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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 for the determination of performance rather than as a determinant of production. In the 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, and changes in equity for reporting purposes (Edwards, 2013). In financial accounting main motive of the organisation is to present financial data and information in a systematic manner for users of financial data such as investors, relevant authorities, lenders and creditors, debtors etc. This report describes the purpose of financial accounting, regulations concerned with financial accounting, rules and principles of accounting, and 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 a set of activities related to the 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 include recording, classifying, summarising, posting, analysing and reporting of financial data or information of business organisations 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 assist in reporting purposes. Financial accounting starts with the collection of financial data and information and ends with the reporting of financial performance and position (Fourie, 2015). In the financial accounting process, accounts are prepared in accordance with local and international accounting assumptions and standards. The following points describe the purpose of financial accounting, are discussed below:

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

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2. Regulations relating to financial accounting:

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

  • Regulations provides guidance for the 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 uniformity in the financial accounting process, some regulations are framed regarding accounting assumptions, concepts, methods, conventions and policies (Hale and Held, 2012).
  • For business organisations 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 help the organisation to smooth its financial accounting process:

Debit what comes in, credit what goes out: This rule is mainly framed for real accounts. Real accounts include all assets of a firm whether tangible or intangible such as plant and machinery accounts, furniture and fixtures, goodwill, land and buildings accounts, free-hold premises etc. Real accounts are classified as Tangible real accounts and Intangible real accounts. Tangible real accounts include building accounts, plant accounts, inventory accounts etc. Whereas Tangible real accounts include 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. A personal account refers to a general ledger account concerned with individuals, firms and associations like creditors accounts, debtors accounts, capital accounts, bank accounts etc. Under this rule, if a person gives something to an organisation it is treated as an inflow therefore personal account will be credited and if a person receives something from the organisation then the amount should be debited in the name of the person (Hall, 2012).

Debit all expenses and losses, credit all incomes and gains: This rule is framed for a nominal account. A nominal account refers to a 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 lead to an increase in capital therefore all incomes and gains are credited whereas all expenses and losses should be debited because expenses or losses lead to a decrease in capital.

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

Dual aspect concept: The dual aspect concept truly resembles to double entry system. According to the dual aspect concept each and every transaction in a business organisation affects both the debit and credit side simultaneously. Under a 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 reporting of assets on their cost. As per this principle business organisations should record their assets on actual cost.

Matching principle: According to this principle, all expenses of business should be matched with revenues that occur or being occurring in a particular period.  

4. Conventions and concepts relating to consistency and material disclosure

Accounting convention refers to guidelines and frameworks for the adoption of accounting principles. It includes general practices and guidelines which assist in the 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 the accounting process (Mullinova, 2016).

Convention of consistency: Conventions of consistency emphasise maintaining consistency in applied policies and assumptions from period to period. The use of this convention assists in the preparation of comparative accounts and reduces complexities in the accounting process.

Convention of material disclosure: This convention creates uniformity in the disclosures of material items in different organisations. Disclosure of material items in final accounts helps to identify any fraud, error or irregularity in a 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 include fundamental assumptions, rules and principles which provide a basis for the recording of accounting transactions and the 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 organisations should be applied consistently from one period to another period. Change in adopted accounting policies and assumptions is allowed only in case it is required by relevant statue or change would result in a better presentation of accounts.

Prudence: As per this accounting concept business organisations should record expenditures and obligations 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 simply exhibits the real consumption of a particular asset. The following are major methods to calculate depreciation:

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

Cost of assets less Residual value

       Total Useful life of the 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 the book value of the asset to get the amount of depreciation for the year. This method is used for assets that have more efficiency in the beginning and thereafter decrease 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 the calculation of the rate of depreciation:

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CLIENT 4

Purpose of bank reconciliation: A bank reconciliation statement is prepared by the organisation to reconcile the amount of bank account prepared by an organisation with the amount shown in the bank statement or passbook of the bank (Edwards, 2013).  

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

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

Its purpose is to reconcile the balance of the bank of books of accounts with the passbook.

Bank reconciliation statement on 1st December 2017

Particulars

Amount

Bank Balance as per passbook

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 the total amount of different ledgers like a summary (Khan and Mayes, 2009). The amount of each control account is also found in the subsidiary ledger. Balance of control accounts shows the sum of the balance of all accounts. The situations that attracts need to prepare a control account in the context of Henderson, are as follows:

  • A control account is required to show a managed summary of different ledgers and accounts.
  • A control account is a tool used by accountants in order to reconcile costs and final accounts.
  • Control account assists in the preparation of profit and loss and financial statements quickly and in an 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:

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

Main features of the suspense account:

  • Suspense accounts help to match the trial balances on a temporary or permanent basis.
  • These accounts assist in the quick Identification of errors by showing mismatched amounts in trial balance (Baldwin, Ingram and Albright, 2007).
  • Suspense account presents possible misstatements in the final account and assist in the identification of the source of the misstatement.
  • It is very easy to allocate one-sided errors by using a suspense account and it also helps to evaluate errors.

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

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CONCLUSIONS

In conclusion, it has been stated that accounting practices are being implemented by accountants of companies in order to maintain records, reports and financial statements at the end of an accounting year. Generally accepted accounting standards are followed by the accountant of the company so that statements are reliable and free from any type of error. Management of an organization makes sure that to increase the reliability and credibility of fiscal statements there must be proper use of accounting standards.  Reporting under the financial accounting process builds trust of users of financial statements in business organizations which creates potential long or short-term advantages for business organizations.

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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