Financial Accounting Principles

Purpose of financial accounting:

Following points are describing key purpose of financial accounting, as follows:

• Main purpose of financial accounting is reporting of actual position and performance to internal and external users of financial data and information.
• Activities in financial reporting is framed in a systematic way to provide smoothness in accounting operations.
• Financial accounting ensures compliance of rules and regulation relating to relevant statute.
• Activities involved in Financial accounting, acts in conformity of various assumptions, accounting policies, concepts, principles and other significant fundamentals.
• Strategy formulating and implementation processes in business organisations are purely depends upon results of financial accounting.
• It provides a decision making framework for investors, shareholders, owners, lenders and creditors, governing body etc.
• It provides an assurance that accounting policies and procedures adopted by business organisation are uniformly followed.

2. Internal and External Stakeholders:

Stakeholders refers to individuals, persons, body of individuals or organization that has substantial interest or concern in an business organization. Stakeholders are highly influenced by actions of organization, goals or objectives and policies adopted by business organisation. Stakeholders are classified by their nature and concern in two parts: Internal stakeholders and external stakeholders. Large scale organisations have direct or indirect influences of different stakeholder (Hale, 2012). Key stakeholders in business organisation are shareholders, creditors, government directors, employees, owners, suppliers, unions, and the community. Internal stakeholders are those individuals, persons, group or organisation who can influence or are influenced by an business organisation such as directors, owners, employees and management. External stakeholders incudes individuals, persons,groups, body of individuals or organizations outside of business organisation like customers, suppliers, creditors, government or regulatory body, society etc.

Major Internal Stakeholders and their interest in large business organisation:

Following are the major internal stakeholders of a large business organisation:

1. Employees: Employees are prime internal stakeholders because employees have monetary interests in form of salary, bonus and incentive in the organization. Employees in an entity play a major role in formulation of strategy and other vital operations of organisation. A large business organization considers employee opinions, their concerns, and values in formulating of strategy, objectives, mission and any long term visions of business organisation.
2. Owners or Shareholders: Owners or shareholders as the case may be are individuals or group of individuals holding major shares of company. Owners or shareholders having substantial interest in forms of monetary investment and shares held by them in business organisation . Decisions of owners or shareholders can affect organisation in various ways. Owners are responsible for key decisions related to both internal and external stakeholders (Hall, 2012).

Key External Stakeholders and their interest in large business organisation:

1. Customers: Customers are significant external stakeholder in large business organisation, Customers affects demands and marketing strategy of business organisation. Customers have interest in business organisation in form of quality, brand status, price sensitiveness and popularity. Main purpose of a business organisation is to fulfil the demands of customers while providing maximum customer satisfaction.
2. Suppliers: Suppliers can influence organisations supply and demand perceptiveness. Suppliers are tries to receive their payments within scheduled times and having interest in liquidity position of business organisation (Jönsson, 2013).
3. Regulators: Every organisation is governed by their relevant regulator as per their business structure. Regulators are external stakeholder and always tries to monitor compliance of issued regulations and formalities. Regulators having interest in business organisation in form of assurance of constant compliance of existing and potential regulation.
4. Government: Governments collects various taxes on business organisations, therefore have firm stake in profitability and success of business organisation. Government also ensures compliance of various laws and regulations and provides a framework for organisation's sustainable growth.

Client 1

(a) Journal Entry in the books of Alexandra Study:

See Appendix

(b). Ledgers:

(c). Trail Balance in the books of Alexandra Study:

Client 2

(a) Profit and loss account of Munteanu Limited

 (b) Balance Sheet of Munteanu Limited 

(c) Accounting Concepts: Consistency and Prudence:

Accounting convention and concepts :

Accounting concept states the assumptions or insights which are based on financial statements of any enterprises. An accounting convention is a common practices that is used as guideline during business transaction (Peterson, S.J., 2005). Concept provides a different structure and internal logic to accounting process. To maintain uniformity and consistency there is need to prepare and keeping records of certain principles and rules have been followed-

Consistency: According to this convention accounting policies should be same or equal. The concepts, practices rules and principles which is being used in accounting should be observed and examined. It contains any organisation should includes transactions on daily basis and be treated same day and year to year.

Prudence: This is an accounting tool that assures assets and incomes are not overestimated and expenses and liabilities are not underestimates (White, Sondh, and Fried, 2000).

(d) Purpose of Depreciation and its Methods:

Depreciation: This states reducing value of an assets after a certain period, due to wear and tear of tangible assets. The main purpose of depreciation is to match the cost of fixed assets and to the revenues generated by using the fixed assets. Depreciation can be calculated by straight line method and written down value method.

Straight line method: This is used to recognise the carrying value of a fixed tangible assets during its useful life. The total amount of depreciation over the years useful life of assets would be less out of the full amount of assets any assumed salvage value (Khan and Mayes, 2009).

Written down value method: This is an accounting reducing method that reduces the value of an assets by a fixed percentage every year. Its values are reduced year to year and helps to define the minimum value foe which it would be sold.

(e) Evaluation of difference between financial statements prepared by sole traders and limited companies:

Financial statements are the final reports of any organisation that includes financial activities and position of a business, entity or other person. It also contains a balance sheet or statement records of a company's assets, owner's equity and liabilities at a given time.

For sole trader: financial statements are maintained by the sole proprietor or trader at small size of company. It includes financial position of a sole trader that is shown by the holding amount of assets and the amount of owner's capital. In this type of business audit is not compulsory.

For limited company: These are prepared by the wider size of company which is controlled by the government or other stakeholders. There is internal and external audit is needed by the organisation that helps to provide tax benefits (Saunders, Cornett and McGraw, 2006).

Client 3

1. Purpose of preparation of Bank Reconciliation Statement:

Bank reconciliation statement is prepared by business organisation to reconcile the balance of bank account as prepared in cash book with amount shown in bank statements. Bank-reconciliation statements may be prepared on monthly, quarterly or annually however organisation should prepare bank-reconciliation statements on monthly basis in order to avoid any complexity or inconsistency in accounts (Libby, Bloomfield and Nelson, 2002).

2. Areas where bank records vary from personal records

Difference between bank balance as per cash book and bank balance in bank statements arises due to bank charges charged by banks, direct deposit of any amount by any party, cheque issued but not presented and due to other charges charged by bank without ant further information.

3. Imprest:

Imprest is type of financial accounting system and most popular imprest system is petty cash system. Under imprest system of petty cash a fixed amount is reserved by organisation to meet their day to day expenses.

4. Bank-reconciliation statements of Burcu Ltd, for September 2018:

Bank Reconciliation Statement

 
Client 4

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

Control Account: /strong>Control account is the summary of a general ledger account. Is is used by large enterprises, since their dealing volume is very advanced. Its main purpose is to maintain general ledger clean and fair that helps to show correct balance in any organisation. It is also used o record the balances on a number of subsidiary accounts and to provide a cross verification on them. Following important points are covered to make understand hill which is discussed as below-

• It helps to provide a cross check for ensuring that all expenses are recorded or not through control accounts.
• It assures about preparing periodical and monthly financial statements.
• It is important to identify errors in the subsidiary ledgers that gives benefit to any organisation (Edwards, 2013).

Client 5

(a) Suspense account and its features:

Suspense account is a temporary or memorandum account prepared by business organizations to identify any error like commission, omission or other principle or arithmetical errors. Suspense account is opened by business entities to match the trial balance or financial statement at year end for short period.

Main features of suspense account:

• Suspense accounts helps to find out any error or omission in final accounts.
• By using suspense account its is very easy to allocate one sided error.
• In case of any arithmetical error in trial balance suspense accounts provide quick access to such error (Holthausen and Watts, 2001).
• It assists in finalization of accounts within scheduled time.

(b) Preparation of Trial Balance:

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

 JOURNAL ENTRIES

                                                                                                                                             (in £)

Conclusion

From above report it has been concluded that an organisation's all activities are directly or indirectly inked with accounting principle, policies, concepts and fundamentals. Almost all functions of accounts and financial transactions are covered under financial accounting. Financial accounting provides a framework for reporting and decision making. Reporting is main purpose of financial accounting and it assists in assessment of actual position and performance of entity.

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

Journal Entries:

Ledgers:

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