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Assessment
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Table of Contents
Introduction......................................................................................................................................3
Part A...............................................................................................................................................3
A. Double entry records..............................................................................................................3
B. Balance the accounts..............................................................................................................5
C. Trial Balance as at 31st October 2020...................................................................................10
D. Income Statement for the period ended on 31st October 2020.............................................11
E. Statement of Financial Position as at 31st October 2020......................................................11
F. Brief letter to Linda...............................................................................................................12
Part B.............................................................................................................................................12
A. Ratio Analysis......................................................................................................................12
B. Analysis of ratio analysis.....................................................................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................16
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Introduction
Books of accounts in a business are maintained to record all the materially significant
events that takes place in the course of business as transactions. Only financial parts of events are
recorded in the books of accounts (Wild, Shaw and Chiappetta, 2015). They are recorded in
accordance with the guided principles and conventions of accounting in books of accounts like
journal, ledger and trial balance. Balances obtained out of trial balance is used to prepare final
accounts which includes income statement, statement of financial position and cash flow
statement. Final accounts are then used for further analysis by both internal and external
stakeholders of business through various techniques such as ratio analysis. This report is aimed
at exploring this whole process of recording business transactions in primary books of accounts
to ratio analysis of a sole trader Linda.
Part A
A. Double entry records
Journal
(For the month October 2020)
Date Particulars L.F. Dr. (in GBP) Cr. (in GBP)
01/10/20 Cash-at-bank A/c...........................................Dr. 8000
Cash-in-hand A/c..........................................Dr. 5200
Van A/c........................................................Dr. 3000
To Capital A/c..... 16200
(Business started with cash-in-hand, van and
cash-at-bank)
02/10/20 Laptop A/c....................................................Dr. 1000
To Cash-at-bank A/c...... 1000
(New laptop bought and cheque paid)
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04/10/20 Purchase A/c.................................................Dr. 2450
To Toy Limited...... 2450
(Goods purchased on toys at credit)
05/10/20 Cash-at-bank A/c...........................................Dr. 1500
To Sales A/c...... 1500
(Sales made and payment received in bank)
12/10/20 Repairs A/c....................................................Dr. 80
To Cash-in-hand A/c...... 80
(Cash paid for laptop repair)
18/10/20 Toy Ltd. A/c..................................................Dr. 100
To Returns Outward A/c..... 100
(Goods returned to creditor Toys Limited)
21/10/20 Cash-at-bank A/c...........................................Dr. 500
To Rent A/c...... 500
(Rent received for part of the premise)
23/10/20 Cash-in-hand A/c..........................................Dr. 1500
Fred A/c.........................................................Dr. 400
To Sales A/c..... 1900
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(Sales made part on credit part on cash)
23/10/20 Cash-in-hand A/c..........................................Dr. 500
To Sales A/c...... 500
(Cash sales made and payment received)
24/10/20 Car A/c..........................................................Dr. 2500
To Cash-at-bank A/c....... 2500
(Bought second-hand car for business)
26/10/20 Wages A/c.....................................................Dr. 820
To Cash-at-bank A/c..... 820
(Monthly wages paid to part-time shopkeeper)
30/10/20 Rent A/c........................................................Dr. 1000
To Cash-at-bank A/c....... 1000
(Rent paid through cash-at-bank)
31/10/20 Drawings A/c................................................Dr. 1600
To Cash-at-bank A/c...... 1600
(Amount paid from business for personal
holiday)
B. Balance the accounts
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Cash-at-bank Account
Date Particulars Amount Date Particulars Amount
01/10/20 Capital A/c.. 8000 02/10/20 Laptop A/c.. 1000
05/10/20 Sales A/c.. 1500 24/10/20 Car A/c.. 2500
21/10/20 Rent A/c.. 500 26/10/20 Wages A/c.. 820
30/10/20 Rent A/c.. 1000
31/10/20 Drawing A/c.. 1600
31/10/20 Balance c/d.. 3080
Total 10000 Total 10000
01/11/20 Balance b/d 3080
Cash-in-hand Account
Date Particulars Amoun
t
Date Particulars Amount
01/10/20 Capital A/c.. 5200 12/10/20 Repair A/c.. 80
23/10/20 Sales A/c.. 1500 31/10/20 Balance c/d.. 7120
23/10/20 Sales A/c.. 500
Total 7200 Total 7200
01/11/20 Balance b/d 7120
Fred Account
Date Particular Amount Date Particular Amount
23/10/20 Sales A/c.. 400 31/10/20 Balance c/d.. 400
Total 400 Total 400
01/11/20 Balance b/d 400
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Purchases Account
Date Particular Amount Date Particular Amount
02/10/20 Toys Limited A/c.. 2450 31/10/20 Balance c/d.. 2450
Total 2450 Total 2450
01/11/20 Balance b/d 2450
Toys Limited Account
Date Particulars Amount Date Particulars Amount
18/10/20 Returns Outwards A/c.. 100 04/10/20 Purchases A/c. 2450
31/10/20 Balance c/d.. 2350
Total 2450 Total 2450
01/11/20 Balance b/d 2350
Rent Account
Date Particulars Amount Date Particulars Amount
30/10/20 Cash-at-Bank A/c.. 1000 30/10/20 Bank A/c.. 500
30/10/20 Balance c/d.. 1000
Total 1000 Total 1000
01/11/20 Balance b/d 1000
Van Account
Date Particulars Amount Date Particulars Amount
01/10/20 Capital A/c.. 3000 31/10/20 Balance c/d.. 3000
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Total 3000 Total 3000
01/11/20 Balance b/d 3000
Capital Account
Date Particulars Amount Date Particulars Amount
31/10/20 Balance c/d. 16200 01/10/20 Bank A/c.. 8000
01/10/20 Cash A/c.. 5200
01/10/20 Van A/c.. 3000
Total 16200 Total 16200
01/11/20 Balance b/d 16200
Sales Account
Date Particulars Amount Date Particulars Amount
31/10/20 Balance c/d.. 3900 05/10/20 Cash-at- bank A/c.. 1500
23/10/20 Cash-in-hand A/c.. 1500
23/10/20 Fred A/c.. 400
23/10/20 Cash-in-hand A/c.. 500
Total 3900 3900
01/11/20 Balance b/d 3900
Laptop Account
Date Particulars Amount Date Particulars Amount
02/10/20 Cash-at-Bank A/c.. 1000 31/10/20 Balance c/d.. 1000
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Total 1000 Total 1000
01/11/20 Balance b/d 1000
Car Account
Date Particulars Amount Date Particulars Amount
24/10/20 Cash-at-Bank A/c.. 2500 31/10/20 Balance c/d.. 2500
Total 2500 Total 2500
01/11/20 Balance b/d 2500
Drawings Account
Date Particulars Amount Date Particulars Amount
31/10/20 Cash-at-Bank A/c.. 1600 31/10/20 Balance c/d.. 1600
Total 1600 Total 1600
01/11/20 Balance b/d 1600
Wages Account
Date Particulars Amount Date Particulars Amount
25/10/20 Cash-at-Bank A/c.. 820 31/12/20 Balance c/d.. 820
Total 820 Total 820
01/11/20 Balance b/d 820
Repair Account
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Date Particulars Amt. Date Particulars Amt.
12/10/20 Cash-in-hand A/c.. 80 31/10/20 Balance c/d.. 80
Total 80 Total 80
01/11/20 Balance b/d 80
Returns Outward Account
Date Particulars Amount Date Particulars Amount
31/10/20 Balance c/d.. 100 18/10/20 Toy Limited A/c.. 100
Total 100 Total 100
01/11/20 Balance b/d 100
C. Trial Balance as at 31st October 2020
Trial Balance
(as at 31st October 2020)
Particulars Dr. Amt. In GBP Cr. Amt. In GBP
Cash-at-Bank Account 3080
Cash-in-hand Account 7120
Van Account 3000
Laptop Account 1000
Toys Limited Account 2350
Purchases Account 2450
Returns Outward Account 100
Sales Account 3900
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Rent Account 500
Wages Account 820
Drawings Account 1600
Capital Account 16200
Repairs Account 80
Fred Account 400
Motor Car Account 2500
Total 22550 22550
D. Income Statement for the period ended on 31st October 2020
Income Statement
(for the period ending 31st October 2020)
Particulars Amount Particulars Amount
Purchase 2450 Sales 3900
Less: Return outwards 100 2350 Closing Stock 250
Gross Profit c/f 1800
Total 4150 Total 4150
Rent paid 1000 Gross Profit b/d 1800
Wages paid 820 Rent received 500
Repairs 80
Net Profit 400
Total 2300 Total 2300
E. Statement of Financial Position as at 31st October 2020
Statement of Financial Position
(as at 31st October 2020)
Particulars Amount Particulars Amount
Capital: 16200 Cash-in-hand 7120
Add: Profit 400 Cash-at-bank 3080
Less: drawings 1600 15000 Accounts receivable 400
Accounts Payable 2350 Stock at end 250
Motor car 2500
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Van 3000
Laptop 1000
Total 17350 Total 17350
F. Brief letter to Linda
When a proprietor takes away goods or cash out of the business accounts and use them
for non-business purposes such as personal use, it is known as drawings made out of business. It
is maintained in a separate ledger and is directly debited to capital account in the books of
accounts. Therefore, it is directly reflected in Statement of final position or Balance Sheet under
the head of capital account (Warren, Jonick and Schneider, 2020). As per the scenario given,
proprietor Linda has taken a week-long holiday for personal leisure and debited those expenses
out of business account but since the trip was not undertaken for business purposes, it cannot be
termed as business event and thus cannot be charged to profit and loss statement of the trader and
has to be treated as drawings made out of business, charged directly to capital account of the
trader.
Part B
A. Ratio Analysis
Ratios Ratios of Linda's Firm Competitors Average
Net Profit Ratio
= Net Profit / Net sales %
= (400 / 3900) *100
= 10.26%
31.00 %
Gross Profit Ratio
= Gross Profit / Net Sales %
= (1800 / 3900) * 100
= 46.15%
54.00 %
Current Ratio
= Current Assets / Current Liabilities
= 10850 / 2350
= 4.62 times
2.87 Times
Quick Ratio
= Quick Asset / Current Liabilities
= 10600 / 2350
= 4.51 times
1.35 Times
A/cs Receivable Collection Period
= (Accounts Receivable/ Net Credit
= (400/ 400) * 31
= 31 Days
50 Days
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Sales) *Number of working days
A/cs Payable Payment Period
= (Accounts Payable/ Net Credit
Purchases) *Number of working days
= (2350 / 2350) * 31
= 31 Days
72 Days
B. Analysis of ratio analysis
Ratio analysis refers to the analysis of finding among the financial statements of the
business in terms of its profitability, solvency, turnover, etc.
 Net Profit Ratio – It is a profitability ratio. It is used to determine the percentage of net
profit in comparison to total sales of the business (Brown and Johnston, 2019). It cannot
be judged as standalone figure and is either compared against the performance of
business with its previous performances or against its competitors or industry benchmark.
Since, this is the first month of operation of Linda’s business, it is not possible to have
past performance and therefore, it is to be compared against competitors or industry
average. Higher the net profit ratio is, better it is considered. Net profit ratio of firm is
10.26% while rivals’ average ratio is 31% and it can be deduced that new business has to
cover a long way to at least reach up to its competitors’ level and then surpass it.
 Gross Profit Ratio – It is also a profitability ratio that is used to assess the relationship
between gross profit and turnover of the business in the defined period (Storey, 2016). It
cannot be also judged standalone and higher the gross profit ratio, better it is operational
efficiency is considered. Linda’s firm has a reported gross profit ratio of 46.15% against
the competitors’ average 54%. Although, it was unable to surpass the average, it can be
considered that business is doing good, considering the fact it is only its first month of
operations.
 Current Ratio – It is a liquidity ratio. It is calculated using working capital of the business
as it is used to determine business’s capability to finance its short-term liability with its
current assets. Ideal current ratio is considered to be 2:1 i.e., presence of twice of current
assets than current liabilities in the Balance Sheet is considered good enough to be
assured of the business’s capability of financing its short-term debt obligations. Higher
than this ratio is considered good but too much higher is not considered good as it points
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towards operational inefficiencies of working capital. Current Ratio of Linda’s firm is
4.62 times against 2.87 times of competitors. This might superficially look good as it is at
higher side but it might also be result of unbalanced working capital management. Since,
it is the first month of operation, proprietor needs to have a revised look into working
capital management.
 Quick Ratio – It is also a liquidity ratio and is one step ahead of current ratio in
determining firm’s abilities to pay off its current liabilities with its quick assets i.e., those
assets which can be converted into cash quickly (Henderson and et.al., 2015). Therefore,
inventories are deducted from current assets to calculate quick assets. 1:1 is considered
ideal quick ratio. Linda’s quick ratio is 4.51 times while competitors have 1.35 times.
Business performance can be said good but analysis reveals that it has unbalanced
working capital management.
 Accounts Receivable Collection Period (ACP) – It refers to that period which business
usually takes to pay off its debtors and complete one inventory cycle. Shorter it is, better
it is as that means business is able to manage debtors well. Linda has ACP of 31 days
while competitors have 50 days but Linda’s performance cannot be said better as in the
period of first month of operation, there is no payment received from debtor against
credit sales made in the first month of operations which means that first inventory cycle
is yet to be completed.
 Accounts Payable Payment Period (APP) – It refers to that period which business usually
takes to pay off its creditors (Drake, Roulstone and Thornock, 2016). Therefore, longer it
is, better it is. Linda has APP of 31 days while competitors have 72 days. This shows
Linda’s business performance in a inferior manner but it is really not comparable as it is
only one month data while competitors average suggest an year APP.
Conclusion
Above report is aimed at exploring process of recording business transactions in the
books of accounts of a sole proprietor and it can be concluded that though the transactions are
recorded based on guided principles and conventions, it is still subjected to interpretation of the
person making entries into books of accounts and therefore, accountant needs to make entries
into the books of accounts with an objective and rational sense. Further, ratio analysis has been
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made out of the data collected from the financial accounts and it can be observed that it serves as
an effective yet simple medium to analyse and compare business data with its own past
performance as well as competitor and industry averages.
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References
Books and Journal
Brown, R.G. and Johnston, K.S., 2019. Paciolo on accounting. Routledge.
Drake, M.S., Roulstone, D.T. and Thornock, J.R., 2016. The usefulness of historical accounting
reports. Journal of Accounting and Economics. 61(2-3). pp.448-464.
Henderson, S. and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Storey, D.J., 2016. Understanding the small business sector. Routledge.
Warren, C.S., Jonick, C. and Schneider, J., 2020. Accounting. Cengage Learning.
Wild, J.J., Shaw, K.W. and Chiappetta, B., 2015. Fundamental accounting principles. McGraw-
Hill Education,.
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