Financial Accounting Report: Principles, Statements, and Application

This report provides a comprehensive overview of financial accounting, focusing on the preparation of financial statements such as the balance sheet, income statement, and cash flow statement. It begins with an introduction to financial accounting and its importance, followed by a detailed discussion of accounting principles and concepts, including the roles of professional bodies like the FRC, IASB, and IFRS, and the application of GAAP rules. The report emphasizes the significance of financial accounting for stakeholders' decision-making. It covers topics such as journal entries, ledger accounts, trial balance preparation, and the application of accounting concepts like consistency, prudence, and materiality. Furthermore, the report includes examples of bank statements, cash books, and reconciliation processes. The report highlights the importance of preparing financial statements in compliance with accounting principles and regulations and provides a practical guide to various financial accounting aspects.

Financial Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
A. Preparation of report for Line Manager on accounting principles....................................1
CLIENT 1........................................................................................................................................6
1. Journal entries for firm.......................................................................................................6
2. Preparation of ledger accounts...........................................................................................6
3. Producing trial balance.......................................................................................................6
M1. Transaction of purchase and sale to prepare trial balance..............................................6
D1. Producing trial balance by using accounting concepts....................................................6
CLIENT 2........................................................................................................................................7
A Preparation of Income statement for the organisation........................................................7
B Statement of financial position for Peter Piper organisation..............................................7
CLIENT 3........................................................................................................................................7
A Income statement for Raintree organisation.......................................................................7
B Statement of financial position for organisation.................................................................7
C Consistency and Prudence concept.....................................................................................8
D Highlighting purpose of deprecation and methods of charging deprecation......................8
M2 P&L account, balance sheet and cash flow statement.....................................................9
D2 Preparation of the financial statements.............................................................................9
CLIENT 4........................................................................................................................................9
A Bank statement...................................................................................................................9
B Outlining causes of recording bank statements..................................................................9
C. Cash books.........................................................................................................................9
M3 Reconciliation process and relevant terms.......................................................................9
D3 Producing BRS.................................................................................................................9
CLIENT 5........................................................................................................................................9
A Sales and purchase ledger account for Henderson.............................................................9
B. Control account................................................................................................................10
CLIENT 6......................................................................................................................................10
A Suspense account and highlighting features of the same.................................................10

B. Trial balance....................................................................................................................10
C. Constructing journal entries.............................................................................................10
D. Distinguishing clearing and suspense account................................................................10
M4 Various types of accounts and reconciliation................................................................10
D4 Outlining accounting methods for firm..........................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial accounting is the main branch of accounting which helps in preparation of
various financial statements such as balance sheet, income statement, cash flow statement and
statement of changes in equity. These statements are required to be prepared by complying with
the provisions and guidelines provided by professional bodies so that adequate financial
statements may be prepared quite effectively. The present report deals with financial accounting
principles and methods and importance to company. The report also highlights preparation of
trial balance and preparation of balance sheet and income statement for organisations. Moreover,
it also deals to comply with various accounting principles and concepts so that adequate financial
information may be prepared and provided to various stakeholders to take effective decisions.
A. Preparation of report for Line Manager on accounting principles
To: Line Manager
From: Junior Accountant
Subject: Providing accounting principles and regulations for adequate financials of the
company
Respected Sir,
Accounting principles are required to be adopted by company so that financial
statements may be prepared with much ease and carry proper information to be imparted to
various stakeholders' of the company. Accounting professionals or accountants are under duty
to prepare accounting records by complying accounting principles and concepts so that
adequate and proper records may be made and as such, financial statements may be
consecutively prepared. The financial statements must be prepared in proper manner so that true
and fair financial health of the company may be provided to stakeholders' for taking better and
effective decisions quite effectively (Warren and Jones, 2018). This task is not an easy one but
requires that accountants follow prescribed rules and concepts of accounting so that financial
statements may be prepared and as such, stakeholders' may take decisions with much ease. The
stakeholders consist of government, suppliers, investors, creditors, management and many
more. These stakeholders' whether internal or external are required to analyse financial health of
the company so that they may assess its financial position with much ease. This helps them to
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take effective decisions for their individual benefits.
1. Enumerating financial accounting
Financial accounting is a branch of accounting that records daily transactions of
business in books of accounts. As such, each and every record is maintained effectively. The
records are maintained in various books of accounts namely purchase book, day book, sales
book etc. Journal entries are made in chronological order and as such, entries are posted in
ledger. From this process, trial balance is prepared to check accuracy of the accounting records
maintained in these books of accounts. Finally, financial statements such as balance sheet,
Profit & Loss account and cash flow statement are prepared which clearly exhibits financial
health of organisation quite effectively. Thus, such information is then provided to various
stakeholders to take better and enhanced decisions. Financial accounting is also known as
historical accounting as it takes past data or summary of records which is then used to prepare
financial statements. Financial accounting is the base for preparing managerial reports which
are then utilised by managers to take better internal decisions by analysing financial statements
with much ease (Campbell, Khan and Pierce, 2017). External stakeholders such as creditors and
investors require financial statements of the firm so that they take decisions whether to provide
funds to firm or not. As financial position is provided to stakeholders', they take enhanced
decisions in the best possible way.
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The above diagram shows various financial statements which are prepared by business
so that financial information may be provided to users of it with much ease. External and
internal stakeholders' are enhanced by financial statements as it provides clear information to
them regarding financial health of organisation. Moreover, financial information is also used by
taxation authorities so that tax may be paid by company and no tax evasion may be made. As
such, they rely on accuracy of financial statements which provides required information to
them. As a result, it can be said that financial accounting is helpful for various stakeholders to
draw meaningful information for taking enhanced decisions.
2. Financial accounting concepts and rules
Accounting records are maintained so that financial statements are prepared quite easily.
But for achieving this task, certain accounting rules need to be followed by accountants so that
no errors may be made and final accounts of company may exhibit true information. As such,
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accounting concepts are required to be followed so that manipulation in accounting records may
not be made. As such manipulation leads to false and wrong financial information which is of
no use to accounting users of information. The manipulation in accounting means that firm
hides net profit or makes certain other tactics so that they may reveal false information to
taxation authorities and other stakeholders' to predict financial health of company sound enough
(Narayanaswamy, 2017). This leads to false information and as such, accounting rules and
concepts are provided by professional bodies so that true financial information may be imparted
by business quite effectively to stakeholders' for taking better decisions. In relation to this, UK's
corporate regulator has issued FRC guidelines to be followed by accountants so that they may
prepare financial statements with reference to such guidelines. The regulations help firm to
exhibit true information and as such, stakeholders' may take better decisions.
Legal frameworks imparted by professional bodies are as follows:
FRC (Financial Reporting Council) : This professional body is formed legally and is formed as
limited guarantee with respect to shares. FRC regulates government entities and organisations.
IT regulates organisations and indirectly helps economy as a whole. Fostering adequate
investment in UK is the main aim and objective of FRC. As such, company is required to abide
by laws of professional body to prepare adequate financial statements and reports quite
effectively.
IASB (International Accounting Standards Board) : This professional body provides legal
framework to organisation so that adequate financial statements may be prepared quite
effectively. It provides accounting procedures to be followed by accountants so that they may
prepare proper financial statements of the concern organisation. This is body under sight of
IFRS (International Financial Reporting Standards). The guidelines imparted by the body are
universally accepted by investors as well to take decisions. As such, accounting professionals
are delighted by accounting procedures provided by IASB.
IFRS (International Financial Reporting Standards) : IFRS is the body entitled to regulate
financial statements of the organisation (Richardson, 2017). This provides effective guidelines
which are then followed by accountants so that well-structured financial statements may be
prepared with much ease. As such, this helps accountants to follow legal structure and as such,
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financial statements are prepared and from it, financial reports are consecutively prepared which
are much useful to stakeholders' to take better and enhanced decisions.
3. Various rules for accounting
In this regard, GAAP (Generally Accepted Accounting Principles) has imparted certain
rules to be used by accounting professionals so that adequate financial statements may be
prepared by them and as such, true and fair information may be imparted for taking decisions.
Various rules of accounting are described below :
1. Monetary unit assumption : The underlying rule states that stable currency should be used by
company for dealing in business transactions. As such, universally accepted currency is US
dollar as it is more stable than any other currencies of the world. As a result, business
transactions must be made in this currency by the business.
2. Economic assumption : The economic assumption states that business should analyse
economic environment and in relation to this, economic assumptions may be made for a
particular period. This assumption is required so that business may predict the viability of the
project to be taken in future by the firm (Maynard, 2017).
3. Cost principle : The cost principle is states that organisation should analyse expenditures
requirement of various divisions and by assessing needs of them, budget should be prepared. As
such, budgets are required to be prepared so that costs may be controlled effectively by firm.
Thus, budgets are prepared in anticipation of the demand of the departments. This helps
company to control costs effectively.
4. Full disclosure principle : Full disclosure principle states that accounting records must be
maintained effectively so that effect of each and every transaction is reflected while preparation
of final accounts of the organisation. This principle states that accounting records should be
prepared effectively by complying with such rule and this will directly help to fully disclosed
financial information in various financial statements of the company. Thus, more reliability may
be attained.
5. Going concern Principle : This principle states that organisation will remain in the market for
longer period and will not shut down within shorter period. By complying with this principle,
financial statements are prepared by business. Thus, necessary information is imparted to users
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of accounting to take better decisions.
6. Materiality concept : The materiality concept says that non-material items must be ignored by
business and only material items must be included in books of accounts. This is done by
analysing information requirement of users that whether this will affect their economic
decisions or not. As such, only material items related information is disclosed to them whch
might affect decisions of them (Brausch, 2017).
4. Material disclosure and consistency concepts
Consistency : This concept states that accounting policies should be followed consistently by
firm and should not change it frequently. This concept says that if frequent changes are made in
accounting policies, then reliability in financial information is lost. Thus, adhering to same
policies up to longer time provides reliable information which is then quite easier to compare
with past financial years. For instance, deprecation charged on fixed assets must be made with
same method only so that valuation may be ascertained else, profit will not be correctly
evaluated.
Material disclosure : This concepts states that material information must be recorded fully in
the books of accounts and as such, financial statements should reflect correct material
information. This helps to provide adequate financial information to various stakeholders' to
take enhanced decisions with much ease.
CLIENT 1
1. Journal entries for firm
Journal entries is the first step of financial accounting. It records various transactions that
take place in the business in daily operations. The main essence of journal is that records are
maintained in chronological order. This means that when transaction occurs, it is immediately
recorded in books of accounts. Journal entries shows various accounts maintained in the business
and ensures that every record is balanced by making relevant entries in debit and credit side. It
means that every transaction recorded must have dual effect (Brandau, Endenich, Luther and
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Trapp, 2017). As such, journal entries are said to be balanced when debit side equals credit side
of the transaction.
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2. Preparation of ledger accounts
Journal provides record of every transaction but does not provide information of specific
account so maintained. This is provided by preparing ledger accounts which are maintained for
each and every account by taking records of journal entries. The ledger accounts provides
complete detail of individual accounts related to personal, nominal and other accounts. Thus, it
helps company to assess balance of specific account with much ease. The ledger includes cash,
accounts receivable, accrued expenses payable, rent expense etc.
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Day books
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JOURNAL ENTRIES
ASSETS debit £ credit £
premises 340000
VAN 51250
FIXTURES 8100
INVESTMENTS 63900
RECEIVABLES:
P MULLEN 1400
F LANE 3100
CASH AT BANK 62400
CASH IN HAND 5600
LIABILITIES
PAYABLES
S HOOD 2150
J BROWN 4600
CAPITAL BAL FIG 529000
535750 535750
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3. Producing trial balance
Trial balance is usually prepared from ledger accounts. This is maintained to effectively
compare credit side with debit one and analyse the difference if any. Thus, after producing
journal entries and preparing ledger accounts, trial balance is prepared. This is prepared to check
mathematical and arithmetical accuracy and highlight if any errors or mistakes are done while
posting in ledger. Thus, total of debit and credit side is analysed with the help of preparation of
trial balance of company (Trial Balance). If after totalling, trial balance agrees then this implies
that books of accounts are correct. In contrary to this, if books are not maintained correctly, trial
balance will not match and this shows certain mistakes prevailing in the books of accounts.
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M1. Transaction of purchase and sale to prepare trial balance
Trial balance provides value of sales and purchase transactions. Sales amounts to 10930
and purchase figure is 38320. This clearly shows that expenses are more than revenue.
D1. Producing trial balance by using accounting concepts
Trial balance is extracted with help of guidelines imparted by professional bodies such as
GAAP, IFRS. This has resulted in mathematical and arithmetical accuracy in trial balance.
CLIENT 2
A Preparation of Income statement for the organisation
Income statement is one of the important financial statements which shows revenues
earned and expenses incurred by the organisation in a particular period. It is usually prepared at
the end of financial year (Demerjian, 2017). Profit and Loss account is known by another name
such as period statement. It is so called because it shows revenue and expenditures made during
specific period. It shows profitability aspect of firm as whether it has incurred loss or profit in a
particular period. As such, income statement provide required information to various
stakeholders to take better and effective decisions with much ease.
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B Statement of financial position for Peter Piper organisation
The statement of financial position is also known as balance sheet which provides
information regarding assets, liabilities and equity of organisation on a particular date usually at
the end of financial year (McCarron and Burstein, 2017). The balance sheet is also known as
position statement which shows assets and liabilities at a particular period. In simple words, this
provides assets, obligation and ownership details of firm quite effectively. Thus, it is also
important document of the company. The balance sheet has been prepared for Peter Piper for the
year ended 31 December 2017.
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CLIENT 3
A Income statement for Raintree organisation
The income statement is used to assess the profitability of the concern. This information
is quite relevant to stakeholders' such as creditors and investors whether company is making
profit or incurring loss. Thus, funds are provided by analysing profitability of business by such
stakeholders and it helps them to take decisions whther to impart funds to company or not.
Income statement is also known as statement of earnings as information related to earnings made
in current year is furnished in it. As such, Net income is obtained by subtracting expenditures
from revenues. This information is useful for stakeholders to assess whether company is making
adequate profits or not. The income statement for Raintree Ltd has been prepared for the year
ended 30 September 2017 below:
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B Statement of financial position for organisation
Balance sheet provides information of assets, liabilities and equity of business at a point
of time. This information is then utilised by stakeholders to assess liquidity and efficiency
position of the company in the best possible way to take enhanced decisions. It provides snapshot
of the company at a particular period (Nash, 2018). Balance sheet records accounting
information on the last day of ending of financial year. Thus, organisation gives complete
information regarding assets, liabilities and equity at a particular period to creditors and investors
that it is used by them for financial purposes quite effectively. The balance sheet has been
prepared for Raintree as at 30 September 2017 below:
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C Consistency and Prudence concept
1. Consistency concept-
The main essence of this concept is that same accounting policies and methods should be
followed by organisation from one year to another. This is done with the respect to compare
profit and losses from the past year. In simple words, this concept states that similar accounting
policies should be utilised by organisation so that it may be compared with past financial
statements as well. Frequent changes leads to unreliable financial information. As such,
consistent policies should be followed in subsequent years as well. Organisation should change
such accounting policies only when new method could lead to enhanced financial results
(Rodrigues and Rodrigues, 2018).
2. Prudence concept-
This concept works on a simple principle that business should anticipate all losses and
not all gains for a particular period. This means that organisation should never overestimate
revenues and underestimate expenditures. This is done because business runs in a dynamic world
and as such, anticipation must be based on this principle only. It means that assets and income
should not be overstated and in turn liabilities and expenditures should not be understated.
Another name of this principle is conservatism.
D Highlighting purpose of deprecation and methods of charging deprecation
Deprecation is termed as reduction in fixed asset caused due to passage of time, normal
wear and tear and obsolescence. It is a charge against profit as it reduces revenue of the concern.
Fixed assets includes buildings, premises, plant and machinery on which deprecation is charged
by organisation. The organisation is mandatory required to depreciate the value of assets so that
correct profit may be ascertained in the best possible way. If deprecation is not provided then,
asset will continue in books of accounts at an overstated amount. Different methods of charging
deprecation are as follows:
1. Straight line method-
The straight line method charges deprecation on constant rate every year over useful life
of asset. After charging deprecation for years, life of asset becomes zero. This method is not
preferred by taxation authorities.
2. Diminishing value method-
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This method is quite useful as it charges deprecation on diminishing balance of fixed
asset. This means that every year rate of deprecation does not remain constant. The main essence
of this method is that life of asset never becomes zero. This is preferred by taxation authorities.
M2 P&L account, balance sheet and cash flow statement
These financial statements provide much needed financial information to users of
accounting information and as such, stakeholders' rely on such statements for taking decisions
related to financial purposes (Carter, 2018).
D2 Preparation of the financial statements
Balance sheet has been prepared. This implies total assets was 137000, liabilities was
137000 and with respect to stockholder's equity, amount was 102000.
CLIENT 4
A Bank statement
The bank statement is prepared to analyse difference that exists in bank's accounts and
that of organisation's records. The difference is observed because not same day all the
transactions of business is recorded in the bank's records. As such, there is a need to prepare
bank statement as bank passbook is not updated instantly. To resolve this issue, trial balance is
prepared. This helps to match discrepancies observed in bank's records and that of organisation
as well.
B Outlining causes of recording bank statements
Different causes of recording bank statements are outstanding cheques, deposit transit,
dishonour of cheque, potential fraud, electronic fees, interest charged and maths errors
encountered. Moreover, it also includes bank service charges as well.
C. Cash books
BRS:
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Cash book:
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M3 Reconciliation process and relevant terms
1. Deposit in transit : It includes coins, electronic transfers which are received by business but it
is not recorded in bank's records till date.
2. Outstanding Checks : As the name suggests, checks which are issued by company but is
pending for bank's clearance.
3. Not Sufficient Funds Check : This in banking term means that check which is dishonoured by
bank. Such act is done when there are insufficient funds in the company's accounts or any other
relevant reason.
D3 Producing BRS
The accounting concepts namely comparative statement, financial ratio analysis, trend analysis
are used for reflecting adequate BRS.
CLIENT 5
A Sales and purchase ledger account for Henderson
Sales Ledger Control Account :
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Purchase Ledger Control Account :
B. Control account
The control account is prepared by large corporations which involves numerous business
transactions on daily basis. As such, separate accounts are prepared so that proper control can be
made and as such, expenditures may be controlled quite effectively. This provides reliable
information.
CLIENT 6
A Suspense account and highlighting features of the same
This account is also known as temporary ledger account. When an item is not recognised,
it is temporarily transferred to suspense account as nature of account cannot be ascertained. Main
features of suspense accounts are it helps to locate errors, helps in rectification of errors etc.
B. Trial balance
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C. Constructing journal entries
D. Distinguishing clearing and suspense account
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M4 Various types of accounts and reconciliation
Statement of financial position shows assets and liabilities at a particular period whereas
statement of income shows revenue earned and expenditures incurred in relevant period.
D4 Outlining accounting methods for firm
Reliability and transparency is found in financial statements prepared by complying
accounting methods and as such, true financial health of company is ascertained with much ease
(Ombati and Shukla, 2018).
CONCLUSION
Hereby it can be concluded that financial accounting is quite relevant to every business
whether small or large. The financial information is required by various stakeholders to take
timely decisions. Moreover, financial accounting principles and concepts given by professional
bodies help accountants to prepare adequate financial statements which are then provided to
stakeholders.
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Trial Balance, 2018 [Online] Available Through:
<http://www.accountingexplanation.com/trial_balance.htm>
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