Analysis of Financial Accounting Concepts: Accounting 1 Report

This report provides a comprehensive analysis of financial accounting principles and practices, divided into two scenarios. Scenario 1 explores various business transactions, including internal and external transactions, and contrasts single and double-entry bookkeeping systems. It delves into journal entries, ledger accounts, trial balances, and the preparation of profit and loss accounts and balance sheets. The report also differentiates between financial statements and financial reports and examines fundamental accounting principles. Scenario 2 focuses on practical applications, specifically bank reconciliation, control accounts, and suspense accounts, demonstrating the practical implications of these concepts through rectification accounts and updated cash books. The report concludes with a thorough understanding of financial accounting concepts.

Accounting
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Contents
SCENARIO 1..................................................................................................................................3
Question 1:...................................................................................................................................3
Question 2....................................................................................................................................5
Question 3: Difference between financial statement and financial report.................................10
Question 4: Fundamental principles of accounting...................................................................12
Question 5..................................................................................................................................13
SCENARIO 2................................................................................................................................14
Question 1: Bank reconciliation................................................................................................14
Question 2: Control accounts.....................................................................................................15
Question 3: Suspense account...................................................................................................16
Question 4..................................................................................................................................17
Question 5..................................................................................................................................18
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................21
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INTRODUCTION
Financial accounting is a concept of recording, classifying, analysing and evaluating the
financial transactions of an organisation. This process requires special skills of knowledge of
financial theories and concepts (Berry, 2018). The main aim of this report is to build an
understanding regarding the double entry system and the process of recording a business
transaction. For this purpose, this report is classified into two sections.
The first section of this report will address five questions related to different types of
business transactions. In these section journal entries, ledger accounts, trial balance, P&L
account and balance sheet will be developed along with analysing the difference between
financial statement and financial report. In the second section of this report, the concepts of
suspense account and control account are analysed along with bank reconciliation. This section
will represent the practical implication of such concepts by the use of rectification account and
updated cash book.
SCENARIO 1
Question 1:
Types of business transaction
Business transaction is an event which has occurred in an economic organisation which
can be measured in terms of money. Such events have a financial impact on the organisation.
There are different types of business transactions and in this case, all these business transactions
are classified as external and internal transactions.
Internal transactions are those events in which no external parties such as investors,
supplier or debtors are involved. These transactions are does not include any exchange of money
with external parties but its occurrence highly impacts financial position of the organisation.
These transactions include depreciation, accumulated depreciation, realising of losses and many
more (Cascino and et.al, 2019).
On the other hand external business transactions are opposite of above transactions as it
includes involvement of external parties as well. Business entity exchanges money from external
parties for such transactions and the scope of such transactions are much higher than the internal.
These transactions include purchase of raw material from suppliers, sales of finished goods to
customers, purchase of current and non-current assets, purchasing services from external service
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providers such as repairing, advertising etc., paying wages and salaries to employees, payment of
taxation, payment of electricity, gas, stationary and other miscellaneous expenses.
Single entry and double entry book keeping
Single entry bookkeeping system is the easiest procedure to record business transactions
as in this system only cash transactions are recorded when they become due. In this system, all
the transactions of a business entity are recorded in a single column as a single entry in the
primary book of journal (Dutta and Patatoukas, 2017). This method is more appropriate for
micro business which does not involve high number of cash transactions and can be only used to
track the cash position of the business. A typical format of single entry bookkeeping is presented
below:
Date Description Transaction value Balance
XX-XX-XXXX £000.00 £000.00
On the other hand, double book keeping system is highly complex than the method
analysed above. In this system, every transaction is recorded into two accounts in order to ensure
that credit and debit of trail balance is equal. This method if book keeping is considered as high
reliable and validated as it helps in ensuring that the accounting books are appropriately
developed if the balance of debit and credit are equal. This system is appropriate for any type of
organisation having any scale, scope or objective. A typical format of double book keeping
system is present below:
Date Description L.F Debit Credit
XX-XX-XXXX £000.00
£000.00
Trial balance and its importance
The term trial balance is used for a worksheet and not for an account which is used for
book keeping all the business transactions which are transacted in an accounting year (Haskin
and Burke, 2016). This type of worksheet is divided into columns for debit and credit and the
balance of both the transactions is required to be equal. There are various significant points of
trial balance which represents its importance for business entities and some of these significant
points are identified below:
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 Trial balance helps an organisation to check the arithmetical accuracy of their accounts
by ensuring the equal balance of the both sides of trial balance.
 Trial balance is a worksheet which acts as a base to prepare financial reports of business
position such as income statement and balance sheet.
 Trial balance also plays an important role in the comparative analysis. A business
organisation can check the balances of accounts of one year and then compare it to last
year trial balance.
 This worksheet also helps in rectify the errors which has made by the management in
developing accounts.
Trial balance also helps in developing the budgets for future areas and helps in identifying
KPIs and benchmarks (Horák and Bokšová, 2018).
A typical format of trial balance is developed below:
Account name Debit (£000) Credit (£000)
Question 2
Journal entries for each transaction
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Ledger accounts
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7

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Trial balance
Trail Balance
Particulars
Debit
amount
Credit
Amount
Cash in hand 11070
Cash at bank 60675
Net Capital 65000
Purchases expenses 18000
Bills payable 14000
Bills receivable 12000
Sales expenses 26000
Equipment account 3000
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Prepaid Insurance account expenditure 75
Prepaid Rent expenses 150
Stationary account expenses 30
Total 105000 105000
Question 3: Difference between financial statement and financial report
Financial report is a document which includes monetary transaction of an organisation.
Such reports are developed to record the effect of every financial transaction on the functioning
of the organisation. There is not specific interval of developing these reports (Kaya and Akbulut,
2018).
On the other hand, financial statement is one of the mandatory documents which are
required to be developed by every business transaction. Every financial statement is a report but
every financial report is not a financial statement.
In order to analyse the uses of such documents and their users, the comparative analysis
between both the statements is conducted below:
Basis of difference Financial report Financial statement
Content Financial reports include all the
monetary transactions of a
business organisation.
Financial statements only include
those transactions and information
which are a requirement given by
governance authority.
Governance The process of financial reporting
is governed by IASB
(International Accounting
Standards Board).
On the other hand, the process of
developing financial statements is
governed by the standards
developed by IASB which are
International Financial Reporting
Standards.
Scope The scope of financial reports are
wider than financial statements as
it has been identified that all
financial statements are financial
reports but not all reports can be
The scope of such documents is
narrower (Kolitz, 2016).
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financial statements.
Examples There are various examples of
financial reports which include
bank statement, account
receivables report, debtor’s
analysis report, bas debts reports
and many more.
On the other hand, there are no
examples of financial statements
but there are four types of financial
statements which include income
statement, balance sheet (statement
of financial position), statement of
cash flows, and statement of
changes in equity.
Requirement The financial reports are needed
by business managers to gather
information regarding expenses
and purchases which the
organisation has done in order to
develop budgets for future year.
The scope of using financial
reports is much wider as these
reports can provide all the
information about an organisation.
These reports are used by the
companies to develop a financial
strategy so that they can ensure
reliable profits and cash flow in
the company.
On the other hand, the financial
statement can only be used for a
certain requirements. These
statements are needed by
stakeholders of the company to
analyse the financial performance,
financial position, cash position and
equity position for the company.
These statements help in the
procedure of decision making by
the external investors to decide
whether they want to invest in a
certain company or not (Maynard,
2017).
Users Users of financial reports include
business managers, board
members and all the users of
financial statements as these
statements are also a part of
financial reports.
On the contrary, the users of
financial statements include
investors, suppliers, creditors,
government, clients, public, debtors
and many others.
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Question 4: Fundamental principles of accounting
Fundamental accounting principles are the guidelines which restricts and limits the
business organisations while developing financial statements and reporting financial data. There
are various fundamental principles which govern the business organisation. These principles are
based on the standards given by “generally accepted accounting standards” and “international
financial reporting standards”. Some of the important fundamental principles of accounting
include:
Economic entity assumption – According to this principle, a business organisation must be
given its own identity and name under which it can do business. The entity of the business
organisation must be different from the entity of its owner
(Najid and et.al., 2016).
Monetary unit assumption – This principle states that all the financial transaction which
have occurred in a business organisation must be recorded using a same monetary unit so that a
familiarity and consistency can be maintained.
Full disclosure principle – This financial principle is a regulation of the entire business
organisation which states that all the business transactions must be recorded in the organisation’s
financial statements so that a true and fair judgement can be passed on the financial performance
and position of that company.
Going concern principle – According to this principle, a business organisation must
continue to exist regardless to the event of owner’s death. Unless, a business organisation is
dissolved, it assumed to be existed.
Materiality principle – This principle states that only monetary transaction can be recorded
in the financial statements of business entity and those transactions must be recorded as soon as
they occur so a monetary value is received or paid by the organisation.
Revenue recognition principle – Amount can be only recognised or recorded by the
organisation as soon as it is earned and not when it is received by the organisation.
Matching principle – According to this principle which acts as a guideline to business
organisations, the total of debit and credit sides of the financial statements must be equal or
matched. Expenses incurred by an entity must always be matched from the revenue generated by
that organisation (Porter, 2019).
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Principle Of Conservatism – This is one of the most essential guideline for business
organisation which state business organisations must be conservative by nature and should be
prepared for the worst. According to this principle, expected inflow of money in the organisation
must always be recorded in the organisation when it is actually received but the expected outflow
of money should be recorded when there is doubt of that outflow. This principle helps in an
organisation for future financial crises (Schroeder, Clark and Cathey, 2019).
Question 5
Profit and loss account
Particular Amount
Revenue 125000
less: sales returns 1500
Total Revenue 123500
Less: Cost of goods sold 83500
Discount received 1000
Rent received in advance 4850
Gross profit 45850
Expenses:
Rent & rates expenditure 1500
Telephone expenses 900
Insurance expenses 7500
Bad debts 1200
Depreciation 5000
Wages and salaries 13200
Provision for bad-debts (934)
Less: Bad debts written off (650) 284
Outstanding expenditure 340
Net profit 15926
Balance sheet
Liabilities Amount Assets Amount
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Capital 120800 Bank balance 10594
Less: Drawings 5150 115650 Cash in hand 340
Creditors 3900 Debtors 12500
Rent received 490 Motor expenses 25000
Reserves balance 15926 less: Depreciation 5400 19600
Suspense account 7489 Prepaid insurance 411
Loan provided 100000
143455 143445
SCENARIO 2
Question 1: Bank reconciliation
Bank reconciliation is a procedure in which an entity matches their accounting records
with the balances of the information gained from their bank statement. The two statements which
are required in this process are cash book of the entity and pass book provided by the bank.
The process of bank reconciliation is necessary for an organisation to be conducted as it
can help in ascertain the differences between the two books. The information on the bank
statement is provided by the bank and includes the bank’s record of all transactions which
impacts the entity’s bank account. There can be various reasons due to which pass book and cash
book do not reconcile and these reasons can be identified using bank reconciliation statement.
The reasons due to which preparation of bank reconciliation statement is necessary are deposit in
transit, outstanding check and NSF. When an entity deposit money value in their bank account, it
does not immediately is reflected in their pass book as the procedure of depositing the money
takes time and this time can result into non reconciliation of the both books for which BRS is
prepared (Sithole and Abeysekera, 2017).
Another reason for which BRS is necessary is outstanding cheque. Sometimes, the
business entity records an inflow of money for the received cheque value but if it is not yet been
presented or recorded to bank yet then the both books can show different value and that value is
balanced in BRS. NFS check is the abbreviation for not sufficient funds. Sometimes, business
managers receives and deposits the cheque to the bank but if the account of that account holder
does not have sufficient balance then it will get dishonoured due to which both books will not
reconcile and this difference can be addressed in BRS.
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The reconciliation between cash book and pass book can be achieved by the preparation of
bank reconciliation statement. This BRS is necessary as it can assist in elimination the difference
between both the books and also helps in maintaining the records of every error which has been
made by the management of organisation in order to make sure that such error will not be
repeated in future.
Question 2: Control accounts
Control account is a financial account which is developed to be included in general ledger.
This account sums up the balances in subsidiary accounts in order to present a summarised view
of accounts which have large number of transactions. The most common accounts of which
balances are summed by control accounts are accounts receivable and accounts payable. Both of
these accounts are documents which usually have high number of transactions and it order to
analyse them it is important to summarise them using a control account. According to the
financial accounting process the balances of such accounts are recorded into subsidiary level
ledger account rather than recording into general ledger.
Control accounts play an important role in the financial management and some points
which can represent this important role and identified below:
 The major role which control account play in financial management is that it keeps the
general ledger free from details due to which general ledger is not cluttered with a lots of
information (Thornton, 2018).
 Control account helps the financial management process to run smoothly as it provides
correct and summarised balance which helps in preparing financial statement.
 Even after recording only summarised value in the control account, the detail information
of each control account can be found in subsidiary account which assist in being cluttered
free and having all the information which can be used in auditing and developing cost
accounts.
 Generally, there are three types of control accounts including debtor’s control account,
creditors’ control account and stock control account. All these accounts play an important
role in financial management. The debtors’ control account helps in identifying the total
amount which is required to be paid by the company to their debtors. The creditors
control account helps in summarising the amount which is required to be received by the
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company and lastly stock or inventory control account helps in keeping the track of used
raw material. All these three control accounts have more transactions in a month than the
entire business have in an year, due to which it is important to develop a control account
for each of such account so that in financial statement, only balance value can be
recorded instead of recording multiple values.
Question 3: Suspense account
A suspense account is a general ledger account in which value is recorded for a temporary
period in order to identify from where that value is being received and in which account it should
be recorded. A suspense account is developed when a business entity is has left with a unknown
monetary value which has no destination to be recorded in, then a suspense account is opened to
record that value in this account but for only a temporary period so that organisation can figure
out that in which account that value should be recorded and what is its correct destination.
A suspense account is drafted by the financial accountant of an organisation and there are
various reasons due to which it is drafted and some of those main reasons are highlighted below:
 The most important reason of drafting a suspense account is to identify the reason due to
which balance of credit and debit side in trial balance do not match. Without developing
trial balance with equal sides, further financial statements cannot be developed. So, in
order continue the process of development of financial statements like income statement
and balance sheet, the suspense account is opened having the value of difference between
the credit and debit side of the trial balance.
 A suspense account is drafted when an organisation receives a payment but it is
unidentifiable that in which account that received money should be recorded. So, in order
to not to waste time and continue the process of financial statement development, a
suspense account is developed with the value of money which is received as a payment to
the company (Zhang, Low and Seow, 2020).
 Another reason of opening or drafting the suspense account is the purchase of a fixed
asset but the fixed asset is yet not revived due to which name of the seller or the invoice
number is yet to be identified. In such case, financial manager opens a suspense account
for a temporary period and as soon as the invoice and fixed asset is being received the
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amount of suspense account is transferred top the appropriate account in which it was
intended to be recorded.
Question 4
Updated cash book and Bank reconciliation statement as on 28th February 2010
Difference between direct debit and standing order, Bank charges, Dis-Houner Cheque
Direct debit Standing order Bank charges Dis-Houner
Cheque
Meaning Direct debit is a
facility which is given
to the clients of banks.
In this facility, client
can provide a direct
order to their bank for
debiting an amount
from their bank
account at a regular
interval. This facility
is a safe service
provided by banks to
This facility is
similar to the direct
debit facility but in
case of standing
order, customers are
only allowed to
order their bank to
make a payment on
their behalf when
the payment is of a
certain value pre
stated by customer
A bank charge is
a fee which is
paid by the
customer to their
banks against the
facilities used by
them. These
facilities can
include direct
debit and
standing orders
stated before.
This is a penalty
which is charge
by the bank from
their customer
when their
cheque is held as
dishonoured. It is
a penalty which
is compulsory to
be paid by the
customer.
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their customers (What
is direct debit. 2020).
at a regular interval. This fee is a
mandatory
charge to the
customer.
Example A customer can order
their bank to pay their
general utility bills
like electricity, gas
etc. at a regular
interval as these bills
became due to a
certain interval. It
must be consider that
customers can also
order to pay an
amount whenever it
becomes due in a
regular interval like a
month or quarter.
A customer can
provide a standing
order to the bank to
make a payment for
their instalment of
loan, EMI etc. as
these payments are
of fixed value and
incur at a regular
interval. This
facility can also be
used for gym
membership or a
club house
membership.
A customer has
to pay fees for
the ATM
facilities,
overdraft
facilities and
even for an extra
cheque book
request.
A cheque is held
as dishonoured if
the client’s
account does not
have sufficient
balance or if
there are few
defects in the
cheque such as
overwriting.
Question 5
Journal entries
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Suspense account
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CONCLUSION
From the above report, it has been found that financial accounting is not only a concept but
is a process which is adopted by every organisation to record their business transactions and then
develop financial statements from those records. The above report is the summarisation of
various financial concepts and accounts from which it has been concluded that financial
statements and reports are different from each other but of these are developed by using the
guidelines and principles of financial accounting. The section of the above report also helps in
reaching to the conclusion that there are accounts like suspense and control account which helps
in proper functioning of financial management process.
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REFERENCES
Books and Journals
Berry, L.E., 2018. Financial accounting demystified. McGraw-Hill,.
Cascino, S. and et.al, 2019. The usefulness of financial accounting information: Evidence from
the field. Available at SSRN 3008083.
Dutta, S. and Patatoukas, P.N., 2017. Identifying conditional conservatism in financial
accounting data: theory and evidence. The Accounting Review. 92(4). pp.191-216.
Haskin, D.L. and Burke, M.M., 2016. Incorporating sustainability issues into the financial
accounting curriculum. American Journal of Business Education (AJBE). 9(2). pp.49-56.
Horák, J. and Bokšová, J., 2018. Influence of Big Data on Financial Accounting. International
Advances in Economic Research. 24(2). pp.205-206.
Kaya, I. and Akbulut, D.H., 2018. Big data analytics in financial reporting and
accounting. PressAcademia Procedia. 7(1). pp.256-259.
Kolitz, D., 2016. Financial accounting: a concepts-based introduction. Taylor & Francis.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Najid, N.A and et.al., 2016. Use of amazacc brain teaser card for financial accounting classroom:
Non-accounting students. In Regional Conference on Science, Technology and Social
Sciences (RCSTSS 2014) (pp. 19-26). Springer, Singapore.
Porter, J.C., 2019. Beyond debits and credits: Using integrated projects to improve students’
understanding of financial accounting. Journal of Accounting Education. 46. pp.53-71.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Sithole, S.T.M. and Abeysekera, I., 2017. Accounting education: a cognitive load theory
perspective. Routledge.
Thornton, S.C., 2018. A Collection of Case Studies on Financial Accounting Concepts.
Zhang, T., Low, L.C. and Seow, P.S., 2020. Using online tutorials to teach the accounting
cycle. Journal of Education for Business. 95(4). pp.263-274.
Online
What is direct debit. 2020. [Online]. Available through:
<https://www.directdebit.co.uk/DirectDebitExplained/Pages/WhatIsDirectDebit.aspx >
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