accounting

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Financial analysis of a grocery shop

In a modern such challenging market, it is very difficult for every company to survive, compete and keep making profit. Therefore, studying the source of their loss and profit is the key of enduring their business. This report will look at the financial information and statements of a Groceries shop that is run by James. Throughout this report we will examine 3 main applications on accounting. First of all, there will be introduction about what the accounting is, afterwards we will get the trial balance, profit and loss account as well as balance sheet from the transactions during the period Jan1 to Jan 31 in 2009 which are provided below. After this on the second part, as owner James requested, we will illuminate who will be interested in financial statement and why. Thus at the end, the accounting concepts which are used in financial statements will be explained.

Introduction

What is Accounting?

First of all, there is no worldwide accepted proper definition on what the accounting is. Moreover different people will give various answers on this question depending on their needs, experience, knowledge and views. Generally, accounting is the financial system that collects, recognizes and records the information of business and gives a picture of that organization to its interested users.

A study conducted in 2005 by Atrill and Mclaney stated that Accounting is concerned with collecting, analyzing and communicating financial information. The purpose is to help people that use this information to make more informed decisions. There would be no point in producing it if the financial information that is communicated is not capable of improving the quality of decisions made.

To provide better financial information which can support the decision is the purpose of the accountant’s work. Accounting is not an exact science, also it is now an important subject for many undergraduate and post graduates on certificates, diploma and degree courses in colleges and universities.

University educators usually divide accounting courses into financial accounting and managerial accounting. Financial accounting deals with reporting to people outside an organization.

Financial accounting deals with the capture, recording and classifying of data in order to present, report and communicates financial information. The financial information which is presented needs to be clear, relevant, reliable, accurate and consistent, to meet interest of the stakeholders who are the users of the financial statements.

Managerial accounting is concerned with the activities inside the organization. There are no rules and regulations in a managerial accounting e.g. accounting concepts and principles.

Section 1

On this part we will look at the transactions of groceries shop throughout January 2009. Firstly, we need to analyze the change on asset, capital, and liability of each transaction.

Assets are what the business owns such as land, building and a vehicle.

Capital

Liability are what the firm owes from others such as loan, mortgage.

Subsequently, the trial balance other financial statements will be examined.

Jan 1. Started business with £25000 cash

Cash ↑ DR

Capital ↑CR

Jan 2. Open bank account by putting in £15000 cash into the Bank

Bank ↑DR

Cash ↓ CR

Jan 3. Bought £4000 Furniture from Smith and Sons on Credit

Furniture ↑ DR

Creditor ↑ (Smith and Sons) CR

Jan 4. Paid £200 cheques to Jacob Electrical supplies for refrigerator and Ice Box

Asset ↑ (fixtures and fittings) DR

Bank ↓ CR

Jan 5. Bought supplies from Smithson Whole Sellers £500 on credit

Purchase ↑ DR

Creditor ↑ (Smithson Whole Sellers) CR

Jan 6. Bought cash till £650 cash

Asset ↑ (fixture and fittings) DR

Cash ↓ CR

Jan 7. Sold goods £650 cash

Cash ↑ DR

Sales ↑ CR

Jan 8. Bought supplies from Smithson Wholesalers £400 on credit

Purchase ↑ DR

Creditor ↑ (Smithson Wholesalers) CR

Jan 9. Sold goods £150 to Jacob on credit

Debtor (Jacob) ↑ DR

Sales ↑ CR

Jan 10. Sold goods to Pauline £300 on credit

Debtor (Pauline) ↑ DR

Sales ↑ CR

Jan 11. Sold goods £500 cash

Cash ↑ DR

Sales ↑ CR

Jan 12. Paid rent £150 by cheque

Rent ↑ DR

Bank ↓ CR

Jan 13. Paid wages £200 cash

Wages ↑ DR

Cash ↓ CR

Jan 14. Bought stationeries for the use of business £20

Asset ↑(fixture and fittings) DR

Cash ↓ CR

Jan 15. Bought supplies £700 on credit from Jackson

Purchase ↑ DR

Creditor (Jackson) ↑ CR

Jan 16. Returned some of supplies to Smithson’s Wholesalers £20

Creditor (Smithson Wholesalers) ↓ DR

Returned outwards ↓ CR

Jan 17. Paid cheque of £400 to Smith and Sons and getting a discount of £20

Creditor (Smith and Sons) ↓DR

Bank ↓CR

Jan 18. Receive some cash from Pauline £250

Sales ↓ DR

Debtor (Pauline) ↓ CR

Jan 19. Sold goods to Jack £450 on credit

Debtor (Jack) ↑DR

Sales ↑ CR

Jan 20. Paid transport cost £12 cash

Transport ↑DR

Cash ↓ CR

Jan 21. Bought furniture £540 cash

Furniture ↑ DR

Cash ↓ CR

Jan 22. Took out £100 for own personal use

Drawing ↑ DR

Bank ↓ CR

Jan 23. Paid lightning and heating £400 by cheque

Lightning and heating ↑ DR

Bank ↓ CR

Jan 24. Paid repairs to roof £250 by cash

Repair ↑ DR

Cash ↓ CR

Jan 28. Receive cash from Jack £150

Sales ↓ DR

Debtor (Jack) ↓ CR

Jan 4 bank

Section 2

Financial statement

Each business is required to maintain a set of financial statements for its operations. Atrill and McLaney in 2005 conducted that the objective of the major financial accounting statements is to provide a picture of the overall financial position and performance of the business.

In order to accomplish this objective, the three major financial statements that form the core of financial accounting are produced by the accountants. Those are:

The profit and loss account

Balance sheet

Cash flow statement

The profit and loss account(P&L) is targeted for the calculation of the profit or loss of the company for the certain period. It sometimes expressed as the income statement. In general P&L account has two main purposes, it can reveal that whether the company has made a profit or loss over the accounting year, also explain how those loss and profit occurred.

First of all, Balance sheet is not an account; it is a list of assets, capital and liabilities as at a specific date. In some study it is called as a position statement. A business will normally prepare a balance sheet as at the close of business of the last day of its financial year. In the UK, businesses are free to choose their accounting year. The latest new balance sheet brings more effective assessment in financial position.

Cash flow statement also known as funds flow statement records the all cash inflows and outflows in an accounting period. Basically, it shows us the actual movement of cash in or business, therefore there are many users including investors who give more significances on this statement.

As Dyson (2004) stated that for accounting information to be useful, the accountant must be clear about for whom the information is being prepared and for what purpose the information will be used. There are likely to be various groups of people (known as user groups) with an interest in a particular organization, in the sense of needing to make decisions about the organization.

Depending on their decisions that user faced, they choose their own financial information. There are 2 broad groups of users of financial information: internal users and external users.

Internal users of accounting information are those individuals inside a company who manage, plan, and operate the business.

Owners (shareholders): need it to know the process the business whether it is tolerable to continue or not and to assets the financial health of the company or business.

Managers and directors: Need it for internal and external evaluations and comparisons of financial performance, e.g. in order to highlight their own strengths and weaknesses, or ensuring that they are receiving and adequate return on capital employed .

Employees of the company will be interested in the financial statements for their career. Promotion, rankings and salary hike those kind of manners can be illustrated by the statements.

External users are individuals and organizations outside a company who want financial information about the company.

The creditors want to know if they are likely to get paid, and look particularly at liquidity and cash flow.

Prospective investors need to assess whether they will get a satisfactory return on their investment, the level of risk attached to their investment, and what could happen if things go wrong.

Tax authorities need it, e.g. for VAT, income and corporation tax purposes.

Society at large needs it, as we are all would-be investors. They may also be interested in other aspects, e.g. environmental considerations, social responsibility and future plans.

Section 3

Accounting Concept are customs and traditions which are used as a guide for preparation of financial statements. Every firm or company has to follow these concepts in order to produce any kind of financial statements. The concepts provide the rules and guidelines that govern the way in which the figures that will appear in the financial statements are arrived at. The different individuals using the same data could produce 2 entirely different sets of accounts because of the way in which they applied the concepts. Generally those accounting concepts are divided into two main categories:

Underlying concepts which are the traditional concepts applied ever since financial statements were first produced for reporting purposes.

Fundamental concepts are so imperative and are enforced by Accounting Standards and Company Act 1985. Essentially, five of them have been enforced through the Companies act 1985 , and a sixth through an accounting standard, FRS 5. Those five enforced thorough Companies act are the consistency, accruals, going concern, prudence and realization.

Underlying concepts :

1). Objectivity : -

The objectivity concept says that accounting will be recorded on the factual accuracy which can prove some evident like receipts, bank statements and invoices.

2). Historical cost:

This convention is the most common one and states simply that resources obtained by the firms are recorded at their original purchase price. It tells us how the item is actually to be measured. In other words, this requires transactions to be recorded at the price of that market time, and for assets to be valued at their initial cost.

3). Money measurement concept

Accounting normally deals with only those items that can be measured in monetary terms. Those items that are competent to being articulated in monetary will be included in the financial accounts. Money has an ability to express extensive range of resources held by a business. Nevertheless, not all the resources can be determined in monetary terms, e.g. human assets which are claimed as the most precious asset of the business. Therefore from a balance sheet it will be eliminated due to the difficulties of the evaluating the employees.

4). Business Entity Concept:

This means that the business has an identity and existence separate from its owners. In other words, to the accountant the owners and companies are considered as distinct legal individuals. Transactions of the business are treated as they have an effect on the business, not as they influence the owner. However, by law for sole proprietorships and partnerships, there is no difference between the company and its owners. On the other hand, the law makes clear distinction between business and its owners for limited companies. For accounting purposes these legal distinctions are extraneous, nevertheless this concept applies to all business.

5). Dual Aspect Concept highlights that the double entry rule which states that on accounting there will be always two aspects in each transaction. Moreover, the concept states that these two aspects must have same amount of difference. For example, purchase of a refrigerator for cash bring in an increase in furniture account and decrease by same amount in another account.

6). Time interval concept:

In accounting the financial statements are prepared at regular time. The maximum length of period normally used is one year. This is supported by legislation normally requiring the preparation of full audited accounts annually. However, managers can prepare far more frequently for internal purposes, possible a monthly or even more frequently.

7). Going concern means that the company will carry on their business for the foreseeable future. Accountants often consider as foreseeable future by at least 12 months from the balance sheet date. For instance, when the firm is confirmed that it is going to bankrupt in the near future, accountant cannot use this concept for accounting statement.

8). Consistency

Every company should choose their own technique or system of analyzing, evaluating their business which can show the most relevant information. However you cannot change your method in every year, the profits will be calculated ambiguously due to frequent changes of method. According to Alexander and Britton (1996) study, that when a business has once fixed method for the accounting treatment of item, it will enter all similar items that follow in exactly the same. In simple words, one method has to be used for similar operations.

9). Prudency:

In some books prudency concept is described as conservatism concept. One of the fundamental principles of accounting, the prudence concept, states that the expenses and liabilities are recorded as soon as possible on the financial statements. Nevertheless, it can be used on statements when the income is certain and assured.

10).Accruals: Revenue – expenses = Net profit

It is used to determine the expenses used up to obtain the revenue are referred as matching expenses against. The income accruing to the owner of a business is not necessarily the amount of cash actually received in a period of account. Many difficult problems arise in deciding how much income has actually accrued in any period. Accrual of income is always measured over a period of time which is normally the accounting year. Expenses are costs incurred in earning revenues. Those expenditures which may be charged against revenues for a period will be considered as operating expenses. The accrual concept is applied both in ascertaining the revenues for a period and in ascertaining the expenses to be charged against the revenues.

11). Realisation concept: Revenue is considered as earned on the day which it is realised and this is when goods are transferred to the customer in exchange for a valuable consideration. The Accountant usually uses the date the product is shipped to the customer or the date on the invoice, whichever is the later.

12). Materiality concept: This means that the depending on the size of the amount, items which have small importance will not be applied on financial statements. In other words, all the essential matter are revealed, and the those negligible matters are to be unnoticed in accounting.

Conclusion

Accounting is the core of the business. The proper, accurate and professional accounting create the clear picture of the business and provides much useful, efficient information to stakeholders. Furthermore it helps owners, managers and other users to make more appropriate decisions, more importantly it keeps the business profitable.

References:

Alexander, D. and Britton, A. (1996), Financial Reporting, (4th edn), International Thomsan Business Press, UK

Atrill, P. and McLaney, E. (2005), Financial Accounting for Decision makers, (4th edn), Pearson Educated Limited, Essex England , p35

Dyson, J.R. (2004), Accounting for non-accounting students, (6th edn), Pearson Educated Limited, Essex England,


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