Financial Accounting Principles

Purpose of financial accounting:

The following points describe the key purpose of financial accounting, as follows:

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

2. Internal and External Stakeholders:

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

Major Internal Stakeholders and their Interest in large business organisation:

The following are the major internal stakeholders of a large business organisation:

1. Employees: Employees are prime internal stakeholders because employees have monetary interests in the form of salary, bonuses, and incentives in the organization. Employees in an entity play a major role in the formulation of strategy and other vital operations of organisation. A large business organization considers employee opinions, concerns, and values in formulating strategy, objectives, mission, and any long-term visions of a business organisation.
2. Owners or Shareholders: Owners or shareholders as the case may be are individuals or groups of individuals holding major shares of the company. Owners or shareholders have a substantial interest in forms of monetary investment and shares held by them in a 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 a significant external stakeholder in the large business organisation, Customers affect the demands and marketing strategy of business organisation. Customers have an interest in business organisation in the form of quality, brand status, price sensitivity, and popularity. The main purpose of a business organisation is to fulfill the demands of customers while providing maximum customer satisfaction.
2. Suppliers: Suppliers can influence organisations supply and demand perceptiveness. Suppliers try to receive their payments within scheduled times and have an interest in the liquidity position of the business organisation (Jönsson, 2013).
3. Regulators: Every organisation is governed by its relevant regulator as per its business structure. Regulators are external stakeholder and always try to monitor compliance with issued regulations and formalities. Regulators have an interest in business organisation in the form of assurance of constant compliance with existing and potential regulations.
4. Government: Governments collect various taxes on business organisations, therefore have a firm stake in the profitability and success of the business organisation. The government also ensures compliance with various laws and regulations and provides a framework for the 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 :

The accounting concept states the assumptions or insights that are based on the financial statements of any enterprise. An accounting convention is a common practice that is used as a guideline during business transactions (Peterson, S.J., 2005). The concept provides a different structure and internal logic to the accounting process. To maintain uniformity and consistency there is a need to prepare and keep records of certain principles and rules that 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 include transactions on a daily basis and be treated the 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 underestimated (White, Sondh, and Fried, 2000).

(d) Purpose of Depreciation and its Methods:

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

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

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

(e) Evaluation of the 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 the position of a business, entity, or another 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 a small size of the company. It includes the financial position of a sole trader which 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 companies: These are prepared by the wider size of the 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:

A Bank reconciliation statement is prepared by a business organisation to reconcile the balance of the bank account as prepared in the cash book with the amount shown in bank statements. Bank-reconciliation statements may be prepared monthly, quarterly, or annually however organisation should prepare bank-reconciliation statements on a 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 banks without any further information.

3. Imprest:

Imprest is a type of financial accounting system and the most popular imprest system is the petty cash system. Under the 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. It is used by large enterprises since their dealing volume is very advanced. Its main purpose is to maintain a general ledger clean and fair which helps to show the correct balance in any organisation. It is also used to record the balances on a number of subsidiary accounts and to provide a cross-verification on them. The following important points are covered to understand Hill which is discussed below-

• It helps to provide a cross-check to ensure 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 give benefit to any organisation (Edwards, 2013).

Client 5

(a) Suspense account and its features:

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

Main features of the suspense account:

• Suspense accounts help to find out any error or omission in final accounts.
• By using a suspense account it is very easy to allocate one-sided errors.
• In case of any arithmetical error in trial balance suspense accounts provide quick access to such errors (Holthausen and Watts, 2001).
• It assists in the finalization of accounts within the 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 the above report, it has been concluded that an organization's all activities are directly or indirectly linked to accounting principles, 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 the main purpose of financial accounting and it assists in the assessment of the actual position and performance of the 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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