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Financial Accounting Principles

Assignment Brief

Financial Accounting Principles

Learning Outcomes:

  • LO1 Record business transactions using double entry book-keeping, and be able to extract a trial balance.
  • LO2 Prepare final accounts for sole-traders, partnerships or limited companies in accordance with appropriate principles, conventions and standards.
  • LO3 Perform bank reconciliations to ensure company and bank records are correct.
  • LO4 Reconcile control accounts and shift recorded transactions from the suspense accounts to the right accounts.

You are a Junior Accountant for a small accountancy firm, and you have been asked by your line manager to prepare a 1500-word report as evidence that your firm is aware of regulations relating to accountancy, as well as the rules, principles and conventions relating to accountancy.

Your document will:

  1. Define financial accounting and its purposes.
  2. Name two internal stakeholders AND four external stakeholders of a large business organisation.

For the internal and external stakeholders, you have identified above, comment briefly on why each of them might be interested in the financial information of the organisation. (LO 1, 2, 3 and 4) b. Your accounting firm has given a portfolio of clients to cater for their financial needs. You are required to record and complete the given tasks for the respective clients within your portfolio

Sample Answer

Financial Accounting Principles Report

Introduction

Financial accounting plays a crucial role in modern business by systematically recording, summarising, and reporting financial transactions. Its primary objective is to provide accurate and reliable financial information to a variety of stakeholders, enabling them to make informed decisions. This report demonstrates an understanding of financial accounting regulations, principles, conventions, and the practical application of these concepts in recording and reporting financial information. Additionally, it illustrates how internal and external stakeholders use financial data to assess business performance and make strategic decisions.

Definition and Purpose of Financial Accounting

Financial accounting can be defined as the structured process of recording, classifying, summarising, and communicating the financial activities of a business. Through this process, an organisation produces financial statements such as the income statement, balance sheet, and cash flow statement. The purpose of financial accounting is multifaceted. Firstly, it supports decision-making by providing managers, investors, and other stakeholders with information about the financial performance and position of the business. Secondly, it ensures compliance with legal and regulatory requirements, including company law and professional accounting standards. Thirdly, it provides a basis for evaluating business performance over time, measuring profitability, liquidity, and financial stability. Finally, it serves as a communication tool, conveying the organisation’s financial health to both internal and external parties.

Stakeholders and Their Interest in Financial Information

Stakeholders are individuals or groups with an interest in the financial affairs of a business. They can be classified as internal or external. Internal stakeholders, such as managers and employees, rely on financial information for different purposes. Managers use financial data to plan, monitor, and control business operations, enabling informed decision-making, budgeting, and performance evaluation. Employees are concerned with job security, potential profit-sharing schemes, bonuses, and the overall financial stability of the organisation, all of which are influenced by the company’s financial position.

External stakeholders include investors, creditors, government agencies, and customers. Investors and shareholders require financial information to assess profitability, dividend potential, and risk, thereby guiding investment decisions. Creditors and suppliers use financial data to determine the company’s ability to meet its obligations and to evaluate creditworthiness. Government authorities, including tax agencies, examine financial statements to ensure compliance with laws and to calculate taxes accurately. Customers are interested in the company’s stability and long-term viability, particularly if they rely on the business for ongoing supply agreements or contractual obligations.

Recording Business Transactions

The foundation of financial accounting is the accurate recording of business transactions using the double-entry system. This system ensures that every transaction affects at least two accounts, maintaining the accounting equation in balance. For instance, if a company purchases office supplies for cash, the supplies account is debited while the cash account is credited. Transactions are first recorded in journals and subsequently posted to ledger accounts. Preparing a trial balance is an essential step to confirm that total debits equal total credits, ensuring the accuracy of recorded transactions and serving as the basis for further reporting.

Continued...


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