Financial Accounting: Business Transactions and Financial Statements

This report provides a comprehensive overview of financial accounting, covering various aspects such as business transactions, single and double-entry bookkeeping, and the importance of a trial balance. It differentiates between financial statements and financial reporting, elaborates on accounting principles like accrual and consistency, and discusses bank reconciliation and control accounts. The report also includes practical applications with journal entries, income statement preparation, balance sheet analysis, and cash flow statement interpretation. Scenario-based questions are addressed to illustrate the concepts, providing a thorough understanding of financial accounting principles and their application in real-world business scenarios. Desklib offers students access to similar solved assignments and resources for further study.

Financial Accounting

Table of Contents
Introduction......................................................................................................................................2
Scenario 1........................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................4
Question 3....................................................................................................................................5
Question 4....................................................................................................................................6
Question 5....................................................................................................................................7
Question 6....................................................................................................................................8
Question 7....................................................................................................................................9
Scenario 2......................................................................................................................................10
Question 1..................................................................................................................................10
Question 4..................................................................................................................................12
Question 5..................................................................................................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................15
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Introduction
Financial accounting as a particular branch of accounting and it represents to an ongoing
procedure of recording identifying and analysing summarising all the transactions which has
been taken place in the business operations for an accounting period (Yerznkyan and et.al 2020).
All these transactions are further categorised and summarised and different financial statements
such as balance sheet income statement and cash flow which records all the operating
performance of the company for specified time duration. This report further demonstrate about
various types of business transactions and it also includes single entry and double entry
bookkeeping. Importance of trial balance has also been defined in this report. Key difference
between financial statement and financial reporting has also been elaborated in this report.
Different principle of accounting it is also being jotted in this report. Bank reconciliation and its
importance has also been discussed in this report. Role of control account in financial
management has also been defined in this report along with this suspense account and reason for
drafting suspense account is also been mentioned in this report.
Scenario 1
Question 1
Different types of business transaction
There are number of business transactions held in the organisation such as:
Purchase of raw material and goods
Every organisation needed various goods and raw material so that they can produce
quality goods. Purchase can be categorised into cash or credit (Types of Business Transactions
and Documentation., 2020). Those organisation which go for cash purchase then they need to
make payment immediately on the other hand when they go for credit then they will not need to
take immediately to the supplier so most of the organisation works on credit purchase.
Sales
Sales also divided into two parts such as cash sales and credit sales. In the credit scenes
organisation gets the payment after some time but in cash saves the get immediate payment by
selling goods and services.
Wages and salary
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Organisation needs cash to make payment of their employees and it is one of the
important business transactions because if organisation fails to pay salary and wages to their
employees on time then they may switch to other company.
Purchase of services
Organisation need to purchase some services as well such as electricity telephone
insurance and others. This is also an important business transaction because in the absence of
these organisations can’t run effectively (Hope and et.al 2019). It is mandatory for the
organisation that they properly order and receive these services.
Single entry and double entry bookkeeping
As the name suggests single entry bookkeeping is having only one entry for each and
every transactions on the other hand double entry bookkeeping contains 2 entry of every
transaction one is debit side and other is credit. But on the flip side single entry bookkeeping
system uses only one account for every transaction and therefore there is no need to match debit
side and credit side of the transaction.
Trial balance
Trial balance worksheet of bookkeeping which contains balance of all the ledgers which is
being compiled into debit and credit account and both debit and credit side should be equal. The
main purpose of producing trial balance is to make sure that all the entries in the bookkeeping
system of companies are accurate and mathematically flawless.
Trial balance is very important for the organisation because it helps the management to
detect various errors by providing them information from the beginning. It also provides
background for preparing final accounts so that in the final accounts management not have to
face any fraudulent activities and transaction.
Apart from this the primary benefit of preparing trial balance is to make sure that all the
transactions was get recorded in the books of accounts and must be mentioned in the debit side
and credit side. Debit and credit amount should be matched to each other. Trial balance plays
Critical role to check the accuracy of ledger accounts organisation to prepare financial
statements. It is very important for the organisation to know that all the transactions of balance
sheet especially the Asset side should be equal and matched to the liability side.
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So the trial balance is also works on this approach all the debit side and credit side should
match to each other if they get matched then it can be stated that all the accounting entries have
been made appropriately.
Question 2
S. no Particular Amount
01/06/2016 Cash a/c Dr
To business a/c
65000
65000
02/06/2016 Purchase a/c Dr
To accounts payable
80000
8000
07/06/2016 Cash a/c Dr
To inventory a/c
4000
4000
08/06/2016 Purchase a/c Dr
To bank a/c
4000
4000
14/06/2016 Insurance premium a/c Dr
To bank a/c
75
75
15/06/2016 Purchase a/c Dr
To accounts payable
10,000
10,000
16/06/2016 Purchase a/c Dr
To Cash a/c
3000
3000
18/06/2016 Rent a/c Dr
To bank a/c
150
150
20/06/2016 Cash a/c Dr
To payable a/c
10,000
10,000
21/06/2016 Cash in hand a/c Dr 100
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To Bank a/c
100
25/06/2016 Cash a/c Dr
To pity cash book a/c
100
100
30/06/2016 Purchase a/c Dr
To Cash a/c
30
30
Question 3
Difference between financial statement and financial report
Financial statement and financial report both terms can be used interchangeably but they are
different. Financial report is known as an umbrella term which covers different types of report
(Dobie and et.al 2020). On the opposite financial statement as one report which faults under the
financial statement. It can be stated that all the financial statements are known as financial
reports but all the financial reports cannot be describe as financial statement.
Financial statement includes income statement various statement of cash flows and
balance sheet. On the opposite financial report collect information about financial factors of the
company. The main purpose of creating financial statement is to generate all the financial
information about the company such as what is the financial position of the company how the
cash flow is operating etc.
Financial statement is very important for the perspective of investors and other people
because by checking financial statement of the company they can choose their decision. Income
statement of the company shows the ability of organisation to make profit and it also represents
the overall expenses of the company which is not mentioned in the financial reports. Apart from
this balance sheet also provide snapshot of the company’s position because it provides the status
of liquidity debt and other funding.
Question 4
Principles of accounting
Accrual principle of accounting
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This principle states that all the accounting transactions of the organisation must be
recorded in the accounting period and the duration in which this transaction occurs instead of
recording them as per the cash flow statement.
This is one of the oldest form of accounting (Renes, 2020). This principle is also useful for the
financial statements because by using this principle, financial statement can provide accurate
result to the organisation.
Consistency principle
This principle represent that once an organisation adopt any accounting principle then
they should use the same principle for long. If the organisation is not following consistent
principal then it can be stated that organisation is jumping between different and various
accounting treatments it can become difficult for the organisation to can long-term result.
Cost principle
This is one of the oldest principle which emphasize night business must record all the
Asset liabilities and equity at exact purchase cost. But this principle is not popular nowadays
because it is very difficult for the organisation to adjust their asset and liabilities on the fair
value.
Going Concern principle
According to this principle business will remain for so long in the market and never stop
their operations. Every organisation has this objective that they will serve their customers for
long duration and earn profit.
Monetary unit principle
This principle of accounting emphasise that organisation must record their transactions
which can be defined in the terms of currency. It becomes easy for the organisation to calculate
all the revenues and expenses for the accounting period if the transactions are being recorded in
the units of money.
Question 5
Particulars Amount Amount
Sales 900,000
Cost of sales 7,00,000
Gross profit 200,000
Expenses :
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Advertising 10,000
Salaries 50,000
Electricity 10,000
Telephone 9,000
General expenses 1200
Total expenses 80200
Net profit 119800
Balance sheet
Particulars Amount
Capital 354200
Current liabilities
Payables 80000
Bank overdraft 20000
Total liabilities 454200
Current asset
Receivables 1100000
Fixed assets
Land and building 400,000
Plant and machinery 30,000
Total 5,40,000
Income statement
Income statement is also a financial statement which represents all the income and expenditure
of the business. It also provides all the necessary information that is the company is earning
profit or loss for the accounting period. Income statement is used with balance sheet and cash
flow statement so that investors can know the financial health of the company.
Statement of financial position
Statement of financial position popularly known as balance sheet, which provides detailed
information about all the assets liabilities equity and applications of the organisation for a certain
point of period. Provide detailed information about them current asset as well as fixed assets
such as property plant and other equipments also the liabilities such as loans and outstanding of
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the organisation. So that company can certain positions to repay their applications with the help
of assets.
Question 6
Balance sheet
Particulars Amount
Capital 120800
Current liabilities 5150
Drawing 80000
Creditors 3900
Loan 1,00,000
Total liabilities 309850
Current asset
Debtors 12500
Stocks 10500
Total 23000
Trading account
Particular Amount Particular Amount
To opening stock 9500 Sales 1250000
To purchase 75000 Less : drawings 5150
By closing stock 1000
To gross profit 34350
Profit and loss account
Particular Amount Particular Amount
Gross profit 34350 Rent received 5340
Office and
administrative expenses
Interest earned 1000
Wages and salaries 132000 Provision from bad debts 934
Rent and rates 1500
Postage 900
Insurance 7089
Bad debts 1200
Net profit 169765
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Question 7
Cash flow of Mark and Spencer plc
Particulars Amount
Cash flow from operations
Net earnings 8,00,000
Cash flow from investing activity
Increases in inventory 2,00,000
Cash flow from finance activity
Notes payable 5,00,000
Cash flow for the year ended 2020 15,00,000
Cash flow statement
Cash flow statement is one of the financial statements which provide accurate data which is
related to all the cash inflows and cash outflows (Aswar, 2020). It is prepared by the organisation
to summarise all the amount of cash which is entering into the company and going out from the
company so that management can know accurate profit.
Scenario 2
Question 1
Bank reconciliation
Bank reconciliation refers to the statement which represents the summary of Banking and
all the activities of the business which are reconciled with the bank account and the financial
records (PURI and et.al 2021). Bank reconciliation states about all the deposit withdrawal and
other activities which affects the overall bank accounts for a certain period of time.
Bank reconciliation is also necessary for the organisation because it confirms all the
payments which has been processed and also the cash collections which has deposited in the
bank accounts of the company. It also provides all the fee details which is being charged by the
bank from the company. Along with this all the adjustments and the balance which is remained
in the bank reconciliation should equal to the last balance of bank accounts so that both can be
reconciled.
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To prepare accurate bank reconciliation statement it requires current and last month
statement apart from this it also required closing balance of the accounts that angry conciliation
can show exact result to the organisation. Bank reconciliation is very important because it
provides all the internal records of the company and matches such records with the statement of
bank so that discrepancies can be found.
This process is important because it can easily recognise all the fruits and accounting
mistakes. Reconciliation make sure that actual amount of money should match with the available
balance of bank account for a fiscal period. Company scan conductor conciliation on regular
intervals so that they may identify all the frauds and errors. Conciliation can take place on
monthly quarterly and yearly basis. Typically there are 2 methods suggest documentation review
and analytical review. Those businesses which are small in nature the main objective is to
reconcile the bank statement so that they can make sure all the recorded balance is matching up
with the bank balance.
Question 2
Control accounts
Control account refers to the summary account which is being prepared in the general
ledger. This account contains all the totals for each and every transaction which are individually
mentioned in the subsidiary level ledger (Azam, 2019). The main purpose of forming control
accounts is to summarise of the country symbols and account payable because these two contains
use number of transactions that is very necessary to separate them into subsidiary lasers instead
of merging them into general ledger with ample of information.
The last balance of control account should get matched with the ending total of subsidiary
ledger. If the balance of both will not get match then there is high chances that general entries in
the ledger account has not been mention accurately. Apart from this it is helpful for those who
want to check the details of account payable and account receivable then they can simply
checkout control accounts so that they may get all the necessary information.
All the transactions and activities take place in the control account on daily basis such as
all the accounts payable entered on the same day when the transaction take place and it’s also
posted summary level. But all the transactions must be mentioned in different accounts before
the closing of box and it should be maintained before the reporting period.
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The primary role of control account screenshot that the accuracy of subsidiary account
must be clear and sorry check the individual accounts and transactions before mentioning them
into the subsidiary ledger.
Apart from this it also provides up to date balance of each and every account on a given
time duration and therefore it is essential for the organisation to prepare control accounts.
Control accounts are kind of the general ledger accounts which summarises all the large number
of accounting transactions and therefore it is being maintained by most of the business so that
they can know their cash flow management is well and they can easily report each and every
transaction.
Question 3
Suspense account
Suspense account is a part of general ledger all the records and entries of the organisation I been
ancient improper classification and accurately (Firawati 2017). Suspense account papers to
brokerage account where investors can temporary there cash which is not getting used. Such cash
can be used to buy new investments.
Suspense account can be clear out once the discrepancies of the transaction can be find
out and the records and transactions can be shuffle to other accounts so that at the end of
accounting period organisation can get to know the accurate and exact transaction and amount as
well. Suspense account should be returned routinely check so that discrepancies can be resold
and it can be shuffle to other accounts.
Suspense account is being used by the mortgage lenders in which the borrower
accidentally make any monthly payment and if the borrower selects any kind of breakup to
monthly payment (Aisyah, and et.al 2017). The main purpose of creating suspense account is to
know the trial balance and unidentified transactions.
As the suspense account is being listed on the trial balance it is being maintained to know
the imbalance of the transactions. Another purpose of preparing suspense account is to receive
the payments which are not correctly identified whether they have received earlier or not so with
the help of suspense account such payments can be identified.
Apart from this it also helps the organisation in management to know who made the
payment the overall invoices. Along with this it is also beneficial for the organisation because
they can we check with their clients before posting any payment so that they may get to know the
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