Finance Accounting

Purpose of Financial statement

• Financial statement shows financial details of company like profit earned, assets, retained earnings for both internal and external user who so ever are interested in financial statements of company.

• Investor invest in company after analysing the financial statement of the company. Firm with more assets and profits will attract more investor. Therefore, this is win win situation for both investor as well as for firm.
• Lenders/Creditor prior of extending loan thoroughly checks financial statement of respective company and then make decision related to extending or restricting their credit requirement.
• Taxation are imposed by government on basis of revenue and assets of company. Hence, real position is displayed by financial statement thus charged tax accordingly.
• Financial statements help in making external comparison (between different firm) as well as internal comparison (within the firm).

2. Regulation related to Finance

Stakeholder of company are the users of financial statement. They access financial statement for their personal interest like investment/purchase share of particular company, provide credit to the company, purchase product etc. Moreover, the main concern of user is that they get useful, reliable and relevant data as a base for future actions. Taking into consideration the requirement of user, government has developed a regulatory framework known as GAAP (General Accepted Accounting Principle). It is a standard method that involve concept, rules or principle, which ensure financial statement of the company is transparent, reliable as well as consistent (Fourie, 2015).

There are three regulatory/financial standard in the UK

Financial policy committee: It check financial statement as a whole. It's work is to manage risk associated with the stability of firm. Hence, they are responsible for macroeconomic regulation.

Prudential regulatory authority: These authority are responsible for microeconomic regulation. Their objective is to safeguard the interest, safety and financial strength of firm by reducing external factor that have negative effect on firm.

Financial conduct authority: Financial conduct authority's responsibility is to conduct business regulation, safeguard interest of investors and promote competition for customers. They have additional power like withdraw existing product, or imitated product as well as they can stop the functioning of any firm, which provide misleading data to outside party.

3: Accounting rules and principles

Accounting rules: Accounting is a dual entry system, which affect two account one is a debit account, and the other one is a credit account. There are three rules of accounting for personal account, real account and nominal account (Hall, J. A., 2012).

Personal account:It includes account of human being (sole proprietor, debtor) and artificial independent body (company, bank). As well as account of group person like drawing account, prepaid salary account etc. Hence, the golden rule for personal account is “debit the receiver and credit the giver”.

Real account: Real account is a part of impersonal account that include firm's tangible asset (machinery account, cash account) and intangible assets (patent account, goodwill account). The golden rule for real account is “Debit what comes in, credit what goes out”

Nominal account: Nominal is again a part of impersonal account that include all fictitious account like expense, revenue, gain and loss of firm. Such as travelling expenses account, advertisement expense, commission paid and rent received account. The golden rule for nominal account is “debit all expenses and losses, credit all income and gain” .

Accounting principles

Economic Entity: As business and businessmen are two separate legal entities. So it is duty of accountant to separate the account of business owner from its business. Like drawings are liability of business owner.

Monetary measurement: Accountant of firm record only those transaction which can be displayed in term of money. There can be non monetary transaction which are important for business but can't become part of financial transaction.

Historical cost principle: The value of assets keeps on changing with time. Moreover, it is the duty of accountant to update only that price on which assets were taken or brought into the firm. Firm don't have to do anything with current value of asset. Their further valuation takes place on basis of historical prices.

Full disclosure of account: Any relevant information to stakeholder must be displayed in the books of firm. This principle make sure that stakeholders don't get manipulative or misleading data as well as it ensure firm don't hide any relevant entry.

Going concern principles: This principle says whenever a firm operate, it operate with life long running prospective. In case accountant comes to know that company can't continue any more then this information must also be disclosed in their statements.

4 Convection and concept related to consistency and material disclosure

Consistency: This method states that the policy formed by company should be followed for years and years they cannot change them repeatedly. Adopting same policy helps company to make better comparison within the industry. For instance, if a firm is following straight line method of depreciation they should try to continue with that only (Jönsson, 2013).

Materiality disclosure: All transaction should be recorded or disclosed properly. This brings transparency to firm and attract stakeholders. Like if the company’s liabilities are more than asset they should disclose it in their financial statements. All petty information should not be hide from outside party for the self-motives of firm.Coursework help online

Client 1

See appendix

Client 2

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

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

Client 3

(a) Profit and loss account of Bowling Limited:

(b) Balance Sheet of Bowling Limited

(c) Accounts concepts : Consistency and Prudence:

Accounting concepts refers to basic assumptions, rules and principles that gives a frameworks for recording of accounting transactions and preparation of final accounts. Accounting is mainly concerned with principles and accounting principles are framed on the basis of some assumptions such assumptions are also known as accounting concepts (Mullinova, S., 2016).

Consistency: According to this accounting concept accounting policies adopted by business organisation should be applied consistently from one period to another period. Any change in already adopted accounting policies and assumption can be made only if it is as per relevant statue or any change would results in better presentation of accounts.

Prudence: According to this accounting concept business organisation can record expenses, liabilities and obligation as soon as they occur whereas any revenues and incomes should be recorded as they realized.

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

Depreciation used by business organisation to exhibit decrease in assets arises due to obsolescence or physical wear and tear of assets during a particular period (Bushman and Smith, 2001). Depreciation is simply shows actual consumption of particular asset. Following are major methods to calculate depreciation:

Straight line method: In straight line method an equal amount of depreciation is provided by business organisation 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: In 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 the 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 (Holthausen and Watts, 2001). This method is usually adopted for plant and machinery, fixtures and fittings, motor vehicles, etc..

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 (Libby, Bloomfield and Nelson, 2002).

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:

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

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

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 

(ii) Sales Ledger Control A/c

(b) Control Account:

A control account refers to a general ledger account that shows only total amount of different ledgers like a summary (Edwards, 2013). Amount of each control account also found in subsidiary ledger. Balance of control accounts shows sum of balance of all accounts.

Needs for preparing control account in the context of Henderson: Control account required to show a managed summary of different ledgers and accounts. A 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, 2000). 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 posting of uncertain or doubtful entries and irregularities pending and unclassified amounts (Khan and Mayes, 2009).

Main features of suspense account: Suspense accounts assits in balancing of trial balance on temporarily or permanently basis. This accounts helps to easily Identification of error by showing mismatch amount in trial balance (White, Sondh, and Fried, 2005).

(b) Preparation of Trial Balance: 

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

 JOURNAL ENTRIES                                                                                                                                              (in £)

(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)

Conclusion

From the above report it has been concluded that financial accounting, GAAP framework, accounting principles and rules regulation associated with financial statement holds a huge relevance to prepare financial statement of the firm. Financial statement works for both internal party as well as for outside party. In simple words who so ever finds interest in financial report of company can go through the profit and loss as well as balance sheet of company. Internal party uses information to check the performance of company like the amount of revenue generated by company.

References

Books and Journal:

• 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.
• Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.
• Khan, A. and Mayes, S., 2009. Transition to accrual accounting. International Monetary Fund.
• Saunders, A., Cornett, M.M. and McGraw, P.A., 2006. Financial institutions management: A risk management approach (Vol. 8). New York: McGraw-Hill/Irwin.
• White, G.L., Sondh, A.C. and Fried, D., 2005. Analysis of Financial Statement. Analysis.
• Peterson, S.J., 2005. Construction accounting and financial management (p. 556). New Jersey: Pearson Prentice Hall.

Appendix

(a)  Journal Entry in the books of David Study

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

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