Financial Accounting Report: Analysis of Financial Principles

This report delves into the core principles of financial accounting, examining its purpose and legal requirements, particularly within the context of a small accounting company named Brook City. It contrasts financial and management accounting, highlighting their differences in legal requirements, focus, and adherence to GAAP. The report identifies and differentiates between internal and external stakeholders, emphasizing the importance of financial information for their decision-making processes. Furthermore, the assignment provides practical examples, including double-entry bookkeeping with ledgers for various clients, demonstrating the application of accounting principles in real-world scenarios. The report covers the creation of essential financial statements such as balance sheets and trial balances, as per accounting rules and standards.

Financial Accounting
Principles

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
Financial accounting and its purpose..........................................................................................1
Legal requirements......................................................................................................................2
TASK 2............................................................................................................................................5
Client 1. ......................................................................................................................................5
CLIENT 2..................................................................................................................................14
Client 3......................................................................................................................................16
Client 4......................................................................................................................................19
CLIENT 5..................................................................................................................................19
CONCLUSION .............................................................................................................................21
REFERENCES .............................................................................................................................22

INTRODUCTION
In accounting term, financial accounting relates to the accounting standards and methods
involved in preparing the firm's crucial financial statements like trading profit and loss accounts,
cash flow statements and statements of financial position (Edwards, 2013). In general words,
financial accounting is an accounting field that is consistent with the collection, analysis and
presentation of financial data so that financial position and strength of company can be
presented to external and internal stakeholder. In order to better understand the concept of small
accounting company have been selected named Brook City which has the main function to
provide essential accounting services to number of people at initial level in London.
In this project meaning and purpose of financial accounting, difference between Financial
and Management accounting is discussed. Report also defines about the external and internal
stakeholders and the important of financial information to them in decision making. This project
also discusses about formulation of assorted accounts like bank reconciliation statement, balance
sheet, trail balance as per principles and rules of accounting.
TASK 1
Financial accounting and its purpose.
In business word, the definition of accounting defines the process of recording, reporting,
analysing and summarising useful relevant financial data (Whittington, 2016). This is consider
to be the language of finance which transmits the company financial situation to interested
parties such as manager, shareholder and creditor, so that they can translate a firm's operations
into authentic and comparable accounts. The main role to be achieved by accounting is related
with recording of the various operations that are produced within the company.
Financial accounting is a methodology of collecting and processing an organization's
financial statements that demonstrates the business's economic stability used by business-related
stakeholders to create an intelligent decision. The financial accounting method starts with the
recording of overall business dealing within journal, that are further posted into ledger and then
to check the overall accountability trail balance is prepared at the end of specific accounting
year. Financial manager are truly responsible to record and report every business dealing that
shows the actual and real value of business. This stream of accounting is total different for
management accounting because it relates to the evaluation of professional expertise, methods
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and theory in the preparation of financial reporting material in a way which assist to the
organization's management in developing policies and plans, regulating the firm's activities,
making a decision, optimizing raw material use, disclosing management and safeguarding assets
(Management accounting, 2019). There are basic differences that are discussed below:
Basic Financial accounting Management accounting
Legal requirements Public limited companies are
required by law to produce
annual financial reports
On the other side the Management
accounting is optional for
companies.
Emphasis on smaller
parts or segments
Financial accounting reports
describe the company
holistically as it focuses on
entire business of firm.
Management accounting focuses
on small parts of the organisation
for example the cost and
profitability of products or
services.
GAAP According to GAAP, financial
reports are required release and
review legislative auditors.
The management reports are never
published or audited by any of the
respective auditors.
Regulatory Framework Financial accounts must be as
per the accrual basis and must
follow the double entry system
of accounting.
To help management in
scheduling and judgement making
by offering comprehensive data on
different issues.
Conceptual Framework It is described that financial
Statements shall be ready at the
end of the accounting period.
Management reports are never
prepared on fixed date as manager
prepare them according to the
requirement of business.
Some purpose of financial accounting are discussed below:
 Preparation of financial reports: This is the primary objective of financial accounting
wherein the annual reports are made by businesses. These accounts assist businesses to
make a lot of key decision which help in growth and development. Advantageous in making comparison: This is among the most important purposes of
financial accounting, as it makes possible to compare the earnings and expenses of
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company with their preceding year which further aid businesses to create corresponding
adjustments to plans and strategies (Fraser, Ormiston and Fraser, 2010). Benefit to build strategies: Financial reports provide the entire management of Brook
City with both quantitative and qualitative information which support them develop
future policies. The manager prepare and interpret the information into useful outputs
regarding the current target that are to be focused with the assist of financial data.
 Support to stakeholders: The stakeholders should analyse profitability and possible
future situation with the help of company's financial statements. They may assess
whether to spend further or cancel their cash on the grounds of this data. It also helps the
authorities find out if the business is fluid or moving towards illness.
A stakeholder any person or entity who will take interest in the business activities and
focus on the operations that play role in failure and success of a business project. They can have
influence on decision in reference of operations and finances of a company. There are
categorised of stakeholder into two parts -
 Internal stakeholders
 External stakeholders
Both type of stakeholders aware for the other business function and take report in details.
There are defined both stakeholders in detail -
External stakeholder – These types of stakeholders are part of stakeholder who can not
take interest into daily routine activities of business but sometimes take interest. They have
different types of rights like other company members. There are consisting of various types of
stakeholders such as government, suppliers, creditors etc. All the external stakeholder wants to
earn more income from the company and on the basis of financial information invest money in
the company. Herein, below some types of external stakeholder are mentioned such as -
 Investors – These stakeholders are involved in spending cash in company procedures
and events (Hiebl, 2014). The purpose of investors to earn more profit from their invested
money so fulfil the purpose they were taking interest into financial information. They are
taking meeting and right to provide suggestion regarding to company policy. On the basis
of financial report they take decisions about whether they should invest or not. In the lack
of reviewing the company's economic data, asset allocation can be hard for them
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 Government – In different countries, the government apply different rules and
regulations and play valuable role as external stakeholders. The set rules and standards
adopted by the companies and fulfil the requirement to survive their company in the
market. Therefore, the government present interest to discover financial information as
the purpose of calculate tax of the company on the basis of their revenue.
 Suppliers – They are providing raw material and other required things on the time for
continue procedure of the company. Thy are making transaction in two different ways
such as on credit and on cash. The credit transaction done by the company when they
have good reputation in the market and also analysis their financial transaction. To fulfil
the purpose suppliers take interest into financial information of the company. While
company have not good reputation and have not sufficient financial condition that time
they will not take interest to make transaction on credit basis (Weil, Schipper and Francis,
2013).
 Creditors - These are types of shareholders that provide businesses with economic help
if they need it. In exchange, they receive value on the quantity lent. Herein, it is valuable
for the creditors to analysis the financial situation of company before providing financial
services. Firstly they ensure about the company it will return amount in future with
interest amount. So they are taking interest to analysis of financial information.
Internal stakeholders – The internal stakeholders are those type persons who always
available into daily routine activities of company. It means they are working in the company and
take decision on internal basis. There are defined some examples of internal stakeholders such as
manager, employees, board of directors etc.
 Employees: These types of stakeholder are working in the company and conduct daily
routine activities & operations. For this they get wages, salary and any other monetary
interest. They can play important role in the company and financial information of an
organisation depend on them. The staff members assure about the financial situation of
company due to their growth and development connected with them (Kotas, 2014).
 Board of directors: Board of directors are valuable internal stakeholder who take
effective decision regarding to company on the basis of financial information. They are
most valuable because they were responsible for developing and executing business
policies as per the situation of the company. They take interest into financial information
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in an organisation to make future plans and think about further investments as per the
policies.
TASK 2
Client 1. Double entry with ledgers:
Date Particulars..... Debit Credit
01/01/19 Premises A/c....................................................................Dr. 240000
Motor Van A/c.................................................................Dr. 51250
fixtures A/c................................................................ Dr. 8100
Inventory A/c................................................................ Dr. 23900
P Mole A/c................................................................ Dr. 4400
F Lane A/c................................................................ Dr. 6100
Bank A/c................................................................ Dr. 68400
Cash A/c................................................................ Dr. 15600
To S Hood A/c 12150
To J. Brown A/c 16600
To Capital A/c (Balancing Figure) 389000
(Being Owner's Capital is calculated )
Therefore, Alexandra Study's Capital at 1st January
= £ 389000
Date Particulars Debit Credit
01/01/19 Storage cost A/c...............................................................Dr. 450
To bank A/c 450
(Being storage cost is paid)
02/01/19 Purchases A/c ................................................................Dr. 7680
To S Hood A/c 1450
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To D Main A/c 2060
To W Tone A/c 960
To R Foot A/c 1610
(Being goods purchases on credit from various parties)
03/01/19 J Wilson A/c ................................................................ Dr. 1200
T. Cole A/c ................................................................ Dr. 1650
F. Syme A/c ................................................................Dr. 2100
J. Allen A/c ................................................................ Dr. 1020
P. White A/c ................................................................Dr. 2520
F Lane A/c ................................................................ Dr. 980
To Sales A/c 9470
(Being goods sold on credit to various parties)
04/01/19 Motor Expenses A/c …..................................................Dr. 470
To Cash A/c 470
(Being motor expense is paid)
07/01/19 Capital A/c................................................................Dr. 1500
To Cash A/c 1500
(Being cash withdrawal by owner himself)
09/01/19 T. Cole A/c................................................................ Dr. 680
J. fox A/c................................................................ Dr. 1310
To Sales A/c 1990
(Being goods purchase on credit with various parties)
11/01/19 Sale Return A/c............................................................. Dr. 680
To J. Wilson A/c 270
To F. Syme A/c 410
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(Being goods is returned back by the parties
16/01/19 Bank A/c................................................................ Dr. 7020
To P. Mullen A/c 1400
To F. Lane A/c 3100
To J. Wilson A/c 850
To F. Syme A/c 1670
(Being Payment received from various parties)
19/01/19 R Foot A/c ................................................................ Dr. 50
To Purchases Return A/c 50
(Being Goods is returned to creditor)
22/01/19 Purchases A/c................................................................ Dr. 3740
To L Mole A/c 1830
To W Wright A/c 1910
(Being goods purchased on credit)
24/01/19 S Hood A/c ................................................................ Dr. 3600
J Brown A/c ................................................................ Dr. 4600
R Foot A/c ................................................................ Dr. 1400
To Bank A/c 6000
(Being payment is made to creditors)
27/01/19 Salaries A/c ................................................................ Dr. 4800
To Bank A/c 4800
(Being salaries are paid through cheque)
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30/01/19 Business Rates A/c.........................................................Dr. 1320
To Bank A/c 1320
(Being business rates are paid through cheque)
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Trial Balance as at 31st January 2019 in the books of Alexandra Study:
Trial Balance for the month of July....
Particulars Debit Credit
Storage Cost 450
Purchase 9820
Sales 11460
Motor Expenses 470
Cash At Bank 52680
Cash In Hand 20200
Payables:
S. Hood 10000
J. Brown 12000
W Tone 960
R Foot 160
L Mole 1830
W. Wright 1910
D Main 2060
Premises 240000
Van 51250
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Fixtures 8100
Inventory 23900
Receivables:
P Mullen 3000
F Lane 3980
J Wilson 80
T Cole 2330
F Syme 20
J Allen 1020
P. White 2520
J Fox 1310
Sales Return 680
Purchase Return 50
Salaries 4800
Business Rates 1320
Capital 387500
Total 427930 427930
CLIENT 2
Q.(1). Statement of Profit and Loss of Munteanu Ltd. For the year ended 31st December
2018:
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Q.(2). Statement of financial position of Munteanu Ltd. As at 31st December 2018:
Statement of financial position of as at 31st December 2018
Assets Amount in EUR
Land 20000
Building 40000
Less: Accumulated Depreciation 10000
30000
Depreciation for the year 800 29200
Plant and machinery 60000
Less: Depreciation 20000
40000
Depreciation for the year 8000 32000
Total non-current assets 81200
Inventories 20000
Prepaid Rent 3000
Accounts receivable 26000
Total current assets 49000
Total assets 130200
Equity and liabilities
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Share capital 40000
Share premium 20000
Retained Earnings including current year profit 26200
Equity 86200
Current and other tax liabilities 2000
Accrued salaries 2000
Bank Overdraft 18000
Accounts payable 22000
Total current liabilities 44000
Total equity and liabilities 130200
(c) Various kind of accounting concepts:
Consistency concept: According to this concepts, companies must obey an equivalent
financial reporting concept when any concept has been implemented so that the company's
financial statements can become reliable (Liao, Morris and Tang, 2013). In certain words,
businesses should attempt to introduce the same principle of accounting as in previous years as it
make easy to compare from the current year. Finally, in the lack of this concept, organizations
will find it very difficult to systematically analyse the financial statements. Generally speaking,
the company ignores the consistency concept of accounting in order to display the higher profit
in the annual statements.
Prudence concept: These accounting ideas respond to a company that does not overstate
its income and undervalue the amount of spending. It is basic accounting process ideas that
produce more reliable data to the management of company for reporting. Principles of prudence
usually practice in placing the quantity on obsolete inventory for doubtful bonds or reserves.
Financial statement are more accurate and reliable and the facts and figures which are recorded
by using this concept.
(d) Depreciation's purpose in formulating the financial statements.
Deprecation is described as the value of any respective assets of company that keeps on
decreasing year by year. This is actually the charge to the assets as per the continuous use and
physical damage that further supportive to assess the actual cost of these assets during the rest of
life. There are different methods to ascertain the value of deprecation such as:
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Straight line method: This technique is also recognized through the set installation
technique used to determine the bearing value of any specific fixed asset over the whole lifetime.
Mainly company uses this method only for those assets whose value have been decreasing at a
fast pace during its working life (Marshall, McManus and Viele, 2011). There are few steps
which are required to calculate deprecation such as:
 Investigation of the original fixed asset costs
 Subtracting the fixed asset scrap value from book value.
 Determining the asset's projected existence
 Multiply the rate of depreciation and the price of assets.
Reducing balance method: This is a sort of technique used for calculating the
depreciation value depends on a fixed rate which is equal to the straight line technique. In this
method the percentage of the price is not calculated according to asset price because the value is
calculated on the book value of fixed asset.
(e) Difference between the financial statements of sole traders and of limited companies:
Basis of
difference
Sole traders Limited company
Auditing In the financial statement of the sole
traders, there is no need to conduct the
auditing of the financial statements.
In the limited company's financial
statements, it is vital that the
businesses perform the audit in order
to measure the effectiveness of the
financial statements that are prepared
annually.
Preparation of
financial
statements
The financial statements are mainly
formulated by the responsible owner.
In limited companies, financial
statements are basically formulated by
internal accountant.
Amount of
transaction
Due to small business size, there are
fewer economic transactions in the
sole traders companies (Rutherford,
2013).
Similarly within these kind of
companies, there are more number of
financial dealing.
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Client 3
Meaning Purpose of the bank reconciliation statement
Bank reconciliation is an essential tool to match the records of user with their banks at the
end of the month. Accountants evaluates the closing balance of bank books with the closing
balance of the cash book with user accounts. This evaluation helps in determining the reasons of
having the mismatch of closing balances. After detecting the reasons, adjustment is made with
determined formats and controls. The main purpose of preparing bank reconciliation is to ensure
the owners of business for better management of financial transactions and creating a transparent
bond between the bank and organization.
Reasons of preparing BRS on monthly basis
Small entities prepare the BRS on monthly basis however the large companies maintain
BRS on daily and weekly basis. Main reason of preparing Bank reconciliation statement is to
reduce the burden of monthly checks and reducing the amount of errors and omissions. The
statement not only reduce the errors but also helps in compensating the additional bank charges
and expenses. There are kind of reasons found in the end of every month that creates the
differences between the balances of cash and bank account. These reasons are defined as
follows:
 Lack of awareness about bank charges: It is the primary reason due to which bank
statements differ from the money records because owing to the service bank provide, thus
it accepts some amount which is bank transaction fee. Bank does not instruct the client
about this charges and that becomes a main reason for differences (Schroeder, Clark and
Cathey, 2009).
 Direct debited interest by bank: Usually bank charge some interest according to the
loan amount directly to the bank account of specific customer. Thus it become the reason
of difference because these amount are not included in the cash books.
C) Imprest: In accounting, the system that have been created to record and trace the
documents and transaction of cash is consider as imprest system. If a company utilizes the
imprest scheme, an imprest account will be created to compensate for fairly small, regular, or
indirect expenditures. This account seems to have a set balance and is recharged with some other
account, like cashing a bank account check. Some of the common example of imprest accounts
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manager use to create and distribute a specific amount of cash for petty cash fund which is
recorded into separate account within general ledger.
(D) Cash book for Burcu limited for September, 2018:
Particulars Amount
Bank Balance as per pass book 398
Add: Items having effects of higher balance in cash
book
 Bank charges not recorded in cash book...... 36
 Adjustment for direct debit rates.............. 105
Less: Items having effects of lower balance in cash
book
Payments to:
 C David 122
 S Leeming 116
 C Lyons 87
Bank balance as per cash book 214
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Client 4.
(a) Prepare and balance in the books of Hilly for January, 2018-
(I) Sales ledger control account:
(ii) Purchase ledger control account:
Purchase Ledger Control A/c
Particulars Amount
(£)
Particulars Amount
(£)
Discount Received....... 850 Balance b/d............ 11360
Purchase Return.......... 3110 Credit Purchase................... 126500
Bank/ Cash (Payment to
suppliers)..............
91010 Bank (Refund from
supplier).............
500
Set-off (Transfer from sales
ledger)............
640
Balance c/d.......... 42750
Total 138360 Total 138360
Balance b/d 42750
Control accounts: An account which is part of general ledger that contain the accurate
summary of amount is known as control accounts (Trotman and Carson, 2018). The furthermore
detail of every control accounts are determined in the relevant subsidiary accounts. For example
accounts receivable account detail are transferred into customer ledger balance and rest of the
summary are posted within control accounts.
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CLIENT 5
Q.(i) Suspense Account and its main Features:
In accounting world, a kind of account which is used to record of different unclassified
business transaction is known as suspense accounts. The main use of this accounts is to hold the
transaction for temporarily basis unless and until it is properly checked and classified. Some of
the main features of suspense accounts are as follows:
 This accounts help company to maintain books balanced in systematic and appropriate
manner (Trucco, 2015).
 With the help of this accounts responsible accountant can easily determine the issue of
commission, omission etc.
 Suspense accounts gives a legal framework which ease in ascertaining any wrong amount
entered into accounts.
Q.(ii) Trail Balance by using a control account as balancing Figure:
Q.(iii) Correction through journal entries:
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CONCLUSION
In conclusion it is found that the financial accounting is a system for collecting,
summarizing and subsequently reporting of company activities is an significant component for
any business organization. Consideration of different strategies, procedures, laws and regulations
enhances reporting and helps to prevent any difficulty. Organization should create modifications
in accordance with new or amended accounting measures and laws. In lack of any information to
any transaction, suspense account is used to record these transaction for temporary basis.
Furthermore, it is found that a business need to use its bank reconciliation accounts to fit its cash
book records including its pass book entries given by bank.
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