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A/508/0496 Financial Accounting | Depreciation and Prepayments

Question :

This assessment will cover certain questions which are like:

  • What is financial statement and the differences between income and financial position.
  • Elaborate the bank reconciliation statements.
  • Elaborate the effective general accounts and balance sheets.
Answer :

INTRODUCTION

Financial accounting is a specific branch of accounting where involve the procedure of recording, summarizing and reporting the transactions and get result through business activities in certain period of time (Baker and Burlaud, 2015). On the basis of these transactions prepare of financial statements where consist of income statement, balance sheet and cash flow statement. These statements are presenting in front of outsider to present actual performance of the business such as investor, suppliers, creditors and customers. It is different from the management accounting because in this accounting reports are presented to internal management to take decision regarding to business. Financial accounting mainly uses to providing useful information to external users. In this report consist of preparing of the final accounts from the trial balance where adjust amount of depreciation & prepayments. Along with develop final accounts and compare with the differences between income statements and statement of financial position. Additionally, create bank reconciliation example and provide the procedure of this to define the general accounts and balance sheets.

Question 1

Profit & loss account

Particular

Amount

Particulars

Amount

To Opening inventory

190000

By Sales

1301500

To Purchase

960000

By Closing Inventory

120000

To Wages

330000

By Gross Loss

58500

1480000

 

1480000

To Gross Loss

58500

By Net loss

388000

To Sundry Expenses

165000

Less: Prepaid Rent

35000

161500

To Depreciation

70000

To Heat and light

92000

Add: O/s Gas payment

7500

99500

Outstanding wages

30000

 

 

388000

 

388000

Financial statement of the Greg Palmer

For the year ended 31st April 2019

Liabilities

 

Amount

Assets

 

Amount

Equity & Capital

Fixed Assets

Capital

960500

Furniture and fittings

350000

Less: Drawings

105000

Less: Depreciation

70000

280000

Less: Net loss

388000

9112000

 

Non Current liabilities

Current assets

Band overdraft

50000

Inventory

120000

O/s Gas Payments

7500

Trade Receivables

120000

O/s Wages

30000

Prepaid Rent

35000

555000

 

 

555000

 

Question 2

Statement of Profit & loss account for Kenny Paton

For the year ending 31st August 2019

Particulars

 

Amount

Sales Revenue

2068000

less: Cost of sales

1062000

Gross Profit

1006000

Less: Distribution Costs

367000

Less: Administration Costs

287000

654000

Outstanding interest

14274

Outstanding Dividend

152000

Depreciation:

On plant & machinery

119700

On office equipment

26400

146100

Profit before tax

39626

Less: Tax

30000

Profit after tax

9626

Statement of financial position of Kenny Paton

For the year ending 31st August 2019

Liabilities

Amount

Assets

Amount

Equity

Non current assets

Ordinary share capital

1520000

Tangible assets

Net Profit

9626

Premises

1345000

Property & plant

798000

Non Current liabilities

Less: Depreciation

119700

678300

5 Year 13% loan

549000

Office Equipment

176000

Dividend

152000

Less: Depreciation

26400

149600

O/s interest

14274

Current liabilities

Current assets

Trade payable

640000

Trade receivables

619000

Tax

30000

Bank

45000

Stock

78000

Total equity & liabilities

2914900

Total Assets

 

2914900

 Working Notes:

1. Cost of Sales

Particulars

 

Amount

Opening inventory

86000

Purchases

1054000

Less: Closing inventory

78000

Total

1062000

2. Depreciation

Particulars

Amount

Amount

Cost 

798000

176000

Less: Depreciation

119700

26400

Total

678300

149600

3. Dividend

10% on the share capital: 1520000*10%

                                   = 152000

Question 3

 Financial statement and profit & loss account are important portion of the final account that develop by the accountant to present the actual position of the organisation. The main purpose of these financial statements to supplying a absolute evaluation through financial execution of the business entity. In the context of the business reporting it is necessary by related rules according the statue. Eventually, statement of the financial position are reportable through organisations on the yearly base (Ball, 2013). To conduct inner analysis required to prepare final accounts which is determined the organisation position on quarterly and half yearly basis. There are defined the difference between the income statements and statement of financial position:

  • Timing: To analysis the position of the organisation required to know actual total assets as well as liabilities on a particular date and financial position statement produced through various company. It helps to analysis the position of all the assets & liabilities in order to defined monetary value in certain period of time. To conduct assessment of net gains and profit for accounting period of profit & loss of income statement is applied by the business entities.
  • Items reported: The significant items shown in the balance sheet like current assets, non current assets and in the liability section presents equity & liabilities and current liabilities. According to sub heading classified of the items and calculate both side if both side same so all the transactions are recorded appropriately. In the income statements from the revenues less cost of sales then less all the expenses and add all the income after that get the amount of the net profit/loss. The particular amount carried forward in the balance sheet and shows in capital section (Chhabra and Pattanayak, 2014).
  • Used for management: The managerial personnel apply to know the accurate data and facts to figure out the report as per the financial position statements. On the basis of financial statement company knows the actual position to take long term fiscal and economic decision regarding to organisations. To conduct day to day business activities and for short term decision require to analysis of short term goals on the basis of income statement of business that determined by the managers. 
  • Uses for lenders and creditors: The balance sheet developed for the lenders as well as creditors to present the structure, leverage, funding and solvency position of the business entity that is utilised by the creditors to analysis the different credit approaches and given period of the company. While income statements are utilised by the lenders to determine the appropriate profitability as well as level of sales to understand the business position to repay the debt in the stipulated time period.
  • Purpose: Both are different due to different purposes because the main purpose of the income statement to shows which sources company gain profits and where spend money that consist in expenses. Through this statement know the actual profit that helps to know actual position of the internal and outer management.The purpose of the statement of financial position to presents financial position of the organisation and calculate the total assets & liabilities. These are helping to analysis of actual position of the business (Iatridis and Dimitras, 2013).

Question 4

Bank Reconciliation Statement: It is a document where recoded all the bank amounts and match with the cash balance of the organisation from company's balance sheet to the corresponding amount on its bank statement. The particular statement defined as the summary of the business activity and the banking that reconcile of the entity's bank account. In this statement consist of the withdrawals, deposits and other activity the influencing of a bank account in certain period of time. This statement is helpful for the financial internal control tool that utilised to thwart fraud.

Process of Bank Reconciliation statement: There is some steps of bank reconciliation as follows:

  • During the first step, equate the starting account number with both the banking section of the cash book and the bank statement that vary due to unproductive or disenfranchised checks from the previous budget (Martin and Roychowdhury, 2015).
  • After that in the bank statement compare of credit side with debit side of the bank column of cash book and debit side of the bank statement with the credit side of the bank column in the cash book. There is marking tick when items shows in the both records.
  • Then evaluation the entries in the cash book and pass book to find out the missed entries that are not recorded into the bank column of the cash book. For this require to prepare a list of those entries and record all the entries that mossed by the accountant on the entries in the cash book.
  • Correct it when any mistakes or fault find out in the cash book.
  • Computed all the corrected and revised balance from the cash book, bank's column.
  • After updated cash book balance start to produce of the bank reconciliation statement.
  • There are add all the the un-presented cheques (When cheque issued by the business entity to its creditors or suppliers but not presented for payment) ad subtract all the un credited cheques like cheques paid into the bank but not yet collected that known as income.
  • After that apply all the important adjustments regarding the bank errors. In respect of bank reconciliation statement starts with the debit balance according to bank column of the cash book. After that add all the amounts  that mistakenly credited by the bank and less the amount that attributable by the bank. It is repeated for the bank-reconciliation when start from the credit balance.
  • As a result in the end figure must be equal to the balance as per the ban statement (Patro and Gupta, 2012).

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Updated cash book

Bank Reconciliation statement

 Check general accounts and balance sheets: Most of the organisation to analysis record of bank prepare bank reconciliation statement with the help of recorded transactions of ledger, balance sheets and different accounting book of the business firm. The observation and monitor activities is operated through distinguish between the amounts that are recorded by the accountant in the books of subsidiary books and financial position of the business with the numbers in the statement that generated through the bank. When identify any differences so conduct proper consideration has to be there. When there is not identifying any differences so it can be concluded in the reconciled bank statement. 

Bank reconciliation is essential area of the accounting and companies prepare it to know transactions of cash book as well as bank statement that are match or not. If there is recognising any differences so there must happen any mistakes in both account balances. Through reconciliation supports the exact problem that created in between general account as well as balance sheet. These differences are related with the some cheques that outstanding and issued but not presented. During to reconciliation the accountant must think about the o/s cheques and add back these deposited cheques. According to size of the organisation, there are many cheques that has been bot deposited so is not processed in the bank account. 

Question 5

Control Account: It is a type of general ledger account that consist of summary of different items and show their amount in this account. The control account mostly utilised by the organisations to keep detail information of the accounts payable as well as accounts receivable to contain large volume of transactions. The balance of the control account match with the related subsidiary ledger account. If any case the balance does not match so chances increase of wrong journal entry has done into control account that was not recorded into ledger (Raiborn and Sivitanides, 2015).

Reconciliation of Control account: The reconciliation of the control require to assure about the transactions of the sales and purchase ledger appropriate with the accurate entries in the control accounts. After the equalization of control account and other account total will be same otherwise any entry recorded wrong. The function of this account is relation to inner accounting process. The control accounts mainly knows as two specific account such as purchase ledger control account and sales ledger control account.

 Suspense Account:  It is a part of the company books where it records its uncategorised credits and debit amounts. The suspense account made by the company for temporarily basis to keep amount on hold because unrecognised amount when company decides to classification. Transactions in the suspense account keep continue to present in the general ledger for the business (Steenkamp, Baard and Frick, 2012). Organisation try to as soon as possible amount moved into right account from the suspense account.

Reconciliation of suspense account: A suspense account provide help to procedure of the reconciliation. While preparing of the final accounts that time some amounts are recorded in the suspense account due to identify right account for the particular amount (Wang, 2014). Suspense account reconcile to analysing and recognising the main source of recoded amounts after evaluating possible consequences and reapportion them. To understand the suspense account reconciliation through particular example:

A manufacturing company provide invoice of $2500 to supplier. In the accountant  of the organisation get confused that what is appropriate head in which the particular expenditure show in the right section. An accountant recorded the particular amount such as $2500 to the suspense account. This amount recognition in the creditors as well as shown as debit amount in the suspense account. It is understand through entry such as:

Account

Debit

Credit

Suspense Account

$2500

To Accounts payable account

$2500

 

In the end of the year closing of accounts the accountant check out all the accounts and check the above record transaction and search out the account and introduction related to company purchase section. Therefore, to reconcile the particular account such as:

Distinguish between control account and suspense account:

Control Account

Suspense Account

It is summarises all the large transaction in short manner.

It is recorded those amounts that not match any particular section.

This account known as the summary account

Suspense account also called as the Memorandum account.

Zero balanced by posting to final account

Zero balanced by posting to correct account.

The balance of this account shows that amount is waiting for settlement (Velte and Freidank, 2015).

In the account balance shows in suspense or resolution.

Through control account track the continuous transactions.

In the Suspense account track the problems or errors.

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CONCLUSION

As per the above report it is analysed that financial accounting is significant part of the organisation that help to present all the financial information of the business in front of outsider people through accounting books. On the basis of these book they are calculating the position and assess for the further investments. There are preparing to final accounts of different organisations to asses the position of business and know the difference between the income statements and financial position statements. Control account and suspense account prepare by the company to settle amount and present short summary of the transactions.

You may also like to read: Financial management

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