BTEC HND in Business

Student Name:
Student ID:
Unit Level: 04
Unit Number and Title: Unit 05 Accounting Principle
Unit Lecturer:

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Table of Contents
Introduction....................................................................................................................................................3
LO1 Examine the context and purpose of accounting...................................................................................5
P1 Examine the purpose of the accounting function within an organisation.............................................5
P2 Assess the accounting function within the organisation in the context of regulatory and ethical
constraints..................................................................................................................................................5
M1 Evaluate the context and purpose of the accounting function in meeting organisational, stakeholder
and societal needs and expectations...........................................................................................................6
D1 Critically evaluate the role of accounting in informing decision-making to meet organizational,
stakeholder and societal needs within complex operating environments..................................................8
LO2 Prepare basic financial statements for unincorporated and small business organizations in
accordance with accounting principles, conventions and standards..............................................................9
P3 Prepare financial statements from a given trial balance for sole traders, partnerships and not-for-
profit organizations, to meet accounting principles, conventions and standards.......................................9
M2 Produce financial statements from a given trial balance, making appropriate adjustments..............11
LO3 Interpret financial statements...............................................................................................................14
P4 Calculate and present financial ratios from a set of final accounts....................................................14
P5 Compare the performance of an organisation over time using financial ratios..................................15
M3 Evaluate the performance of an organisation over time. using financial ratios with reference to
relevant benchmarks................................................................................................................................17
D2 Critically evaluate financial statements to assess organizational performance using a range of
measures and ben.....................................................................................................................................17
LO4 Prepare budgets for planning, control and decision making using spreadsheets.................................17
P6 Prepare a cash budget from given data for an organisation using a spreadsheet................................17
Prepare a cash budget in January to April...............................................................................................17
P7 Discuss the benefits and limitations of budgets and budgetary planning, and control for an
organisation..............................................................................................................................................18
M4 Identify corrective actions to problems revealed by budgetary planning and control for effective
organizational decision making...............................................................................................................18
D3 Justify budgetary control solutions and their impact on organizational decision making to ensure
efficient and effective deployment of resources......................................................................................19
Conclusion...................................................................................................................................................20
References....................................................................................................................................................21

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Introduction

We know that, accounting principles is one of the most essential thing of an organization. This
task investigates budgetary administration interior businesses, looking at the objectives, focal
points, and imperatives of budgets and budgetary arranging and the vital work of remedial
measures in settling budget-related issues. To begin with, see at the centre objectives of an
organization’s accounting work, counting how it oversees challenging operational conditions.
Actually it gives information for organizational financial decision making and employees and
clients and societal desires. An extra ordinary plans and good financial accounting can help to
makes decision making of an organization to obtain success. There has huge benefits to maintain
financial activities properly if an organization can build proper financial accounting system and
maintain that very carefully and comply of Generally Accepted Accounting Principles (rules and
regulations). So, it’s very essential for an organization to produce a perfect financial statements
and explore that financial situation very carefully. Then they can makes decision making for
their organization to right way. It’s the other important thing to be done secure financial
information and maintain it properly. To be explore various financial activities perfectly so that
they can makes financial statement properly and can makes decisions for organisation. And to be
maintain budgetary arranging and administration to guarantee strong budgetary control system
for organisation.

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LO1 Examine the context and purpose of accounting

P1 Examine the purpose of the accounting function within an organisation.

The accounting function within an organization serves several essential purposes:

1. Risk Management: Accounting distinguishes and oversees monetary chance. Companies
can identify liquidity issues and abundance obligation through monetary investigate and
announcing. This permits them to settle issues and relieve dangers.
2. Financial recording: It is very essential responsible for record of all types of financial
transactions, involving income, all assets, liabilities and expenses. It could help maintain
a clear and right financial record of the organisation’s activities.
3. Proper Budgeting and planning: Generally accounting function helps in budgeting and
financial planning for the company’s. Its can helps analyse variances between actual and
budgeted figure for improve.
4. Control of Financial Transactions: Accountants can track different monetary
exchanges related to company instalments to guarantee that it gets income and remains
productive.
5. Financial Reporting: accounting create and generates various types of financial
statement, like income statement, balance sheet, cash flow statement etc. These
statements provide an overview of the company’s financial health and situation and can
make a decision.
6. Audit of Finance: Accountants can conduct money related reviews of companies,
recognize bookkeeping inconsistencies and actualize remedial measures.
7. Compliance with legal requirements: Accounting guarantee that companies comply
with industry and government rules, directions and approaches related to tax assessment,
budgetary announcing and representative finance.
8. Evaluating financial resources: Companies can utilize accounting to distinguish an
organization's money related shortcomings and qualities, to address shortcomings and
progress qlities, and to execute suitable procedures.
9. Reviewing Results: Accounting includes conducting standard money related surveys of
company offices to assess their execution and diminish squander, increment efficiency,
and streamline costs.

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P2 Assess the accounting function within the organisation in the context of regulatory
and ethical constraints.

Regulatory restrictions:

Monetary announcing measures:

Organization must be take exactly guideline of accounting and controls. United Kingdom
companies comply Generally Accepted Accounting principles (GAAT). If any company cannot
comply these rule and regulations then they cannot run their company’s financial activities
properly.

Assess rules: For the tax collection accounting function is very important. Calculation of charge
and finance charge and announcing for requires precise money and VAT. These all thing must be
comply otherwise may be create obstacles.

Securities and Trade Commission Compliance:

All companies must be comply with SEC controls system. There are exact report (budgetary) and
opportune and various insider exchanging rules and regulations for comply.

Ethical constraints:

Astuteness: Announce of budget must be honest stand and legal for company’s goodwill.
Accountants should be honest and careful about money related data to maintain properly. And
must be comply of rules and moral standards.

Privacy: Accountants should be aware of sensitive budgetary information. These information

must be secure from unauthorized person, also individual data. Insufficient protection of data
and information can destroy company’s privacy system and protection of data.

Freedom: When accountants do their financial activities then they can comply of autonomy and
objectivity for maintain money related moral requirements. So, they should be maintain
sufficient distance from unethical activities very carefully so that they can be success their
activities properly.

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M1 Evaluate the context and purpose of the accounting function in meeting
organisational, stakeholder and societal needs and expectations.

1. Organizational needs:

Control of Monetary Exchanges: Accountants can track financial transactions related to

organization instalments. By these actions can ensure to gets compensation and profit.

Risk maintenance: Another significant work of bookkeeping incorporates chance

administration. Companies utilize the information collected through bookkeeping to analyse
zones of hazard. They too analyse assets that are not as valuable as anticipated and ventures that
are not giving anticipated returns.

Decision making support: Accounting advises administration choices. Money related

examination makes a difference supervisors decide the leading choices based on money related
affect.

2. Stakeholder needs:

Clients: Clients may be concerned around the company's financial soundness since it impacts
the quality of things and organizations.

Moneylenders: Accounting information makes a distinction banks and suppliers assess the
company's money related soundness and financing risk.

3. Community needs and expectations:

Administrative compliance:

Accounting creates a honest and lawful administrative commitments in finance related

announcing, collection of tax and various monetary things by promising social compliance by
maintain properly.

Moral behaviour: Society requests money related morals from the organization. They should
be maintain properly money related moral requirements otherwise there can be create social
conflict and unwanted situation. So it’s must be maintain that and must be secure moral
behaviour.

Evaluation
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The accounting functions plays an important role to create relationship between objectives and
substance and partners and societal needs.

Straightforwardness: Must be fulfil societal wants with straightforwardness and obligation by

giving clear money related matters disclosures.

Chance diminish: We see that accounting makes a distinction recognise and direct cash related
matter, ensure organisational stability and fulfilment of shareholders.
Accuracy and comfort:

The budgetary information must be right and fortunate to create good choices, comply with
heading and fulfil accomplices. Accounting guarantees this.

D1 Critically evaluate the role of accounting in informing decision-making to meet

organizational, stakeholder and societal needs within complex operating environments.

We know that accounting plays a very essential role in organizational decision making in a risky business
environment by providing crucial financial information and various insights to different stake holders.
Let’s go evaluate the role.

1. Provide Strategic planning: generally reporting data in making to strategic decision for
an organisation. By the analysis of financial reports measurement an organisation can
develop efficiency, set realistic objectives.
2. Communication of stakeholders: Actually account reports are the major implies of
communication with partners, controller and workers on budgetary articulations to get
monetary position and activities.
3. Financial transparency: Generally accounting provides a framework to summarizing,
recoding and reporting of financial exchanges. This transparency is very important for
stakeholders like money lenders and investors and others.
4. Control or management of risk: Accounting play a important role to recognizing and
managing all financial risk. An organisation can be exposed to various risks likemarke
volatility, liquidity or change of credit. .
5. Allotment of resources: It can helps effectively allotment of resources. And
management can determine where should be redistributed or distributed depend on
measurement of performance.

The challenges and impediments:

1. Overload of information: Budgetary data can overpowered decision -makers and
fundamental to show information in a concise and clear way.

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 2. Complexity of working situation: In the very difficult situations, accounting can
complete and making it capture of challenging.
3. Subjectivity: Accounting involves gauges and judgments so that can represent
subjectivity. The choice income acknowledgement approaches effect on financial all
results. So, it is very essential for financial reasons.

LO2 Prepare basic financial statements for unincorporated and small

business organizations in accordance with accounting principles,
conventions and standards

P3 Prepare financial statements from a given trial balance for sole traders, partnerships
and not-for-profit organizations, to meet accounting principles, conventions and
standards.

Answer 1. a) Stephen Chee Statement of Profit or Loss for the y

Revenues
Cost of Sales
Opening Inventory
Purchase
Purchase Returns

Closing Inventory

Other Income Discount Received

Gross Profit
Expenses
Operating Expenses
Wages & Salaries (Work Out 1)
Discount Allowed
Irrecoverable Debts (Work Out 2) (4600+760-500)
Loan Interest (Work Out 3)
Depreciation (Work Out 4)
Other Operating Expense (Work Out 5)

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 Profit For the Year

Stephen Chee Statement of Financial Position for the year en

Non-current assets
Property (Work Out 4) (120,000-21,800)
Equipment (Work Out 4) (80,000-58,000)

Current Asset
Inventory
Trade receivables (Work Out 2) (38,000-760)
Prepayment
Bank
Cash in Hand

Total Asset
Capital
Balance at 1 June 2023
Profit for the year
Drawings
Total Capital
Non-current Liabilities
17% Loan
Current Liabilities
Trade Payables £ 36,000.00
Accruals £ 800.00

Total Liabilities
Total Liabilities & Owners Equity

Work Out
1 Wages and Salaries in Trial Balance £ 58,800.00
Wages and Salaries Accrued in adjustment £ 800.00
W&S in SPL
2 Irrecoverable Debts
New Allowance (2%*38000) £ 760.00
Previous Allowance £ (500.00)
Increase in Allowance
3 Loan Interest (17%*30000)

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 4 Depriciation
Property
Opening Provision £ 20,000.00
Provision for the year (1.5%*120000) £ 1,800.00
Closing Provision
Equipment
Opening Provision £ 38,000.00
Provision for the year (25%*80000) £ 20,000.00
Closing Provision

Total Change in Provision (10,500+1,800)

5 Operating Expense in Trial Balance £ 17,700.00
Prepaid Operating Expenses £ (300.00)
Operating Expense in SPL

M2 Produce financial statements from a given trial balance, making appropriate

adjustments

Donald Brown Brother's Statement of Profit or Loss for the year ended 31st Decem

Revenues
Cost of Sales
Opening Inventory
Purchase
Closing Inventory

Other Income Discount Received

Gross Profit

Expenses
Discount Allowed
Lighting and Heating
Motor Expenses (Work Out 1) (2862+218)
Rent (Work Out 2) (8841-680)

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 General Expenses
Depriciation (Work Out 3) (Motor Vehicles+Fixture & Fittings) (9146+4220)
Total Cost
Profit for the year

Donald Brown Brother's Statement of financial position for the year ended 31st Dec
Non-Current Asset
Fixtures and Fittings (Work Out 3) (42200-6420)
Motor Vehicles (Work Out 3) (45730-24438)

Current Asset
Inventory
Receivables
Prepayments
Cash in Hand

Total Asset
Capital
1st of January
Profit for the year
Drawings

Liabilities
Payables
Accruals
Bank Overdraft

Total Capital & Liabilities

Work Out
1 Motor Expenses in Trial Balance
Motor Expenses Additional Expenses
Motor Expenses in SP&L

2 Rent in Trial Balance

Rent Prepaid

3 Depreciation: Motor Vehicles

Opening Provision £ 15,292.00
Depreciation (45730*20%) £ 9,146.00

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 Closing Provision (amount deducted from assets)

Depreciation: Fixtures & Fittings

Opening Provision £ 2,200.00
Depreciation (42200*10%) £ 4,220.00
Closing Provision (amount deducted from assets)

Churchill Foundation Statement of Profit or Loss For the Year Ending 31st
December 2023
Revenues
£
Contributions 60,000.00
£
Grants 15,000.00
£
Membership Dues 2,500.00
£
Program Service Revenue 18,000.00
Total Revenues £ 95,500.00

Cost of Service Provided

£
Program Expenses 25,000.00
£
Fundraising Expenses 2,500.00
Total Service Cost £ 27,500.00
£
Gross Profit 68,000.00

Operating Expenses
Administrative Expenses £ 5,000.00
£
Net Profit 63,000.00

Churchill Foundation Statement of Financial Position As of 31st December 2023

Assets
Cash £ 10,000.00
Accounts Receivable £ 2,000.00
Prepaid Expenses £ 500.00
Investments £ 15,000.00
Property, Plant and Equipment £ 25,000.00
£
Total Assets 52,500.00

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 Liabilitie
s
Accounts Payable £ 1,000.00
Accrued Liabilities £ 500.00
Deferred Revenue £ 3,000.00
£
Total Liabilities 4,500.00

Equity
Net Profit £ 63,000.00
Withdrawals £ (15,000.00)
£
48,000.00
£
Total Liabilities & Equities 52,500.00

LO3 Interpret financial statements

P4 Calculate and present financial ratios from a set of final accounts.

Financial ratios are a quantitative measure of a company's overall performance, stability, and
health. It provides invaluable information on a range of company characteristics such as
profitability, liquidity, solvency and efficiency. Debt-equity ratio, earnings per share (EPS),
price-earnings (P/E) ratio, and current ratio are some examples of financial ratios. Professionals,
investors and all other parties can evaluate the company's performance and financial health using
this ratio.

1. Liquidity Ratios:

Current Ratio: Nazem (2013) states that the current ratio evaluates an organization's ability to
meet short-term financial obligations with a one-year maturity horizon. Another name for it is a
liquidity ratio.

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Current Assets: £81,140
Current Liabilities: £36,800
Current Ratio = £81,140 / £36,800 = 2.20

Quick Ratio: Also known as the acid test or liquidity ratio, the Quick Ratio assesses a
company's ability to meet its short-term obligations by looking at how easily it can convert its
resources into cash. These assets include cash in banks, securities and debt. The reason these
assets are called "quick" assets is because they are quickly converted into cash.

Quick Assets (Current Assets - Inventory): £81,140 - £42,000 = £39,140

Quick Ratio = £39,140 / £36,800 = 1.06

P5 Compare the performance of an organisation over time using financial ratios.

1. Income Ratio:
Gross Profit Ratio: Gross profit ratio is a measure of efficiency derived from the ratio of gross
profit (GP) to net profit. It shows the profit of the business after deducting the cost of revenue.
The amount of money above the cost of goods sold.
 Gross Profit: £159,200
 Net Sales: £402,200
 Gross Profit Margin = (£159,200 / £402,200) * 100% = 39.63%

Net Profit Ratio: Also known as net profit margin, the net profit ratio is an economic measure
that shows the percentage of a company's net income compared to total sales. (net income / net
sales) Multiply 100% to answer this question.
✔ Net Profit: £46,740
✔ Net Sales: £402,200
✔ Net Profit Margin = (£46,740 / £402,200) * 100% = 11.63%
Return on Equity (ROE): This ratio measures the profitability of a business investment. A
business evaluates how many resources the owner allocates to generate revenue. A higher ratio
indicates a better company. Profit after tax is equal to net worth, which is the sum of reserves,
surplus, equity, and equity.
✔ Net Profit: £46,740
✔ Owner's Equity (as of 01 June 2022): £121,300

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✔ ROE = (£46,740 / £121,300) * 100% = 38.50%
2. Efficiency Ratio:
Inventory Turnover Ratio: A company's inventory turnover ratio measures how often its
inventory is sold and replenished during a given period. The methodology can also be used to
estimate the length of time it will take to sell current inventory.
✔ Cost of Goods Sold: £243,000
✔ Average Inventory [(Beginning Inventory + Ending Inventory) / 2]: (£50,000 +
£42,000) / 2 = £46,000
✔ Inventory Turnover Ratio = £243,000 / £46,000 = 5.28
3. Debt Ratio:
Debt-Equity Ratio: This metric shows the contribution of lenders and investors to the basic
requirements of the business. The debt-equity ratio is the basic ratio of a company's total long-
term debt to its equity. (2022) Economic Times. The company's solvency is determined by its
debt ratio.
How is Total Liabilities/Owner's Equity Calculated?
✔ Total Liabilities: £66,800
✔ Owner's Equity (as of 01 June 2022): £121,300
✔ Debt to Equity Ratio = £66,800 / £121,300 = 0.55
Leverage Ratio: This shows how well the company can finance its interest expenses. EBIT is
calculated before operating expenses / taxes and taxes.
✔ EBIT (can be approximated as Gross Profit - Operating Expenses): £159,200 - £112,160
= £47,040
✔ Interest Expense: £5,100
✔ Interest Coverage Ratio = £47,040 / £5,100 = 9.22
Reconciliation of financial statements and opening balance as of June 1, 2022
 An increase in the quick and current ratio indicates an increase in liquidity.
 A slight decrease in Net Net margin and Gross Income may indicate an increase in
operating expenses.
 An increase in ROE indicates a higher return on equity; increased inventory turnover
ratio indicates better inventory control;
 A low debt-to-equity ratio indicates a relatively low amount;
 A good interest coverage ratio indicates that the company can easily cover its interest
expenses.

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M3 Evaluate the performance of an organisation over time. using financial ratios with
reference to relevant benchmarks.

D2 Critically evaluate financial statements to assess organizational performance using a

range of measures and ben

LO4 Prepare budgets for planning, control and decision making using
spreadsheets..
P6 Prepare a cash budget from given data for an organisation using a spreadsheet.

Prepare a cash budget in January to April

January February March April

Beginning balance £8000 £15000 (£30000) (£71000)
Expected sales £60000 £40000 £45000 £40000
Total cash available £68000 £55000 £15000 (£31000)
Expected purchase £48000 £80000 £81000 £90000
Wages £5000 £5000 £5000 £5000
Total Expenses £53000 £85000 £86000 £95000
Net cash £15000 -£30000 -£71000 -£126000

P7 Discuss the benefits and limitations of budgets and budgetary planning, and control
for an organisation.

Benefits of Budgets and Budgetary Planning:

Choice Back: Budgets offer help survey choices. Executives may survey choices' budgetary
impacts a few time as of late execution.

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Resource Assignment: Budgets effectively manage resources to support the organisation's
crucial goals.
Execution Estimation: Budgets track and account for execution. Compare veritable comes
about to budgeted numbers to find irregularities and settle them.
Limitations of Budgets and Budgetary Planning:
Time-Consuming: Building and managing budgets takes time, particularly for gigantic. It’s may
be involve company from other basic activities.
Powerlessness: Doubts progress and do powerful to budgets. Financial depressions may impact
on budgets.

Budgetary Control:

Budgetary control refers to the process of planning, controlling and observing the organisations
to the income and expenditures. Below some activities.
 Do toll diminish and activity by empowering.
 Provides guarantee cash related tax and commitment.
 Reduce budgetary conflict and settling.

M4 Identify corrective actions to problems revealed by budgetary planning and control

for effective organizational decision making.

Below some way to solve problems:

Setting and Prioritizing Goals: This makes a difference organizations centre on the foremost
imperative exercises and apportion assets in like manner.

Resource Allocation: Budgeting empowers organizations to distribute assets viably and

productively. By recognizing the assets required to attain objectives, organizations can designate
their assets for more noteworthy affect.

Cash Flow Management: Budgeting empowers organizations to oversee cash stream by

estimating future incomes and costs. It makes a difference organizations to arrange their cash
stream necessities and guarantee that they have adequate reserves to meet their commitments.

Performance Monitoring: Budgeting makes a difference organizations screen their execution

by comparing genuine comes about with budgeted comes about. This makes a difference
organizations to distinguish where they are doing well and where they ought to make strides.

Make Informed Decisions: With a clear understanding of the organization's money related
circumstance, the organization can make educated choices almost where to contribute its assets.

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D3 Justify budgetary control solutions and their impact on organizational decision
making to ensure efficient and effective deployment of resources.

Below some way to solutions and impact on organization decision making.

Below some way to solutions and impact on organization decision making.

Planning:
We know that a proper organising is the beginning and fundamental step of any company or
organisation. Actually it incorporates creating a budgetary organise for a specific time period
and based on the company’s futures activities and likes.

Coordination: In the organisation, there main objectives of the goal setting is to coordination
of all cash related activities and properly maintain. If an organisation can’t coordinating
properly they can downfall very quickly. So, it is essential to setting common goals and
targets, ensuring that all divisions and activities according to common objective.

Choice Making: We also know that budget control is the key steps to makes a exact
environment for creating fundamental choice so that it impact the long -term and survive of the
company.

Taken a toll Control: It is an organisation’s way of examine budgets and expenditures and
others things. It to boot basic to recognize ranges where costs can be lessened. It maintains a
strategic distance from misuse or abuse of resources and increases efficiency.

Asset Assignment: It got to ensure that resources are allocated to the first basic locales and
utilized in a perfect world based on needs and prerequisites that progress the organization's
objectives.

Conclusion

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We know that, accounting principles is one of the most essential thing of an organisation. This
task investigates budgetary administration interior businesses, looking at the objectives, focal
points, and imperatives of budgets and budgetary arranging and the vital work of remedial
measures in settling budget-related issues. To begin with, see at the centre objectives of an
organisation's accounting work, counting how it oversees challenging operational conditions.
Actually it gives information for organisational financial decision making and employees and
clients and societal desires. A extra ordinary plans and good financial accounting can help to
makes decision making of an organisation to obtain success. There has huge benefits to maintain
financial activities properly if an organisation can build proper financial accounting system and
maintain that very carefully and comply of Generally Accepted Accounting Principles (rules and
regulations). So, it’s very essential for an organisation to produce a perfect financial statements
and explore that financial situation very carefully. Then they can makes decision making for
their organisation to right way. It’s the other important thing to be done secure financial
information and maintain it properly. To be explore various financial activities perfectly so that
they can makes financial statement properly and can makes decisions for organisation. And to be
maintain budgetary arranging and administration to guarantee strong budgetary control system
for organisation.

References

19