MOD003456-Preparing The Annual Reports Of Toff

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. Your explanation should include a consideration of:

The Day books and Journals

The General Ledger

The double entry system for recording transactions

Trial balance and annual reports.

 

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

a)Profit and Loss Report, and

b)Statement of Financial Position (Balance Sheet)
 

 

1.The issue presented in the question is that Toff is a furniture retail business. The financial statements that have been prepared by the accountant of the organization are the trial balance and other related accounting records. It must be noted here that the owner of the business does not necessarily understand the materials provided by the accountant and need help in understanding these accounting proceedings.

Before understanding, the particular recorded financial transactions, the events that had occurred in the month of September 2017, the fundamental concepts of accounting must be understood. The most fundamental concept of accounting refers to the golden rule that debit what comes into business and credit what goes out of business. Furthermore, this fundamental concept of accounting can be integrated into the three broad categories of business accounts (Biondi 2016).

The three golden rules of accountancy can be defined as follows:

• Personal Account – In regards to accountancy, a personal account is an account that can be linked to a person with whom business transactions are carried out on a continuous basis. It must be noted here that a person might be in the nature of natural person or a legal person. Now, if a person makes a receipt of anything from business, he will be known as the receiver and his account will be debited in the books of the firm. Moreover, if a person gives anything to business he is known as the giver or the payer and his account will be credited in the books of the firm. Therefore, the golden rule in regards to the personal account is that debit the receiver and credit the giver (Biondi 2016).
• Real account – the real account refers to the properties that may come in or go out of business. This means that if the business makes any purchased of a required property then the account in relation to that particular property will be debited in the books of the firm. Moreover, if a property goes out of business then the account of that property will be credited in the books of the firm. Therefore, the golden rule in relation to a real account is that debit what comes in and credit what goes out (Biondi 2016).
• Nominal account – Lastly, nominal account refers to that particular account that is related to a varied range of business expenditure, loss, gain and income. It must be noted here that the expenses that have been incurred by business for carrying out the regular operational proceedings must be debited in the books of the firm. Moreover, when there is a payment that the business receives on account of revenue or credit sales such an account related to income is credited in the books of the firm. On the other hand, the particular losses that are incurred by business on account of purchase or sale of assets, the account of that loss is to be debited in the books of the firm. In case the business gains a certain level of profit from the purchase or sale of the assets then that particular account has to be credited in the books of the firm. Therefore, the golden rule for this particular account is debit all expenses and loss and credit all gains and income (Vysotskaya, Kolvakh and Stoner 2016).

Thus, these are the particular accounts that are the broad categories in which the accounts can be segregated and the golden rules can be integrated into these particular accounts.

The fundamental accounting proceedings that have been carried out in the month of September are the major accounting transactions related to sales, purchases, wages, rent, trade receivables, trade payables and drawings. Moreover, the sales day book that has been included in the statements for recording the financial particulars show the revenue that has been incurred by business on account of sales.  The sales return book however, summarizes the returns that have been proceeded by the customers or clients of the firm. The purchase day book defines the purchases that have been carried out by the business firm on account of purchase of the raw materials or other related materials for carrying out the operational functions of the firm. The purchase day returns book on the other hand refers to the purchase returns that have been carried out by business on account of certain faulty features of the purchased goods. 

Next, the cash receipts book depicts the payments that have been received by the business on account of the different operational proceedings executed by the same over the stipulated time period. Similarly, the cash payments book depicts the payments that has been made by business to the different creditors of business or the other related expenditures in relation to operational proceedings of business.

The journals that have been included in the books of the firm follow the golden rule essentially. This can be explained with the particular instance of Journal 1 that has been provided in the case study. The Journal 1 apparently shows the fact that the electricity account has been debited with an amount of £1,000 and the drawings account has been credited with the similar amount of £1,000. This means that the electricity account has been had been wrongly debited with the amount that had been expended by business on account of payment for electricity. Therefore, it can be deduced from the journals that have been provided in the case study that journals are the foundations upon which the ultimate financial statements like the balance sheet and the profit and loss statements of the firm are prepared. It must be noted here that a public certified accountant preparing the financial statements for a corporate entity has to mandatorily prepare the accounting journals before preparing any other accounting statements. This is because the journals pass the essential entries that effectively debit or credit a particular account.

Next, the ledger accounts have been deduced from the different journal entries that have revealed the particular way in which the accounts are being affected due to the different journal entries. This can be explained with the help of particular instance of the sales ledger. It can be observed from the sales account that a particular entry in the debit section of the ledger has been passed. The credit section of the sales account has been featured by the sales day book and reflects the fact that the particular amount of sales that have been proceeded by the business on account of credit has been of the amount of £10,360. Moreover, the cash sales account that has also been included in the credit section of the reflects the particular amount of sales that has been proceeded by the firm on the basis of cash. Furthermore, here it should be noted here that the balance that the sales account has been forwarded from the previous year has been reflected in the credit section of the sales account. To be precise, the sales account being a credit account, begins with the balance on the credit section of the particular ledger account. The balance of the sales account that has been forwarded to the income statement of the account. The balance that will be forwarded to the income statement has been shown in the debit section of the ledger account. Lastly, the trial balance has been further deduced from the ledger accounts evaluates the correctness of the journal and ledgers prior to the preparation of the trial balance. This is executed by checking of the balances of the debit and the credit sections of the trial balance. If the balances of the debit and the credit section of the trial balance match then it is a proof that the journals and ledgers, in all probabilities have been executed properly. 

2.The importance of a record keeping system is huge in case of the firm carrying out the necessary accounting procedures. A record keeping system essentially refers to the system that facilitates the recording of the different financial transactions that take place in a business firm within a particular accounting year. The crucial steps that can be involved in a record keeping system are as follows:

Capture – The term “capture” refers to the particular process that refers to the act of capturing the relevant financial transactions that take place within an organization. There is a lot of information that flows into business and. The very method of capturing involves the collection of the important information that is relevant from an accounting perspective and will have an impact upon the profitability of the firm. It must be noted here that the essential process of capture includes the description of the item and the amount and date of the financial transactions of the firm (Snow 2016).

Evaluation of the collected information – the financial information that has been collected by the accountant of the firm by following the method of capture should be properly evaluated and checked before entering the information in the particulars of the accounting statements. For instance, the price by which a business firm purchases an equipment for the purpose of the business can be a credit purchase or a purchase that has been proceeded by cash. Therefore, the checking of the selected financial information in regards to the fact that whether the information is complete and correct is a very important step and should be included as a part of the record keeping system (Snow 2016).

Recording of the information – the recording of the processed and filtered financial information is another crucial step that should be included in the record keeping system. It should be noted here that the recording of the information can be carried out in a spreadsheet or an accounting software (Snow 2016).

Reviewing the recorded information – the recorded information that has been entered in the accounting statements after proper checking and evaluation should be consolidated. The process of consolidation refers to the compilation of the recorded financial information in an already established framework. This means that the accounting regulatory bodies all over the world have established steps for the preparation of the financial statements. Moreover, the major financial statements include the balance sheet, income statement and accounts receivable and the accounts payable report (Nobes 2015) 

Financial position – Lastly, the financial position of the firm has been evaluated on the basis of the results reflected by the financial statements of the company (Nobes 2015)

Thus, the only procedure for establishing a proper record keeping system has been explained that helps in processing the entire accounting process of the firm. The particulars of the record keeping system are the fundamental essentialities of business and should be carried out properly.

Next, the components of a record keeping system have been discussed in order to understand the significance of the financial statements that have been discussed in the provided case study. These are as follows:

The day books and journals – there are two types of day books that are considered while preparing the accounting statements. These are the sales day book and the purchase day book. The sales day book lists the credit sales of the firm and the receivables and payables accounts in the general ledger are updated with the help of the sales day book. The purchase day book facilitates the identification of the credit purchases. The receivables and the payable accounts in the general ledger are also updated with the help of the purchase day book. Moreover, the journals makes adjustments to accounts by following the double entry system (Adejare 2014).

The general ledger – the general ledger is a complete record of the financial accounts that have been involved in recording the financial transactions. A ledger that has been prepared provides the much needed account balances that are required for the preparation of the financial statements like the income statement and the balance sheet of the company. This is facilitated by the preparation of the trial balance. It must be noted here that a ledger is prepared by following the double entry system (Adejare 2014).

Trial balance and annual reports – the trial balance that is prepared from the general ledger of the business firm is a list of closing balances that have been computed from the general ledger of the company. It must be noted here that a trial balance is prepared at the end of an accounting period. The trial balance leads to the preparation of the financial statements. Moreover, as it has been mentioned in the earlier part of this study the preparation of a trial balance facilitates the checking of the correctness of the journal and the ledger accounts. Therefore, the rectification of the fundamental accounting entries is facilitated by the preparation of the trial balance. Next, the financial statements are prepared on the basis of the trial balance. These major accounting statements are balance sheet and income statement of the business firm (Adejare 2014). 

It must be noted here that all the fundamental accounting particulars like the journals and the ledgers are prepared on the basis of a double entry book-keeping system. The double entry bookkeeping system refers to the particular system that involves the rule that every financial transaction has equal and opposite effects in at least two different accounts. The double entry bookkeeping system satisfies the equation Assets = Liabilities + Equity. Therefore, the record keeping system that is utilized by the accountants of the firms for preparing the accounting statements includes the above mentioned components and results in an accurate financial system (Bull 2014).n 3

3.aThe Profit and Loss report for Toff has been prepared as follows:

In the books of….
Profit & Loss Statement
for the period ending 30 September 2017
Particulars	Amount	Amount
Sales		£291,940
Purchase	£143,420
Less: Return Outwards	£10,300
Net Purchase	£133,120
Add: Carriage Inwards	£1,300
	£134,420
Add: Opening Inventory	£51,600
	£186,020
Less: Closing Inventory	£62,000
Cost of Sales		-£124,020
GROSS PROFIT		£167,920
Discount Received		£210
TOTAL REVENUE		£168,130
Operating Expenses:
Wage Expense	-£56,890
Rent Expense	-£37,230
Electricity Expense	-£19,000
Discount Allowed Expense	-£500
Allowance expense	-£770
Depreciation Expense	-£18,000
TOTAL OPERATING EXPENSES		-£132,390
NET PROFIT FOR THE PERIOD		£35,740

b.The Statement of Financial Position for Toff has been prepared as follows:

In the books of….
Balance Sheet
as on 30 September 2017
Particulars	Amount	Amount
Current Assets:
Closing Inventory		£62,000
Trade Receivables	£47,120
Less: Allowance for Receivables	-£3,770
Net Trade Receivables		£43,350
Bank		£27,180
Prepayments		£1,250
TOTAL CURRENT ASSETS		£133,780
Non-Current Assets:
Equipment	£190,000
Less: Prov. For Depreciation	-£52,000
Equipment (net)		£138,000
TOTAL NON-CURRENT ASSETS		£138,000
TOTAL ASSETS		£271,780
Current Liabilities:
Trade Payables		£27,540
Accruals		£500
TOTAL CURRENT LIABILITIES		£28,040
Non-Current Liabilities:
Loan		£50,000
TOTAL NON-CURRENT LIABILITIES		£50,000
TOTAL LIABILITIES		£78,040
NET ASSETS		£193,740
Owner's Contribution:
Capital	£165,000
Add: Net profit for the period	£35,740
	£200,740
Less: Drawings	-£7,000	£193,740
TOTAL OWNER'S CONTRIBUTION		£193,740

 

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