Financial Accounting Report: Analysis of Financial Statements

This report delves into the core concepts of financial accounting, offering a comprehensive overview of its purpose, regulations, and fundamental principles. It explores various financial statements, including the Cash Flow Statement, Income and Expenditure Account, Balance Sheet, and Statement of...Read More

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
(A) REPORT ...................................................................................................................................1
1: Financial accounting and its purpose......................................................................................1
2: The regulations relating to financial accounting.....................................................................2
3: Accounting rules and principles..............................................................................................2
4: Conventions and concepts related to consistency and materiel disclosure.............................4
CLIENT 1........................................................................................................................................5
(a) Definitions:............................................................................................................................5
(b): Double entry system.............................................................................................................5
(c): Trial Balance in the books of Amstel's D the 01 may 2017 (Figures in £)........................14
CLIENT 2......................................................................................................................................16
(a) The Statement of profit or loss for Sierra Laurent for the year ended 31st July 2018........16
Working notes:..........................................................................................................................16
(b) The Statement of Financial Position for Sierra Laurent as at 31st July 2018.....................17
Working note:............................................................................................................................18
CLIENT 3......................................................................................................................................19
(a): Profit and loss statement.....................................................................................................19
(d): Purpose of Depreciation.....................................................................................................21
CLIENT 4......................................................................................................................................21
(a): BRS (Bank Reconciliation statement)................................................................................21
(b): Areas which may cause the record to vary from the bank pass book................................22
(c): Bank reconciliation statement............................................................................................22
(d): Cash Book..........................................................................................................................23
CLIENT 5......................................................................................................................................23
(a): Entries in the books of Henderson for July 2018...............................................................23
CLIENT 6......................................................................................................................................24
(a): Main features and term of suspense account......................................................................24
(b): Trial Balance (£).................................................................................................................24
(c): suspense account.................................................................................................................25
d) Difference between a Suspense Account and a Clearing Account.......................................25
CONCLUSION..............................................................................................................................25
REFERENCES..............................................................................................................................26

INTRODUCTION
Financial accounting is an integral part of an organisation which assists them in
identifying their actual financial position in market through preparing different forms of financial
reports such as Profit & Loss a/c, Balance sheet, Cash Flow statement etc. It is necessarily
required to follow accounting rules and principles to prepare all such accounts which are
explained in this report.
The present assignment report covers all aspects related with financial accounting. It
consists of business reports which include business reports describing meaning, purpose and
objectives of financial accounting. In addition, with this, financial and accounting calculations
such as Book-keeping system, ledger accounting, double entry system etc. Along with this,
financial statements include income and expenditure a/c, Balance sheet are also prepared with
practical evaluation (Badolato, Donelson and Ege, 2014).
(A) REPORT
1: Financial accounting and its purpose
Financial accounting: It is an activity of preparing financial reports which assist an
organisation to identify their actual financial performance to the involved parties to an
organisation such as investors, creditors, suppliers and customers. It facilitates managers to
forecast the company's financial position through making proper analysis of such reports.
For this, various accounting rules and concepts are formulated which required to be
follow by the accountant while preparing financial statements. It can be made on quarterly or
annual basis. It is mandatory for managers to prepare financial reports so that interested parties
such as investors, creditors, shareholders etc. may provide support to them in achieving growth
and success.
There are different types of financial accounts which are briefly mentioned under the following:
Cash Flow statement: It is a statement showing the details of cash generation and spent
on particular time period such as monthly, quarterly or yearly. It includes three heading such as
cash flow operations, cash flow from investing and cash flow from financial activity. The
statement includes only those transactions which are transacted in monetary terms (Bayou,
Reinstein and Williams, 2011).
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Income and expenditure account: It is a statement containing all details regarding
expenses incurred and revenue generated by company in doing business activities. It is more
helpful for company to prepare as it assists an organisation to calculate net profit/loss thus
preparing on annual basis.
Financial position statement: It is a statement presenting actual financial position of
company through considering all assets and liabilities. It is also known as Balance sheet
containing two heading i.e. assets and liabilities which should be equal. It assists parties outside
of an organisation to make decision whether it become profitable to invest capital in business.
Change in equity statement: It is a statement that assisting manager must manage
financial reports and information which are related with capital structure of an organisation. It
helps in identifying the fluctuations in equities and share capital of company (Edwards and et.
al., 2013).
2. Regulations relating to financial accounting
Accounting is mandatory for every organisation thus it is important to prepare financial
accounting reports in better way. For this, the accountant must require to follow prescribed all
accounting rules and concepts so as to eliminate any errors or deviations. Through considering
all concepts and rules in briefly manner, the manager is more capable to prepare financial
statements and assist an organisation to provide their actual financial position at current time in
market.
There are mainly two international bodies such as IASB and IFRS which were formed to
develop specific formats and structures for financial statements. Developing frameworks help in
ensuring whether an organisation can get useful information from such financial reports. Here
are the same rules and regulations which are introduced by such authorities:
AS 1: As per this standard, all policies are required to disclosed to parties outside of an
organisation. Such policies are related with pricing policies, target audience, marketing policies
etc. which should be disclosed towards related parties such as investors, creditors and many more
which further help in making an effective decision.
AS 2: According to such standards, the inventory available in an organisation should
require to be recognised and recorded so as to determine its actual value. Its main motive is to
ascertain cost of stock, their written don cost and their net reliable value.
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3: Accounting rules and principles
Accounting rules: It is a process of directing accounting manager to record all business
transactions in financial statements; after taking all rules and regulations into consideration so
that reliable and accurate information are provided which facilitate management to make an
effective decisions and plans for betterment of an organisation. Such rules are listed under the
below:
Debit the receiver, credit the giver: Such rule says that an individual who receives goods
or services i.e. debtor will be recorded as debit transaction whereas an individual transfer goods
i.e. creditor will be recorded as credit transactions. Under this rule, personal accounts shall be
considered (Francis and et. al., 2015).
Debit all expenses and losses, credit all income and gains: This rule communicate that
all expenses incurred in business operations are recorded as debit transaction whereas income
earned will be recorded as credit transaction. Under this rule, nominal account will be
considered.
Debit what comes in, credit what goes out: Such rule says that if an individual or
company acquires or purchases assets then it will be recorded as debit transaction whereas any
sale or transfer of assets will be recorded as credit transaction. Under this rule, real accounts will
be considered (Gupta, 2011).
Accounting principles
Principles of Conservatism: This is the concept which communicate to accountant that
expenses and liabilities will be recorded when they are recognised and not when the outcomes
have been received. On the other hand, assets and revenues will be recorded when it has been
actually received.
Cost Principle: In this principle, all the assets, liabilities and equity investment shall be
recorded at their acquisition or original cost and ignore market price. Thus, it is also known as
historical cost principle. For example, the cost of machinery at the time of purchasing is 200000
and after two years, the price is increased to 250000 then using this principle, the accountant
shall require to consider actual cost price i.e. 200000.
Going Concern: It is the principle based on assumption that an organisation will
successfully continuing business operation till the next accounting period. It allows company to
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purchase goods on credit with an intention to make repayment in future period of time (Libby,
2017).
Monetary unit: Such principle directs the accountant to record all the transactions which
are expressed and measured in monetary terms. For an illustration, purchasing goods in cash
should be recorded whereas if transaction made in other form of payment method such as barter
system then should not be recorded.
Fill disclosure: This is the accounting principle tells that the transactions shall be
recorded with brief descriptions. If the brief description is not provided, then it should be
recorded under the head of foot note of financial statements.
Matching principle: This is the principle states that the revenues and expenses incurred
in business activities that to be recorded in financial statements must be matched or equal.
Revenue recognition principle: This is the principle which states that the revenues shall
be recorded in books of accounts when it has been identified and not when the outcome has been
received. For example, at the time of sale of goods, revenue should be recorded instead of the
fact whether payment has been received or not.
Materiality: This is the principle which states that only relevant and material information
shall be recorded in financial statement and irrelevant information which are not useful for
company shall be ignored (McEnroe and Sullivan, 2013).
Time period assumption principle: This is the principle which states that the accounts
shall require to record transactions in financial statements within given time period for particular
transactions.
Economic entity assumption: This is the principle which states that an organisation and
owners are two different identities thus not responsible to pay debts for each other. Due to
having number of owners called as shareholders such principle is more preferable by company.
4: Conventions and concepts related to consistency and materiel disclosure
Accounting is a mandatory activity required to perform by an organisation in order to
determine their actual financial position in market. It includes financial statements such as profit
& loss a/c, balance sheet, cash flow statement etc. For this, there are different concepts and
conventions which are required to be follow at the time of record of transactions. Some of are
given as under:
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Consistency concept: This is the accounting concept which states that an organisation
will continuing its business consistently without any interruptions through following policies and
standard. This enable company and outside parties to make transaction with one another with a
hope of receiving repayment in future time period (Oulasvirta, 2014).
Material Disclosure: This is the concept which states that it is essentially required for
accountant to disclose all relevant information related with made transaction under financial
statements so that it brings true and fair information about actual financial position of company
towards interested parties such as creditors, investors etc.
Accrual concept: This is the concept which states that the revenues should be recorded
when it has been earned and not when it has been actually received. On the other hand, in case of
expenses, the record to be done when incurred and not when they are actually paid.
CLIENT 1
(a) Definitions
Sole trader: It is the simplest form of business structure in which an individual solely
decide to run and operate business operations thus legally responsible for all aspects of the
business. As ownership is attached with single individual thus personally liable for their
business's finances which means they can keep profits himself and also repays any debts out their
own pocket (Peytcheva, Wright and Majoor, 2014).
Capital: It is form of assets or money which are needed to produce the products and
services that an organisation offered to their targeted customers. Therefore, it is essential for
company to have sufficient amount of capital in acquiring assets and maintain their business
operations.
Assets = Equity + Liabilities; It is called as Balance sheet equation, which represents the
relationship between assets, liabilities and owner's equity of a business. It is considered as the
foundation for the double entry bookkeeping system.
(b) Double entry system
a) Book of prime entry
Journal entries in the books of Amstel D for July 2018
Date Particular Dr Cr
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01/07/18 storage cost 800
to bank 800
02/07/18 purchase a/c 7310
to accounts payable 7310
03/07/18 accounts receivable 10740
to sales 10740
04/07/18 expenses 1170
to cash 1170
07/07/18 Drawing a/c 2500
to cash 2500
09/07/18 accounts receivable 3390
to sales 3390
11/07/18 sales a/c 1780
to J Wilson 870
to F syme 910
14/07/18 van a/c 28500
To Abel motor ltd 28500
16/07/18 bank a/c 1330
sales discount 70
to P games a/c(5% discount) 1400
16/07/18 bank a/c 2945
sales discount 155
to F steel(5% discount) 3100
16/07/18 bank a/c 807
sales discount 43
to J Wilson (5% discount) 850
16/07/18 bank a/c 1586
sales discount 84
to F syme (5% discount) 1670
19/07/18 R foot 500
to purchase 500
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20/07/18 purchase a/c 3740
to accounts payable 3740
24/07/18 S Lyle a/c 3600
to purchase discount(10% discount rec) 360
to bank 3240
24/07/18 J brown 4600
to purchase discount(10% discount rec) 460
to bank 4140
24/07/18 R foot 1400
to purchase discount(10% discount rec) 140
to bank 1260
27/07/18 salary a/c 4800
to bank 4800
30/07/18 business rate a/c 1320
to bank 1320
31/07/18 Abel motor a/c 20500
to bank 20500
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b) Ledger posting
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2

3

4

5

6

7

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(c): Trial Balance in the books of Amstel's D the 01 may 2017 (Figures in £)
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CLIENT 2
(a) The Statement of profit or loss for Sierra Laurent for the year ended 31st July 2018
Working notes:
1. Depreciation
 Depreciation on premises = 2% on cost
=2% * 40000 = 8000 add to accumulated depreciation
 Depreciation on equipment = 10% * 280000 = 28000
 Depreciation on motor vehicle = 20% * (cost – accumulated depreciation)
= 20% * (45000-14000) = £6200
2. Adjustment of accrued Wages and salaries = 144000+2220 = 146220
3. Prepaid expenses administration expense = 14800 – 7470 = 7330
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(b) The Statement of Financial Position for Sierra Laurent as at 31st July 2018
Capital 6,44,590
Add :- Profit 2,18,590
Less :- drawings (35,000) 183590
Total equities and liabilities 8,91,510
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Working note:
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CLIENT 3
(a): Profit and loss statement
(b): Statement of financial statement of Braintree Ltd.
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(c): Accounting concepts
Consistency: This is the accounting concept which is based on an assumption that an
organisation if adopt one policy in past years then it will have required to continue to follow the
same in future period of time as well. Therefore, no changes in policy are allowed. Same policy
can be applied irrespective of the situation whether different or same in future. The accountant
may change such policy when there are requirements has been identified. It is also required to be
notified with an appropriate reason. It is a useful concept in making comparison between
financial books with an accounting statement of other organisation. In addition, it may not be
useful if an organisation needs to get a review of expenses and revenues in the mid of the
financial year (Scott, 2015).
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Prudence: This is the concept which restricts an accountant to show their revenue at
over-valued and expenses at under-valued. It is essential to show the actual expenses and
revenue in the financial statements so that accurate and reliable information are easily
communicated with the interested parties to an organisation. Such concept is mostly used by
company which are operated in dynamic and complex environment. The main objective behind
using such concept is to help accountant in acquiring information related with all income earned
and received in cash and expenses when recognised.
(d): Purpose of Depreciation
Depreciation is a technique which is useful to determine the current value of assets. It can
be identified through deducting depreciable amount on annual basis. It is based on matching
principle which determine the actual cost of productive asset and matched it with the revenues
earned from using such asset. The main purpose of adopting such technique is to charge
expenses incurred on assets. The accounting of Depreciation has been done through recording
depreciation amount in income and expenditure a/c and also deducted from the value of asset in
balance sheet. There are mainly two method of charging depreciation which are given as under:
Straight line method: It is a default method, which is used to gradually decreases the
carrying amount of fixed over its useful life. Using such method is more beneficial where
economic benefits from an asset are anticipated to be realized evenly over its useful life. For an
instance, if the depreciation rate is 12% on machinery then it will have charged at same rate
during every accounting year (Objectives of Financial Accounting, 2017).
Written down method: Under this method, the depreciation amount will be changed
every year due to external environment elements. The main purpose of using such method is to
provide benefit to such organisation which has complexity in their assets and its values. For
example, if an organisation is depreciating its assets with the written down value as 12% in first
year, 10.80% in second year and so on then the company are using such method of depreciation.
CLIENT 4
(a): BRS (Bank Reconciliation statement)
Bank Reconciliation statement is a kind of financial report of bank account holder. BRS
reflects every transaction related with any withdrawal, deposits or any other activity in the bank
account. All the activities performed within an organisation are recorded in BRS. The depositors
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prepare bank-reconciliation-statement in order to match bank account details and the information
shown in the accounting books so that the differences between the bank passbook and cash-book
are easily identified. Identification of such differences are the main objective of BRS. Sometimes
the balances of cash and pass book doesn't match due to which BRS help in understanding the
reason of such differences (Bank reconciliation statement, 2017).
(b) Areas which may cause the record to vary from the bank pass book
There are few reasons by which contrasts in these book happen some of which are given
as below:
In Bank reconciliation statement, the chances of missing transactions are more. The
procedure of preparing BRS involves more time due to which it may bring disadvantage to
company. It is more useful but it an accountant doesn't have adequate knowledge then it may
difficult for them to understand the concept of BRS and thus failed to get desired knowledge.
The chances of occurring risk in the dates covered by the bank statement are high due to which it
is essential to prepare such BRS manually.
(c) Bank reconciliation statement
BANK RECONCILIATION STATEMENTS
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(d): Cash Book
CLIENT 5
(a): Entries in the books of Henderson for July 2018
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CLIENT 6
(a): Main features and term of suspense account
Suspense account is created in order to carry forward expenses or revenues which are not
identified in the general ledger. The nature of such account is named as current account due to
having temporary income for an organisation.
(b): Trial Balance (£)
Particular Debit amount Credit amount
Suspense a/c 1100
Sales 11000
Rent paid 2500
Receivables 3200
Travel Expenses 1600
Purchase 7000
Payables 3500
Cash at bank 8400
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Capital 7100
Total 22700 22700
(c): suspense account
Suspense account
Particulars Amount Particulars Amount
To White's personal account 7500 By balance b/d 3300
By Jones personal account 4200
d) Difference between a Suspense Account and a Clearing Account
SUSPENSE ACCOUNT CLEARING ACCOUNT
It is prepared with an aim of correcting the
errors which has been occurred during an
accounting year.
This account is prepared with an objective of
confirming that all the expenses and
expenditures are correctly recorded.
CONCLUSION
It has been concluded from the above project report that financial accounting is a
valuable part of an organisation which determined the actual financial performance and position
in the market. For this, preparing financial report are a must to prepare which includes profit &
loss a/c, Balance sheet, Cash flow statement etc. It is required for accountant to consider various
accounting rules and concepts so to bring accuracy and reliability of information provided in
financial statement. Book-keeping system, ledger posting, preparation of final accounts, sales
ledger etc. have been illustrated in the practical scenario.
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REFERENCES
Books and Journals
Badolato, P. G., Donelson, D. C. and Ege, M., 2014. Audit committee financial expertise and
earnings management: The role of status. Journal of Accounting and Economics. 58(2-3),
pp.208-230.
Bayou, M. E., Reinstein, A. and Williams, P. F., 2011. To tell the truth: A discussion of issues
concerning truth and ethics in accounting. Accounting, Organizations and Society, 36(2).
pp.109-124.
Edwards, J. R. and et. al., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29).
Routledge.
Francis, B., and et. al., 2015. Gender differences in financial reporting decision making: Evidence
from accounting conservatism. Contemporary Accounting Research, 32(3). pp.1285-
1318.
Gupta, A., 2011. Financial Accounting for Management: An Analytical Perspective. Pearson
Education India.
Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to
Behavioural Accounting Research (pp. 42-54). Routledge.
McEnroe, J. E. and Sullivan, M., 2013. An examination of the perceptions of auditors and chief
financial officers regarding principles versus rules based accounting standards. Research
in Accounting Regulation. 25(2). pp.196-207.
Oulasvirta, L., 2014. The reluctance of a developed country to choose International Public Sector
Accounting Standards of the IFAC. A critical case study. Critical Perspectives on
Accounting, 25(3). pp.272-285.
Peytcheva, M., Wright, A. M. and Majoor, B., 2014. The impact of principles-based versus rules-
based accounting standards on auditors' motivations and evidence demands. Behavioral
Research in Accounting. 26(2). pp.51-72.
Scott, W. R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Online
Objectives of Financial Accounting. 2017. [Online]. Available
through:<https://bizfluent.com/info-8131759-objectives-financial-accounting.html>.\
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Bank reconciliation statement. 2017. [Online]. Available
through:<https://www.toppr.com/guides/accountancy/bank-reconciliation-statement/
preparation-of-bank-reconciliation-statement/>.
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