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Financial Accounting Rules Regulations and Principles

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Introduction

Financial Accounting is an area of accounting that considers cash or other monetary items as a basis of determination of performance rather than as a determinant of production. In financial accounting process accounting data or information is classified as cash inflow and out outflow in terms of revenue and expenditure, assets and liabilities. Financial data and information are collected and then summarised in order to prepare financial statements, income statements, cash flows, change in equity for reporting purpose (Edwards, 2013). In financial accounting main motive of organisation is to present financial data and information in a systematic manner for user of financial data such as investors, relevant authorities, lenders and creditors, debtors etc. This report describes purpose of financial accounting, regulations concerned with financial accounting, rules and principles of accounting, different aspects of financial reporting including concepts and conventions related to consistency and material disclosure.  

BUSINESS REPORT

1. Define financial accounting and its purpose

Financial accounting refers to set of activities related to preparation of financial  statements to present or report financial performance and position to internal or external users of financial data. Major activities of financial reporting includes recording, classifying, summarising, posting, analysing and reporting of financial data or information of business organisation including drafting of financial statements such as balance sheet, profit and loss and cash flow analysis. Financial accounting not only covers monetary items but also non monetary items which assists in reporting purpose. Financial accounting starts with collection of financial data and information and ends with reporting of financial performance and position (Fourie, 2015). In financial accounting process accounts are prepared in accordance with local and international accounting assumption and standards. Following points describes the purpose of financial accounting, are discussed below:

  • The primary purpose of financial accounting is reporting of final accounts to external or internal.
  • Financial accounting assists in compliance of rules and regulations prescribed by relevant authorities.
  • Financial accounting through internal check ensures accuracy in recording of financial information and data.
  • It assists in identification of suitable accounting policies, assumptions, conventions and other fundamentals as per business structure of organisation.   
  • Financial accounting provides a basis for choosing and implementing a most appropriate strategy as per business requirement.
  • Actual outcomes regarding financial performance and position of  business organisation under financial accounting process define the objectives and goals of company.

2. Regulations relating to financial accounting:

Regulations refers steps normally in form of order, taken by relevant authority or governing body to control and regulate activities of organisations or individuals. To establish proper control and to maintain uniformity in accounts relevant authorities create regulations. Following are the significant regulations relating to financial accounting:

  • Regulations provides guidance for preparation and presentation of financial accounts such as generally accepted accounting policies and standards.
  • Some regulations are applicable for business organisations operating its business globally such as IFRS (International financial reporting framework).  
  • For making uniformity in financial accounting process some regulations are framed regarding accountingassumptions, concepts, methods, conventions and policies (Hale and Held, 2012).
  • For business organisation regulated under any specific act, regulations are framed under such relevant act.

3. Describe accounting rules and principles

Data and information are initially recorded using accounting entries. There are some accounting rules are discussed below which helps the organisation to smooth their financial accounting process:

Debit what comes in, credit what goes out: This rule is mainly framed for real account. Real accounts includes all assets of a firm whether tangible or intangible such as plant and machinery account, furniture and fixture, goodwill, land and buildings account, free hold premises etc. Real accounts are classified as Tangible real accounts and Intangible real accounts. Tangible real accounts includes building accounts, plant account, inventory account etc. Whereas Intangible real accounts includes accounts of items which do not have any physical existence such as goodwill, patent, copyright etc.

Debit the receiver, credit the giver: This rule is framed for personal accounts. Personal account refers to a general ledger account concerned with individuals, firms and associations like creditors account, debtors account, capital account, banks account etc. Under this rule if person  give something to organisation it treated as inflow therefore personal account will be credited and if person receive something from the organisation than amount should be debited on name of person (Hall, 2012).

Debit all expenses and losses, credit all incomes and gains: This rules is framed for nominal account. Nominal account refers to General ledger account concerned with all revenues or income, expenses, losses and gains. In this rule capital is treated as liability for business and liability shows credit balances. Incomes and gains leads to increase in capital therefore all incomes and gains are credited whereas all expenses and losses should be debited because expenses or losses leads to decrease in capital.

Principles: Following are the major principles of accounting that provides a framework for preparation of final accounts, are as follows:

Dual aspect concept: Dual aspect concept truly resembles to double entry system. According to dual aspect concept each and every transaction in an business organisation affects both debit and credit side simultaneously. Under Single entry system only one side of an account is affected which creates complexity in accounting calculation therefore single entry system is avoided by entities (Jönsson, 2013).

Cost principle: This principle emphasises on reporting of assets on their cost. As per this principle business organisation should record their assets on actual cost.

Matching principle: According to this principle, all expenses of business should be matched with revenues which are occurred or being occurred in particular period.  

4. Conventions and concepts relating to consistency and material disclosure

Accounting convention refers to guideline and framework for adoption of accounting principles. It includes general practices and guidelines which assists in preparation of final accounts. Accounting conventions are used in areas where no accounting standard is prescribed. Conventions are applied by business organisations as per their requirements to reduce complexity in accounting process (Mullinova, 2016).

Convention of consistency: Conventions of consistency emphasises on maintaining consistency in applied policies and assumptions from period to period. Use of this convention assists in preparation of comparative accounts and to reduce complexities in accounting process.

Convention of material disclosure: This convention creates uniformity in disclosures of materiel items in different organisations. Disclosure of material items in final accounts helps to identify any fraud, error or irregularity in business organisation.

CLIENT 1

(a)  Journal Entry in the books of David:

Client 1 Particulars

continued Client 1 Summary

 being goods

(b) Ledger Accounts:

Storage Cost

Total

Motor Van A/c

Purchases A/c

T cole A/c

W Wright A/c

(c) Trial Balance as at 31st January, 2018:

trial balance for tyhe month of july

CLIENT 2

(a) Statement of profit and loss for Peter Hampau for the year ended 31st July 2018

particulars

(b) Statement of financial position for Peter Hampau as at ended 31st July 2018

Capital

CLIENT 3

(a) Profit and loss account of Bowling Limited:

sales

(b) Balance Sheet of Bowling Limited

Assets

 

(c) Accounts concepts : Consistency and Prudence:

Accounting concepts includes fundamental assumptions, rules and principles which provides a basis for recording of accounting transactions and preparation of final accounts. Accounting is purely based on principles and accounting principles are framed on the basis of some assumptions such assumptions are also known as accounting concepts (Bushman and Smith, 2001).

Consistency: As per this accounting concept accounting policies adopted by business organisation should be applied consistently from one period to another period. Change in adopted accounting policies and assumption allow only in case if it is required by relevant statue or change would results in better presentation of accounts.

Prudence: As per this accounting concept business organisation should record expenditures and obligation or liabilities as soon as they occur whereas revenues and incomes should be recorded when realized.

(d) Purpose of depreciation in formulating accounting statements and methods of Depreciation:

Depreciation is provided to show the decrease in assets arises due to physical wear and tear and obsolescence of assets during a particular period (Holthausen and Watts, 2001). Depreciation is simply exhibits real consumption of particular asset. Following are major methods to calculate depreciation:

Straight line method: Under straight line method an equal amount of depreciation is provided during the whole useful life of asset. This is an simple and most widely used method of depreciation. Formula of depreciation under this method is:

Cost of assets less Residual value

       Total Useful life of asset

Written down value method: Under this method a certain formula is used to calculate fix percentage of depreciation and such percentage is applied to book value of asset to get amount of depreciation for the year. This method is used for assets that have more efficiency in the beginning and thereafter decreases year after year (Libby, Bloomfield and Nelson, 2002). This method is usually adopted for plant and machinery, fixtures and fittings, motor vehicles, etc.. This is the formula for calculation of rate of depreciation:

CLIENT 4

Purpose of bank reconciliation: Bank-reconciliation statement is prepared by organisation to reconcile the amount of bank account prepared by organisation with amount shown in bank statement or pass book of bank (Edwards, 2013).  

Reason for variation in cash book and bank statement: Due to deposit of any amount by customers directly into bank account, bank charges charged by bank and organisation in unaware the fact, cheque issued but not presented etc. are major reason for difference in balance of cash book and bank statement as on a particular date (Bank reconciliation statement. 2017).

(i) Bank reconciliation statement at 1st December 2017:

Its purpose to reconcile the balance of bank of books of accounts with the pass book.

Bank reconciliation statement at 1st December 2017

Particulars

Amount

Bank Balance as per pass book

17478

Less: Suspense due to wrong carry forward

987

Actual balance as per cash book after reconciliation

16491

(ii) Durrell Ltd's updated cash book for December 2017 :

Updated Cash Book for December Month

Particulars

 

Amount

Particulars

 

Amount

Balance B/d

 

16491

Alexander

 

857

Suspense A/c

 

987

Bank Charges

 

47

Able

 

962

Burgess

 

221

Baker

 

1103

Barry

 

511

Direct deposit by customer

 

176

Cook

 

97

Charlie

 

2312

Payment

 

120

Delta

 

419

Hay

 

343

Instrument No. 785

 

106

Rent

 

260

Echo

 

327

Instrument No. 780

 

426

Cash Sales

 

529

Instrument No. 781

 

737

Fred

 

119

Instrument No. 310923

 

297

Instrument No. 787

 

260

Standing order rates

 

137

 

 

 

Balance c/f

 

19738

Total

 

23791

Total

 

23791

(iii) Bank Reconciliation Statement as at 31"t December 2017:

Bank Reconciliation Statement

Particulars

 

 

Amount

Bank Balance as per pass book

 

 

19738

Add: Items having effects of higher balance in cash book

 

 

         Cheque deposited but not yet cleared

 

120

         Bank charges not recorded in cash book

 

47

         Payment by bank not recorded in cash book

 

 

 

Instrument No.780

 

426

 

Instrument No.781

 

737

 

Instrument No.310923

 

297

Adjustment for standing order rates

 

137

 

 

 

 

Less: Items having effects of lower balance in cash book

 

          Cheque issued but not yet presented for payment

 

 

 

Instrument No. 785

106

 

 

Instrument No.787

260

366

         Direct deposit by customer

 

176

 

 

 

 

 

 

 

 

Bank balance as per cash book (Should be)

20960

Less: Opening Balance difference

(17478-16491)

987

Actual balance as per cash book after reconciliation

19973

CLIENT 5

In the books of Henderson for January, 2018

(a) Sales Ledger Control and Purchase Ledger Control Account:

  1. i)Purchase Ledger Control A/c

Purchase Ledger Control A/c

Particulars

Amount (£)

Particulars

Amount (£)

Discount Received

550

Balance b/d

10160

Purchase Return

2110

Credit Purchase

106500

Bank/ Cash (Payment to suppliers)

111010

Bank/ Cash (Refund from supplier)

400

Set-off (Transfer from sales ledger)

540

 

 

Balance c/d

2850

 

 

Total

117060

Total

117060

 

 

Balance b/d

2850

(ii) Sales Ledger Control A/c

Sales Ledger Control A/c

Particulars

Amount (£)

Particulars

Amount (£)

Balance b/d

9600

Sales Return

5320

Credit Sales

142350

Bad Debts

1200

 

 

Discount Allowed

960

 

 

Bank/ Cash (Receipt from credit customers)

150610

Balance c/d

6680

Set-off (Transfer to purchase ledger)

540

Total

158630

Total

158630

 

 

Balance b/d

6680

 

(b) Control Account:

A control account refers to a general ledger account that shows only total amount of different ledgers like a summary (Khan and Mayes, 2009). Amount of each control account also found in subsidiary ledger. Balance of control accounts shows sum of balance of all accounts. Following are the situations that attracts needs for preparing control account in the context of Henderson, are as follows:

  • Control account required to show a managed summary of different ledgers and accounts.
  • Control account is a tool used by accountants in order to reconcile cost and final accounts.
  • Control account assists in preparation of profit and loss and financial statements quickly and in easy manner (Saunders, Cornett and McGraw, 2006).
  • Control accounts are prepared by accounts as an activity of internal check or account balances and transactions.

CLIENT 6

(a) Suspense Account:

Suspense account is an temporary general ledger account prepared for posting of  uncertain or doubtful entries and irregularities pending and unclassified amounts. Practically amounts, transaction or balances that are unidentified before finalisation of account are recorded in suspense account until these amount are allocated (White, Sondh and Fried, 2005).

Main features of suspense account:

  • Suspense accounts helps to match trial balance on temporarily or permanently basis.
  • This accounts assist in quick Identification of errorby showing mismatch amount in trial balance (Baldwin, Ingram and Albright, 2007).
  • Suspense account presents possible misstatement in final account and assist in identification of source of misstatement.
  • It is very easy to allocate one sided error by using suspense account and also helps to evaluate error.

(b) Preparation of Trail Balance:

Ledgers

Debit

Credit

Purchase Account

700

 

Sales Account

 

1100

Rent Paid

250

 

Cash in bank

840

 

Travel expense

160

 

Receivables

320

 

Payables

 

350

Opening Inventory

220

 

Capital Account

 

710

Control Account

 

330

Total of all balances

2490

2490

(c) Journal entries in order to show necessary corrections for eliminating suspense account balance:

 Journal Entries

Particulars

Debit

Credit

Simon A/c                                                              Dr

       To Smith A/c

(being sale was debited to smith instead of Simon)

220

                        

220                 

Jones  A/c                                                              Dr

        To Suspense A/c

(being sale of £420 not entered in Jones account, now entered)

420

 

420

Suspense A/c                                                       Dr

        To White A/c

(being purchase of £750 not entered in White account, now entered)

750

 

750

 Dr. Suspense Account  Cr.

Particulars

Amount

Particulars

Amount

To White A/c

750

By opening balance

330

 

 

By Jones A/c

420

Total

750

Total

750

(d) Difference between a Suspense A/c and Clearing A/c:

Suspense account are mainly prepared by an accountant of a business firm in case of any error or omission found within account. In case if balance of trail balance on credit and debit side shows different balance accountant of use to open a suspense account until the problem is identified. On the other side clearing accounts are mainly prepared by bookkeeper of an organisation that help them to record financial dealing on  the temporary basis. The wait for the suitable time and post the transaction into permanent account. Clearing account can also be used in a way for accounts receivable (Peterson, 2005).

CONCLUSIONS

In conclusion it has been stated that accounting practices are being implemented by accountant of company in order to maintain records, reports and financial statements at the end of an accounting year. General accepted accounting standard are followed by accountant of company so that statements are reliable, free from any type of error. Management of an organization make sure that to increase the reliability and credibility of fiscal statements their must be proper use of accounting standards.  Reporting under financial accounting process build trust of users of financial statement in businesses organization which create potential long or short term advantages for business organization.

REFERENCES

  • Edwards, J. R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.
  • Fourie, M. L., and et. al., 2015. Municipal finance and accounting. Van Schaik Publishers.
  • Hale, T. N., Hale, T. and Held, D. eds., 2012. Handbook of transnational governance. Polity.
  • Hall, J. A., 2012. Accounting information systems. Cengage Learning.
  • Jönsson, S., 2013. Accounting and business economics traditions in Sweden: A pragmatic view. In Accounting and Business Economics (pp. 203-219). Routledge.
  • 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.
  • Bushman, R.M. and Smith, A.J., 2001. Financial accounting information and corporate governance. Journal of accounting and Economics, 32(1-3). pp.237-333.
  • Holthausen, R.W. and Watts, R.L., 2001. The relevance of the value-relevance literature for financial accounting standard setting. Journal of accounting and economics. 31(1-3). pp.3-75.
  • Libby, R., Bloomfield, R. and Nelson, M.W., 2002. Experimental research in financial accounting. Accounting, Organizations and Society. 27(8). pp.775-810.
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