Financial Accounting Report: Financial Statements and Analysis

This report provides a comprehensive overview of financial accounting, beginning with a definition of the field and its importance to both internal and external stakeholders. It details the purposes of financial accounting, including determining operational results, evaluating financial positions, controlling assets, providing information to tax authorities, and aiding in cash planning. The report then analyzes internal and external stakeholders, explaining their interests in financial information. It includes practical examples, such as client case studies, showcasing the application of accounting principles like double-entry recording, profit and loss account preparation, and the formulation of statements of financial position. Furthermore, the report covers key accounting concepts such as consistency and prudence, along with depreciation methods like the straight-line and diminishing balance methods. It concludes by highlighting the differences between financial statements prepared by sole traders and limited companies, offering a well-rounded understanding of financial accounting principles and their practical applications.

Financial Accounting
Principles

Table of Contents
INTRODUCTION...........................................................................................................................3
Part (a)..............................................................................................................................................3
Part (b).............................................................................................................................................6
Client 2.......................................................................................................................................19
Client 3.......................................................................................................................................22
Client 4.......................................................................................................................................24
Client 5.......................................................................................................................................26
CONCLUSION..............................................................................................................................28
REFERENCES..............................................................................................................................29

INTRODUCTION
The term financial accounting has been defined as a kind of accounting which is related
to the management of financial position of companies by preparation of financial statements with
the help of analysis of financial information (Albanese, Andersen and Iabichino, 2015). This
field of accounting is useful for both to the internal and external stakeholders. It is so because
with the use of this accounting methodology, internal stakeholders can take important decisions
as well as external stakeholders can assess the actual financial position. Herein, the project report
the financial accounting and its purposes are mentioned as well as various kind of stakeholders
are also included. In the further part of report, calculation is done as per the requirement of brief.
For better understanding, a small sized accountancy firm is selected that is City gate
accountants. This company is located in London and provides various kind of accounting
consulting services to other companies.
Part (a)
1. Financial accounting and its purpose.
Financial accounting- It may be defined as an accounting that is related with the tracking
of all kind of financial transactions of companies with an objective of preparation of financial
statements (Wen and Moehrle, 2015). This accounting is essential for companies because it
provides the information about actual financial position of company to the stakeholders. Under
this accounting different kind of financial statements are prepared as per the accounting rules and
principles.
Purpose of financial accounting- The financial accounting is very crucial for both to
internal and external stakeholders. Herein, below importance of this accounting is mentioned that
is as follows:
 It helps in determining the result of operations- This is the main purpose of financial
accounting because with the help of it, companies can evaluate the efficiency of their
various kind of operations in terms of profits and loss. Due to this companies make
corrective actions for further. Such as in the above city gate accountants company, they
use this accounting for assessment of actual financial results.

 Helps in evaluating the financial position- Another purpose of financial accounting is
that, it is helpful for evaluation of actual financial position of companies (Du, 2015). On
the basis of it, stakeholders make investment in companies as well as owners determines
about the areas in which company's performance is weak. In the aspect of above
company, they enable to know about financial position with the help of this accounting.
 Maintains a control over assets- The financial accounting is important for maintaining a
proper control over the assets of companies. It is so because, with the help of balance
sheet analysis organisation can aware about how much assets they have in compare to
liabilities. Like in the above company, their managers keep an extra site of eye over the
assets by help of this accounting.
 Helps in providing information to the tax authorities and government agencies- Apart
from above mentioned purpose, another importance of financial accounting is that by this
tax calculation of companies get easier (Pucheta‐Martínez and Olcina‐Sempere, 2016). It
is one of the crucial benefit of financial accounting because with the help of it
government can determine the rate of tax on the basis of overall profitability. Such as in
the above city gate accountants company, at the end of year tax rate is easily calculated
by help of financial accounting.
 Help in making planning for cash- The financial accounting is useful for determination of
need of cash for future activities. In the absence of estimation of future need of cash, this
can be difficult for companies to manage the liquidity position. This is being done by
analysis of cash flow statement. Like in the above city gate company, they evaluate the
need of cash with help of financial accounting.
So these are the purpose of financial accounting in relation to internal and external management
of companies. As well as in the above city gate company, the financial accounting plays an
important role that is described above.
2. Evaluation of internal and external stakeholders and reason for which they show interest in the
financial information of companies.
Stakeholders- The stakeholders can be defined as a person or group of person who show
interest in financial position of companies with an objective to make investment as per the
financial condition (Brown and Dillard, 2015). There are majorly, two types of stakeholders

which are internal and external stakeholders. Herein, below both of these stakeholders are
mentioned as follows:
Internal stakeholders- These are the individuals or group of individuals in a company
who have an active interest in the business activities. In the aspect of internal management, these
stakeholders are very crucial because they take part into day to activities. Herein, below some
types of internal stakeholders are mentioned that are as follows:
 Employees- These are one of the important stakeholder of companies because all
profitability depends on them. This is so because if they will not perform well then
overall operating activities will be caused and it can result in loss to companies.
Basically, the employees involve actively in process of completing various kind of tasks.
They show interest in the financial information of companies because on the basis of it,
employees can determine that whether they should work with company or not. Like if a
companies' financial position is getting down then employees will not have willing to
work with that company. Apart from it, another reason to show interest in the financial
information of employees is that as per it, they can assess their level of performance. It is
so because financial statements present the conclusion of all business activities in the
form of profit or loss.
 Managers- Another internal stakeholders are managers who manage all the business
activities from an edge (Grenier, Pomeroy and Stern, 2015). As well as they prepare
various kind of plans, policies and strategies so that their company can beat to their
competitors. The managers show interest in the financial information of companies so
that they can assess the actual financial condition and on the basis of it can make
effective plans and policies. Otherwise, in the absence of complete financial information,
it can be difficult for them to formulate the plans and strategies as well as to manage the
business.
External stakeholders- These stakeholders are those who keep an eye on the company's
performance from outside. Eventually, they do not take part into day to day activities and have a
common objective to know the financial position of companies so that they can make
investment. Herein, below some common example of external stakeholders are mentioned below
which are as follows:

 Customers- These are one of the key external stakeholder of the companies because, they
are the only who become source of income of companies by purchasing of goods and
services (Holt, 2015). All organisations try to attract more and maximum customers so
that their profitability can be raise. They show interest in the financial information of
companies so that they can decide about purchasing.
 Suppliers- These stakeholders sell the goods to companies in the form of credit and cash.
In the condition of credit transaction, suppliers evaluate the financial condition of
companies. If companies are not performing well then they will not offer products on
credit. Hence, this is the main reason for which they show interest in the financial
information of companies.
 Investors- These are kind of stakeholders who make invest in the operations of
companies with an expectation of getting return on invested amount of money. The rate
of return on investment depends on the financial position of companies. Hence, the
investors show the interest in financial information of companies so that they can
determine about whether they will get higher return or not on their invested capital.
 Government- The government is very crucial external stakeholder. This is so because
they are the only who set rules and regulations which are needed to be followed by
companies (Ward and Lowe, 2017). They show the interest in the financial information
of companies so that tax rate can be determined.
So these are the main external stakeholders who have multi-pal purpose for which they show
interest in the financial position of companies.
Part (b)
Client 1.
Completion of double entry recording within relevant ledgers:

Ledger accounts:

Different day books:
Purchase day book-

Trial Balance
As on 31st January 2019
Working notes:

Calculation of payables:
= (10000 + 12000 + 960 + 160 + 1830 + 1910 + 2060)
= 28920
Calculation of receivables:
= (3000 + 3980 + 80 + 2330 + 20 + 1020 + 2520 + 1310)
= 14260
Client 2
(a) Preparation of profit and loss account for the company:
Statement of Profit and Loss
For the year ending 31st December 2018
For Munteanu Ltd.
(b) Formulation of statement of financial position of the company:
Statement of financial position
For the year ending 31st December 2018
For Munteanu Ltd.

(c) Various kind of accounting concepts- This is important for companies to follow all the
accounting concepts for making entry of financial transaction. There are various kind of
accounting concepts and some of these are mentioned below:
 Consistency- It is a kind of accounting concept which is related to the following a
common rules and regulation for recording the transactions in entire accounting time

period without making any changes (Brusca, Montesinos and Vela, 2015). This is
important for companies because if companies will not follow consistency in their
accounting transactions then, it can be difficult for companies to make any comparison
from previous year's financial statements.
 Prudency- This is one of the important principle or concept of accounting which is also
known by conservatism principle. As per this concept, it is important for companies to
neglect those assets and income which are overrated. By implementation of this
accounting concept, organisations get able to manage the overestimated income and
expenses in an effective manner.
(d) Depreciation and its purpose-
The term depreciation is related with minimisation in the value of an assets during a
particular time period (Ryan, 2017). The value of this depreciation starts to decrease as time
passes. The main purpose of calculating depreciation is find out actual value of assets. There are
various kind of methods for calculation of depreciation and some of them are mentioned below
that are as follows:
 Straight line method- This can be defined as a kind of method for calculating the
depreciation in which a fixed amount of depreciation is charged till the life of an assets.
In broad sense, this method of depreciation is being used for those assets which are being
used in an unequal manner for long time period. It is quite easy and simple method of
calculating the depreciation because in this depreciation is charged with an equal amount.
 Diminishing balancing method- It is a type of method of depreciation in which first year's
depreciation is being calculated as per the book value of assets. While in the rest of years,
this is computed on the basis of written down value. One of the important thing in this
method is that it do not depreciate the value of assets till zero.

Difference between financial statement prepared by sole trader and limited companies:
Basis Sole trader's financial statement Limited company's financial
statement
Format of
financial
statements
In the financial statement of sole
traders, there is no specific format
to prepare the statements.
While in the limited companies,
financial statements are prepared with
a particular format as per the
accounting standards.
Preparation of
financial statement
Under this, the financial statements
are being prepared by owner.
On the other hand, in limited
companies, the financial statements
are prepared by accountants.
Auditing The sole traders' financial
statements are not audited.
The financial statements of companies
are necessary to be audited by auditor.
Client 3
Bank reconciliation statement: This can be defined as a kind of statement which is
being prepared by companies to assess the transaction of banks ( Bierstaker, Kopp and
Lombardi, 2016). Along with, it is prepared with an objective to find out the variation between
financial accounts of companies and bank account.
Areas that can become cause variation from the bank statements:
 If interest amount is credited by bank and not informed to the company then there can be
variation in bank statement and cash book.
 Any type of error or mistake made be accountant of companies can be reason of
difference in the cash book and bank statement.
 Dishonoured cheques can also be an another reason of difference in both the statements.
Imprest: This has been defined as an amount of money that is being used by companies to
manage the small amount of expenses. Additionally, this amount of money is stored by
organisations as a reserve with an objective of dealing with financial crises in future time period.

Updated cash book:
Bank reconciliation statement:

Client 4
Preparation of different control accounts:
 Sales ledger control account: This may be defined as kind of account that is being
prepared by organisations with an objective to assess the outstanding amount of various
debtors. In broad sense, this is a type of account that informs to companies to evaluate
further receivables.
Sales ledger control Account

 Purchase ledger control account: It account is also known by trade creditor control
account. The main objective of this account is to tracking actual amount of payable of a
company.
Purchase ledger control Account

Control account- It can be defined as a kind of account which is being prepared by companies
to record balance of various kind of subsidiary accounts. The key objective of this account is to
verify the amount of books of accounts. It is widely used by companies to manage the general
ledgers in an effective manner. As well as this account is prepared by commonly by all kind of
organisations.
Client 5
Suspense account: It can be defined as a kind of account which is prepared by companies on a
temporary or permanent basis for carrying doubtful entries and transactions (Wang, 2015). Under
this account, entire unclassified amount is entered. In various kind of organisations, this account
is prepared on the monthly basis and quarterly basis.
Features of suspense account- The suspense account has different types of features which are as
follows:
 This is beneficial for companies in effective management of financial statements.

 It is linked with the proper evaluation of errors like principle, commission etc.
 Along with this is useful for ensuring that all data are linked to accounts as well as
entered correctively.
 By use of it, inappropriate and wrong amount that is entered in book of accounting is find
out easily.
So these are the main feature of suspense account which are mentioned above.
Formulation of trial balance using control account:
Journal entries to make corrections:
Suspense a/c
Particulars Amount Particulars Amount

White a/c 7500 Balance B/d 3300
Jones a/c 4200
Total 7500 Total 7500
CONCLUSION
On the basis of above project report, it has been concluded that financial accounting is
very crucial for companies because with the use of it managers can assess the actual financial
condition. As well as this accounting is linked with the measurement of performance of
companies. Under project report, term financial accounting and its purpose for companies is
concluded as well as both kind of stakeholders are also mentioned. In the internal stakeholders
employees and managers are mentioned while in the external stakeholders government, suppliers
and investors are concluded. In the further part of project report various kind of calculation is
done on the basis of given data about five different clients.

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