Financial Accounting: Principles, Stakeholders, and Statements

This report delves into the core principles of financial accounting, presenting a detailed exploration of its purpose and application. The report begins by defining financial accounting and its significance, followed by an examination of both internal and external stakeholders within a large business organization, highlighting their specific interests in financial information. The main body of the report includes practical examples of double-entry bookkeeping, trial balance, statement of profit and loss, and statement of financial position. It further elaborates on key accounting concepts such as consistency and prudence, along with a discussion on depreciation methods and their role in accounting. The report also addresses bank reconciliation statements, including their purpose and the factors that may cause discrepancies between bank and company records. Furthermore, it covers sales and purchase ledger control accounts, suspense accounts, and journal entries. Overall, the report provides a comprehensive analysis of financial accounting, supported by practical examples and real-world scenarios.

FINANCIAL ACCOUNTING
PRINCIPLES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Defining financial accounting and its purpose........................................................................1
2. Naming two internal and four external stakeholders of large business organisation and
reason behind their interest in financial information of entity....................................................3
CLIENT 1........................................................................................................................................5
1. Completing double entry recording within the relevant ledger..............................................5
2. Trail balance at 31st January 2019........................................................................................13
CLIENT 2......................................................................................................................................14
(A.) Statement of profit and loss of Munteanu Ltd...................................................................14
(B.) Statement of financial position of Munteanu Ltd..............................................................14
(C.) Explaining the following accounting concepts..................................................................15
(D.) Describing the purpose of depreciation in formulating accounting concept with its two
widely used methods.................................................................................................................16
(E.) Critically evaluating difference between financial statements prepared by sole trader and
the limited companies...............................................................................................................17
CLIENT 3......................................................................................................................................17
(a.) Explaining the purpose of bank reconciliation statement with reason of performing
statements on monthly basis......................................................................................................17
(b.) Listing some areas which may cause record vary from the bank records..........................18
(c.) Explaining the term 'imprest' which used in petty cash system..........................................18
(d.) Bank reconciliation statement as at 30 September 2018....................................................18
CLIENT 4......................................................................................................................................20
(a.) preparation of sales and purchase ledger control account..................................................20
(b.) Explaining need for preparing control account and the term control account....................20
CLIENT 5......................................................................................................................................21
(a.) Describing the term suspense account with its main features............................................21
(b.) Trial balance from the figures............................................................................................22
(c.) Preparation of journal entries with suspense account.........................................................22

CONCLUSION..............................................................................................................................23
REFERENCES.............................................................................................................................24

INTRODUCTION
Financial accounting principles are the rules and guidelines which must be followed by
entity while reporting financial data in entities books of accounts. It is the specialised branch of
accounting which generally keeps track on financial transactions of the entity (Peterson,
Schmardebeck and Wilks, 2015). For the present report, selected small accountancy firm is
Howlader & Co. which is a group of chartered accountants that provides services as both tax
advisers and CA. In this report, explanation will be provided on financial accounting and its
purpose with two internal and four external stakeholders of organisation. Further, study will be
discussed on the interest of each stakeholder’s in the financial information of the entity.
Moreover, this report will also provide explanation related to methods of depreciation and need
of bank reconciliation statements.
MAIN BODY
To,
The Line manager
Howlader & Co,
Date: 16 march 2019
This is to inform you that for smooth running of business, here are some accounting rules and
regulations which our company is aware about it.
1. Defining financial accounting and its purpose
Financial accounting is a special branch of accounting which mainly helps entity to keep
track of accounting transactions of the entity. It is the field of accounting which mainly
concerned with the summary, analysis and reporting of financial transactions. This is an area of
accounting which focuses on providing information related to internal and external business
affairs to its users, stakeholders and creditors. Financial statements are issued by entity on their
routine schedule and such statements are given to people outside the company so that they are
able to take decision regarding investing their money on capital of the firm.
In other words, financial accounting is also known as field of accounting which treat money as
a means of measuring entity's economic performance rather than measuring as the factor of
production. It is also considered as process under which complete monitoring and control of
money takes place in order to analyse the amount of money which flow in and out from
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organisation in the context of assets and liabilities. Thus, it can be said that financial accounting
is the process which keeps on track the cash flow of entity in order to run business with the long
term perspective.
However, it is a fact that financial accounting is mainly termed as the language of business
which main function is to serve communication. Thus, in order to protect the interest of the
shareholders, financial accounting is governed by both local and international accounting
standards. Through such accounting, Howlader & Co. will able to disclose its financial
capabilities and its performance in business market to the general public and to its stakeholders.
Its main purpose are as follows-
Main purpose of financial accounting is to provide the information which is important in
terms of decision making process of the entity. It is important to analyse that purpose of
financial accounting is not to report the business transaction. Rather, its goal is to provide
enough information to users and customers so that they will able to assess the value and
capability of company for themselves.
Its role is to prepare effective financial reports which will provide information regarding
the performance of the firms to its internal and external stakeholders such as investors,
creditors, manager and customer as well. It is a process through which company's revenue,
receivables, incomes and expenses are generally collected, measured and reported in the books
of accounts. Thus, it can be said that its purpose is to collect information regarding business
results, its financial capabilities and cash flow of organisation.
The other additional purpose of the financial accounting is as follows-
Credit decision: financial statements used by the lender for analysing entire set of
business information in order to determine whether the money which they have invested in
company will need to be extended or to be restricted. Thus, through this information, entities
will able to attract more support from the creditors.
Investment decision: financial statements are provided to investor so that they will use
such information in order to decide whether to invest on entity's business capital or at price per
share (The purpose of financial statements, 2018). Such information will analyse by them to
decide capability of the firm to provide adequate return.
Taxation decision: purpose of financial accounting is to serve the financial statements to
government or tax authorities so that they will able to charge tax on business by analysing
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company's assets and income.
Union bargaining decision: other purpose of financial accounting is to serve
information of business transaction to unions on which they can base their bargaining position
by analysing ability of the company to pay benefits to employees.
2. Naming two internal and four external stakeholders of large business organisation and reason
behind their interest in financial information of entity
Generally, stakeholders in every organisation plays an important role whether in terms
of decision making process or in terms of investment. These are the group of people which may
or may not be affected by the business actions. Thus, basic definition of stakeholder state that
those group of people without which support a business cease to get exist. There are two types
of stakeholder which include internal and external. Employees, managers and owners are the
group of internal stakeholders and suppliers, government, customers and shareholders are the
groups external stakeholders.
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Illustration 1: internal and external stakeholders
(source: Identifying and managing internal and external stakeholder interests,
2017)

The interest of each stakeholder behind the financial information of the entity is as follows-
Customers: These are the major important group of stakeholders for any type of
organisation whether it is small or large. In fact, it is said that business exist only to serve its
customers. Customers are known to be an actual stakeholder for enterprise and mainly impacted
by the service quality and its value. They are interested in company's financial information in
order to analyse the financial capability of the firm to serve them for the long term perspective.
They are generally interested in knowing the financial strength of the entity.
Employees: These are the group of stakeholders which has direct interest in entity's
financial information. Reason behind such interest is that they earn to provide support to
themselves and other too. They are interested towards profitability and stability in order to
analyse the ability of the company for paying their salaries and benefits (Interested parties of
financial statements, 2019). They are also interested to analyse their career development
opportunity in such enterprise.
Management: these are the group of stakeholders which has the deep interest in entities
financial as well in performance information. For small businesses are known as owners and are
hired professional to whom all the responsibility of the business operations are given.
Therefore, their interest in financial information of entity is for analysing the amount of
supplies which company purchased, cash inflows and outflow in the entity and profit which
earn last year so that sound economic decision will get developed for further business
operations of the entity.
Suppliers: they are the group of stakeholder which generally sells goods and services to
business and mainly rely only for the revenue generation with current business operations of
entity. They are the group which directly involved in companies’ operations (Mio, 2016). They
are interested in financial information in order to analyse the ability to pay obligation when it
becomes due. In simple terms, they are interested in liquidity position of the company and its
ability for paying short term obligations.
Government: they are also considered as major stakeholder group of business as
government collect taxes from both company and from its employees. This group is generally
interested in company's financial information for the purpose of taxations and regulatory
purpose. Government charge tax on the basis in entity's business operations result so that tax
will get charged on them. They are also interested in analysing amount of money which paid by
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taxpayer is correct or not.
Shareholders: These are the group of stakeholders which owns share in business with
the motive of getting return on capital. In general sense they are the real owners and has deep
interest in financial information of the entity. They want financial information in order to
analyse the way entity is utilizing their money which invested and ascertaining the profitability
and capability of the enterprise.
Thus, these are the two internal and four external stakeholders of the large business and
their interest towards financial information of the company. In simple terms, all these group are
interested in order to analyse the capability and strength of firm in business market.
From-
Junior Accountant
CLIENT 1
1. Completing double entry recording within the relevant ledger
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6

7

Sales Ledger
8

Cash Book
9

10

11

12

13

2. Trail balance at 31st January 2019
14

CLIENT 2
(A.) Statement of profit and loss of Munteanu Ltd.
(B.) Statement of financial position of Munteanu Ltd.
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(C.) Explaining the following accounting concepts
Consistency:
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According to the term consistency accounting concept, accounting method which once
adopted by company must be applied consistently in future as well (Mora and Walker, 2015).
Entity will not be allowed to change method which has been adopted but the only way of
changing the method is applicable if there is new version available which will further help in
improving financial result of the company.
Prudency:
Concept of prudence requires that accountant needs to take proper care in the adoption of
policies and in estimating the assets and income of the entity. It is the concept which states that
an entity must not to overestimate its amount of revenue recognised and besides this entity do not
have to underestimate the amount of liability, losses and expenses (Barker, 2015). Management
must have to conservative in order to record the amount of assets and not to underestimate the
liabilities.
(D.) Describing the purpose of depreciation in formulating accounting concept with its two
widely used methods
The purpose of calculating depreciation is to match the cost of productive assets of
company by comparing it to the revenue which has been earned with the use of such asset.
However, another purpose of depreciation is to charge expense to a portion of the asset so that
revenue which generated with the use of such asset will be evaluated (Maynard, 2017). It is an
allocation process so that matching principle gets achieved.
Its two most widely used methods are as follows-
Straight line method:
It is a common and simple method in order to calculate the expenses. In this method,
amount of expense remains same every year which is over the useful life of assets. It gets
calculated by subtracting the scrap value of assets from its original price. Practically this method
is used when no reliable estimation will get made regarding the pattern of economic benefit
which will expected to drive over an useful life of an asset.
Reducing balance depreciation:
This is the method in which amount of depreciation changes over the time period. This
method is generally most useful for such types of assets which typically lose their value from the
very beginning period (Warren and Jones, 2018). It is also considered as the accelerated
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depreciation method. Practically this method will get used when asset has higher utility or
productivity at a beginning of its useful life.
By comparing both the methods, straight line depreciation method is the one which is
most commonly and widely used because it is very simple in order to calculate the value of asset.
(E.) Critically evaluating difference between financial statements prepared by sole trader and the
limited companies
Basis of difference Sole trader Limited companies
Number of items In the financial statement of
sole trader, owner's equity has
only one item which is known
as owner's equity account.
In financial accounts of such
companies, owner's has share
capital, retained earnings,
other revenue and capital
reserves.
Tax charged Generally tax gets charged on
income of the owner and sole
proprietorship
(Narayanaswamy, 2017).
In the financial statements of
such companies, tax has been
separately imposed as it is a
separate legal entity.
Methods of financial
statements
In this process, owners will
only decide whether
statements needs to prepare or
not.
In order to prepare financial
statements, entity must have to
follow proper accounting
concept, principles, rules and
other regulatory frameworks.
CLIENT 3
(a.) Explaining the purpose of bank reconciliation statement with reason of performing
statements on monthly basis
Bank reconciliation statements are used for comparing cash book record to those of the
bank in order to analyse any difference between these two sets of cash transactions. Ending
balance of the cash records is known as the book balance while ending balance of cash record
will know as bank balance (Gitman, Juchau and Flanagan, 2015). Its purpose is to carried out
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uncover and correct any type of error while recording payment which mainly made from the
bank accounts.
BRS is prepared on monthly basis in order to check that whether bank related
transactions are recorded properly or not in cash bank column as well as in bank statements. By
preparing such statement on monthly basis, Burcu Ltd. entity will able to add or subtract fees and
interest which charged by bank sometimes.
(b.) Listing some areas which may cause record vary from the bank records
Some areas because of which difference between the balance of the bank statements and
books of accounts gets generated are as follows-
 Outstanding checks
 Deposit in transit
 Bank service charges
 Check printing charges
 Errors on the books of company
 Electronic charges
The difference gets raise because mismatching between the items which are already
recorded in general ledger accounts but do not have appeared on the bank statements will create
difference in the areas and because of which record get very from the bank statements (Del
Giudice, Manganelli and De Paola, 2016).
(c.) Explaining the term 'imprest' which used in petty cash system
Imprest is the type of petty cash system under which round sum of money is estimated
because of necessary possible need of business in order to meet the expenses of petty cash
(Küpper and Pedell, 2016). Under this system, petty cash custodian at all times must have a
combination of the currency, coins and receipts. Thus, this is an accounting system which is
designed for tracking and documenting cash which is being spent.
(d.) Bank reconciliation statement as at 30 September 2018
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CLIENT 4
(a.) preparation of sales and purchase ledger control account
(b.) Explaining need for preparing control account and the term control account
Control account is the type of general ledger account which only contain summary of the
books of accounts. Details of this account will be recorded and founded in the subsidiary ledger.
This is the account which contains total of aggregate transactions which are individually
recorded in subsidiary ledger (Maffei, 2016). It is considered as one of the most up-to-date
balance in a particular time period which generally helps in keeping the trial balance neat and
clean.
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The purpose of preparing control account is to keep the general ledger nice and clean
which is without any details, errors and only correct will be used for preparing the financial
statements.
CLIENT 5
(a.) Describing the term suspense account with its main features
Suspense account is the general ledger account which is used by the accountant of entity
for recording transaction on temporarily basis (Harrison and van der Laan Smith, 2015). It is
only used when appropriate transactions of the general ledger account would not be determined
at the time when it was originally recorded. Thus, to keep trial balance account matched,
suspense account has been created. It is important for the firms to keep the unidentified amounts
in a type of separate account so that whole process of making financial statements did not get
mismatched. When correct amount gets identified such transaction will get posted to original
ledger.
Its main features are as follows-
It balance the trial balance:
It is very important that in order to prepare perfect financial statements, there is a need
that trial balance will get agree. If it does not get agree than the whole process of preparing final
accounts gets wrong.
locating the error:
Another feature of suspense account is to locate the errors because if it is not available
then accountant will not able to find the errors which was committed in the past.
Balance which occurred in suspense account will help accountant to locate the accounting
transaction error it helps account in determining the head under which there are might be chances
of have the error or it has been committed.
It rectifying one-sided error entirely:
Through this account, entity's accountant will able to detect the error and once it has been
detected then the amount was transfer to its original account (Gordon, Raedy and Sannella,
2016). Therefore, it generally helps in rectifying whole one-sided error entirely whether it is
debit or credit.
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(b.) Trial balance from the figures
(c.) Preparation of journal entries with suspense account
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CONCLUSION
From the above report it can be concluded that financial accounting principles plays an
important role in order to correctly disclose the performance of the entity among its users and
stakeholder. In this report, study has been discussed in the purpose and meaning of financial
accounting where it is analysed that its main purpose is to provide useful information to users of
the company so that they will able to take sound economic decision. Further, in this report
explanation has been provided on two internal and four external stakeholders and their need for
the financial information of company. Moreover, explanation also has been provided on the
concept of consistency which indicates method which once adopted by company must be applied
consistently in future as well
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REFERENCES
Books and Journals
Barker, R., 2015. Conservatism, prudence and the IASB's conceptual framework. Accounting
and Business Research. 45(4). pp.514-538.
Del Giudice, V., Manganelli, B. and De Paola, P., 2016, July. Depreciation methods for firm’s
assets. In International Conference on Computational Science and Its Applications (pp.
214-227). Springer, Cham.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Gordon, E. A., Raedy, J. S. and Sannella, A. J., 2016. Intermediate accounting. Boston, MA:
Pearson.
Harrison, J. S. and van der Laan Smith, J., 2015. Responsible accounting for
stakeholders. Journal of Management Studies. 52(7). pp.935-960.
Küpper, H. U. and Pedell, B., 2016. Which asset valuation and depreciation method should be
used for regulated utilities? An analytical and simulation-based comparison. Utilities
Policy. 40. pp.88-103.
Maffei, M., 2016. Amortization and Depreciation. Global Encyclopedia of Public
Administration, Public Policy, and Governance. pp.1-7.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Mio, C. ed., 2016. Integrated reporting: A new accounting disclosure. Springer.
Mora, A. and Walker, M., 2015. The implications of research on accounting conservatism for
accounting standard setting. Accounting and Business Research. 45(5). pp.620-650.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning Pvt.
Ltd..
Peterson, K., Schmardebeck, R. and Wilks, T. J., 2015. The earnings quality and information
processing effects of accounting consistency. The accounting review. 90(6). pp.2483-2514.
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Online
Identifying and managing internal and external stakeholder interests. 2017. [Online]. Available
through <https://www.healthknowledge.org.uk/public-health-textbook/organisation-
management/5b-understanding-ofs/managing-internal-external-stakeholders>
Interested parties of financial statements. 2019. [Online]. Available through
<https://accountlearning.com/interested-parties-of-financial-statements/>
The purpose of financial statements. 2018. [Online]. Available through
<https://www.accountingtools.com/articles/what-is-the-purpose-of-financial-
statements.html>
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