Financial Accounting Homework: Comprehensive Case Study Analysis

This document presents a comprehensive financial accounting homework assignment solution, covering a range of topics. It begins with an introduction to financial accounting, defining its purpose and objectives, and exploring the interests of internal and external stakeholders in financial statemen...Read More

Financial Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
a. ......................................................................................................................................................1
1.Defining financial accounting and its objectives.....................................................................1
2.Explaining the internal and the external stakeholders and their in interest in the company's
financial statements.....................................................................................................................2
b........................................................................................................................................................3
Client 1.............................................................................................................................................3
I. Recording and classification of the journal entries..................................................................3
ii. Preparation of the trial balance...............................................................................................3
Client 2.............................................................................................................................................3
a. Preparation of the income statement.......................................................................................3
b. Statement of balance sheet......................................................................................................3
c. Explaining the concepts of accounting....................................................................................3
d. Describing the purpose of charging depreciation and various methods used by the
organization for evaluating depreciation.....................................................................................4
e. Evaluating the difference in between the financial statements of sole trader and the limited
company......................................................................................................................................4
Client 3.............................................................................................................................................5
a. Explaining the objective of formulating the bank reconciliation statement............................5
b...................................................................................................................................................5
c. Explaining the concept of imprest in the system of petty cash...............................................5
d. Preparation of bank reconciliation statement..........................................................................5
Client 4.............................................................................................................................................5
a. Preparing sales and the purchase ledger account....................................................................5
b. Explaining the meaning of control account ...........................................................................5
Client 5.............................................................................................................................................5
a. Explaining the meaning and the features of suspense account ..............................................5
b. Drafting a trial balance ...........................................................................................................5

c. Rectification of errors .............................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Financial accounting refers to the process that involve the collection and the processing
of the financial information in order to meet the need of internal and the external parties relating
to their decision making. The present study is based on several aspects of the financial
accounting that include its purpose and interest of the users in the accounting information of the
organization. Journal, ledger and trial balance is been under the study for recording and reporting
the results of the financial transactions. Various accounting concepts and the methods of
depreciation are also been described under the report. Furthermore, income statement and
balance sheet are also formulated. Moreover, Bank reconciliation statement with the description
of its purpose is been mentioned and concept and features of control and the suspense account is
also included.
a.
1.Defining financial accounting and its objectives
Financial accounting is the practice that records, analyse, summarize and report the
business transactions resultant from the operations of the business over the time period. It utilizes
a set of the accounting conventions and the principles at the time of financial accounting. These
accounting principles are formulated and established for the purpose of facilitating consistent
information to the investors, regulators, tax authorities and the creditors. Financial accounting is
been performed using the accrual and the cash method (Mullinova, 2016). It results in the
reporting of the income by preparing the income statement and financial position by formulating
the balance sheet. There are various purposes of the financial accounting as follows-
The main purpose or objective of financial accounting is to facilitate the information which is
required for making the suitable decisions and to frame the financial reports which results in
providing the information relating to the performance of the company to the internal as well as
the external users. Other objectives include-
Relevancy- The foremost purpose of financial accounting is to provide the relevant
information to the users which helps them in making the decisions regarding their financial well
being. It helps in making the investment decisions for the investors.
Reliability- Accounting information that is recorded been entered in the financial
statements must be reliable which means free from bias and does not contain any misleading
statement. Reliability can be attained by the organization through the verification of the
1

accounting treatments and the transactions based on the audits. This in turn enable the end users
in taking the best decisions by using the financial information.
Consistency- It is also one of the most important objective of financial accounting to gain
consistency in recording and communicating the financial information (Dutta and Patatoukas,
2016). This help the users in comparing the financial results of various periods with appropriate
disclosures.
Comparability- Facilitating the information that comprises the quality of comparison is
also a main purpose of the financial accounting. An organization uses the established system in
case of recording and reporting the financial information of the business so that investors can
compare the data for making the relative judgements for availing various investment
opportunities.
Thus, these are the major purpose for which the organization opts for financial
accounting in order to provide the adequate information to the users with compliance of all
standards and the concept of accounting as provided by IFRS and GAAP.
2.Explaining the internal and the external stakeholders and their in interest in the company's
financial statements.
Business organization functions in the large environment which involves many factors
that directly or indirectly affects the financial wealth of the enterprise. Stakeholders are
considered as one of the major factor that influences the activities of the organization.
Stakeholders are categorised into two segments that is internal and the external stakeholders.
Internal stakeholders means the individual or the parties that are present within the
enterprise. For example- Employees, owners, managers and investors.
Owners- For assessing the performance of their organization, they seek for the financial
statements that facilitate the useful information relating to the profitability and the position of
overall business organization across the globe (Barth, 2015). They show the keen interest in the
financial information as it helps in determining the stability level and the extent to which the
economic factors has affected their business. Financial information assist the owners in deciding
for making the further investment in the existing or the new business ventures that generates
large profits.
Managers- They require the financial information for planning, monitoring and in
making the relevant decisions for the business. Accounting information provides for allocating
2

the financial, capital and the human resources adequately through the process of budgeting.
Financial accounting helps the manager in monitoring the business performance by making the
comparison against the past results, competitor analysis through benchmarking and key
performance tool (Libby, 2017). Managers can form the business decisions like financing,
pricing and the investment appropriately by using the accounting information.
External stakeholders refers to the parties that are present outside the organization and
highly affects the activities of the business. For instance- investors, customers, lenders, tax
authorities, suppliers, Auditors and the government.
Investors- They need accounting information in order to analyse or assess the
performance of the organization in which the investment has been made by them. Primarily they
use the financial statements that are published by the organization for evaluating the profitability,
risk and the valuation in respect of their investment. Investors uses the financial information for
identifying that the investment made be them is good or in deciding whether to hold, decrease or
increase the portion of their investment from the organization.
Lenders- They utilise the accounting information in order to know the credit-worthiness
of the organization that means whether the enterprise capable of paying back the loan. They offer
the loans or the other credit facilities on the basis of financial health of the organization.
Government- They require accounting information for ensuring that the organization has
presented all the disclosures in accordance with the rules and the regulations as provided in the
accounting standards (De Waegenaere, Sansing and Wielhouwer, 2015). Government prevents
the stakeholders interest by ensuring that the statements is been providing a true and the fair
view. Government defines the thresholds like sales revenue, net profit etc. in context of
determining the size and the scope of each business.
Auditors- External auditors makes the examination of the financial statements and the
recording of the accounting information for the purpose of forming an opinion. The other
external user rely on the opinion provided by the auditors relating to the financial well-being of
the organization as the accuracy of the information increases by conducting the audit
appropriately.
3

B.
CLIENT 1
I. Recording and classification of the journal entries
Journal entries in the books of Alexandra for January 2019 are as follows
Date particulars Debit Credit
1st jan 2019 Storage exp.A/c Dr 450
To bank A/c
2nd jan 2019 Purchase A/c Dr 6080
To S. hood A/c 1450
To D main A/c 2060
To W Tone A/c 960
To R foot A/c 1610
3rd jan 2019 J Wilson A/c Dr 1200
T . Cole A/c dr 1650
F. Syme A/c Dr 2100
J . Allen A/c Dr 1020
P. white A/c Dr F. Lane A/c Dr 2520
F. lane A/c Dr 980
To sales A/c 9470
4th jan 2019 Motor Exp. A/c Dr 470
To cash A/c 470
7th jan 2019 Drawing A/c Dr 1500
To cash A/c 1500
9th jan 2019 T. cole A/c Dr 680
J. Fox A/c Dr 1310
4

To sales A/c 1990
11th jan 2019 Sales return A/c Dr 680
To J. wilson 270
F.syme 410
16th jan 2019 Cash A/c Dr 7020
To P. Mullen A/c 1400
To F. Lane A/c 3100
To J. Wilson 850
To F. Shyme 1670
19th jan 2019 R. foot A/c Dr 50
To Purchase return A/c 50
22st 2019 Purchase A/c Dr 3740
To L.Mole A/C 1830
To W. Wright 1910
24th jan 2019 S. Hood A/c DR 3600
J. Brown A/c Dr 4600
R. Foot A/c Dr 1400
To Bank A/c 9600
27th jan 2019 Salary A/c Dr 4800
To bank A/c 4800
30th jan 2019 Business rates A/c Dr 1320
To bank A/c 1320
5

6

7

8

9

F. Lane
Debit side Credit side
Date Details Amount (in
£)
Date Details Amount (in
£)
1st Jan 2019 Balance b/d 6100 16th Jan
2019
cash 3100
31st Jan 19 Sales 980 31st Jan 19 Balance c/f 3980
7080 7080
1st Feb 2019 Balance b/d 3980
J. Fox
Debit side Credit side
Date Details Amount (in
£)
Date Details Amount (in
£)
31st Jan
2019
By balance
b/d
1310
9th Jan 19 sales 1310
1310 1310
10

11

12

Capital a/c
Debit side Credit side
Date Details Amount (in
£)
Date Details Amount (in
£)
1st Jan 2019 By balance
b/d
389000
31st Jan 19 To balance
c/d
389000
389000 389000
D. Main a/c
Debit side Credit side
Date Details Amount (in Date Details Amount (in
13

£) £)
2nd Jan 2019 Purchase
day book
2060
31st Jan 19 To balance
c/d
2060 1st Feb 2019 By balance
b/d
2060
ii. Preparation of the trial balance
Trial balance for the month ended on 31st January 2019
Particular Debit Amount (in £)
Credit Amount (in
£)
S. Hood 10000
J. Brown 12000
D. Main 2060
R. foot 160
W. Tone 960
L. Mole 1830
W. Wright 1910
J whilson 80
F. syme 20
T.cole 2330
J. Allen 1020
P white 2520
F.lane 3980
J.fox 1310
P.mullen 3000
Sales 11460
Purchase 9820
14

purchase return 50
sales return 680
storage cost 450
Motor expense 470
salary 4800
drawings 1500
business rates 1320
capital 389000
premise 240000
van 51250
Fixtures 8100
inventory 23900
Cash in hand 13630
Cash at bank 59250
Total 429430 429430
Client 2
a. Preparation of the income statement
Profitability statement of Munteanu Limited for 31st December 2018
Particulars Amount (in £)
Amount (in
£) Amount (in £)
Sales revenue 138000
Less: Return inward 3000 135000
Cost of goods sold (W.N.1) 54500
Gross Profit 80500
Depreciation charged on land & building 800
Depreciation on plant & machinery 8000
15

Administrative Expenditure 30000
Distribution expenses 35000
Less: Prepaid rent -3000
Add: Outstanding salaries 2000
Finance Cost 1500 74300
Corporation tax 2000
Total 76300
Net margin 4200
Cost of Goods sold (w.n. 1)
Particulars Amount (in £)
Opening Inventory 15000
+Purchases 61000
-Closing Inventory -20000
-Return Outward -1500
54500
b. Statement of balance sheet
Balance sheet of Munteanu Limited for 31st December 2018
Particulars Amount (in £)
Amount (in
£) Amount (in £)
Current assets
Debtors or bills receivable 26000
Prepaid rent 3000
Closing stock 20000
49000
Fixed assets
Land & Building 60000
16

Less: Accumulated Depreciation charged
on L&B 10800 49200
Plant & Machinery 60000
Less: Depreciation @ 20% 28000 32000
81200
Total assets 130200
Liabilities
Current liabilities
Creditors or bills payable 22000
Outstanding salaries 2000
BO 18000
Corporation tax 2000
Total current liabilities 44000
Owners’ s fund 40000
share premium 20000
Retained earnings 22000
Net profit 4200
Total shareholders’ equity 86200
Total liabilities 130200
c. Explaining the concepts of accounting
Consistency- This concept of accounting states that the accounting method which is
adopted once must be applied by the organization consistently in the future. It acts as the
essential concept as it provides for the comparability which in turn helps the investors in making
the appropriate decision making.
Prudence- It refers to accounting concept that facilitates the anticipation for all the
possible losses and the realized profits (Callen, 2015). It is applied for preventing the profits to
be overstated and expenses to be understated.
17

d. Describing the purpose of charging depreciation and various methods used by the organization
for evaluating depreciation
Depreciation refers to fall in the value of the fixed assets due to any wear, tear or
obsolescence over a useful life of the asset (Francis and et.al., 2015). The main purpose of
evaluating depreciation is for matching the productive asset cost with that of the revenues earned
from that utilizing that asset. It helps in gaining the benefit of tax saving for the organization
against its revenues.
There are mainly two methods of depreciation that include-
Straight line method- It is called as the default method that is used for recognizing the
carrying amount of the non-current asset evenly over the useful life of asset.
Written down value method- It is known as the reducing balance depreciation method
where a fixed percentage of the depreciation is charged on original cost in first year.
e. Evaluating the difference in between the financial statements of sole trader and the limited
company
Sole trader Limited Company
 The segment of owners equity contains
only a single item that is the owner's
equity account.
 Tax under the financial statement of
sole trader is been imposed on the
income of the owner.
 Preparation of the financial statements
is not mandatory for the sole proprietor.
 Auditing of the sole proprietor's
statement is not compulsory.
 The owner's equity of limited company
include various items that are share
capital, reserves and other revenues.
 Tax is imposed on the limited company
as it is counted as separate legal entity.
 In accordance with the IFRS and
GAAP, it is mandatory for the company
to follow appropriate concept, rules and
the principles of accounting.
 The financial statement of limited
company is needed to be audited by
following proper regulatory framework
18

Client 3
a. Explaining the objective of formulating the bank reconciliation statement
The main objective of the BRS is to ensure accuracy of balances that are shown by pass
book and the cash book. It provides for updating cash book through discovering the entries that
are not recorded (Loulou-Baklouti and Triki, 2018). It helps in detecting the error and
rectification of it in books of the accounts.
b. Determine the areas which causes record to vary from banks
The major aspect relating to the causes varying records are in context of difference in
time committing with the records. The cash book that reflects deduction of the amount but it is
not mentioned in the pass book or the bank detail indicates the causes of varying entries. The
another variance are in terms of Checks which are issued by bank but not presented within the
stipulated time and efforts. It also results in occurring variance in bank details and the transaction
which are omitted by banks. The another aspects is related to interest which the bank directly
added to the firm account, and they came to know only through checking the statement of the
bank.
c. Explaining the concept of imprest in the system of petty cash
It is the type of the financial accounting system and known as the petty cash system. The
basic characteristic of this system referred as the fixed amount that is reserved after the fixed
time period or at the time of requirement of the circumstances. In other words it is kept as the
small reserve for meeting any uncertainty in the future (Lev, 2018). It helps in replenishing the
petty cash system subsequently of the organization.
d. Preparation of bank reconciliation statement
Bank Reconciliation account as at 30th Sept. 2018
Details Cheque No. In$
Balance as per
bank statement 515
Add:- C lyons 87
Updated cash book for the year ended on 31st sept. 2018
Date Receipts Amount Date Payments Amount
19

1 sept. 2018 balance b/d 515 9th sept. 2018 m. potter 251
7th sept.2018 cash sales 64 10th sept. 2018 c. lyons 87
17th sept. 2018 cash sales 171 14th sept. 2018 C hallen 89
24th sept. 2018 cash sales 103 20th sept. 2018 C. david 122
12th sept. 2018 m pointer 26 28th sept. 2018 S leeming 116
17th sept. 2018
Direct debit -
rates 105
30th sept. 2018 bank charges 36
30th sept. 2018 Balance c/d 73
Total 879 Total 879
Bank Statement as at 30th sept. 2018
Date Particulars Receipt Payment Balance
1st sept.2018 Opening Balance 515
8th sept. 2018 cash sales 64
11th sept. 2018 101202 251
13th sept. 2018 deposit 26
17th sept. 2018 101204 89
17th sept. 2018 debit rates 105
18th sept.2018 cash sales 171
26th sept.2018 cash sales 103
30th sept.2018 bank charges 36
10th sept.2018 C. lyons 87
20th sept.2018 C. david 122
28th sept. 2018 S. leeming 116
364 806
Balance as per cash
book 73
20

Client 4
a. Preparing sales and the purchase ledger account
b. Explaining the meaning of control account
Control account referred as the summary account in general ledger. It contains the
aggregate total of the transactions which are been stored individually in subsidiary ledger
accounts.
21

Client 5
a. Explaining the meaning and the features of suspense account
Suspense account refers to the amounts that are recorded on the temporary basis. This
account is used because the adequate general ledger could not determine at the time of recording
the transaction.
b. Drafting a trial balance
c. Rectification of errors
22