Financial Accounting Report: Principles, Regulations, and Concepts

This report provides a comprehensive overview of financial accounting, encompassing its purposes, regulations, and fundamental principles. It details the role of financial accounting in recording transactions, classifying data, and generating financial statements such as profit and loss accounts, balance sheets, and cash flow statements. The report examines key accounting rules, including those for personal, real, and nominal accounts, and highlights important accounting principles like the economic entity, monetary measurement, historical cost, full disclosure, and going concern. Furthermore, it explores the concepts of consistency and materiality disclosure, illustrating their significance in financial reporting. The report also includes practical examples, such as bank reconciliation statements and the use of suspense accounts, and provides financial statements for various clients, demonstrating the application of these principles. The appendix provides journal entries and ledger accounts to further illustrate the concepts discussed.

Finance Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
BUSINESS REPORT......................................................................................................................1
1.Financial Accounting and its purposes................................................................................1
2:Regulation related to finance...............................................................................................2
3: Accounting rules and principles.........................................................................................3
4 Convection and concept related to consistency and material disclosure.............................4
CLIENT 1........................................................................................................................................4
CLIENT 2........................................................................................................................................4
(a) Statement of profit and loss for Peter Hampau for the year ended 31st July 2018 ..........4
(b) Statement of financial position for Peter Hampau as at ended 31st July 2018 ................6
CLIENT 3........................................................................................................................................6
(a) Profit and loss account of Bowling Limited:....................................................................6
(b) Balance Sheet of Bowling Limited...................................................................................7
(c) Accounts concepts : Consistency and Prudence:..............................................................8
(d) Purpose of depreciation in formulating accounting statements and methods of
Depreciation:..........................................................................................................................8
CLIENT 4........................................................................................................................................9
(i) Bank reconciliation statement at 1st December 2017:......................................................9
(ii) Durrell Ltd's updated cash book for December 2017 :.....................................................9
(iii) Bank Reconciliation Statement as at 31"t December 2017:..........................................10
CLIENT 5......................................................................................................................................10
(a) Sales Ledger Control and Purchase Ledger Control Account:.......................................10
(b) Control Account:.............................................................................................................11
CLIENT 6......................................................................................................................................11
(a) Suspense Account:..........................................................................................................11
(b) Preparation of Trail Balance:..........................................................................................11
(c) Journal entries in order to show necessary corrections for eliminating suspense account
balance:.................................................................................................................................12
(d) Difference between a Suspense A/c and Clearing A/c:..................................................12

CONCLUSION..............................................................................................................................13
REFERENCES .............................................................................................................................14
APPENDIX....................................................................................................................................15
(a) Journal Entry in the books of David Study....................................................................15
(b) LEDGER ACCOUNTS..................................................................................................17

INTRODUCTION
Financial accounting is field of accounting mainly concerned with recording of financial
transaction, classification of different transactions, reporting and analysis in order to know
performance and profitability of business organisation. Furthermore, it include financial
statement, profit and loss account, cash flow statements and other significant statements to know
true position of business organisation (Edwards, J. R., 2013). Main duty of accountant in a
business organisation is to record all financial transaction in journals, post them in ledger,
prepare trial balance and finally reporting through financial statements to present true and fair
view of financial statement. This report exhibits various aspects of financial accounting like
purpose of financial accounting, regulations relating to financial accounting, accounting rules
and principles and explanation about convections and concepts relating to consistency and
material disclosure. This report also covers bank reconciliation statement, process of preparing
bank reconciliation statement and, suspense account and its importance.
BUSINESS REPORT
1.Financial Accounting and its purposes
Financial accounting refers to set of activities related to preparation of final accounts of
a business organisation in order to access and provide information about actual performance and
financial position to internal and external users of financial accounting such as employees,
investors, lenders and creditors, suppliers, government, customers and other regulatory bodies.
Such final accounts are prepared by business organisations while considering various accounting
policies, guidelines, rules and regulations (Hale, 2012). A Business organisation prepare
financial accounting which mainly includes statement of financial position, profit and loss
account or income statement, statement for change in equity and cash flow statement.
Purpose of Financial statement
 Financial statement shows financial details of company like profit earned, assets, retained
earnings for both internal and external user who so ever are interested in financial
statements of company.

 Investor invest in company after analysing the financial statement of the company. Firm
with more assets and profits will attract more investor. Therefore, this is win win
situation for both investor as well as for firm.
 Lenders/Creditor prior of extending loan thoroughly checks financial statement of
respective company and then make decision related to extending or restricting their credit
requirement.
 Taxation are imposed by government on basis of revenue and assets of company. Hence,
real position is displayed by financial statement thus charged tax accordingly.
 Financial statements help in making external comparison (between different firm) as well
as internal comparison (within the firm).
2:Regulation related to finance
Stakeholder of company are the users of financial statement. They access financial
statement for their personal interest like investment/purchase share of particular company,
provide credit to company, purchase product etc. Moreover, the main concern of user is that they
get useful, reliable and relevant data as a base for future actions. Taking into consideration the
requirement of user, government has developed a regulatory framework known as GAAP
(General Accepted Accounting Principle). It is a standard method that involve concept, rules or
principle, which ensure financial statement of company is transparent, reliable as well as
consistent (Fourie, 2015).
There are three regulatory/financial standard in UK
Financial policy committee: It check financial statement as a whole. It's work is to manage risk
associated with the stability of firm. Hence, they are responsible for macroeconomic regulation.
Prudential regulatory authority: These authority are responsible for microeconomic regulation.
Their objective is to safeguard the interest, safety and financial strength of firm by reducing
external factor that have negative effect on firm.
Financial conduct authority: Financial conduct authority's responsibility is to conduct business
regulation, safeguard interest of investors and promote competition for customers. They have
additional power like withdraw existing product, or imitated product as well as they can stop the
functioning of any firm, which provide misleading data to outside party.
2

3: Accounting rules and principles
Accounting rules: Accounting is a dual entry system, which affect two account one is debit
account, and other one is credit account. There are three rules of accounting for personal account,
real account and nominal account (Hall, J. A., 2012).
Personal account:It includes account of human being (sole proprietor, debtor) and artificial
independent body (company, bank). As well as account of group person like drawing account,
prepaid salary account etc. Hence, the golden rule for personal account is “debit the receiver and
credit the giver”.
Real account: Real account is a part of impersonal account that include firm's tangible asset
(machinery account, cash account) and intangible assets (patent account, goodwill account). The
golden rule for real account is “Debit what comes in, credit what goes out”
Nominal account: Nominal is again a part of impersonal account that include all fictitious
account like expense, revenue, gain and loss of firm. Such as travelling expenses account,
advertisement expense, commission paid and rent received account. The golden rule for nominal
account is “debit all expenses and losses, credit all income and gain” .
Accounting principles
Economic Entity: As business and businessmen are two separate legal entities. So it is duty of
accountant to separate the account of business owner from its business. Like drawings are
liability of business owner.
Monetary measurement: Accountant of firm record only those transaction which can be
displayed in term of money. There can be non monetary transaction which are important for
business but can't become part of financial transaction.
Historical cost principle: The value of assets keeps on changing with time. Moreover, it is the
duty of accountant to update only that price on which assets were taken or brought into the firm.
Firm don't have to do anything with current value of asset. Their further valuation takes place on
basis of historical prices.
Full disclosure of account: Any relevant information to stakeholder must be displayed in the
books of firm. This principle make sure that stakeholders don't get manipulative or misleading
data as well as it ensure firm don't hide any relevant entry.
3

Going concern principles: This principle says whenever a firm operate, it operate with life long
running prospective. In case accountant comes to know that company can't continue any more
then this information must also be disclosed in their statements.
4 Convection and concept related to consistency and material disclosure
Consistency: This method states that the policy formed by company should be followed for years
and years they cannot change them repeatedly. Adopting same policy helps company to make
better comparison within the industry. For instance, if a firm is following straight line method of
depreciation they should try to continue with that only (Jönsson, 2013).
Materiality disclosure: All transaction should be recorded or disclosed properly. This brings
transparency to firm and attract stakeholders. Like if the company’s liabilities are more than
asset they should disclose it in their financial statements. All petty information should not be
hide from outside party for the self-motives of firm.
CLIENT 1
See appendix
CLIENT 2
(a) Statement of profit and loss for Peter Hampau for the year ended 31st July 2018
Peter Hampau
Statement of Profit or Loss for the year
ended 31 July 2018
£ £ £
Revenue 1,20,000
Less cost of sales
Opening inventory 4,500
Add purchases 70,000
74,500
Less closing inventory Note 1 -42,640 -31,860
4

Gross profit 88,140
less expenses
Wages and salaries 16,500
Add wages and salaries accrued 1,520 18,020
Motor expenses 4580
Admin expenses 1,650
Heating and lighting 550
Advertising expenses 1,030
Less advertising expenses
prepaid -447 583
Depreciation on premises 560
Depreciatiomn on equipment 1,900
Deprecition on motor vehicles 360 2,820
28,203
Net profit 59,937
5

(b) Statement of financial position for Peter Hampau as at ended 31st July 2018
Peter Hampau
Statement of Financial Position as at 31 July 2018
ASSETS £ £ £
Non-Current Assets cost
Accumulated
depreciation Net Book Value
Freehold Premises (4450+560) 28,000 -5,080 22,990
Equipment (6800+1900) 19,000 -8,700 10,300
Motor vehicles (1200+360) 3,000 -1,560 1,440
Total Non-Current Assets 50,000 -15,270 34,730
Current Assets
Inventory Note 1 42,640
Trade receivables 11,520
Prepaid advertising
expenses 447
Cash in hand 300
Total Current Assets 54,907
Total Assets 89,637
Equity and liabilities
Equity
Capital 24,380
Add profit 59,937
84,317
Less drawings -2800
Total Equity 81,517
Current Liabilities
Trade payables 5,600
Accruals: wages and salaries 1,520
Bank overdraft 1,000
6

Total Current Liabilities 8,120
Total Equity and Liabilities 89,637
CLIENT 3
(a) Profit and loss account of Bowling Limited:
Bowling Limited
Statement of Profit or Loss for the year ended 31st July 2018
£000
Revenue 1,05,000
Less:Cost of sales 31,000
Gross profit 74,000
Expenses
Less: Administrative cost 30,000
Less: Distribution cost 30,000
Operating profit 14,000
Less: Tax 4,000
Profit for the year 10,000
(b) Balance Sheet of Bowling Limited
Bowling Limited
Statement of Financial Position as at 31st July 2018
£000
Assets
Non-Current Assets
Land and buildings
(60000-1000-7000) 52,000
7

Plant and machinery
(65000-10000-15000) 40,000
Total Non-current Assets 92,000
Current Assets
Inventory 18,000
Trade receivables 24,000
Other receivables (prepayments) 3,000
45,000
Total Assets 1,37,000
Equity and Liabilities
Share Capital 50,000
Share Premium 20,000
Retained earnings 32,000
1,02,000
Current Liabilities
Trade payables 14,000
Other payables 2000
Bank overdraft 15000
Tax payable 4000
Total current liabilities 35,000
Total Equity and Liabilities 1,37,000
(c) Accounts concepts : Consistency and Prudence:
Accounting concepts refers to basic assumptions, rules and principles that gives a
frameworks for recording of accounting transactions and preparation of final accounts.
Accounting is mainly concerned with principles and accounting principles are framed on the
basis of some assumptions such assumptions are also known as accounting concepts (Mullinova,
S., 2016).
Consistency: According to this accounting concept accounting policies adopted by
business organisation should be applied consistently from one period to another period. Any
8

change in already adopted accounting policies and assumption can be made only if it is as per
relevant statue or any change would results in better presentation of accounts.
Prudence: According to this accounting concept business organisation can record
expenses, liabilities and obligation as soon as they occur whereas any revenues and incomes
should be recorded as they realized.
(d) Purpose of depreciation in formulating accounting statements and methods of Depreciation:
Depreciation used by business organisation to exhibit decrease in assets arises due to
obsolescence or physical wear and tear of assets during a particular period (Bushman and Smith,
2001). Depreciation is simply shows actual consumption of particular asset. Following are major
methods to calculate depreciation:
Straight line method: In straight line method an equal amount of depreciation is
provided by business organisation during the whole useful life of asset. This is an simple and
most widely used method of depreciation. Formula of depreciation under this method is:
Cost of assets less Residual value
Total Useful life of asset
Written down value method: In this method a certain formula is used to calculate fix
percentage of depreciation and such percentage is applied to book value of asset to get amount of
depreciation for the year. This method is used for assets that have more efficiency in the
beginning and thereafter decreases year after year (Holthausen and Watts, 2001). This method is
usually adopted for plant and machinery, fixtures and fittings, motor vehicles, etc..
CLIENT 4
Purpose of bank reconciliation: Bank-reconciliation statement is prepared by organisation to
reconcile the amount of bank account prepared by organisation with amount shown in bank
statement or pass book of bank (Libby, Bloomfield and Nelson, 2002).
Reason for variation in cash book and bank statement: Due to deposit of any amount by
customers directly into bank account, bank charges charged by bank and organisation in unaware
the fact, cheque issued but not presented etc. are major reason for difference in balance of cash
book and bank statement as on a particular date (Bank reconciliation statement. 2017).
(i) Bank reconciliation statement at 1st December 2017:
9