Financial Accounting Case Study

Introduction

Financial accounting is the portion of accounting concerned with the summary, analysis, and reporting of financial transactions of a business. There are many activities that pertain to this process of financial accounting, such as systematic bookkeeping that includes daily books and journals that record each transaction that happens on a daily basis. There is also the preparation of general ledger books and trial balances. Profit and loss account and the statement of financial position. For a better understanding, I am going to lay the foundation for a better understanding of each and every activity we undertook in the month of September 2017 by defining each activity clearly at the onset.

The daybooks are the first data entry point for transactions. Entries in daybooks are built in systematic order, just as they do in journals. These entries in the organization’s various daybooks are transferred normally to the organization’s journal and then eventually to the ledger. Toff has various Daybooks as outlined below:

i. Toff Sales Daybook- This is a record entry for all the Sales made in the Month of September, capturing the Date, Customer’s name, the Invoice number and the total.

ii. Toff Sales Return Daybook- This is a record of all the items returned by the Customer for a certain specific reason. The record captures the Date, the Customer’s name, the Item identification number and the total amount of items returned.

iii. Toff Purchases Daybook- All the September 2017 purchases were recorded here, capturing the specific dates, supplier’s name, invoice number, and the total amount of each purchase.

iv. Toff Purchase Returns Day Book – a book in which the goods returned to suppliers are recorded.

v. Toff Cash Receipts Book-used to record all receipts of cash attracted to the Organization

Journals are entries recorded shortly after a business or Organization closed a sale, incurred an expense or earned revenue, and, in turn, impact the business’s accounts. While trial balance is a sheet that consists of a debit column with all debit balances of accounts and a credit column with all credit balances of accounts. But, trial balance shows only the arithmetical accuracy of placement in the ledger. The trial balance, apart from assisting in arithmetical accuracy, has many more uses such assist in the location of errors in ledger posting, it is the initial step in preparing financial statements with is the ultimate objective for any business at the end of the accounting year.

The Profit and Loss Statement (P&L) is a financial statement that summarizes the money earned from the sale of items/products or services, costs and expenses gained during a specific period of time. For the statement of financial position is also referred to as Balance sheet, the statement indicates, the organization’s assets, liability, and equity at a certain period of time, often at the end of a fiscal year which is reported together with Statement of Profit and Loss. The total asset must equal the sum of liability and capital.

The annual report is a publication given out to a business’s shareholders, creditors, and supervisors at the end of its fiscal year. The report usually comprises at least an income statement, balance sheet, statement of cash flows, and complementary cross-references. It may also contain a dispatch to shareholders, management comments, an audit report, and various subsidiary schedules that may be essential for supervisory organizations. Over the years annual report used to be a key product of the financier relations department, however, it has wilted in prominence over time.

The general ledger book contains all the transactions of accounts of the business that relate to the business assets, liabilities, revenues, and expenses. The general ledger is the ligament of all account processes, which contains all the financial and non-financial data for the business, so they are a collection of all accounts.

Question No 1

Produce a short explanation of the events that occurred in the month of September 2017 so that the owner can understand the events, even though they do not understand the accounting records.

Some of the events that happened during this month of September 2017 were daily sales, which are recorded in the Toff sales day book September 2017 that total up to 10,360. Secondly is the daily sales return, which is recorded in the Toff sales returns day book for September 2017 in the amount of 2,700. The other one is daily purchases, which are recorded in the Toff purchase day book for September 2017, which totals up to 10,020. Next is the daily purchase return, which is recorded in the Toff purchase returns day book for September 2017 as a total amount of 4,850. The other one is the cash receipt book, which is recorded in the Toff cash receipts book for September 2017 which demonstrates that total sales were 32,720, the total discount allowed was 500, cash sales were 6,820, the receivable amount was 5,900, and the total amount received using another method of payment is 20,000.

The other one is a cash payment that was made by the business, which is recorded in the Toff cash payments book for September 2017, where we can see that the total amount the business paid was 38,420. Also business received a discount of 210, it paid in cash a total amount of 2,100, the total amount to be paid or payable is 3,320, the total amount the business voted into rent was 4,100, the total amount voted to electric was 1,900 and finally the total amount business paid using other methods were 27,000. Also, there was a preparation of a journal that impacts business accounts when a business closes the sales, earned revenue or incurred an expense.

From the Toff journals September 2017, there is a record in journal one which shows the correction of electricity wrongly recorded as drawings of a total amount of 1,000; second was journal 2, which shows the record of accrued wages of £500 at the 30 September 2017, the other is journal 3threewhich shows the record of prepaid rent of £1,250 at the 30 September 2017, next is journal 4fourwhich shows the record of depreciation for the year and finally is journal 5fivewhich shows the record of increase in allowance for doubtful debts at 30 September 2017.

Question 2

The owner does not understand the system used to keep the records. With reference to the records provided, explain how the record-keeping system works.

Starting with daily book records are the first data entry for transactions.

Toff Sales Day Book September 2017

The table above is used to capture daily sales transactions, which include the date, customer name, invoice number and amount of the item or items. For further explanation, we can see that on 2nd September 2017, Mild bought items of 1,400 using invoice number 0035. On 5th September 2017, Cold bought an item worth 1,200 using invoice number 0036. 11th September 2017 Warm bought two separate items, the first one worth 2,600 with invoice number 0037 and the other one worth 3,100 using invoice number 0038. On 24th September 2017, Wet bought an item worth 2,060 using invoice number 0039. Also, this table captures the total sales for this month, which is 10,360.

Toff Sales Returns Day Book September 2017

The table above has been used to capture the sales return for the month of September 2017. This table shows that on 16th September 2017, Cold returned the item he/she bought, which was worth 1,200, and it was recorded on the credit note number 003. The other one is on 20th September 2017. Freeze returned the item he/she bought, which was worth 1,500, and it was recorded on the credit note number 004. Also, this table records the total amount of sales returned, which sum up to 2,700.

Toff Purchase Day Book September 2017:

The above table is used to capture daily purchases for the month of September 2017. This system captures the date the product was purchased, the name of the supplier, the item invoice number and the total amount in a specified invoice number. For example, in the table above, we can see that on 5th September 2017 business received an item worth 2,650 from Dark, who is a supper with invoice number 139B. On 6th September 2017 business received an item worth 1,400 from Night, who is a supper with invoice number XXX97. On 8th September 2017, the business received an item worth 2,400 from Morn, who is a supper with invoice number 08814. On 10th September 2017 business received an item worth 870 from Night who is a supper with invoice number 140B. On 21st September 2017, the business received an item worth 3,100 from Shine, who is a supper with invoice number 210955. Finally, this table shows the total amount of the item that was supplied in September 2017 which is 10,020.

Toff Purchase Returns Day Book September 2017:

The above purchase return shows the purchase that was returned by the business to the supplier where we capture the date of return, the supplier, the amount of the item(s) that were returned and the credit note number where the returned product was recorded. From the table above, on 9th September 2017 business returned the item to the supplier called Dark for the amount of 2,650 and recorded it in the credit note number XX949. On 18th September 2017, the business returned the item to the supplier, called Ray for the amount of 2,200, and recorded it in the credit note number 712. Finally, the total purchase return was 4,850.

Toff Cash Receipts Book September 2017:

The cash receipt book above demonstrates the sales transaction. For example, in the above table, on 12th September 2017, the business sold an item worth 4,600 to Wind and gave him a discount of 400, and the payment is yet to be received. 14th September business sold an item worth 920 to Beds in cash. On 18th September business sold an item worth 1,300 to Mild and gave him a discount of 400, and the payment is yet to be received. 20th September business offered a loan of 20,000 through other means. On 25th September business sold an item worth 3,400 to Rugs on cash, and finally, on 27th September business sold an item worth 2,500 to Wardrobes on cash.

Toff Cash Payments Book September 2017:

The above cash payment book is used to capture all cash transactions that were made by the business to various business accounts like electricity, equipment, drawings, Beds and others, which also needs to record the date on which this transaction was made, total amount, discount received and the account debited with this specified payment. For example, from the above table, on 10th September business paid a rent of 4,100, which was credited to the rent account. On 12th September business allocated 2,500 with a discount of 15,0, which is to be paid.

Toff Journals September 2017:

Journal 1:

Dr: Electricity account £1,000

Cr: Drawings account £1,000

Being the entry to record correction of electricity wrongly recorded as drawings.

This shows that there was a splitting in the book of accounts where an expense of electricity was recorded as a drawing instead of an electricity expense. In order to make the correction, the journal is affected where the account of electricity is opened and debited with 1000 while the drawing account is closed by crediting with 1000.

Journal 2:

Dr: wages expense account £500

Cr: accruals account £500

Being the entry to record accrued wages of £500 on 30 September 2017.

An introduction of an expense called wage in the account, which had not been recorded, is done by effecting a journal where an account of wage is debited to show a deduction in the expense and the accrual account credited to show an increase in the amount to be paid by the company.

Journal 3:

Dr: prepayment account £1,250

Cr: rent expense account £1,250

Being the entry to record prepaid rent of £1,250 on the 30 September 2017.

Prepayment shows a payment done in advance, therefore in order to reflect a payment done in advance which had not been previously reflected in the accounts record. A journal is affected where a debt is done on a prepayment account to show an increase in the amount paid in advance and crediting less expense to show a reduction in the amount of rent to be paid.

Journal 4:

Dr: depreciation expense account £18,000

Cr: Provision for depreciation account £18,000

Being the entry to record depreciation for the year.

A debit in the depreciation expense account shows an increase in depreciation amount, and a credit in the provision shows a reduction in the amount provided in anticipation of its occurrence; a journal has been affected since the depreciation expense has not been previously included in the record of account.

Journal 5:

Dr: Allowance expense account 8% x 47,120 – 3,000 £770

Cr: Allowance for doubtful debts account £770

Being the entry to record increase in the allowance for doubtful debts at 30 September 2017.

The debit of the allowance expense shows an increase in the expense, which is a credit that shows a reduction in the amount allowed in anticipation of the occurrence of bad debt. The journal has been affected by the expense in the record since it has not been previously shown.

General Ledger:

The general ledger above demonstrates a sales account where, on the 1^st of September 2017, the balance that was brought down was 227,460; by the 30^th of September 2017, sales were 10,360, and cash sales were 6,820 while at the same time, the sales return were 2,700 and from all of these we get the sales income statement of 291,940.

From the ledger purchase account above, the balance brought down on 1 September 2017 was 131,300, and on 30th September 2017, purchases were 10,020 and cash purchases of 2,100, which generated a purchase income statement of 143,420.

In the above ledger account for carriage inwards, the balance brought down on 1st September 2017 was 1,300, which gave a 1,300 income statement on 30th September 2017.

The returns Outwards ledger account had a 10,300 income statement on 30th September 2017, while on 1st September 2017, there was a 5,450 balance brought down, and on 30th September 2017, the purchase return was 4,850, yielding a total of 10,300.

Wage expense ledger account on 1^st September 2017 the balance brought down was 52,390, on 29 September the wages paid 4,000 and on 30^th September the accrued wage was 500 which in total was 56,890.

The trade payables table demonstrates a double entry account. On 1^st September 2017, the balanced brought down were 25,900, on 30^th September purchase recorded on daily book were 10,020. On the other side, by 30th September, purchase returns were 4,850, and discount receivable was 210. The cash paid was 3,320, and finally, the balance carried down was 27,540 and at the same time was carried down on 1st October 2017.

Question 3

Prepare the annual reports of Toff for the year ending 30 September 2017. The annual reports are:

1. Profit and Loss Report, and

2. Statement of Financial Position (Balance Sheet)

a)

Reference

Sangster, Alan and Wood, Frank (2015) Business Accounting 1 (13^th edition), Pearson.

Atrill, P and McLaney, E (2016) Accounting and Finance for Non-Accounting Specialists (10^th edition), Pearson,

Dyson, J (2017) Accounting for Non-Accounting Students (9^th edition), Pearson, (current edition)

ACCA paper F3 Financial Accounting study text, Kaplan Publishing.

Wood, Frank (2001) Book-keeping and Accounts, FT Prentice Hall

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