Financial Accounting Homework: Detailed Client Solutions Analysis

This financial accounting assignment solution provides a comprehensive overview of various accounting concepts and their practical application through multiple client scenarios. The solution covers the definition of financial accounting, relevant regulations, accounting rules, and principles like accrual and going concern. It includes detailed examples of books of prime entry, ledgers, and trial balances for Client 1. Client 2 and 3 solutions feature the preparation of profit and loss accounts and statements of financial position, along with explanations of consistency, prudence, and depreciation methods. Client 4 focuses on bank reconciliation statements, updated cash books, and the reasons for balance variations. Client 5 covers sales and purchase ledger control accounts, explaining their purpose. Finally, Client 6 addresses suspense accounts and journal entries for rectification. The assignment comprehensively demonstrates the application of accounting principles and practices in real-world scenarios.

FINANCIAL ACCOUNTING
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TABLE OF CONTENTS
INTRODUCTION................................................................................................................................3
A. (i) Defining financial accounting................................................................................................3
(ii) Explaining the regulations relating to financial accounting......................................................3
(iii) Describing accounting rules and principles..............................................................................4
(iv) Explain conventions and concepts of consistency and material disclosure..............................4
CLIENT 1.............................................................................................................................................5
(i) Books of prime entry...................................................................................................................5
(ii) Ledgers.....................................................................................................................................11
(iii) Trial balance............................................................................................................................19
CLIENT 2...........................................................................................................................................20
(A). Statement of profit or loss account.........................................................................................20
(B). Statement of financial position...............................................................................................21
CLIENT 3...........................................................................................................................................22
(A). Statement of profit or loss account.........................................................................................22
(B). Statement of financial position...............................................................................................23
(C). Explaining consistency and prudence accounting concept....................................................23
(D). Depreciation, purpose and two methods................................................................................24
CLIENT 4...........................................................................................................................................24
(A). Purpose of preparing bank statement.....................................................................................24
(B). Key areas which may create vary balance in bank records and bank statements...................24
(C) (i) Bank reconciliation statement at 1st December 2016..........................................................25
(ii) Updated cash book of Kendal ltd for December 2016.............................................................25
(iii) Bank reconciliation statement as on December 2016.............................................................25
CLIENT 5...........................................................................................................................................26
A. (i) Sales ledger control account.................................................................................................26
(ii) Purchase ledger control account..............................................................................................26
B. Meaning of control accounts.....................................................................................................26
CLIENT 6...........................................................................................................................................27
A. Suspense account meaning and its features..............................................................................27
B. Trial balance..............................................................................................................................27
C. Journal entries for rectification.................................................................................................28
D. Differentiate suspense and clearing account.............................................................................28
CONCLUSION..................................................................................................................................28
REFERENCES...................................................................................................................................30
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INTRODUCTION
Financial accounting is a field or branch of accounting that consider money as a means of
measuring and recognising economic performance. It gathers information regarding monetary
transactions of the business and record, summarize and interpret it by preparing annual accounts
encompasses statement of comprehensive income, balance sheet and statement of cash flow as well.
The current research assignment presents accounting guidelines and rules that is necessary to follow
while preparing financial statements. Moreover, different accounts such as profit and loss account,
statement of financial position, bank reconciliation statement, accounts payable and accounts
receivable control accounts will be prepared following applicable standards.
A. (i) Defining financial accounting
FA can be defined as a entire system that records, monitor and control only monetary
activities or the flow of money in and out from the enterprises as revenues, expenditures, assets and
liabilities as well. It collects the financial information so as to construct their annual accounts i.e.
income statement and balance sheet and report the result of business functioning to the top
management, lenders, investors, taxation authorities and others for varied purpose (Hahn, Fairchild
and Dowis, 2013). Income statement reports transactions that will either bring revenue into the firm
and results in outflow of cash in the form of expenditures so as to determine the net results i.e. net
profit or loss. It record transactions following accrual concepts therefore both the revenues and
expenditures of the current year will be reported regardless whether expenses is still unpaid and
revenues is still not received in cash. However, on the other side, balance sheet reports assets &
liabilities to measure the financial status at the end of the period. As per Company Act, 2006, both
the statements needs to be prepared following GAAP, IAS and IFRS for improving transparency
and harmonization.
(ii) Explaining the regulations relating to financial accounting
There are some regulatory requirement which is necessary to be applied and implemented by
the UK establishments while reporting their transactions in annual accounts. In order to record the
activities, accountant generally follows UK GAAP which provides essential guidelines &
conventions to report the monetary transactions. However, multinational organizations need to
follow global standards i.e. international accounting standards (IAS) and International Financial
Reporting Standards (IFRS) to publish their annual financial statements in the front of external user
i.e. investors, lenders, suppliers, tax authorities and others (Alver, Alver and Talpas, 2013). Issuance
of IFRS mainly targeted at building faith among investors as they will be able to compare the
performance of different entities and can make rationalized investment decisions. Besides this,
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company Act 2006 make legal obligations for both the private as well as publicly listed companies
to audit their accounts so as to make it sure that the constructed accounts are free from any material
misstatement and present true and fair position and profit and loss (McAuley, 2015). It helps
outsiders i.e. investors, lenders, suppliers, tax authorities and others to gather prominent and
authentic information so as to make successful decisions.
(iii) Describing accounting rules and principles
Accrual accounting concept: It is based on the principle that every monetary activity that
will either drive revenue into the organization or results in cash outflow as an expense will be
record immediately when occur instead of their actual impact on cash position. It means that P&L
account records outstanding expenses and accrued revenues of the current year to determine net
profit or loss.
Going concern concept: This principle believes in continual operations of the
establishments and there is no possibility that in the future period, company may go into liquidation.
It enables businesses to amortize depreciation over the estimated life period of assets (Gregory, Uys
and Gregory, 2014).
Monetary concept: Financial accounts treat money as a source of measuring the impact of
transactions over businesses therefore; it presents only the quantitative information such as revenues
from sales, purchase, administration, selling and distribution expenses as well.
Full disclosure concept: It states that every monetary transaction will be disclosed clearly
in the company’s annual reports along with the followed accounting rules, principles and standards
in footnotes (Beatty and Liao, 2014).
(iv) Explain conventions and concepts of consistency and material disclosure
Consistency concept: This concept is based on the assumption that once followed
accounting principles will be followed continually until and unless, there is no sound reason to
change it so as to improve the current financial reporting system. It helps entities to analyze and
compare the results of business operations over different accounting years.
Material disclosure concept: This method demonstrates that several items which does not
have any significant effect on the accounts and consider immaterial by professional judgements can
be excluded from the financial statements (Henderson and et.al., 2015). Thus, it can be said that this
principle enable businesses to violate the matching accounting principles by not disclosing the
immaterial information in the annual accounts.
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CLIENT 1
(i) Books of prime entry
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6

7

8

9

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(ii) Ledgers
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12

13

14

15

16

17

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(iii) Trial balance
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CLIENT 2
(A). Statement of profit or loss account
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(B). Statement of financial position
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CLIENT 3
(A). Statement of profit or loss account
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(B). Statement of financial position
(C). Explaining consistency and prudence accounting concept
Consistency: The concept of consistency in accounting means that once followed
accounting method will be applied and followed consistently without any change throughout the
accounting years. It states that without any reasonable reason, accountant cannot change the
methods adopted in earlier years. It is important for the purpose of comparability which enable
investors and other users to compare the performance of the establishments over different period for
the smart decisions (Kim and et.al., 2016).
Prudence: It states that financial accounts must be free from any overestimated of incomes
and underestimation of spending. Thus, it is necessary to be conservatism in recording the business
assets and do not underestimate the organizational liabilities. The key aim of such principle is to
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give accurate and realistic information to the users of the financial statements by authentic
reporting.
(D). Depreciation, purpose and two methods
Depreciation simply means reduction in the value of assets because of its utilization in
business operations. Non-current assets like machinery, building and other fixed assets depreciate
over time therefore, in order to accurately report their costs in the annual accounts; accountant
needs to charge depreciation upon it to reflect their true and fair value. Thus, keeping in view this
thing, companies valued their assets must at original cost net of depreciation.
Businesses can either follow straight line method or written down value method of
depreciation for accounting purpose (Kumar and Rao, 2016). In the first method, fixed amount of
depreciation is deducted from its original value over its useful life. However, on the contrary side,
in the WDV method, depreciation in every accounting year is charged on the net balance. Thus,
over the period, the value of depreciation goes down.
CLIENT 4
(A). Purpose of preparing bank statement
BRS (Bank Reconciliation Statement) is a statement that is prepared with the aim to find out
the reasons why balance of bank column in cash book and pass book differs and reconcile the same
to match both the balances. At the end of every month, commercial banks construct bank statement
so as to reflect clearly the varying reasons and match it to eliminate any confusion (Gregory, Uys
and Gregory, 2014). It helps to make it sure that all the transactions have been properly recorded in
both the cash book and pass book and reflects the same amount of balance at the end of the period.
(B). Key areas which may create vary balance in bank records and bank statements
There are multitudes of reasons which may vary the bank column of cash book and pass
book’s balances and through preparing a reconciliation statement, it is matched.
Unpresented cheques: If in case, where Kendal Ltd has issued a cheque for making
payment to the outsiders i.e. payables and passed necessary accounting entry in the cash book, but,
accountant forgot to present the cheque to the bank then no entry will be passed in the pass book, as
a result, cash book will show decreased balance however, pass book balance is still not debited by
the same amount.
Deposits in transits: In case, where Kendal Ltd has deposited a cheque in the bank then
cash book will be debited by the amount, however, on the other side, Bank takes some time in the
collection of money from cheque (Malik, Field and Gorwood, 2016). Thus, till the time, cash is not
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being collected by the bank then such amount is not credited by the bank, as a result, balance of
cash book and pass book will do not match.
Bank charges: Charges such as transaction fees, interest & others are deducted by the bank
and results in decreased bank balance, however, in the cash book, no entry is passed out, as a result,
both the balances differs from each other.
(C) (i) Bank reconciliation statement at 1st December 2016
(ii) Updated cash book of Kendal ltd for December 2016
(iii) Bank reconciliation statement as on December 2016
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CLIENT 5
A. (i) Sales ledger control account
SLC also termed as trade receivables control a/c is an accounting statement that presents the
outstanding balances of debtors along with their respective credit notes, receipts and invoices as
well (Alver, Alver and Talpas, 2013).
(ii) Purchase ledger control account
PLC also termed as payable ledger control account reflects necessary information about
supplier invoices, payments to payables and relevant credit notes and assists entity to know the net
outstanding amount that business has to pay to the suppliers.
B. Meaning of control accounts
Control accounts summarizes accounting information from the GL (general ledger) and
reflects only summarized financial data set which detailed data set can only be derived from the
subsidiary ledgers (SL). The purpose of making control account is to determine the total
outstanding amount of receivables and outstanding amount owed from suppliers. Trade
receivable/sales ledger control a/c presents monetary information regards to credit sales, collections
from debtors, discounts and allowances and net balance remained still due (McAuley, 2015).
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Similarly, accounts payable/purchase ledger control account presents information about credit
purchase, payment to the suppliers, discounts and allowances received and net outstanding amount
that suppliers owed. It helps internal managerial team of Henderson to make better credit
collections policies and decisions and manage cash successfully by promptly receipts from debtors
and late payments to suppliers. As a result, liquidity position to meet out short-term obligations can
be managed effectively.
CLIENT 6
A. Suspense account meaning and its features
Suspense account is a temporary account which records amounts on temporary basis i.e.
doubtful revenues. Accountant creates suspense account if trial balance debit and credit balances do
not perfectly matches with each other. In other words, one-sided error in the trial balance leads to
open a suspense account and reflects that there is something error made in the journal recording and
ledger posting. Suspense account works as a base to match both the balances of trial balance and
assists in preparation of final accounts (Hahn, Fairchild and Dowis, 2013).
Features:
 It helps to determine the total amount of error that has been made either in recording into
ledger or ledger posting or both.
 It helps to sort out the errors where transactions have been recorded wrongly, as a result,
both the balances can be matched.
 Checking errors helps accountant to correctly match both the balances and helps in
constructing final accounts i.e. income statement and balance sheet.
B. Trial balance
Trial balance is a statement that presents the closing balances of every ledger to know the
arithmetical accuracy in the recording, prepared here as under:
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C. Journal entries for rectification
D. Differentiate suspense and clearing account
One-sided error in trial balance is a reason for opening suspense account whereas on the
other side, clearing account is just open till the time an item cannot be transferred to permanent
account. Although both the accounts are temporary, still, they differs because clearing a/c aims to
post the relevant item to its correct ledger in later period whilst suspense account aims to match trial
balance by passing an accounting entry by the way of suspense by the amount of founded error.
Suspense account indicator errors or omissions made which is necessary to be rectifies for the
correct reporting, contrast to it, clearing account is constructed just to transfer the temporary item
into its relevant permanent item (Alver, Alver and Talpas, 2013). At the end, when the account is
transferred to its relevant ledger, clearing account shows nil balance, similarly, by passing necessary
rectification entries, suspense account is also cleared with zero balance.
CONCLUSION
Aforementioned report concluded that income statement and balance sheet only reports
quantitative information about business operations and financial position which is not only useful
for the internal decision-makers but also used by investors, lenders, suppliers and others for
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different purpose. However, in order to report true and fair position, accountant needs to follow
accrual, going concern, matching, full disclosure and other policies on a consistent base, so that,
results can be compared over the years. Besides this, Bank statement is created to match the balance
of bank column of cash book and pass book. Lastly, SLC and PLC has been prepared to find out the
net amount due from the debtors and amount that is still unpaid to the suppliers.
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REFERENCES
Books and Journals
Alver, L., Alver, J. and Talpas, L., 2013. Institutional pressures and the role of the state in designing
the financial accounting and reporting model in Estonia. In Accounting in Central and
Eastern Europe (pp. 91-120). Emerald Group Publishing Limited.
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics. 58(2). pp.339-383.
Gregory, B., Uys, P. and Gregory, S., 2014. The role of instant feedback in improving student
understanding of basic accounting concepts. Rhetoric and Reality: Critical perspectives on
educational technology. Proceedings ascilite Dunedin. 12(3). pp.634-637.
Hahn, W., Fairchild, C. and Dowis, W. B., 2013. Online homework managers and intelligent
tutoring systems: A study of their impact on student learning in the introductory financial
accounting classroom. Issues in Accounting Education. 28(3). pp. 513-535.
Henderson, S. and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Kim, J.B. and et.al., 2016. Financial statement comparability and expected crash risk. Journal of
Accounting and Economics. 61(2). pp. 294-312.
Kumar, K. K. and Rao, P. B., 2016. A Book Review of “Strategic Financial Management: Managing
for Value Creation” by Dr. Prasanna Chandra. Indian Journal of Finance. 10(12). pp. 56-64.
Malik, A., Field, C. and Gorwood, P., 2016. Managing financial resources in healthcare
settings. Psychiatry in Practice: Education, Experience, and Expertise. 14(3). pp.45-69.
Online
McAuley, S., 2015. Financial Accounting Regulations. [PDF]. Available through: <
http://www.dphu.org/uploads/attachements/books/books_5963_0.pdf>. [Accessed on 2nd
June 2017].
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