Financial Accounting Case Study

Introduction

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

The daybooks are the first data entry point for transactions. Entries in daybooks build 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 have various Daybooks as outlined below:

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

iv. Toff Purchase Returns Day Book – is 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 a 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 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 give out to a business’s shareholders, creditors, and supervisory 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 by supervisory organizations. Over the years annual report used to be a key product of the financier relation 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 contain 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 happen 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 daily sales return which is recorded in the Toff sales returns day book September 2017 of amount 2,700. The other one is daily purchase which is recorded in the Toff purchase day book September 2017 which total up to 10,020. Next is daily purchase return which is recorded in Toff purchase returns day book September 2017 of total amount 4,850. The other one is cash receipt book which is recorded in the Toff cash receipts book September 2017 which demonstrate that total sales were 32,720, total discount allowed were 500, cash sales were 6,820, receivable amount were 5,900 and total amount received using another method of payment are 20,000.

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

From the Toff journals September 2017 there is a record in journal 1 which shows the correction of electricity wrongly recorded as drawings of total amount 1,000, second was journal 2 which shows the record of accrued wages of £500 at the 30 September 2017, the other is journal 3 which shows the record of prepaid rent of £1,250 at the 30 September 2017, next is journal 4 which shows the record of depreciation for the year and finally is journal 5 which 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 books record, these are the first data entry for transaction.

Toff Sales Day Book September 2017

Date	Customer	Invoice No.	Amount
2 Sep	Mild	0035	1,400
5 Sep	Cold	0036	1,200
11 Sep	Warm	0037	2,600
11 Sep	Warm	0038	3,100
24 Sep	Wet	0039	2,060
Total			10,360

From the table above is used to capture daily sales transaction which includes date, customer name, invoice number and amount of the item or items. For the 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 item, 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

Date	Customer	Cedit note no.	Amount
16 Sep	Cold	003	1,200
20 Sep	Freeze	004	1,500
Total			2,700

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

Toff Purchase Day Book September 2017:

Date	Supplier	Invoice No.	Amount
5 Sep	Dark	I39B	2,650
6 Sep	Night	XXX97	1,400
8 Sep	Morn	08814	2,000
10 Sep	Night	I40B	870
21 Sep	Shine	210955	3,100
Total			10,020

The above table is used to capture daily purchase for the month of September 2017. This system captures the date the product was purchased, the name of the supplier, 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 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 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:

Date	Supplier	Cedit note no.	Amount
9 Sep	Dark	XX949	2,650
18 Sep	Ray	712	2,200
Total			4,850

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, 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 of amount 2,650 and recorded it in the credit note number XX949. On 18th September 2017 business returned the item to the supplier called Ray of amount 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:

Date	Detail	Discount Allowed	Total	Cash Sales	Receivables	Other
12 Sep	Wind	400	4,600		4,600
14 Sep	Beds		920	920
18 Sep	Mild	100	1,300		1,300
20 Sep	Loan		20,000			20,000
25 Sep	Rugs		3,400	3,400
27 Sep	Wardrobes		2,500	2,500
Total		500	32,720	6,820	5,900	20,000

From the cash receipt book above demonstrate the sales transaction. For example in the above table on 12th September 2017 business sold an item worth 4,600 to Wind and give him a discount of 400 and the payment is yet to be received. 14th September business sold an item worth 920 to Beds on cash. On 18th September business sold an item worth 1,300 to Mild and give him a discount of 400 and the payment is yet to be received. 20th September business offered 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:

Date	Detail	Discount received	Total	Cash purchases	Payables	Rent	Electric	Other
10 Sep	Rent paid		4,100			4,100
12 Sep	Dark	150	2,500		2,500
14 Sep	Shadow	60	820		820
16 Sep	Electric		1,700				1,700
21 Sep	Equipment		20,000					20,000
25 Sep	Electric		200				200
27 Sep	Beds		2,100	2,100
29 Sep	Drawings		3,000					3,000
29 Sep	Wages		4,000					4,000
Total		210	38,420	2,100	3,320	4,100	1,900	27,000

From the above cash payment book is used to capture all-cash transaction that were made by the business to various business account like electricity, equipment, drawings, Beds and among other, where also need to record the date 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 rent of 4,100 which were credited to the rent account. On 12th September business allocated 2,500 with a discount of 150 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 miss posting in the book of accounts where an expense of electricity was recorded as drawing instead of 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 at the 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 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 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 depreciation expense account, show an increase in depreciation amount and a credited in the provision shows a reduction in the amount provided in the 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.

Debit of the allowance expense shows an increase in the expense which is a credit shows a reduction in the amount allowed in the anticipation of the occurrence of bad debt. Journal has been affected to the expense in the recorded since it has not been previously shown.

General Ledger:

Sales Account
Date	Description	Dr	Date	Description	Cr
30 Sep	Sales Returns Day Book	2,700	1 Sep	Balance b/d	277,460
			30 Sep	Sales Day Book	10,360
30 Sep	To Income Statement	291,940	30 Sep	Cash Sales (CB)	6,820
		_______			______
		294,640			294,640

From the general ledger above it demonstrate sales account where on the 1^st September 2017 the balance that was brought down were 227,460, by 30^th 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.

Purchases Account
Date	Description	Dr	Date	Description	Cr
1 Sep	Balance b/d	131,300
30 Sep	Purchases Day Book	10,020
30 Sep	Cash Purchases (CB)	2,100	30 Sep	To Income Statement	143,420
		_______			______
		143,420			143,420

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

Carriage inwards Account
Date	Description	Dr	Date	Description	Cr
1 Sep	Balance b/d	1,300
			30 Sep	To Income Statement	1,300
		_____			_____
		1,300			1,300

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

Returns Outwards Account
Date	Description	Dr	Date	Description	Cr
			1 Sep	Balance b/d	5,450
30 Sep	To Income Statement	10,300	30 Sep	Purchase returns book	4,850
		_____			_____
		10,300			10,300

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

Wages Expense Account
Date	Description	Dr	Date	Description	Cr
1 Sep	Balance b/d	52,390
29 Sep	Wages paid (CB)	4,000		To Income Statement	56,890
30 Sep	Accrued wages journal 2	500
		______			_____
		56,890			56,890

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.

Trade Payables Account
Date	Description	Dr	Date	Description	Cr
30 Sep	Purchase Returns Book	4,850	1 Sep	Balance b/d	25,900
30 Sep	Discounts received (CB)	210	30 Sep	Purchases day Book	10,020
30 Sep	Paid in Sep (CB)	3,320
30 Sep	Balance c/d	27,540			_____
		35,920			35,920
			1 Oct	Balance c/d	27,540

From the trade payables table demonstrate 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. While on the other side, by 30^th September purchase return were 4,850, discount receivable were 210. The cash paid were 3,320 and finally the balance carried down were 27,540 and at the same time was carried down on 1^st 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)

TOFF RETAIL BUSINESS PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDING 30TH SEPTEMBER 2017
Income		Dr		Cr
Sales				291,940
Discount Received				210
Cost Of Goods Available For Sale
Opening Stock		51,600
Purchase		143,420
Return Outward				10,300
Carriage Inwards		1,300
		196,320		302,450
Gross Profit				106,130
Expenses
Wage Expense		56,890
Rent expenses		37,230
Electricity Expenses		19,000
Discount Allowed Expenses		500
Allowance expenses		770
Depreciation expenses		18,000
Total Expenses		132,390
Net Profit/Loss				(26,260)
b)
TOFF RETAIL BUSINESS BALANCE SHEET STATEMENT FOR THE PERIOD ENDING 30TH SEPTEMBER 2017
	Dr		Cr
Asset
equipment’s	190,000
Bank	27,180
Prepayment	1,250
Trade Receivables	47,120
	265,550
Total Assets			265,550
Liabilities & equity
Capital			165,000
Accrual			500
allowance receivable			3,770
Drawings	(7,000)
Trade Payable			27,540
Loan			50,000
Provision For Depreciation			52,000
Net Profit/Loss	(26,260)
			291,810
Total equity and liability			265,550

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

https://primo.anglia.ac.uk/primo-explore/fulldisplay?docid=44APU_ALMA2120516590002051&context=L&vid=ANG_VU1&lang=en_US&search_scope=CSCOP_APU_DEEP&adaptor=Local%20Search%20Engine&tab=default_tab&query=any,contains,Bookkeeping&sortby=rank&offset=0

The Accounting Entity, Relevance, and Faithful Representation: Linking Financial Statement Notes to the FASB and IASB Conceptual Frameworks, Issues in Accounting Education, Nov 2013, Vol.28,issue 4,pg 1009 -1029

The genesis of double entry bookkeeping, Sangster Alan, Accounting Review, 2016, Vol 91 (issue1), pg299 – 277