Characteristics of Financial Accounting, Double Entry Accounting System - Assignment Example

Introduction to Financial accounting concept

Financial Accounting is considered to be the process in which organizational transactions are recorded continuously in the various recording that is kept by a particular organization or individual for financial effectiveness. The monetary articulations are fundamentally of two kinds: that is, the profit as well as the loss accounts and the organizational balance sheet. Therefore, accounting concept has been considered to be of great importance to any particular firm for it will enable it to estimate its annual spending. That is, the company will be able to gauge whether it is making a profit from a particular investment or making a loss. From this analysis, the company management will be in a better position to make an informed decision on whether to continue investing in that particular project or decide to drop the project. In addition, the accounting concept also enables an organization to detect and correct errors in financial reports of the firm and hence enabling the firm to remain on the right track as far as its financial state is concerned.

1. Characteristics of Financial Accounting

Financial Transactions is considered to be one of the major characteristics. In this case, the trait enables the organization to record most of its financial recordings on their books of accounts to ascertain whether they are making profits or losses at any particular time.

Relevance information is also another major trait of financial accounting in any particular organization (Lee, 2004). In this case, financial accounting provides the organization with adequate information to enable to make an informed decision and hence enabling the organization to continue existing in the near future and also be able to avoid unnecessary mistakes which might be costly to the organization.

Lawful Requirement

Money related bookkeeping is a lawful prerequisite. It is important to keep up the monetary bookkeeping and get ready money related explanations there from. It is additionally required to get these money related articulations evaluated. Therefore, financial accounting has a characteristic of abiding by law prescriptions since all monetary transaction are governed by company policies as well as the law of that particular country to ensure that there are consistency and transparency as far as financial transaction are concerned.

Preparations of various accounts, as well as the balance sheet, are another primary trait of the financial accounting in any particular organization. In this case, the accounts enable the company management to distinguish between different projects and be able to ascertain which is making profits as well as the one that is making losses. In this case, the company management will be in a better position in planning its budget in order to attain maximum returns from its investments.

Monetary accounting Process

The process of monetary accounting is considered attain great influence various accounting approaches took after by organizational accountants. This recording approaches contrast essentially in the following sections: the calculation of devaluation as well as stock valuation (Fields, 2002). Therefore, the monetary accounting process is considered to be one of the vital traits of financial accounting in any organization.

2. Double entry accounting system

Double entry is considered to be any particular transaction conducted by an individual or organization that involves two accounts. Also, double entry balances the equation which indicates that assets are attained after summing up the liabilities and the owners’ equity. For instance, if a particular firm borrows money from any particular money lending institution, its cash account is considered to increase as well as its liability account Loans receivable. Another aspect is a situation in which the amounts entered into organizational general ledger accounts as debts should be equal to the sum that is entered as credits.

3. The history of and development of accounting

The accounting history is traced back to the period when Franciscan Monk, who was known as Luca Pacioli, introduced double-entry bookkeeping in the accounting field. That is, he introduces them during the economic growth in times of unprecedented economic growth. Therefore, firms took control in the enhancement of financial accounting by introducing clear, comparable as well as reliable financial information to the investors.

The current situation prodded the need for effective and enhanced cost ascertainment mechanisms as well as the improvement of partnerships that are made more enhanced in the section of external suppliers, the shareowners as well as the bondholders, in which they were not part of the association's company management. However, they had good expectations from the returns. The emerging aspects in the accounting section are considered to contribute to a total change of accounting into a profession. It was first introduced in the UK followed by the United States. In the year 1887, the study indicates that more than 31 accountants had come together to form an association of accountants. In this case, approved body was introduced and was able to analyze the operations of the accountants effectively.

4. a) writing off a bad debt

An obligation is composed off as awful when the bank doesn't number the cash you owe them as an advantage of the organization any longer. Its monetary proclamations will mirror that change. They're required to discount certain terrible credits so as not to deceive financial specialists.

b.) Making of allowances

Recoverability of some debts might be far doubtful in spite of the fact that it does not go. Such receivables are known as dicey obligations. Judiciousness requires that a remittance is made to perceive the potential misfortune emerging from the likelihood of causing terrible obligations.

The stipend for suspicious obligations is made by shaping a credit equalization which is deducted from the aggregate receivables parity in the announcement of money related position. This works similarly as gathered deterioration is deducted from the altered resource cost account. The remittance for dicey obligations decreases the receivable parity to the sum that the substance judiciously gauges to recuperate later on.

Allowances comprise of two sorts;

Special Allowance

This is recompense made in admiration of particular receivables which are known not confronting genuine budgetary issues or have an exchange debate with the firm. Such balances might be distinguished by analyzing a matured receivable investigation which points to interest the time slipped by since the formation of a receivable. Long, remarkable equalizations recognized from such examinations could be considered for incorporation in the stipend for doubtful financial obligations.

General Allowance

Past history of a business may demonstrate that a part of receivable equalizations is not recuperated because of unanticipated circumstances (Livingstone and Grossman, 2002). Subsequently, it might be reasonable to make a general allowance for doubtful debts notwithstanding the particular remittance. The general stipend might be ascertained on the premise of past experience concerning recoverability of financial obligations.

c).Why do you only need to create an expense for the difference between the provisions of two years?

The expense is created for the differences between the provisions for two years because the cash used for it is treated as an operating expenditure for the business.

d) Write and explain the double entries for an increase and a decrease in the allowance for doubtful debts, and irrecoverable debt is written off.

DOUBTFUL DEBTS (DECREASE)

Basing on Quarter 1, we have provided for doubtful debts of one hundred thousand euro Say, at the end of Quarter 2, we have surveyed our accounts receivable and needing to expand the provision by an extra sum 50,000 Euros

The solution is as follows

For Quarter 1,

The Original Entry is:

DR (Debit): Provision for the far-fetched obligations (I.S) Euros 100,000

Credit: Provision for far-fetched obligations (Balance Sheet) Euros 100,000

Being production of provision for suspicious debts at fist Quarter

In Quarter 2,

In this case, there was an addition of extra fifty thousand euros particularly:-

DR: Provision for Doubtful Debts in an Income Statement of 50,000 Euros

Credit: Provision for doubtful debts £ 50,000 in the Balance sheet.

Being further additional provision for doubtful debts at second quarter

We should take a gander at the effect

From the Income Statement:-

For Quarter 1, Profit is brought down by 100,000 euros

For Quarter 2, Profit is also brought down by fifty thousand euros

For Year To Date Quarter 2: Overall benefit is brought down by £100,000+£50,000 =£150,000

From the Balance Sheet:-

At Quarter 1:

Exchange Debtors £500,000 (say)

Less:

Procurement for dicey obligation (£100,000)

Net Trade Debtors £400,000

At Quarter 2:

Exchange Debtors £500,000 (say)

Less:

Procurement for dicey obligation (£150,000 multiply by (£100,000 plus £50,000)

The net Trade Debtors is the considered to be 350,000 euros

In view of the double entry idea, the addition of the extra procurement will diminish the benefit furthermore decrease the estimation of the advantage which is the exchange account holder.

For this situation, with the expansion in procurement for dicey obligation, it results in an extra measure of 50,000 lessening in the Income Statement with a relating diminish in the Trade Debtors of the Balance Sheet.

DOUBTFUL DEBTS (DECREASE):

Taking that in the quarter 2, some of these dicey clients paid £80,000 .We would treat it as

Situation 1: If terrible obligations as of now being composed off

As cash is gotten and the terrible obligations have prior been composed off implying that the exchange indebted individuals no more exist in the books of records, at that point we ought to:

Charge: Bank (cash is gotten) 80,000 euros

Credit: Bad Debts Written Off in the income statement which is considered to be 80,000 euros

Being cash gotten from before provision for doubtful debts

Situation 2: Assuming that already there is a general procurement for doubtful being made

at that point we ought to:

DR (Debit): Provision for suspicious obligation (Balance Sheet) 80,000 Euros

Credit: Provision for suspicious obligation (Income Statement) 80,000

Being recuperation of prior procurement for suspicious obligation (receipt of money 80,000)

We should take a gander at the effect

From the Income Statement:-

Accepting that in the first Quarter, the addition of doubtful debts of 100,000 is made thus diminishing comparing the benefit by the same sum.

For Quarter 2, because of the receipt of money from the doubtful debts, benefit is presently higher by £80,000 as this viable diminish  the procurement for uncertainty obligations

For Year to Date of the second Quarter: the net Profit in euros is 100,000 minus the 80,000 which will be 20,000 euros

From the Balance Sheet:-

At Quarter 1:

Exchange Debtors is 500,000 Dollars

Less:

Doubtful debtors Provision will be considered to be 100,000

Therefore, the net trade Debtors will sum up to 400,000

At Quarter 2:

Exchange for debtors £500,000

Less:

Procurement for dubious obligation 20,000 multiply by 100,000-80,000

Net Trade Debtors 480,000 dollars

To finalize, with cash from provision for doubtful debts, we can either:-

(1) On account of irrecoverable debts, the money got is credited to the irrecoverable debts in the Income Statement or

(2) For the situation of just a prior procurement made with no discount, then the income statement can be credited with provision for doubtful debts. Likewise, the cash got will then be counterbalanced against the exchange indebted individuals (not discounted) and reflected in the financial balance.

For the Bad Debt Write Off, the bookkeeping records will demonstrate the accompanying accounting entries for the writing off irrecoverable debts.

Diary Entry for Bad Debt Write Off

AccountDebitCredit

B. Debt Expense 200

Debtors 200

Total 200 200

Explanation of accounting entries for irrecoverable debts

Debit

Irrecoverable debt is a cost for the business, and a charge is put forth to the statement of comprehensive income through the bad debt cost account.

Credit

The sum owed by the client 200 would have been sitting as a charge on records receivables. The credit above decreases the sum down to zero.

To conclude accounting, which some call "the dialect of business," is vital to organizations of any size. For it gives them room to make informed decisions and hence guaranteeing the existence of that particular organization for some more years to come because of its financial stability that came as a result of effective financial accounting. For little entrepreneurs, the significance of monetary bookkeeping some of the time is neglected. By seeing how helpful budgetary bookkeeping can be to the accomplishment of a little business, you can concentrate on the qualities that can take your business the farthest.