Financial Accounting Report: Amstel D. and Sierra Laurent Analysis

This report delves into the core principles and practices of financial accounting. It begins with an introduction to the field, explaining its purpose, regulations, and the importance of adhering to accounting standards like GAAP and IFRS. The report then examines key accounting principles, including the...Read More

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
A......................................................................................................................................................1
1. Report to Line Manager explaining accounting regulations....................................................1
2. Financial Accounting Regulations...........................................................................................2
3. Accounting Principles and Rules.............................................................................................3
4.Concepts relating to consistency and material disclosure........................................................4
CLIENT 1........................................................................................................................................5
1. Preparation of journal entries for Amstel D............................................................................5
2. Creating leader accounts for Amstel D....................................................................................6
3. Extracting Trail Balance by compiling accounts...................................................................22
CLIENT 2......................................................................................................................................23
1. Preparation of Statement of Profit and loss for Sierra Laurent.............................................23
2. Preparing Statement of Financial Position............................................................................24
CLIENT 3......................................................................................................................................27
1. Profit and Loss account of LMS Ltd....................................................................................27
2. Statement of financial position of company..........................................................................28
3. Explanation of consistency and prudency concept................................................................30
4. Description of purpose of depreciation and explaining methods of charging it....................30
CLIENT 4......................................................................................................................................31
1. Purpose of preparing Bank Reconciliation Statement of Kendal Ltd....................................31
2. Causes of varying accounting records with bank statements................................................31
3. Preparation of cash book and Bank Reconciliation Statement..............................................31
CLIENT 5......................................................................................................................................34
1. Producing sales and purchase ledger control account of Tom Higher..................................34
2. Defining control account.......................................................................................................35
CLIENT 6......................................................................................................................................35
1. Suspense account and outlining its rain features...................................................................35
2. Constructing trial balance......................................................................................................36
3. Differentiating between clearing and suspense account........................................................36
CONCLUSION..............................................................................................................................37
REFERENCES..............................................................................................................................38

INTRODUCTION
The process of recording, summarizing and reporting business transactions that occur
over a specific period of time, is known as financial accounting. It includes the preparation of
financial and income statements, cash flow and balance sheets (Flores and Braunbeck, 2017).
This report will cover purpose of financial accounting and its meaning. Explanation of
accounting rules, regulations and governing principles that aid in preparing financial statements
as well as consistency and material disclosure conventions and concepts will be elaborated.
Double entry book keeping by recording of business transactions and creation of trial balance
will be done and analysed. Bank reconciliation statement's purpose and application, control and
suspense accounts will be explained as well.
A
1. Report to Line Manager explaining accounting regulations
To: Line Manager
From: Junior Accountant
Subject: Accounting terms and regulations useful for organisation to comply with
Respected Sir,
The recording, measuring and summarizing of daily financial transactions in a business
operation is described as accounting. It is both an art and a science because there is requirement
of judgements and skills, as well as a body of knowledge that has rules and principles that
constantly changes. Accounts are only expressed in monetary terms and accountants are to be
trained with proper discipline in order to perform various accounting functions. Financial
accounting is a field of accountancy (Gebhardt, Mora and Wagenhofer, 2014). It helps in
controlling and keeping track of a business' assets and liabilities, while providing methods for
money deduction and cost control. Company is able to determine economic data, policies for its
business and aid in fixation of tax. Trail balance helps in testing the arithmetical accuracy of
accounts which assists in capital borrowing, when needed.
Interpretation of amounts, figures and data is done through the summarization of
recorded information, in order to create financial reports and analyse their results. Management
ascertains positive and negative aspects and take proper measures to correct any problems that
comes forward. The main purpose of accounting is to accumulate and report fiscal information
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with regard to performances, financial position and cash flows of a company's business. It helps
in keeping track of operations. These statements provide qualitative and quantitative information
that is used while making decisions about investments and business management. Owners are
able to find out their entity's stability, profitability and ability to pay obligations (Wagenhofer,
2015). The information is useful for 3rd parties such as creditors, investors, stakeholders, lenders,
employees and government.
2. Financial Accounting Regulations
Financial regulators impart guidelines that are to be followed by various businesses in
order to get rid of manipulation of accounting records which can affect its fairness and reliability
to a large extent. This can help users of financial accounting gain correct information and 3rd
parties do not get misguided by inaccurate information (Ijiri, 2018). International Accounting
Standards Boards or IAS has created International financial reporting standards (IFRS) and
FASB set various accounting standards which have been issues by GAAP that has to be followed
by businesses while preparation of their books of accounts.
Financial reporting council or FRC, is a body that is formed by guarantee and regulates
corporate and government businesses. It is beneficial as proper principles are followed which
leads to preparation of true financials. Accountants have ease while preparing various statements
with regard to IASB prescribed regulations as it helps them in determining correct position of
company. IFRS also helps and guides preparation of financial reports in the best possible way
and aids in following policies and rules so that information is clear and precise for those who
have to make important decisions.
Financial statements are made according to GAAP, which is beneficial for fiscal market
investors as they require information of companies for making decisions. Revenue recognition
helps in improvement of financial reports that includes income and comparability of various
statements. The disclosure of debt securities and purchased financial assets are to be done in
order to help investors understand estimates. Securities and exchange commission body
regulates financial markets and accounting standard setting bodies (Kim and et.al., 2016). Audit
boards are reviewed by Public Company accounting oversight board and auditing standards are
determined by them.
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3. Accounting Principles and Rules
There are various accounting principles that have been created by GAAP that ensures
companies follows rules and concepts while preparing their books of accounts. They consist of:
 Monetary Unit concept: Financial statements have to be prepared in monetary terms,
depending on the country in which business operates and exists. This principle states
that transactions are to be measured in some sort of monetary unit that is stable in
order to be recorded (Warren and Jones, 2018). It should be comparable to other
currencies as well.
 Going concern principle: This is a fundamental principle that assumes that a
company will continue to run business operations and its assets and plans will be able
to meet financial obligations. Company will exist till a foreseeable future as well as
carry out its objectives.
 Historical cost principle: This principle states that assets and liabilities of a business
are to be presented at their historical cost when recorded. This is useful while valuing
items of business as price changes keep occurring.
 Single entity conceptual: Owner and company are not the same according to this
principle and business is a single and separate legal entity. It is a different person all
together.
 Conservatism principle: This principle states that accountants are to be fair and
objective while recording business transitions in books of accounts (Macve, 2015). If
they are in doubt between 2 alternatives, they should opt for the one which gives a
lesser amount of asset or higher liability.
 Time period concept: A company has to report financial results of business activities
over a particular period of time, that can be quarterly, monthly or annually. This
concept ensures that readers know the duration of transactions of business.
 Full disclosure principle: This principle states that it is necessary for a company to
provide required financial information so that management can make important
decisions (Christensen and et.al., 2015). They have to reveal their income and
expenses at the time period in which they are accrued.
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 Recognition principle: Revenue is to be recorded and recognised when it is realised
and earned. Company has to disclose their income and expense at the same time
period in which they are accrued.
 Materiality principle: An accounting standard or principle can be violated by an
accountant when a particular amount is insignificant or misleading and use their
personal judgement when needed.
 Matching principle: This principle states that revenue is to be recorded under accrual
basis when a business has earned it and expenses have to match revenues.
4.Concepts relating to consistency and material disclosure
Accountants are required to prepare books of accounts with the help of certain
conventions and concepts of accountancy (Flores and Braunbeck, 2017). They have to be
followed by businesses and are traditions that guides a company during a financial period.
Consistency convention states that when a business selects a particular method of
accounting, they have to continue to follow the same for future records as well. This helps in
easing comparisons of financial performance over time. When an accounting method is changed,
it causes confusion for accountants and causes wastage of time. A suitable method that is
continuously used will ensure effective and efficient analysis of financial statements. It increases
comparability and accuracy of accounts which aids management in decision making. If a method
has to be changed, it has to be disclosed along with proper reasons of change (Strouhal, 2015).
Advantages of this convention are that it provides consistency in recording of transactions, easy
in comparability and there is no manipulation of records. Its disadvantages are, that not all
members of company will agree to use the same method.
Material disclosure convention states that facts are to be recorded while preparation of
books of accounts. Accountants have to include all important information honestly while
recording them and unnecessary transactions are not to be taken into account. They have to be
disclosed to management, creditors, investors and other interested 3rd parties. This should include
favourable and unfavourable conditions of company so that everyone knows the current situation
of business' financial statements (Ijiri, 2018). Its main purpose is to convey relevant materials
and facts of company's position to whoever requires it. Its advantage is that financial information
is judged on qualitative and quantitative terms, which makes it easy for 3rd parties to analyse and
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determine whether or not the company will be a good investment. Disclosing too much
information is a disadvantage as it weakens a business's competition.
CLIENT 1
1. Preparation of journal entries for Amstel D.
An accounting cycle starts with analysis of transactions and recording them into journals
as entries. It is initiated at start of accounting time period and continues till the end. It is the first
step involved in preparation of books of accounts (Journal Entries, 2013). Business transactions
are recorded appropriately and data is summarized to determine company's true position. Journal
entries are recorded in a chronological order This aids in rectifying any mistakes that occurred
while recording and is considered as a smooth process of accounting function.
Amstel D.'s Journal entries start from 1st July and end at 31st July 2018 and is prepared below:
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2. Creating leader accounts for Amstel D.
Ledger account preparation is the second phase of final accounts. Data is separated into
different accounts which gives a clear viewpoint of business transactions in each head
(McCarron and Burstein, 2017). It furnishes histories of transactions and current balances of
each account in the time period. They are sources of data that helps build company's financial
books of accounts as well as assess accumulated profits and incurred losses. Identification of
assets, liabilities, revenue and expenses becomes easy and the information aids in supporting
finances properly. Therefore, Ledger accounts are required to be made in order to determine
financials of company accurately.
Subsidiary books are a part of financial accounting as well. They are purchase and sales
day book, and their return books. They contain all credit transactions and returns of business
while cash book consists of monetary transactions done (What is a Purchase Book, 2014). They
are all included below with ledger accounts of Amstel D.:
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3. Extracting Trail Balance by compiling accounts
The assessment of journal and ledger entries is done through a trail balance. Errors are
determined and rectified if there are any present. Financial statements are prepared by using this
as a base. This is a list of closing balances and its main purpose is to make sure that all entries
made are arithmetically correct, while debit and credit sides of accounts are supposed to match.
It makes evaluation of accuracy of financial statements easy (Strouhal, 2015). It is not 100%
reliable as mistake in original entry or omission may be done and carried forward unknowingly
by the accountant.
The trail balance of Amstel D. is as follows:
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CLIENT 2
1. Preparation of Statement of Profit and loss for Sierra Laurent
Financial performances of businesses are analysed with the help of statement of profit
and loss as it helps in reflecting its current position and revenues earned as well as expenditures
incurred (Achim and Chiş, 2014). Given below is the income statement of Sierra Laurent:
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2. Preparing Statement of Financial Position
Balance sheets shows the financials of a company and discloses the assets and liabilities
of a specific period (McCarron and Burstein, 2017). It is prepared in order to balance both sides
and give an insight of business.
Client's statement of financial position is as follows:
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CLIENT 3
1. Profit and Loss account of LMS Ltd.
Profit and loss account helps to determine expenses incurred and revenue earned in a
company in a specific period of time (Ijiri, 2018). It shows financial gains or losses that occur
during business operations.
LMS Limited's Profit and Loss Statement is as follows:
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2. Statement of financial position of company
Balance sheets show the exact position of a company at a particular period. Analysis of
assets and liabilities are done in order to find out if business has the right amounts of assets and
liabilities (Strouhal, 2015). If both of them are balanced, it means that organisation has a good
position, financially.
The Balance sheet of LMS Limited is given below:
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3. Explanation of consistency and prudency concept
When an accountant adopts a method of accounting, in a business, it has to be applied
and used in the future as well. This is known as consistency concept. Transactions have to be
recorded in same manner and should not be switched constantly. It makes comparing of financial
statements much easier and effective (Gebhardt, Mora and Wagenhofer, 2014). Methods can
only be changed if it is required for the improvement of company.
Prudence concept states that expenses are to be recorded right after transactions take
place and income should be taken into account when it is actually realised. This helps in
maintaining accuracy of financial statements of company. Liabilities are not to be
underestimated and assets should not be overestimated.
4. Description of purpose of depreciation and explaining methods of charging it
The reduction of value in fixed assets over a long period of time because of usage, wear
and tear or obsolescence is known as depreciation. It is helpful for ascertaining assets' current
value that has to be recorded for financial statements (Kim and et.al., 2016). Calculation is done
by estimating productive life, salvage value and cost of asset.
Straight Line method:
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Depreciation is generally calculated by this method in most businesses. It is highly
recommended as it reflects consumption pattern of assets. Its formula is:
Depreciation amount = (Asset cost – Salvage Value) / Useful life of Asset.
Diminishing value method:
Depreciation is calculated by fixing a rate and decreasing its amount with the decrease in
value of asset. Its formula is:
Depreciation Amount = (Net Value – Salvage Value) / Rate of Depreciation
CLIENT 4
1. Purpose of preparing Bank Reconciliation Statement of Kendal Ltd.
Bank reconciliation statement is prepared to check the accuracy of entries that have been
recorded in cash and pass book of a business. It is one of the financial statements that compares
and determines differences in both books (Macve, 2015). If there are any errors, necessary
adjustments have to be made and reported to bank.
2. Causes of varying accounting records with bank statements
There are many causes of varying of records in BRS, an accountant or bank employee
can make an error while recording a transaction, which can create variance (McCarron and
Burstein, 2017). Bank charges are deductions made by banks which depicts more balance in
cash book and less in pass book. Outstanding cheques are those which have been written and
but not yet deducted and can create differences in both books.
3. Preparation of cash book and Bank Reconciliation Statement
Cash books are journals which includes cash receipts and payments, created by
accountants. Given below are the BRS and cash books of Kendal Limited:
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CLIENT 5
1. Producing sales and purchase ledger control account of Tom Higher
Purchase ledger control account analyses remaining amount that is outstanding by
company to creditors (Flores and Braunbeck, 2017). It depicts how much is to be paid to
suppliers of goods being purchased on credit.
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Sales ledger control account is an account that assesses amount that organisation needs to
recover from debtors (Warren and Jones, 2018). It clarifies remaining amount that is left to be
paid by customers on credit sales.
2. Defining control account
Control accounts are created when there are multiple transactions that are summarized in
various ledgers and requires cross checking (Christensen and et.al., 2015). It records subsidiary
accounts' balances as well as cross check for any errors. It is useful for large companies so that
accuracy can be maintained.
CLIENT 6
1. Suspense account and outlining its rain features
While preparing books of accounts, there are some particular transactions that are
unidentified and accountant doesn't know where to post them. For that, a suspense account is
created in which all temporary transactions are posted because of their unknown nature. It is used
when trial balances are prepared and there is a difference between the debit and credit side
(Achim and Chiş, 2014). The remaining balancing figure is put into suspense account. It is
temporary and becomes zero when their respective account is identified.
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2. Constructing trial balance
Given below is the trail balance of Client 6:
3. Differentiating between clearing and suspense account
The difference between clearing and suspense account are as follows:
Clearing Account Suspense Account
It is useful for following current transactions. It is prepared for tracking problems and errors.
They include incomplete transactions. Nature of transaction is unidentified.
Verification of ongoing amounts is done and
transferred later.
It is created to handle uncertainties.
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CONCLUSION
This report can conclude that financial accounting plays a key role in any business
organisation. A company has to perform the process of recording and summarizing daily
operational transactions that occur so that they are able to determine various financial statements
and their position. Accounting purposes, regulations, rules and principles help understand how it
is applied in book keeping process. The conventions and concepts gives a clear perspective of
how financial accounting works. This includes journal entries, posting to different ledger
accounts and creation of trial balance as well as determined financial statements of various
clients through analysis and preparation of profit and loss and balance sheets. Bank
Reconciliation Statement displays the differences that occur in balances and provide methods on
how they are fixed.
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REFERENCES
Books and Journals
Achim, A.M. and Chiş, A.O., 2014. FINANCIAL ACCOUNTING QUALITY AND ITS
DEFINING CHARACTERISTICS. SEA: Practical Application of Science. 2(3).
Christensen, H.B., and et.al., 2015. Incentives or standards: What determines accounting quality
changes around IFRS adoption? European Accounting Review. 24(1). pp.31-61.
Flores, E. and Braunbeck, G.O., 2017. What is better: to be roughly right or exactly wrong? The
role of quantitative methods in financial accounting. International Journal of
Multivariate Data Analysis. 1(2). pp.162-172.
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of
IFRS. Abacus. 50(1). pp.107-116.
Ijiri, Y., 2018. An Introduction to Corporate Accounting Standards: A Review. Accounting,
Economics, and Law: A Convivium. 8(1).
Kim, J.B., and et.al., 2016. Financial statement comparability and expected crash risk. Journal
of Accounting and Economics. 61(2-3). pp.294-312.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat? Routledge.
McCarron, K.B. and Burstein, A.N., 2017. The importance of mathematics as a prerequisite to
introductory financial accounting. Community College Journal of Research and Practice.
41(9). pp.543-550.
Strouhal, J., 2015. Historical Costs or Fair Value in Accounting: Impact on Selected Financial
Ratios. Journal of Economics, Business and Management. 3(5). pp.560-564.
Wagenhofer, A., 2015. Usefulness and implications for financial accounting. The Routledge
Companion to Financial Accounting Theory. p.341.
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Online
Journal Entries. 2013. [Online]. Available through:
<https://accountingexplained.com/financial/cycle/journal-entries>
What is a Purchase Book? 2014. [Online]. Available through:
<https://www.accountingcapital.com/books-and-accounts/purchase-book/>
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