The purpose of this report is to analyse practices and approaches related to financial accounting as well as its requirement in a business organisation. In this regard, it is needed to evaluate the different accounting principles that may provide appropriateness in business financial decisions.
- Evaluate business transactions with the help of double entry book-keeping, as well as extract a trial balance.
- Analyse final accounts in the context of sole-traders, partnerships or limited companies with the help of principles, standards and conventions.
- Discuss bank reconciliation in order to evaluate that company and bank records are accurate.
- Analyse control accounts and shift the transactions from suspense to right account.
In basic terms, financial accounting is related with providing the interested parties such as shareholders, suppliers, creditors etc. with the relevant information regarding the the financial position and health of the company by summarising and interpreting the informations in the financial records of an organization. such as statement of income, balance sheet, cash flow statements and comprehensive income statement. This information is then used by various stakeholders that are connected with the company in taking decisions regarding whether to invest in the future projects of the company or not. These financial statements also assists the suppliers in deciding whether or not to provide the raw material to the company by judging its financial position and health (Scott, 2015).
In the modern world, information is king. Financial accounting assists the firms in communicating with the interested stakeholders through preparing financial statements. It is the duty of the financial managers to ensure that data must be provided into the statements of the company represents true and real outcomes and it is reliable for the investors of the company so as to take decisions regarding whether to invest in the company or not. In this project of financial accounting we will discuss about the how financial transactions are managed and posted in the statements so that they become effective in taking decisions. The various process of reconciliation are discussed in this reports such as book keeping system, ledger posting system, preparation of trial balance etc. The principles of accounting , importance of financial accounts are also discussed in this project report.
(a): Concept of financial accounting
Financial accounting is the process of accounting that deals with with the preparation of financial statements of the company such as Profit and loss Statement, Balance sheet, cash flow statement and statement of changes in equity. The financial accounting process is done with use of certain pre determined guidelines which are issued by the standard setting bodies such as FASB, IASB etc (Edwards, 2013). The different companies chooses different accounting systems that are prepared by these standard setting bodies such as US-GAAP, IFRS etc. Financial accounting is done by keeping in view these standards and it is the duty of financial managers to present the financial statements with ethical standards such that they represents companies true financial position. The various types of accounts are prepared under financial accounting annually, semi annually which are discussed as under:
Statement of Profit and loss: This financial statements determines the profit and losses of the company which are made by the day to day operations. The items that belongs to the income statement includes revenues , expenses, gains and losses. It helps the company in determining whether the company is making profits or losses form the revenues of the company. The items such as operating profit , gross profit and net profits are calculated in the income statements. The investment ratios such as earning per share are also calculated by using the data form these statements.
Balance sheet: This statement tells about the financial position of the company at a point of time or at a particular date. Balance sheet includes the shareholders equity , company's total assets and total liabilities in the statement. This statements tells about the financial position and health of the company by taking into consideration the total capital that company have and determining whether company has the ability to pay off all of its liabilities by using the company's assets. Financial organisations and other investors check this financial statement for giving loans and investing in the company (Horngren and et. al., 2012).
Cash Flow statement: This financial statement of the company determines the total cash inflow and outflow from the various activities of organisation such as cash flow from operating activities , cash flow from investing activities and cash flow from financing activities. This statements enables the managers in checking the fluctuations of cash in the company. This statement helps in managing the cash in the company and ensuring that the company have optimum cash balance in the company for meeting the requirements of day to day operations of the company.
Statement of changes in owner's equity: This statement provides the necessary information about changes in the equity capital of the company, also it takes into consideration various reserves and surplus and minority shareholder's interest of the subsidiary company.
(b): Regulation related to financial accounting
Accounting is said to be an effective management of all essential aspects which are related with recording of financial transactions those are incurred during the period of time. The international recognized regulatory body named International accounting standards board (IASB) defines in its conceptual framework for financial reporting that ' the main purpose of financial statements of the company is to provide the stakeholders and potential investors with the information that is true and reliable and it shows the fair view of the company. The financial information users are very broad and diversified group according to the financial accounting. And because of such diversification the information required to each individual is also required for many reasons. Though, what every user of financial statements require a common thing which is very necessary that is the true and relevant information , which represents the fair view about the functioning of the company. To maintain these regulations, various regulatory bodies are created such as FASB, IASB etc. and these bodies issue the standards for the preparation of such statements by following accounting standards such as US-GAAP and IFRS (Baxter and Thibodeau, 2011).
The ASB (Accounting Standards Boards) also provides rules and legislations for the preparation of financial statements. These standards provided by the ASB also helps the managers and accountants in presenting financial statements by using financial information and policies of accounting as provided by the ASB.
(c): Accounting principles and regulations
Principles of accounting are based on common law or regulation which is being adopted or proposed with certain guide to actions or basis of conduct. It is known as one of effective system which will be used for the purpose of recording, summarising and evaluating an economic entity that are related with financial transactions. All the data collected from various sources of an organisation are gather for the purpose of making effective financial statements. Some of the common accounting matter which will be consists of earning, expenses, assets and income statements or so on. There are wide number of basic conceptual aspects that are needs to be determine in respect to formulate a firm’s overall base to get more reliable effective outcomes in coming period of time. The main objectives of accounting are to provide appropriate recording, reporting and evaluating financial information in more reliable ways (Openshaw, 2013). There are various types of accounting rules which are needed to make analysis of business transactions. Such as:
First common rules of accounting are that every financial data must be recorded into their set format. This has been said that every business which is operating at small or large scale need to use appropriate accounting rules in effectively.
Personal account: It used to represent all accounting associated matter which are related to an individual, companies and other organisations. In this, receivers must be debited and credit to all givers. Some crucial examples are, capital, drawings and non-profit organisation.
Second common rules of accounting are based on all transaction those are recorded by using double entry accounting methods. The primary act of recording accounting transaction is mainly included to as making journal entries in effective manner.
Real account: These kind of account is associated with tangible or intangible nature of matters. Some crucial examples that are taken into consideration is, plant and machinery, fixtures and patents. As per this rules, debit what comes in the business and credit what goes out during the time (Mulford and Comiskey, 2011).
The third rule of accounting is that every record transaction those are captures in log are said to be journal. It is associated with below mentioned golden rule.
Nominal account: It is one of the financial transaction which are done during each financial year till completion of accounting period. Examples are rent, Salary and dividends.
Principles of accounting
There are various principles which are related with development through common usage. Some of them are mentioned underneath:
- Full disclosure principles: It requires a companies to provide the essential information so that customer those are accustomed to learning financial information which can make better decision in coming time. In accordance with all detail aspects which are related with an organisation to depict principle and bookkeeping models and rules are consider by an organisation.
- Going concern principles: This is based on certain assumption which an organisation remains in business for the future growth. It has been observed that business in said to be continued in longer period so all transactions are made by keeping those aspects into account.
- Cost principles: It is said to be one of the common underlying rules in accounting. It is based on historical cost principles. The cost principles need that assets to be enter at the cash amount only at the time of assets gets acquired.
(d): Convention and concept of consistency and materiality
There are various types of accounting conventions which are held responsible for increasing the overall growth and profitability for an organisation. Some of them are:
Consistency: Company would need to select the most suitable accounting tools and techniques and make adjustments on consistence basis. Modification are permitted only in those situation in which new methods is taken into consideration in more reliable manner. It would reflect the real and fair aspects of the financial position of the company. Some crucial examples of using this is to determine that in case company uses straight line techniques and would not be varies at reducing balances method in other period of time (Amoako, 2013).
Materiality: It is based on immaterial cost that can be aggregated with the amount of common nature or operation of an organisation. It is more depends on total size and nature of their items which are incurred during the time. The target must be appropriately well organise and reported that causes agents to comprehend the opinion of conducting business in more reliable way to increase overall growth an profitability for an organisation. Importance of occasion is to be depicted clearly into their respective set accounts. The main observation of this convention is that it mostly relies on measure of fortune and nature of business operations.
Money measurement: According to this concept all transaction of business are recorded in respect to money used in an organisation. It used to provide appropriate aspects of measuring performance of the company. The skilfulness of administration that would not be revealed in the account.
Prudence/ Conservatism: The total earning and revenue are not awaited. It is more common concept of recognising expenses and debt in case there in uncertainty regarding reliable outcomes, but to appreciate earning that are confident of being trained.