Financial Accounting Report: Analysis of Clients Financial Statements

This financial accounting report provides a comprehensive analysis of various clients' financial data. It begins with an introduction to financial accounting and its importance, followed by detailed journal entries, ledger accounts, and trial balances for multiple clients. The report includes the preparation of profit and loss statements and statements of financial position. It also covers bank reconciliations, the discussion of accounting concepts like consistency and prudency, and the explanation of depreciation methods. Furthermore, the report addresses sales and purchase ledger control accounts, suspense accounts, and the differences between clearing and suspense accounts. The report also explores accounting regulations, principles, and concepts, offering a thorough understanding of financial accounting practices. This document, available on Desklib, offers a complete overview of financial accounting, aiding students in understanding and applying key financial concepts.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
A) Preparation of report to Line Manager..............................................................................1
CLIENT 1........................................................................................................................................4
A) Producing journal entries for the client.............................................................................4
B) Ledger accounts for trader.................................................................................................6
C) Trial balance of the firm..................................................................................................21
CLIENT 2......................................................................................................................................22
A) Producing Statement of Profit and loss for client...........................................................22
B) Preparation of Statement of Financial Position...............................................................23
........................................................................................................................................................24
CLIENT 3......................................................................................................................................24
A) Statement of Profit and loss for LMS Ltd.......................................................................24
B) Balance sheet of company...............................................................................................25
C) Discussing consistency and prudency concept................................................................26
D) Explaining purpose and methods of depreciation...........................................................27
CLIENT 4......................................................................................................................................27
A) Preparation of BRS for company....................................................................................27
B) Discussing causes of variations in accounting records with bank records......................27
C) Cash book and BRS for organisation..............................................................................28
........................................................................................................................................................29
CLIENT 5......................................................................................................................................29
A) Sales and purchase ledger control account......................................................................29
B) Control account...............................................................................................................30
CLIENT 6......................................................................................................................................31
A) Suspense account and features of such account..............................................................31
B) Trial balance ...................................................................................................................31
C) Distinguishing clearing and suspense account................................................................32
CONCLUSION..............................................................................................................................32
REFERENCES..............................................................................................................................33

INTRODUCTION
Financial accounting is useful for preparation of final accounts quite effectually. Present
report deals with various clients for which financials statements are prepared. BRS and cash
book is produced as well. Furthermore, sales and purchase ledger control account both are
prepared. Along with it, financial accounting regulations, accounting concepts and principles are
explained. Moreover, guidelines imparted by accounting professional bodies are enumerated in
report.
A) Preparation of report to Line Manager
To: Line Manager
From: Junior Accountant
Subject: Accounting concepts and regulations useful for organisation
Respected Sir,
Accounting is an art of recording, classifying and summarizing business transactions in
that manner which can be served as a base for preparation of final accounts. It is essentially
required so that firm is able to impart true and fair information to the stakeholders of
organisation for taking better and enhanced decisions. Accounting cannot be done without
relying on accounting regulations and concepts for adequate preparation of financial statements.
Financial accounting and its purpose
Monetary transactions are recorded in that manner which serves for producing true
financial statements in the best possible way. Past data is taken and financials are drawn
showing true performance of company. Financials such as balance sheet, income statement and
cash flow statement are prepared that are beneficial to shareholders and stakeholders in taking
better decisions (Diouf and Boiral, 2017). Creditors are benefited as they can get information
about solvency and liquidity position with regards to overall health as depicted by such
statements. On the other hand, investors are able to study from financials whether it is
performing well or not in market and as such, it helps them in knowing earnings' capability of
firm. Other stakeholders are also able to take relevant information from financial statements in
an effective manner. In all, it can be said that liquidity, profitability, solvency and efficiency
position can be effectively clarified. Hence, financial accounting is important in analysing
1

overall performance of organisation in effectual way.
Financial accounting regulations
Business Transaction which occurs on daily basis are recorded in systematic manner. It
is essentially required so that organisation may be able to prepare fair financials in the best
possible manner. In order to present true financial reports, accounting regulations are vital for
preparation of financials quite effectually. Manipulation could prevail which hampers
information and false one is presented to stakeholders. To kerb this, regulations are provided by
various professional bodies guiding accountants, so that they may prepare true financials and
users of accounting information may be benefited with ease (Hoitash and Hoitash, 2017). UK's
corporate regulator FRC has given guidelines which are suitable for producing final accounts in
accordance to stated norms. Legal frameworks provided by the bodies are outlined as under-
FRC (Financial Reporting Council)- The body is entitled to regulate all government
departments and corporations so that they may strictly adhere to instructions. The guidelines
help company in preparing financials accordingly. Moreover, main of FRC is that fostering
investment in the nation and regulating corporate governance, thus, benefiting country entirely.
IASB (International Accounting Standards Board)- IASB guides and develops standards
which are globally accepted and understandable to accountants, easing-off preparation of
accounts. This helps accounting professionals in producing financials suitable for stakeholders
by applying in practice standards provided by professional body.
IFRS (International Financial Reporting Standards)- It guides accountants in following all
standards and applying the same in preparation of statements with ease. The manipulations can
be eradicated quite effectively and true financials are produced (Mullinova, 2016).
Accounting principles
Business entity concept- The business and owner are two separate entities as per the concept.
However, owner might be the same person who runs business but they both are considered to
be different from each other.
Time period concept- The concept postulates that organisation should provide information
about financial performance or results in timely manner which may be monthly, quarterly or
2

yearly. Hence, stakeholders are benefited with much ease.
Historical cost principle- It states that assets and liabilities of company should be recorded at
their time of acquisition or historically. This helps to analyse historical cost of assets which can
be compared with market value.
Going concern- The company will run for longer time period and will not close in short run.
Under this principle, financials are prepared for business.
Full disclosure- This principle states that all information must be disclosed in financial reports
which may be beneficial for stakeholders to rely upon.
Matching principle- It postulates that organisation should report expenses in the same period in
which income has arrived. This means that income and expenditures should match in which
they are incurred.
Recognition principle- The principle outlines that company should recognise an income only
when it is actually earned. Hence, actual payment received must be recorded in books of
accounts.
Conservatism principle- It says all revenues and assets should be recognised only when
assurance is accomplished. While, recognition must be made of liabilities and expenditures
soon when uncertainties regarding happening of the same are realised (Johnston and Petacchi,
2017).
Materiality concept- The concept states only that information should be recorded which could
influence decisions of stakeholders. On the other side, immaterial information could be
eradicated and ignored which may not impact decisions by users.
Concept of material disclosure and consistency
Material disclosure-
The concept states that immaterial items can be ignored which may not have impact on
decisions to be made by users of accounting information. Material items should be included
which positively influences decision-making. Hence, relevant information is imparted to them.
Consistency concept-
3

The consistency concept postulates that firm should follow same accounting policies
and methods for longer period so as to compare its own performance. Frequent changes in the
policies negatively impacts comparison of financial health, thus, it should be ignored.
CLIENT 1
A) Producing journal entries for the client
Journal entries are also termed as book of prime entry. It is said because these entries are
first step of recording of accounts and from it, ledger accounts are extracted. Journal entries for
client is listed below-
4

5

B) Ledger accounts for trader
Ledger is used to provide summarised view of individual accounts being identified in
journal. It is utilised for effective preparation of financials and next step is to produce trial
balance. Various ledger accounts are produced as under-
Purchase ledger
6

Sales Ledger
7

8

9

10

11

12

13

14

15

16

17

18

19

20

C) Trial balance of the firm
Trial balance is used to test mathematical accuracy which might creep in journal or ledger
accounts. It helps to effectively extract out indifferences in the best possible manner. Trial
balance for the trader is produced below-
21

CLIENT 2
A) Producing Statement of Profit and loss for client
22

B) Preparation of Statement of Financial Position
23

CLIENT 3
A) Statement of Profit and loss for LMS Ltd
24

B) Balance sheet of company
IAS 2 – Inventory valuation
Calculation of cost of sales and ending inventory cost is treated as monetary value. NRV
is expected amount which will be garnered by selling-off part of inventory. Stock should be
valued at lower cost and NRV (Net realizable Value) as per the accounting treatment prescribed
by IAS 2. The methods provided in accordance to IAS 2 are as follows-
FIFO (First In First Out)- It is a method in which old product would be sold first and as a
result, recent value can be recorded in financial statements. Thus, inventory valuation becomes
easy (Pawlowski, Nalbantis and Coates, 2018).
Weighted Average cost- Cost of goods manufactured is calculated and units available to be sold
are carried out and as a result, company can make proper valuation of inventory.
25

Difference between sole trader and company financials
Difference (Basis) Sole trader Company
Filing of accounts They are not entitled to submit
accounts.
Limited organisation is
required to file accounts
usually at the end of
accounting year.
Imposition of tax Tax is imposed on income
earned by individuals.
On the other hand, tax
imposed on company is on
overall financials as it is
regarded as separate entity.
Audit It is not statutory compulsion
to audit accounts of sole
trader.
It is mandatory to check
financials of company with
registered auditor for
scrutinising whether financial
statements reflect fair view of
company's health or not (Li,
Sougiannis and Wang, 2017).
Format of financials No format is prescribed to
prepare financials under the
law.
Companies Act 2006 governs
format and organisation has to
produce final accounts
accordingly.
C) Discussing consistency and prudency concept
Accrual concept
The concept states that revenues should be recorded only when it is actually earned and
not applicable when receive in cash. Similarly, when expenses must be recorded when incurred
and not when payment is done (Accrual Concept. 2013).
Consistency concept
26

It postulates that accounting methods and policies should be consistently followed by
company so as to make comparison of performance. Frequent changes hinders performance and
do not reflect fair view of organization.
Prudency concept-
This concept follows the principle ' anticipate all losses and expenditures but do not
anticipate gains and incomes. This means that underestimation of expenses should not be made
and overestimation of profits as well.
D) Explaining purpose and methods of depreciation
Use of depreciation- It is used to calculate cost of an asset which is allocated or spread
over the years in which asset is being used. This helps to indirectly link revenue attained from
the use of asset. Furthermore, matching principle is achieved by charging depreciation by
devising particular method (Cairns, 2018).
Depreciation is charge over an asset which is made to analyse how much asset has been
used to attain production. There are various methods as follows-
Straight line method-
In this method, same rate of depreciation is charged until life of asset is realised. Life of
asset becomes zero.
Written down method-
Fixed amount of depreciation is not charged but on diminishing rate, depreciation is
charged every year. It is useful for taxation authorities and they rely on the same for analysing
financials.
CLIENT 4
A) Preparation of BRS for company
BRS (Bank Reconciliation Statement) is an important statement prepared in order to
effectively analyse difference existing in bank records as per passbook and accounting records
maintained by organisation. It is used to analyse that payments processed are duly recorded in
bank passbook and cash is collected. However, transactions are recorded by bank on later date
while, firm records the same as soon as it is presented in bank but balance differs. Thus, to
rectify the same, BRS is prepared (Kouki, 2018).
27

B) Discussing causes of variations in accounting records with bank records
Various causes are cheque not cleared by bank till date, deposit in transit, cheques which
are dishonoured, outstanding cheques etc. which leads to variations in bank records with that of
accounting records of firm.
C) Cash book and BRS for organisation
28

29

CLIENT 5
A) Sales and purchase ledger control account
Sales ledger control account
Purchase ledger control account
30

B) Control account
It is prepared by large organization which has numerous business transactions on day-to-
day basis. In relation to this, it is prepared to have better analysis over transactions and thus, firm
prepares control account.
CLIENT 6
A) Suspense account and features of such account
Suspense account is a temporary account prepared because there are certain transactions
which cannot be posted in particular account (Narayanaswamy, 2017). Thus, until nature is
identified, suspense account is prepared and reverse back to original head of account, once
company knows its nature. Main feature of suspense account is that unidentified transactions can
be posted to suspense account. Moreover, it is useful when nature of account is classified.
B) Trial balance
C) Distinguishing clearing and suspense account
31

Clearing account Suspense account
Final account is extracted as posting is done
and remainder becomes zero.
Here, zero balance is attained by transferring
into respective account head.
The transactions are outstanding and ready to
be settled in respective account.
The transaction entered here are of temporarily
nature because particular head tends to be
unidentified.
Clearing account is helpful in analysing current
transactions quite effectually.
It is helpful in assessing errors in transactions
which remains unidentified for particular
period.
It is prepared highlighting incomplete and
pending transactions.
The transaction here are not incomplete but
waiting for shifting to respective account.
CONCLUSION
Hereby, it can be concluded that financial accounting should be done accurately so that
final accounts may be effectively extracted. Accounting regulations provided by professional
bodies are helpful for accountants to carry out true and fair view of financials exhibiting real
performance of company. Moreover, manipulations could be controlled in a better way. Hence,
by abiding all the guidelines imparted by FRC, IASB, IFRS, proper financials can be prepared
and stakeholders can rely on the same and better decisions can be made. Thus, financial
accounting is quite important for corporation in order to prepare the financial statements.
32

REFERENCES
Books and Journals
Cairns, R. D., 2018. Economic Accounting in the Simple Hotelling Model. Resource and Energy
Economics. 51. pp.18-27.
Diouf, D. and Boiral, O., 2017. The quality of sustainability reports and impression management:
A stakeholder perspective. Accounting, Auditing & Accountability Journal. 30(3). pp.643-
667.
Hoitash, R. and Hoitash, U., 2017. Measuring accounting reporting complexity with XBRL. The
Accounting Review. 93(1). pp.259-287.
Johnston, R. and Petacchi, R., 2017. Regulatory oversight of financial reporting: Securities and
Exchange Commission comment letters. Contemporary Accounting Research. 34(2).
pp.1128-1155
Kouki, A., 2018. IFRS and value relevance: a comparison approach before and after IFRS
conversion in the European countries. Journal of Applied Accounting Research, (just-
accepted), pp.00-00.
Li, S., Sougiannis, T. and Wang, I., 2017. Mandatory IFRS Adoption and the Usefulness of
Accounting Information in Predicting Future Earnings and Cash Flows.
Mullinova, S., 2016. Use of the principles of IFRS (IAS) 39" Financial instruments: recognition
and assessment" for bank financial accounting. Modern European Researches. (1). pp.60-
64.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning Pvt.
Ltd.
Pawlowski, T., Nalbantis, G. and Coates, D., 2018. Perceived game uncertainty, suspense and
the demand for sport. Economic Inquiry. 56(1). pp.173-192.
Online
Accrual Concept. 2013 [Online]. Available Through:
<https://accountingexplained.com/financial/principles/accrual>
33