
01/01/19 To Opening
Balance (B/f)
4400 16/01/19 By Bank A/c 1600
31/01/19 By Closing Balance
c/d
2800
Total 4400 Total 4400
Capital A/c
Date Particulars Amount Date Particulars Amount
07/01/18 To Cash A/c 1500 01/01/18 By Opening Balance 389000
27

b/f
31/01/18 To Closing
Balance C/d
387500
Total 389000 Total 389000
J Allen A/c
Date Particulars Amount Date Particulars Amount
09/01/18 To Sales A/c 1310 31/01/18 By Closing Balance
c/d
1310
Total 1310 Total 1310
Motor Van A/c
Date Particulars Amount Date Particulars Amount
01/01/19 To Opening
Balance (B/f)
51250 31/01/19 By Closing Balance
c/d
51250
Total 51250 Total 51250
Salaries A/c
Date Particulars Amount Date Particulars Amount
27/01/19 To Bank A/c 4800 31/01/19 By Trading and P&L
A/c
4800
Total 4800 Total 4800
Motor Expenses A/c
Date Particulars Amount Date Particulars Amount
04/01/19 To Cash A/c 70 31/01/19 By Trading and P&L
A/c
470
Total 470 Total 470
28