Financial accounting

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Table of Contents

Introduction .............................................................................................................................. 3

Part A ........................................................................................................................................ 4

Define financial accounting and its purpose? ........................................................................ 4

Name two internal stake holders and four external stake holders of a large business
organization. Comment briefly on why each of them might be interested in the financial
information of the organization. ............................................................................................. 6

PART B:.................................................................................................................................... 9

Client 1 ...................................................................................................................................... 9

Client 2: ................................................................................................................................... 10

Client 3: ................................................................................................................................... 11

b) List and explain some of the areas which may cause your record to vary from the bank
records (bank statements) ..................................................................................................... 11

Q.C Explain the term “imprest” as used in a petty cash System? .................................... 12

Clint 4 ...................................................................................................................................... 12

Client 5; ................................................................................................................................... 15

Conclusion .............................................................................................................................. 18

References:.............................................................................................................................. 19

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Introduction

This report determines the awareness of rules and regulations related to financial reporting, as
junior accountant of company. It is an accounting system which keeps the record of the
company’s finance related activities. In this the first entry are recorded, summarised, then
presented in financial statement and then this statements are used for making decisions in the
business. It depicts the true performance and position of business. This statements are used
externally and internally both. In financial accounting the double entry system is generally used
for recording of the data. It generally takes into consideration the needs of the external users
like government, suppliers, customers and banks. Financial accounting give the finance related
information of the company to the outsiders, so that they can analyse the information for
making investment decisions. Every limited companies prepares books. This is very important
for every business as it shows income and cost spent of company, it is also called final account
.

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Part A

Define financial accounting and its purpose?

This system of account includes preparation, of financial statements that can be used for the
external use, means it can be helpful to the external users like government, stakeholders,
customers, suppliers etc (Weil, et. al., 2013). it depicts the true and correct position and
performance of business. It includes preparation of trading, profit and loss account, that depicts
net profit of business and balance sheet that shows, the assets and debts or net capital of
business. Financial accounting, is prepared according to some accounting standards that
include various principles according to which the accounting is done. These accounting
principles cannot be changed by the firm frequently; it can be changed only when it is required
by the law or for better presentation of these statement.

Purpose:

 The objective of the such accounting is, to prepare accounting reports that can be used
as a decision making tool by the external users of this statement.

 It helps in giving satisfaction to the customers as they can study the financial statements
and get to know about the profits and soundness of income of the business.

 Financial statements another purpose is to help the management in taking the decisions
and check the financial soundness of the business (Hall, 2012).

 It helps to know about the finance position and changes, if occurred in financial position
as compared to, last accounting period.

 This statements provide the information to the various users, such as:

Managers

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Managers take the help of the financial statements in knowing the correct financial position
and to take the decisions accordingly. As these are the most important part in decision making
process as all decisions are taken after considering performance of business.

Shareholders

Shareholders uses the accounting statements to know rate of return from the shares they have
invested in the business.

Investors

Investors use financial statements to know the debt paying capacity of the business by judging
their profits and interest giving capacity.

Financial institutions

They use financial statements to decide whether they should give loans to this business or not.
It checks the financial health of the business.

Competitors

Competitors study these statements to analyse their performance in the market with rivalry
company so that they can improve their performance (Nam, et. al., 2019). And to know where
they stand in the market, to fight with their competitors in the long run.

Government

Government uses financial statements to calculate the tax from the profit earned and it helps to
know the economic progress of the business.

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Name two internal stake holders and four external stake holders of a large business
organization. Comment briefly on why each of them might be interested in the financial
information of the organization.

Stakeholders are individual or groups who, are keen interested in activities of business. They
study financial statements of business to know the various information and they can influence
by the performance and they can also influence the activities of the organisations. They can be
external or internal.

Internal stake holders

Internal stakeholders, are those persons or groups which, are interested in internal functioning
of the business or those who have interest within the organization (Honková, 2018). The two
internal stake holders are shareholders and employees.

External stakeholders

External stake holders are individual and companies which are outside of a company. They can
influence the various activities of the business. They can also be said as secondary stake
holders. They use these information of company to know its performance and state of liquidity.
These stake holders do not take part in the daily activity of the company but then to the
company’s action affect them. They don’t have any idea related to internal matters of the
company; they just only use financial statements. The four external stake holders are suppliers,
creditors, competitors and government.

Interest of shareholders in the financial statements

Shareholders

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these use the statements to know the financial strength of company. They want to, know
whether the company is in loss or in profit, whether they will get the good return or not. As
they are considered as the owner of company so they want to get information about financial
performance of the company and whether the company is able to provide them good interest
on their investment.

Employees

different employees have different perspective looking towards the financial statements. They
check the financial performance to check whether the company will give them bonus and
handsome amount of increment in their salary. They also study the financial statements to have
deep knowledge of the current position of the business as many companies involve their
employees to help them in making decisions which requires detail understanding. For these
particular reasons the employees of company are interested in the financial statements.

Government

they generally have keen watch on the big companies to know the amount of profit they have
earned. They are generally interested to know earnings of business as they can earn the high
amount of tax on it. They also do future predictions on the basis of the financial statements.
Various government agencies like sales tax department and income tax check whether the
company has paid true tax and have not indulged in window dressing.

Suppliers

these are the people who give goods to the particular are business only the suppliers will
provide goods when the company has good financial health. They also analyse the financial
statements to check whether to give goods on credit or not. They know about the finance related
health of the company before supplying them the goods (Bhattacharyya, 2012). Hence, these
are the main purpose for the use of financial statements by the suppliers.

Creditors

these include individuals and various financial stamens which check the financial statements
to know the debt paying capacity of the company. By studying they get sure about that they
will get their money back. Creditors are generally the person who provides goods on credit
(Gupta & Sharma, 2012). These groups are interested to know the financial soundness of,

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company before providing them credit. They are like the watch dogs for the purpose of being
safe in considerations it their money.

Competitors

they use these statements to compare their performance with that their rival companies. So that
they can know where they stand in the market and that helps in making the decisions and
formulate various strategies. They try to know the financial status of other companies, so that
they can know the competitive edge of their company and can improve their performance in
the market in the long run.

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PART B:

Client 1

You are required to draw a journal and calculate the Owner’s Capital at 1st January 2019

Liabilities amount Assets Amount

Payables : S hood 12150 premises 240000

Brown 16600 Van 51250

fixtures 8100

inventory 23900

Receivable: P 4400
Mullen

F Lane 6100

Cash at Bank 68400

Cash in Hand 15600

total 28,750 Total 4,17,750

-Capital owner

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Assets – Liabilities = 4,17,250 – 28750 = 389,000

Client 2:

Munteanu Limited is a retailing company and a client for your accounting firm. Its trial balance
at 31st December 2018 is as follows:

Trial balance

Particular dr. a/c Particular Cr. a/c

Opening balance 15,000 sales 1,38,000

Purchases 61,000 Less: returns inwards 1,35000

-3,000

Less: return outwards 59,500 Closing stock 20000

-1500

Gross profit 157500

total 293000 total 293000

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Client 3:

a) Explain the purpose of preparing the Bank Reconciliation Statement to Burcu the
CEO because he is having difficulties in understanding the reasons why this should be
performed on a monthly basis.?

Bank reconciliation Statement

Normally a firm or business maintains a cash book which maintains the bank and cash
transaction in it. The cash book comes with the two different columns the cash and the bank
column which shows us cash availability in business and cash availability in bank (Onuoha &
Amponsah, 2012). Banks also keeps another account for customer in whom the bank records
the deposited and withdrawal related information. Whenever a customer deposited cash in the
bank it recorded in credit side and whenever, customer withdrawal the cash it is recorded in
the debit side of the book. And every information sent to the customer by the bank whenever
they want by a statement on their home or through e-mail. A BRS made for rectifying the
difference between balance cash as per cash book and the passbook on the given date. It is not
necessary to make a BRS on a particular date. It just happens on periodically basis to know that
every bank related transaction is recorded properly or not and same as by the bank is happening
correctly or not. It helps in taking the errors in the transactions and a customer can get his exact
balance on the specific date. On the bank statement it is necessary to identify the unissued
cheques and deposit in transit by comparing the company who are issuing cheques and deposit
to the cheques which are shown on the statement. Adding back the deposit by using the cash
balance shown in bank statement. And then to deduct or remove the any unnecessary
outstanding cheques. And this adjusts the bank cash balance (May, 2013). And adding the
interest earned and receivable amount using the companies ending cash balance and deduct the
entire bank service fee, penalties and NFS cheques.

b) List and explain some of the areas which may cause your record to vary from the bank
records (bank statements)

Reasons for difference between cash balance and bank balance:

Outstanding cheque

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It is outstanding check that is issued by person, but does not clear in the bank accounts. these
cheques are called outstanding check.

Deposit in transit

these are type of funds which are received by company and also sent back to bank but not
processed and not deposited in the bank account.

Errors on the company’s book: the small errors in the cash book can also be big problem
sometime and also can generate to the difference between balance in bank statements and cash
book.

Q.C Explain the term “imprest” as used in a petty cash System?

C: An imprest system of petty cash means that the ledger account petty cash will be close down
at a fixed amount. If the amount of petty cash is $50 than it will be always report a debit amount
of $50 only

Clint 4

Hilly is a retailer and is the 4th client in your clients’ portfolio. Information relating to
his business for January 2019 is as follows:

a) Sales ledger control account

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Dr. Cr.

Details £ Details £

Balance B/d (debit 12.600 Balance b/d (credit 11,360

balance) bal.)

Credit sales 1,52,350 Credit purchase 1,26,500

Discount received 850 Bad debt written off 1,600

Purchase returns 3,110 Discount allowed 1,060

Payment to suppliers 91,010 Sales returns 4,320

Transfer of balance 640 Receipts from credit 1,20,610

from sales to purchase customer
ledger (contra)

Refund received from 500

supplier

Balance c/d (credit 11,360 Balance c/d (debit 12,600

balance) balance)

Balance b/d (debit 2,49,200 Balance b/d (credit 2,53,350

balance) bal.)

Purchase ledger control account

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Dr. Cr.

Details £ details £

Balance b/d (credit 11,360 Balance B/d (debit 12.600

bal.) balance)

Credit purchase 1,26,500 Credit sales 1,52,350

Bad debt written off 1,600 Discount received 850

Discount allowed 1,060 Purchase returns 3,110

Sales returns 4,320 Payment to suppliers 91,010

Receipts from credit 1,20,610 Transfer of balance 640

customer from sales to purchase
ledger (contra)

Refund received from 500

supplier

Balance c/d (debit 12,600 Balance c/d (credit 11,360

balance) balance)

Balance b/d (credit 2,53,350 Balance b/d (debit 2,49,200

bal.) balance)

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Part B:

Control Account: the general purpose, of control Account is, to make balance sheet neat and
clean with no details but with correct balance used in the financial statements. There are lots
of calculations of cash going in and out which, record in subsidiary ledger. And this is how
ledger spread all the information like where cash come from. From it came...the date it was
paid (Kayed, 2012). This account includes accumulate total, for transaction which, are
independently stored in the subsidiary level ledger. This balance be related to subsidiary ledger

Client 5;

a) ‘Describe, with an example, what you understand by the term ‘suspense account’
and what the main features of suspense accounts are.

Suspense Account

A suspense account is general ledger. In which amount record only for a particular time
(Paulsen, et. al., 2012). It is used, because relevant general ledger couldn’t have resolved at
that time, the transaction was recorded.

Ex: An accountant has given a work to maintain a journal entry properly which was written by
the controller of a big company. But there was a one amount which is seems like to be
incomplete. In order to complete it. The accountant has to make a mystery account in the ledger
suspense account. And amount will transfer from suspense account to appropriate account
when accountant gets the clarification from the controller.

The main features suspense account is:

It helps in making the trial balance

once its detected that the trial balance doesn’t match. In such case the difference can be, put
in shorter side of trial balance as suspense account. And, trial balance stand closed. And it very
important to do it properly or else and the trial balance can be go wrong. And because of this
small problem. A business can face the big problems.

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2. It helps in finding and verifying the mistakes: it completely helps in the finding the
mistakes because amount of suspense account, helps the accountant, can find the mistakes
which happened in past ( Lauer, 2012). Because without the suspense account it will take a lot
of time finding and correcting the errors. Which is not good for a business?

3. It helps in depicting type of mistakes: suspense account helps accountant to find mistakes
because, the balance helps the accountant, to determine the possible heads of account in which
the mistakes might have occurred.

4. It help in fixing the mistakes: as soon as it finds mistakes, amount of suspense is transfer
to main account. And suspense account, automatically gets close because of nil balance in it...

5. Helps in preparation of the final accounts: the final accounts need the trial to be accurate
and correct. And for this trial should be match. And when it does not happen, the account put
the difference on shorter side of the trial balance, as suspense the match the trial balance. And
final accounts can be making now.

Preparation of suspense account: we have already discussed that how a suspense account
helps in maintaining the balance (Shah, 2013). When the trial balance is not equal. So after
rectifying all the errors from the balance sheet. The amount in the suspense accounts are
reduced gradually there is no balance in the suspense what that means is that the account closed
automatically when all the mistakes from the one side is removed.

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Conclusion

Financial statements are the most important part of the company they provide financial
statements that get prepared according to certain rules and regulations that cannot be changed
regularly. They have to be prepared with full correct information so that know biasness is there,
as they show the, financial performance of business .it shows clear picture of performance of
company that can be compared to the other competitors to, know the performance .it us used
by the various users that can be eternally and the internally used for taking various managerial
decisions. It includes, various types of accounts. Thus, we can say that the financial statements
are an essential part which depicts various things and should be prepared using full precautions
and cheating taking into the considerations.

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References:

.Hall, J.A., 2012. Accounting information systems. Cengage Learning.

Bhattacharyya, A.K., 2012. Financial accounting for business managers. PHI Learning Pvt.
Ltd..

Honková, I., 2018. Process of Implementation of International Financial Standards

(IFRS). Hradec Economic Days 2018. Part 1.

Kayed, R.N., 2012. The entrepreneurial role of profit-and-loss sharing modes of finance: theory
and practice. International Journal of Islamic and Middle Eastern Finance and
Management, 5(3), pp.203-228.

Lauer, J., 2012. Making the Ledgers Talk: Customer Control and the Origins of Retail Data
Mining, 1920–1940. In The Rise of Marketing and Market Research (pp. 153-169). Palgrave
Macmillan, New York.

May, G.O., 2013. Financial accounting. Read Books Ltd.

Nam, Y., Sherraden, M.S., Huang, J., Lee, E.J. and Keovisai, M., 2019. Financial Capability
and Economic Security among Low-Income Older Asian Immigrants: Lessons from
Qualitative Interviews. Social work.

Onuoha, L.N. and Amponsah, E.B., 2012. Bank reconciliation as a due process imperative for
effective financial management. Canadian Social Science, 8(3), p.52.

Paulsen, A., Overgaard, S. and Lauritsen, J.M., 2012. Quality of data entry using single entry,
double entry and automated forms processing–an example based on a study of patient-reported
outcomes. PloS one, 7(4), p.e35087.

Shah, P., 2013. Financial Accounting. OUP Catalogue.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.

Gupta, N. and Sharma, C., 2012. Financial Accounting. Ane Books Pvt Ltd.

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