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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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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