Recording Business Transactions

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Recording Business transaction
Resit Assignment A1

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Contents
Part 1: Management Report.............................................................................................................3
A: Importance of accounting information in the business organization......................................3
B: Difference between gross profit and net profit through using the numerical example...........3
C: Difference between non-current assets and current assets; and non-current liabilities and
current liabilities..........................................................................................................................4
D: Double entry bookkeeping system..........................................................................................5
E: History of double entry bookkeeping......................................................................................5
F: Meaning of debit and credit.....................................................................................................5
Part 2: Recording Business Transactions........................................................................................7
A: Journal Entries.........................................................................................................................7
B: T-Accounts of Kool Kit Limited.............................................................................................9
C: Trial Balance of Kool Kit Limited........................................................................................11
References......................................................................................................................................12

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Part 1: Management Report
A: Importance of accounting information in the business organization
Accounting refers to as systematic process of recording and preparing book of accounts
for all the financial transactions related with the business organization. Accounting comprises of
recording, analyzing, summarizing and reporting of financial transactions so that information can
be used by various stakeholders of the business organization. Information gathered through
accounting can be used in different ways by the users of financial information. Management uses
financial information to ascertain the financial performance and financial position of the business
organization at the given point of time. Accounting information helps ion decision making
process, planning and also helps in controlling other processes. Through use of accounting
information such as profit & loss account, balance sheet and other information management can
make plans to formulate the budgets. Government officials required accounting information to
calculate the tax and also assess the financial position of the company. Information gathered
through accounting is used by the investors to make the investment decision. Information
provided in the financial statements is used by investors, business managers and creditors to
analysis the financial performance of the company and make decision accordingly. So it can be
said that accounting information is highly important for any business organization (Brigham and
Michael, 2013).
B: Difference between gross profit and net profit through using the numerical example
Profit is regarded as the difference between revenue earned and total cost for the
particular period. So profit is monetary reward that business receives during the normal conduct
of the business. Total cost of the business process can be divided into two major parts and they
are cost of goods sold and operating expenses including finance cost and tax. Gross profit
referred to as profit which is calculated by deducting cost of goods sold from sales revenue. Cost
of goods sold include expenses such as purchases, custom duty, inward carriage, labour expenses
and other expenses directly related with the product or services. On the other hand net profit is
calculated after deducting all the indirect expenses or operating expenses from gross profit.
Operating expenses includes expenses required to pay for running the business and selling the
goods. It can be said that gross profit is not the true profit of the company but net profit is the
true profit of the company. Gross profit cannot be used by the investors to judge the profitability
performance of the business but net profit reflects the actual profitability position of the company
(Damodaran, 2011).
Numerical Example: Suppose, a company made net sales $ 115,000 during the year and
expenses include $25000 purchases, $20000 labour charges, $10500 other direct expense and
$36000 operating expenses. Calculate gross profit and net profit.
Gross profit: Sales – cost of goods sold

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= $115,000 – ($25000+$20000+$10500)
= $59500
Net Profit = Gross Profit – all indirect expenses (operating expenses)
= $59500-$ 36000
= $23500
C: Difference between non-current assets and current assets; and non-current liabilities
and current liabilities
Non-Current asset and current asset
Assets that are used within the business can be divided into two major parts; current
assets and non-current assets. Current assets are referred to those items that have capability to be
converted into cash and cash equivalents within one fiscal year. It includes financial items such
as cash, bank balance, short term investments, account receivable, inventory etc. On the other
hand non-current asset are those assets that have life for more than 1 year and they are easily
convertible into cash. Some of important non-current assets are fixed assets like plant, equipment
etc, intangible assets, long term investment etc.
Current liabilities and non-current liabilities
Current liabilities referred to the payments that need to pay within one year time period
and non-current liabilities refers to payments that need to be settled after one year on the balance
sheet date. Current liabilities are generally paid through current assets and difference between
current assets and current liabilities is regarded as working capital.
Numerical Example: Consider the below balance sheet and divide all items into current assets,
non-current assets, current liabilities and non-current liabilities (Davies and Crawford, 2011)
Liabilities Amount Assets Amount
Account payable (short term) £ 15,000.00 Prepaid expenses £ 1,500.00
Unearned income £ 5,000.00 Bank Balance £ 25,500.00
Bank Loan (Long Term) £ 50,000.00 Plant and equipments £ 65,000.00
Tax expenses £ 6,500.00 Furniture £ 22,500.00
Long term investment £ 50,000.00
Goodwill £ 35,000.00
Inventory £ 35,000.00
Current Liabilities Amount Current Assets Amount
Account payable (short term) £ 15,000.00 Prepaid expenses £ 1,500.00
Unearned income £ 5,000.00 Bank Balance £ 25,500.00
Inventory £ 35,000.00