Qualification - Higher National Diploma in Business

Unit Name - Financial Accounting

Unit Number - Unit 10

Unit Level - Level 5

Assignment Title - Applying Financial Accounting Rules and Principles in the Company

Learning Outcome 1: Record business transactions using double entry book-keeping, and be able to extract a trial balance

Learning Outcome 2: Prepare final accounts for sole-traders, partnerships, and limited companies in accordance with appropriate principles, conventions, and standards

Learning Outcome 3: Perform bank reconciliations to ensure company and bank records are correct

Learning Outcome 4: Reconcile control accounts and shift recorded transactions from the suspense accounts to the right accounts

You are a Junior Accountant in a medium sized accountancy and auditing company. As a part of the company annual appraisal process you have been asked by your direct manager to prepare report that define and explain the financial accounting and its importance in the business environment.

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Introduction:
Financial Accounting is all about preparation of books of accounts, its presentation in the form of summary, the analysis of the prepared accounts and reporting to appropriate stakeholders on the financial transactions that has taken place in a particular period. The financial statements prepared are mostly available for public use and the list of people who may be interested in the statements are banks, government, owners, suppliers, employees and investors.

In order to be promoted to a senior level, your manager told you that you need to make successful four (4) closed-book exams.

1. The report will include the following:

a) Define and explain financial accounting.

Definition and Meaning:
Financial accounting is an accountancy process in which the transactions are tracked, summarized and recorded in the form of different statements to provide a synopsis of the transactions that occur during a particular period of time. The transactions being monetary are represented in the form of the most important financial statements of the businesses like profits and loss account, balance sheet and cash flow statements(Mouck, 1989). In order to perform financial accounting, a number of accounting principles are required to be used. The selection of the principles depend upon a lot of factors which include the regulatory and operational requirements of the business and the reporting requirements prevalent in the country of operation. For example, In United States the US GAAP is followed, India follows IND AS and European Union nations follow IFRS. These principles have been discussed in the later segments.

Financial Accounting may be performed using cash basis or accrual basis of accounting. Many entities employ financial accountants who prepare the statements of the business as per the basis of accounting which have been set up by various boards for maintaining consistency and regularity among the adoption of accounting principles. The financial data which is used to perform financial accounting includes revenue transactions, expenses, assets, liabilities and equity. The statement of income includes all revenue and expense transactions which range from research and development to payroll. Assets, liabilities and equity are presented in the balance sheet.

The process known as financial accounting helps in determination of the net profit or loss of an entity at a particular point of time i.e. at end of the Income Statement. This component is posted to the Balance sheet under Equity as Retained earnings or accumulated losses along with other items of assets, liabilities and equity. The balance sheet is used by the owners of the business to ascertain the current position and future economic benefits.

As stated above, Financial Accounting may be performed using Accrual Method or Cash method. Some entities even use a combination of both. Usually, small organizations prefer adopting the cash method due to its simplistic approach. Large organizations mostly prefer the accrual system. Accrual system of accounting entails recording the financial transactions as and when they occur and revenue can be realised. It does not depend upon the actual realisation of cash. Cash Accounting on the other hand records transactions only when real exchange of cash is involved. In cash accounting, recognition of revenue is done on the basis of cash receipts and expenses are booked when expenses are paid in the form of cash.

The objectives of Financial Accounting can be listed below -
• Financial Accounting provides a permanent record to businesses of the transactions that are indulged into. These records may be required and used by businesses for multiple purposes like taxation, internal discussions, performance analysis, future plans etc. The permanent records generated by way accounting for all monetary transactions can be held for a long period of time and retrieved whenever required.
• Financial Accounting provides an aggregate measurement of the outcome of business. A business has several transactions every day. There are some profitable transactions while some loss making ones. Financial Accounting aggregates the impact of all the transactions over a time frame and provided periodic reports which help the business in aligning its operational activities.
• Financial Accounting helps to ascertain the credit worthiness of the entity. All entities require various resources for functioning. If the capital is short, it needs to be procured from Investors and for investors to provide funds to business, they require a satisfactory report on the ongoing operations of the business so that there is reasonable assurance that the business will earn profits. Past records of accounting help the investors in their decision making by providing them an idea of the credit worthiness of the business.
• Financial Information help in efficient use of existing resources. Internal Analysis can be conducted using Financial Statements which provide information on the use of resources along with the timings and a summary of all activities that took place through the resources. This helps management to assess their performance loopholes and perform better in future.
Having stated the various advantages and objectives of Financial Accounting, it is imperative to assess the limitations as well. First of all, Financial Accounting is not free of errors. There are high possibilities of errors despite strict regulations and rules. Moreover, accounting scams are very common in the modern era due to loopholes in the accounting system. The major limitations of accounting are -
• Financial Accounting is a subjective measurement which considers only monetary transactions. There are instances when the monetary value of certain transactions are not ascertainable. For example, depreciation in which case, accounting is bound to use an estimated amount. Such transactions make financial accounting subject to manipulation.
• Financial Accounting ignores Qualitative factors by attaching money value to everything. There are certain aspects of business which cannot be valued in monetary terms like Goodwill. Self-generated goodwill is ignored in accounting while purchased goodwill is recorded. This makes accounting subject to flaws.
• Financial Accounting excludes market dynamics like inflation and currency exchange rate fluctuations as the accounts are prepared in one currency which belongs to the place of operations. For example, the same asset may be purchased for ‘x' amount in the previous year and ‘y' amount in the current year. Although the purpose and utility of the two pieces of the same asset is same, they are valued differently in accounts based on their acquisition price. The impact of inflation and currency fluctuations is thus ignored.
• Financial Accounting ignores the concept of Opportunity cost which is a key element in decision making and can impact future decisions of the management.
However, despite limitations, financial accounting is a boon to the economy.In all, Financial Accounting has several aspects associated with it which are discussed in the report. The accounting conventions, standards, principles etc. together make the field of financial accounting a vast arena.

b) Explain financial accounting rules.

Rules of Financial Accounting:
The relevance and drawbacks of the financial statements emerge, in general, from the rules of accounting or its principles that decide the emergence. These guidelines were derived from traditions that were most commonly found to be beneficial in finance and trade (Robinson, 1998). The debit and credit scheme is centered at the core of the dual-entry system of bookkeeping. It is very beneficial, but then at the same point it is quite challenging to implement in practice. A knowledgeable executive can be expected to understand the scheme of debit and credit balances (Stolowy and Lebas, 2006). That being said, no business can afford such high cash expense for book keeping as it is usually performed by the staff members and the people working in shops.

This led to the creation of the Golden rules of accounting.
These rules turn complicated accounting rules into a collection of concepts that could be conveniently understood and implemented. Accounting involves basic golden rules mentioned below -
• "Debit Receiver and Credit Giver" -Personal accounts usually follow this rule. When any person or another business entity gives any type of asset to business, it increases inflow for the business and thus the giver is credited in the books of accounts. The converse of this, when the organization gives something to another person, it leads to an outflow and the other person needs to be debited.
• Debit whatever comes in and credit whatever goes out -This rule is applicable for Real Accounts. Real Account includes assets like Machinery, Building, Equipment etc. These accounts have a default debit balance. So whatever comes in, adds up to the list of real account and is therefore debited. Anything that goes out reduces the balance of real accounts or tangible assets and therefore is required to be credited.
• Debit all the expenses and losses and credit any incomes and gains -This rule is applied to all nominal accounts. In any business, the capital account is a liability as the business is treated as a separate entity from its owners. Thus, capital has a credit balance by default (Albrecht, Stice, et al., 2007). By crediting all the income and gains i.e. the inflows, the capital account is increased and the same happens vice versa i.e. capital account is debited or decreased in case of losses and expenses. This ensures that the system stays balanced.

c) Explain financial accounting principles, concepts, and conventions.

Accounting Principles, Concepts and Conventions:

Financial Accounting have various fundamental principles. These are -
• Monetary Unit - All transactions are required to be represented in the form of a single monetary unit. Financial Accounting does not account only for goods like the barter system (Macve, 2015). There are prescribed rules to deal with assigning value to transactions like in the case of depreciation, there are rates prescribed for the same.
• Going Concern - Financial Accounting considers the business to be a Going-Concern. Once formed, a business can end only on dissolution. The accounting principle of Going Concern assumes that the business will exist and continue as usual until the end of the next accounting year and there is no information of any dissolution of winding up. Because of this principle, accounting allows businesses to function on credit and account for the receivables and payables which intend to generate or lead to outflow of cash in the future. Even depreciation is charged in fixed assets assuming it will be used for many years as per this principle.
• Conservatism - This is one of the prime tenets of Financial Accounting. As per this principle, when there is doubt on the amount of inflows, the accountant should consider the lowest possible inflow while in case of outflow or costs, the highest should be considered. This is because conservatism principle implies preparing for the worst and hoping for the best. Inventories, for example, following this principle are recorded at lower of cost or net realizable value.
• Cost Principle - As per this principle, everything should be listed at cost price. Appreciation should be recorded only when realized. However, the recent changes in accounting counter this principle as Fair Value measurement is prescribed to present a more appropriate view of the financial statements.
The Accounting conventions list materiality, consistency and full disclosure in addition to conservatism.
• Full Disclosure - As per this convention, the users of the financial statements need to be provided with the information on all facts relating to the transactions for them to have the right interpretation of the statements. These disclosures may form part of the notes or the body of the financial statements itself.
• Consistency - The convention of consistency states that one a particular method is adopted foe accounting, the same is required to be followed for all subsequent events of similar nature. If consistency is not followed, comparison becomes difficult. However, this convention lists consistency only over time and does not include logical consistency.
• Materiality - This refers to the relative importance of a transaction. Accountants need to ensure that all material information is properly reported in Financial Statements. However, the statements should also be cost-effective.
Lastly, there arevarious accounting concepts like matching concept, timeliness, neutrality, faithful representation, prudence, completeness, historical cost, substance over form, money measurement concept and single economic entity concept. All these concepts lead to making Financial Statements concrete in all forms. In case of conflicts between concepts, the one best for an entity is required to be used.

d) What is the difference between Financial reports and financial statements?

Financial Reports vs. Financial Statements:

Financial Statements are part of Financial Reports. Financial Reports are reports on monetary matters having financial effects. These are used to transmit relevant information to users for their decision making. For example, Bank Statement, Aged Debtors report, etc. Financial Statements are also Financial Reports but have a more formal structure. While Financial reports can be prepared in any manner suitable to the users, financial statements have a more defined format to be used (Black, 2004). Financial Statements include the Income Statement, Statement of Financial Position, Statement of changes in Equity and Cash Flow Statement while financial reports is a wider classification containing various other documents. Financial Statements are mandatory to be prepared while reports are at the discretion of the management as these are used for internal purposes only. Although, there are no major differences, these terms carry different meanings in Accountancy.

Conclusion:
Financial Accountancy in each country is governed by its local laws as well as international accounting standards. Most nations have their own GAAP or generally accepted accounting principles to govern their financial accounting process. Apart from this, there is a set of international standards referred to as IFRS designed by the IASB which can be adopted by any nation (Walton and Aerts, 2006). This report has addressed various aspects of Financial Accounting and the segments highlight the importance of accounting along with the rules, principles and conventions which need to be followed.

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2. These four (4) closed-book exams will show that you have the knowledge, skills, and abilities to:

a) Correctly record transactions and produce an accurate trial balance by completing the balance off of ledger accounts, checking that each transaction is recorded in line with accepted accounting principles.

b) Apply appropriate and accurate calculations for the constructing of the final accounts.

c) Prepare accurate bank reconciliations that apply appropriate tools and techniques to check general accounts and balance sheets.

d) Produce accurate accounts that have been reconciled applying the appropriate methods.

Solution:

Journal Entries
These are the record of transactions which are maintained for both economic and non -economic transactions. It comprises of a particular format which is based upon dual system of accounting i.e. every transaction effect both debit and credit accounts. The total amount of debit side is equal to the total amount in the credit side. Journals are considered to be correct if it is balanced i.e. debit side equal to credit and if they are not same it is considered to be unbalanced. Journal entries, such as depreciation or bond amortisation, can record unique items or recurring items. Journal entries are generally entered in accounting software having different accounts like payables along with sub ledgers. For all transactions another business entity gives and value to organization, it leads to an inflow of resource and it must be credited in the books of accounts. The converse of this, when the organization gives something to another person, it leads to an outflow and the other person needs to be debited.The process of financial accounting helps in the determination of the net profit or loss of an entity at the end of the Income Statement. This component is posted to the Balance sheet under Equity as Retained earnings or accumulated losses along with other items of assets, liabilities and equity. The financial statements are used by the owners of the business to ascertain the current position and future economic benefits.

Journal

Date

Account and Explanation

Debit

Credit

Sept 1

Cash

 $ 50,000

 

 

                 Stewart Capital

 

$ 50,000

 

(Being Capital introduced by Stewart)

 

 

 

 

 

 

Sept 4

Supplies

$ 750

 

 

Furniture

$ 2,100

 

 

                 Accounts Payable

 

$ 2,850

 

(Being Supplies and Furniture purchased)

 

 

 

 

 

 

Sept 7

Land

$ 25,000

 

 

                 Cash

 

$ 25,000

 

(Being land purchased for office site)

 

 

 

 

 

 

Sept 10

Revenue

$ 840

 

 

                   Accounts Receivable

 

$840

 

(Being services provided but amount due)

 

 

 

 

 

 

Sept 14

Payables

$ 2,100

 

 

                   Cash

 

$ 2,100

 

(Being cash paid for furniture purchased)

 

 

 

 

 

 

 Sept 17

Cash

$ 140

 

 

                    Accounts Receivable

 

$ 140

 

(Being Cash received from receivables)

 

 

 

 

 

 

Sept 18

Cash

$ 280

 

 

                    Service Revenue

 

$ 280

 

(Being design prepared for school)

 

 

 

 

 

 

Sept 19

Salary Expenses

$ 290

 

 

                    Cash

 

$ 290

 

(Being salary expenses paid)

 

 

 

 

 

 

Sept 20

Rent Expenses

$ 500

 

 

                      Cash

 

$ 500

 

(Being rent expenses Paid)

 

 

 

 

 

 

Sept 21

Purchases

$ 12,000

 

 

                    Accounts Payable

 

$ 12,000

 

(Being inventory purchased on credit)

 

 

 

 

 

 

Sept 22

Accounts Payable

$ 6,000

 

 

                    Purchase returns

 

$ 6,000

 

(Being half of the inventory purchased returned)

 

 

 

 

 

 

Sept 23

Cash

$ 1,800

 

 

                   Sales Revenue

 

$ 1,800

 

(Being goods sold)

 

 

 

 

 

 

Sept 23

Cost of Goods Sold

$ 1,000

 

 

                     Inventory

 

$ 1,000

 

(Being inventory sold transferred to COGS)

 

 

 

 

 

 

Sept 25

Accounts Receivables

$ 5,000

 

 

                    Sales

 

$ 5,000

 

(Being goods sold on credit)

 

 

 

 

 

 

Sept 25

Cost of Goods Sold

$ 2,300

 

 

                     Inventory

 

$ 2,300

 

(Being inventory sold transferred to COGS)

 

 

 

 

 

 

Sept 26

Accounts Payable

$ 6,000

 

 

                    Cash

 

$ 6,000

 

(Being amount paid to creditors)

 

 

 

 

 

 

 

 

 

 

Ledger Accounts

An accounting ledger is prepared pertaining to each transaction and item which are necessary for preparation of balance sheet and income-statement transactions These are classified as store bookkeeping entries. The various ledger accounts that are to be prepared are cash, receivable accounts, investments, inventory, payable accounts, accrued expenses etc. The balances of the ledger accounts are then transferred for preparation of trial balance. It is an important tool in accounting that is used for preparation of most important financial statements like balance sheet, profit and loss accounts that reflects the financial position of the business organization. The ledger accounts have been prepared for each and every item and their closing balances are computed for transferring them to the trial balance worksheet.

Ledger

 

Cash

 

Accounts receivable

Inventory

 

Capital    50000

 

Land       

  25000

Service Revenue 840

Cash        140

Accounts Payable 12000

Accounts Payable    6000

Accounts   140

Receivable

 

Accounts Payable       

 2100

Sales rev 5000

 

 

COGS        1000

Service Revenue

280

Salaries 

290

 

 

 

COGS         2300

Sales Rev  1800

 

Rent 

500

 

Bal  c/f     5700

 

 

 

 

Accounts Payable    

6000

 

 

 

Bal c/f     2700

 

 

Bal  c/f    18330

 

 

 

 

 

 

 

 

 

 

 

 

 

COGS

Accounts payable

Sales revenue

Inventory 1000

 

Cash        2100

Supplies    750

 

Cash          1800

Inventory 2300

 

Inventory 6000

Furniture 2100

 

Accounts Receivable 5000

 

Bal  c/f     3300 

Cash          6000

Inventory 12000

Bal  c/f     6800

 

 

 

Bal c/f      750

 

 

 

 

 

 

 

 

 

Supplies

Furniture

Land

Accounts Payable 750

 

Accounts Payable 2,100

 

Cash         25000

 

 

Bal  c/f     750 

 

Bal  c/f     2,100

 

Bal  c/f     25000

 

 

 

 

 

 

Stewart, capital 

Salary expense 

Rent expense

 

Cash     50000

Cash            290

 

Cash           500

 

Bal  c/f     50000

 

 

Bal  c/f     290

 

Bal  c/f     500

 

 

 

 

 

 

Service revenue 

 

Accounts Receivable    840

 

Cash               280

Bal  c/f     1120

 

 

 

Trial Balance

Trial Balance refers to the worksheet which is prepared by transferring the closing balances of each ledger accounts. The total of all the debits and credits have to be equal while preparing trial balances. It is an important accounting tool that is being adopted by the company and on the basis of which all other statements are prepared. The statement has to be mathematically correct for accuracy of other financial statements. It helps in identification of correctness of the trial balances by detecting the errors like clerical errors, omission errors, totaling errors etc.

Account 

Debit

Credit

Cash

18330

 

Accounts Receivable

 5700

 

Inventory

2700

 

COGS

 3300

 

 Accounts payable

 

 750

Sales Revenue

 

6800

Supplies

 750

 

Furniture

 2100

 

Land

 25000

 

Stewart, Capital

 

50000

Salary

 290

 

Rent

 500

 

Service Revenue

 

1120

 

 

 

Total 

58,670

58,670

Conclusion

At the end of the LO1 Exam, it is clear that the first step in accounting process is to transfer each and every transaction to their respective debits or credits side based on the accounting principle of dual entry system. It gives clarity regarding the accuracy of the recording of various entries, transferring those transactions to their ledger accounts and preparation of the trial balances. It can be seen that the total of debits in trial balance equals total of credits in trial balance representing that the trial balance is a balanced one and it shows clarity and accuracy in recording of accounting transactions.

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LO 2 This examination is based upon the passing of adjustment entries in relation to various transactions that occur at the end of the accounting period or at the end of the month. The adjustment entries passed also have dual effect that is it affects both the debit and credit side of the accounts. The amount by which account gets debited equals the amount of credit side.

JOURNAL ENTRIES

Date

Account and Explanation

Debit

Credit

31 dec

Insurance Expenses

1600

 

 

                      Prepaid Insurance

 

1600

 

 

 

 

 

 

 

 

31 dec

Supplies expense

750

 

 

                       Supplies

 

750

 

 

 

 

 

 

 

 

31 dec

  Depreciation Expenses

1400

 

 

                       Accumulated Depreciation

 

1400

 

 

 

 

 

 

 

 

31 dec

  Salary expenses

600

 

 

                       Outstanding Salary expenses

 

600

 

 

 

 

 

 

 

 

31 dec

Unearned service revenue

2700

 

 

                     Service Revenue

 

2700

 

 

 

 

 

 

 

 

After the adjustment entries are passed the ledger accounts for the accounts that have been affected through the adjustment entries are prepared. The closing balances are computed and then transferred to trial balances. When the clsoing entries are passed, all the expenses and income are transferred to the income statement/Profit and loss account for compuattion of profits of the period.

Ledger- Adjusting and Closing Entries

Unearned service revenue

Service revenue

Insurance expense 

Service

Revenue    2700

Bal b/f      3500

 

Bal b/f     18700

Prepaid insurance 1600

 

 

 

P/L          21400

Unearned Service Rev. 2700

 

P/L         1600

Bal c/f       800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Prepaid insurance

Supplies expense 

supplies

Bal b/f      2500

Insurance expenses    1600

Supplies    750

 

Bal b/f      1500

 

 

 

 

 

P/L             750

 

Exp        

750

 

 Bal c/f          900

 

 

 

Bal c/f   

750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Depreciation expense

Accumulated depreciation  

Salary expense  

Accmulated

Dep.            1400

 

 

Bal b/f  310000

Bal b/f   1900   

 

 

P/L              1400

 

Depreciation 1400

Salary Payable  

 

 

 

 Bal c/f  311400

 

                    600

 

 

 

 

 

 

P/L           2500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salary payable 

Advertising expense

Rama, capital

 

Salary exp   600

Bal b/f        940

 

 

Bal b/f  162180

Bal c/f            600

 

 

P/L            940

 

 

 

 

 

 

Bal c/f  162180

 

 

 

 

 

 

 

Income summary

Rama, drawing

Insurance Expenses     1600

Service          Revenue 21400

Bal b/f      3540

 

 Supplies     750

 

 

Bal c/f       3540

Dep.            1400

 

 

 

Salary          2500

 

 

 

Advertising

Expenses      940             

 

 

 

Bal c/f        14210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Trial Balance - The adjusted balances are transferred from the ledger accounts to the adjusted trial balance account where the sum total of all debits equal sum total of all credits. This is the final balances of all the accounts and thus, the financial statements are prepared on the basis of the adjusted trial balance. The income statement is prepared on the basis of balances extracted in the adjusted trial balance. The statement of owner's equity portrays the change in owner's capital which occurs due to profits earned during the period and the drawings of the owner. After the preparation of all these accounts the final balance sheet is prepared that gives clarity regarding the financial performance of any company. It comprises of both assets and liabilities and thus, the amount of assets equals the amount of liabilities.

Adjusted trial Balance

Account 

Debit

Credit

Cash

 22,000

 

Accounts receivable

44,000

 

Prepaid insurance

 900

 

Supplies

 750

 

Building

 420000

 

Accumulated depreciation

 

311400

Accounts payable

 

2000

Salary payable

 

600

Unearned service revenue

 

800

Rama, capital

 

162180

Rama, drawing

 3540

 

Service revenue

 

21400

Salary expense

 2500

 

Insurance expense

 1600

 

Depreciation expense

 1400

 

Advertising expense

 940

 

Supplies expense

 750

 

Total

498380

498380


Income Statement

 

 

 

       Particulars

Amount

Amount

Sales revenue

 

21400

  Less : Expenses

 

 

  Insurance Expenses

1600

 

  Supplies  Expenses

750

 

  Depreciation

1400

 

  Salary Expenses

2500

 

  Advertising Expenses

940

7190

Total  Profit

 

14,210

 

 

 

Statement of owners' equity

 

 

Opening Capital

162180

 Add : Profits during the year

14210

 Less: Drawings

(3540)

Owners Equity

 172850

Balance sheet

Assets

 

 

Liabilities and owners' equity

Liabilities

 

Land

420000

 

Unearned Service Revenue

800

Less : Accumulated Depreciation

(311400)

 108600

 Accounts Payable

2000

 Accounts Receivable

 

44000

Outstanding Salary

600

 Prepaid Insurance

 

900

 

 

Supplies

 

750

Owners Equity

172850

Cash

 

22000

 

 

Total assets

 

 176250

Total liabilities and owners' equity

 176150

Closing Entries refer to those entries which are passed to close the nominal accounts like expenses, income, drawings and profit and loss account. When the closing entries are passed the drawings get transferred to capital account, expneses and income are transferred to profit and loss account/ income statement and the profit and loss account is then transferred to equity.This is the rule that is applied to all nominal accounts. In any business, the capital account is a liability as the business is treated as a separate entity from its owners. Thus, capital has a credit balance by default.

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Journal- Closing Entries

Date

Account and Explanation

Debit

Credit

31 dec

Capital

3540

 

 

                      Drawings

 

3540

 

 

 

 

 

 

 

 

31 dec

Profit and loss account

7190

 

 

Insurance Expenses 

 

1600

 

Supplies expenses

 

750

 

Advertising Expenses

 

940

 

Depreciation Expenses

 

1400

 

Salary expenses

 

2500

 

 

 

 

 

 

 

 

31 dec

Service Revenue

21400

 

 

                     Profit and loss Account

 

21400

 

 

 

 

 

 

 

 

 31 dec

Profit and loss

14210

 

 

                    Capital

 

14210

 

 

 

 

 

 

 

 


The post-closing trial balance is prepared after the closing entries are passed. Thus, in this trail balance only the items which belong to the balance sheet are reflected. The income and expenses account are replaced by the profit/loss which is further transferred to the capital account. This trial balance can only be used for preparation of balance sheet but cannot be used for income statement as it only reflects the assets and liabilities

Post- closing trial Balance

Account 

Debit

Credit

Cash

 22,000

 

Accounts receivable

44,000

 

Prepaid insurance

 900

 

Supplies

 750

 

Building

 420000

 

Accumulated depreciation

 

311400

Accounts payable

 

2000

Salary payable

 

600

Unearned service Revenue

 

800

Rama, capital

 

172580

 

487650

487650

 

 

 

Conclusion

At the end of this LO 2 Exam 1 it has provided clear understanding of the importance of passing of adjustment entries and the preparation of adjusted ledger accounts. The transferring of adjusted balances to the trail balances and preparation of income statement and balance sheet. It also gives knowledge regarding the passing of closing entries and the presentation of post-closing entries trial balance.Financial Accounting provides an aggregate measurement of the outcome of business. A business has several transactions every day. There are some profitable transactions while some loss-making ones. Financial Accounting aggregates the impact of all the transactions over a time frame and provided periodic reports which help the business in aligning its operational activities.

Part 1
Statement of cash flows

The cash flow statement is prepared for analysing the flow of cash from different activities like operating activities, investing activities and financing activities. It can be prepared using direct and indirect method. The question provided have been solved by using the indirect method. The indirect method of preparation of cash flow statement involves changes in working capital which is not accounted for while preparing cash flow statement using direct method. The plant have been purchased for $ 1,20,000 out of which $ 1,00,000 is paid in cash and the remaining is paid through notes payable. Since notes payable is a non-cash transaction it is not accounted for preparation of cash flow statements. However, the payment for notes payable have been done it is accounted for as investing activity. Depreciation is a non-cash expense and thus, it is added while computing cash flow statement.

The treatment of changes in working capital are as follows :
- Increase in assets and decrease in liabilities lead to decrease in cash flows as the amount to be received gets delayed and for liabilities decrease it denotes that payments have been done.
- Decrease in assets and increase in liabilities leads to increase in cash flows as the amount is realized from assets and no payments have been made for liabilities.

Cash flows from operating activities

 

 

Net Income

 

57,000

Adjustments to reconcile net income to net cash provided by operating activities

 

 

Add : Depreciation

25000

 

           Decrease in Accounts Receivables ( 50000-40000)

10000

 

           Increase in Accounts Payables

24000

 

Less : Increase in inventories

(8000)

 

           Decrease in Accrued Liabilities

(6000)

 

Net cash provided by operating activities

 

45,000

 

 

 

Cash flows from investing activities

 

 

Acquisition of plant

(120000)

 

Sale Proceeds from land

40000

 

Net cash provided by investing activities

 

(80,000)

 

 

 

Cash flows from financing activities

 

 

Issue of Stock

30000

 

Payment of dividends

(6000)

 

Net cash provided by financing activities

 

24000

 Net Change in Cash and Cash equivalents

 

46000

Add : Opening Cash

 

20000

Closing Cash and Cash equivalent

 

66000

Conclusion

The cashflow statement reflects the summary of cash transactions the details of cash and cash equivalents used in the company, if the cash inflow is lower than the cash outflow, then the company used the cash and cash equivalents to obtain the company's profit, and if it is higher than the cash outflow, the company faces the loss. The statement of cash flow is recognized from the three activities such as operating activities, activity investing and activity financing. The cash flows of the company have increased during the year symbolizing that the company has positive cash flows. It reflects the strong liquidity and solvency position of the company.

Part 2
The assets transferred by the partner to the partnership firm are recorded at current market value of assets and liabilities. In the given quetsion, both the partners contribute equally to the firm. Since Huda has contributed net assets of $ 66,100 to the partnership firm, the other partner Nader has also contributed equally in the form of cash to the firm.The balance sheet comprise of the assets and liabilities which have been contributed by the partners.

Journal

Date

Account and Explanation

Debit

Credit

April 15

Accounts Receivable

12000

 

 

Inventory

 40000

 

 

Prepaid Expenses

4100

 

 

Store Equipment

30000

 

 

                         Accounts Payable

 

20000

 

                         Huda's Capital

 

66100

 

 

 

 

 

 

 

 

April 15

Cash

66100

 

 

                        Nader

 

66100

 

 

 

 

 

 

 

 

Balance sheet

Assets

 

Liabilities and owners' equi

ty

Liabilities

 

Accounts Reeceivable

12000

Huda's Capital

66100

Inventory

40000

 Nader's Capital

66100

 Prepaid Expenses

4100

 

 132200

Store Equipment

30000

Accounts Payable

20000

Cash

66100

 

 

Total assets

152200

Total liabilities and owners' equity

152200

Journal

Date

Account and Explanation

Debit

Credit

December 31

Profit and loss Account

90000

 

 

                      Huda Capital

 

54000

 

                      Nader Capital

 

36000

 

(Being Profit of partnership firm distributed )

 

 

 

 

 

 

December 31

Nader's Capital

15000

 

 

Huda's Capital

32000

 

 

              Cash

 

47000

 

(Entry for drawings by partner)

 

 

 

 

 

 

 

 

 

 

Conclusion

The partnership accounts can be effectively prepared on the basis of contribution made by the partners in their ratio of capitals. It is decided by the partners through a proper agreement. The assets introduced by partners beocme the assets of the firm and vice versa for liabilities. The balance sheet comprise of the assets and liabilities which have been contributed by the partners. Drawings made by the partners are subtracted from their respective capital accounts.

Financial Accounting- (LO3+LO4)

1-
A bank reconciliation statement is a comprehensive summary that reconciles the bank record maintained by entity with the records maintained by the banks. It shows summary of deposits, withdrawals and other activities for a particular period affecting a bank account. It is a useful instrument of financial internal control used to prevent fraud.Bank reconciliation statements ensure the processing of payments and the deposit of cash collections into the bank. While preparing reconciliation statement the differences between the bank statement and book balances are identified and accordingly entries are passed.The Bank reconciliation statement helps in finding out the differences between the two and tracking the differences the two. Journal entries are passed for cash book prepared by the businesses to reconcile with the adjusted balances of the bank statement.

Bank Reconciliation

Bank

 

Books

 

 

Balance as per Bank Statement

3070

Balance as per Bank account

 

3760

Add : Cheques deposited not cleared

2100

Add: EFT collections

1000

 

 

 

           Interest

115

 

Less: Cheques issued not yet cleared

(1400)

 

 

 

 

 

Less: Service Charges

75

 

          EFT Ez Check

200

 

 

 

         NSF Check

830

 

Balance as per Cash Book

3770

Balance as per Pass book

 

3770

Journal

Date

Account and Explanation

Debit

Credit

17/2

Bank Account

1000

 

 

                   EFT collections

 

1000

 

 

 

 

 

 

 

 

01/02

EFT Ez Rent

200

 

 

                 Bank Account

 

200

 

 

 

 

 

 

 

 

13/2

NSF Check

830

 

 

                     Bank Account

 

830

 

 

 

 

 

 

 

 

28 February

Bank Account

115

 

 

                      Interest

 

115

 

 

 

 

 

 

 

 

28 February

Bank Charges

75

 

 

                     Bank Account

 

75

 

 

 

 

 

 

 

 

Conclusion

Bank reconciliation statement helps in analysis of the differences in the balances of bank book and the bank statement and helps in rectifying them. It is a widely used tool by the management of any company which helps to detect errors and frauds. A statement of bank reconciliation is a useful instrument of financial internal control used to prevent fraud.Bank reconciliation statements ensure the processing of payments and the deposit of cash collections into the bank.

2- A
Subsidiary ledger accounts are parts of ledger accounts. Customers subsidiary ledger accounts are prepared for each and every customer and accordingly there is carry forward of the balances to general ledger accounts. The balances from these accounts are then used while preparing balance sheet

Subsidiary Ledger; Customers (Debtors)

 

Karam

 LLC

Suzanne Proprietorship

Nader Company

Service

Revenue8000

 

Cash         2000

Service

Revenue 12000

Cash          7500

Service

Revenue 14000

Cash          9000

 

 

Cash         1500

Service

Revenue     5000

 

 

 

 

 

 

 

 

Bal      6000

 

Bal      4500

 

 

Bal      9500

 

 

 

General Ledger; Accounts Receivable

Accounts

 Payable

Total Accounts Payable

6500

 

 

 

                  Bal     6500

Accounts Receivables

 

20000

 

 

 

                 Bal    

 

20000

 

Saad

 Co.

Aslan

 Co.

Cash     1500

Purchases   3000

Cash       4000

Purchases 4000

 

 

 

Purchases 5000

 

 

 

 

 

Bal               1500

 

Bal              5000

2- B

 

Karam

 LLC

Suzanne Proprietorship

Nader Company

Service

Revenue8000

 

Cash         2000

Service

Revenue 12000

Cash          7500

Service

Revenue 14000

Cash          9000

 

 

Cash         1500

Service

Revenue     5000

 

 

 

 

 

 

 

 

 

Bal             6000

 

 

 

 

Bal 9500

 

 

 

 

Bal  4500

 

 

 

 

General Ledger; Accounts Receivable

Accounts Receivable

 

Accounts Receivables

 

 20000

 

 

 

                 Bal    

 

20000

Assets

Liabilities & Owner's Equity

Accounts Receivable              20000

Accounts Payable             6500

3-
For all the accounts for which indefinable accounts cannot be identified the entries are posted as suspense accounts. Later when the transactions are identified they are accordingly transferred to that particular accounts. Suspense accounts are highly used in accounts which helps to record those transactions for which required accounts are not identifiable.

Journal

Date

Account and Explanation

Debit

Credit

3 February

Cash

7500

 

 

                  Suspense Account

 

7500

 

(Being amount received from debtors)

 

 

 

 

 

 

4 February

Suspense Account

7500

 

 

                     Modern style Company 4541

 

7500

 

 

 

 

 

 

 

 

6 February

Suspense

9200

 

 

                     Perfect Manufacturing Company

 

9200

 

 

 

 

 

 

 

 

7 February

Purchases

9200

 

 

                 Suspense

 

9200

 

 

 

 

Suspense accounts enable the posting of transactions before actual information that is sufficient for posting or required for posting is available for passing the correct journal entries. There may be transactions that are not recorded by the end of the reporting period without such transactions being posted, resulting in inaccuracy.However, it is worth remembering that items represent unallocated amounts which is reflected insuspense account. As a result, it is usually viewed negatively to create and transfer amounts to suspense account with outstanding balances on financial statements and it can prove to be weakness for the ones who refer to those statements.Through reviewing each individual transaction in the account, suspense accounts are cleared. The goal of reviewing items is to move the transaction as quickly as possible to the appropriate account.

The process which is undertaken to reconcile control accounts and clearing suspense accounts are by analysis of each and every transaction and finding out the account to which the transaction relates. After identification of the proper ledger accounts the accounts which have been transferred to suspense accounts are cleared and transferred to respective ledger accounts.

Conclusion
Suspense accounts proves to be an essential account which have been used in accounting for recording of transactions which cannot be identified. It helps in easy recording and completion of data recording and thus, records are maintained on the basis of accuracy and correctness of transactions.

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Learning Outcomes and Assessment Criteria

Learning Outcome

Pass

Merit

Distinction

LO1 Record business transactions using double entry

book-keeping, and be able to extract a trial balance

P1 Apply the double entry

book-keeping system of

debits and credits. Record

sales and purchases

transactions in a general

ledger.

 

P2 Produce a trial balance

applying the use of the

balance off rule to

complete the ledger.

M1 Analyse transactions

to show the progression

from a previous trial

balance to the next one

using double entry bookkeeping.

D1 Apply trial balance

figures to show which

statement of financial

accounts they will end upin.

LO2 Prepare final accounts for sole traders,partnerships and limited companies in accordancewith appropriate principles, conventions andstandards

P3 Prepare final accounts

from given trial balance.

 

P4 Produce final accounts

for a range of examples

that include sole traders,

partnerships and limited

companies.

M2 Make adjustments to

balances of sum accounts

for example, accruals,

depreciation andprepayments before

preparing the finalaccounts.

D2 Compare the essentialfeatures of each financialaccount statement toanalyse the differencesbetween them in termspurpose, structure andcontent.

LO3 Perform bank reconciliations to ensure company

and bank records are correct

P5 Apply the bank

reconciliation process to

prepare a number of

bank reconciliations.

M3 Apply the

reconciliation process

demonstrating the use of

deposit in transit,

outstanding checks and

Not Sufficient Funds (NSF)

check.

 

D3 Prepare accurate bankreconciliations that applyappropriate tools andtechniques to checkgeneralaccounts andbalance sheets.

 

LO4 Reconcile control accounts and shift recorded

transactions from the suspense accounts to the rightaccounts

P6 Explain the process

taken to reconcile control

accounts and clear

suspense accounts using

given account examples.

M4 Demonstrate

understanding of the

different types of

accounts and how and

why they are reconciled.

D4 Produce accurate

accounts that have beenreconciled applying theappropriate methods.

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