Introduction to Financial Accounting: Ratio Analysis and Bank Account

This article covers the basics of financial accounting, including ratio analysis and bank account preparation. It includes a sample balance sheet and profit and loss account, as well as an interpretation of financial ratios. The article also covers the straight-line and reducing balance methods of depreciation.

Table of Contents
INTRODUCTION 3
MAIN BODY 4
CONCLUSION 10
REFERENCES 1

INTRODUCTION
MAIN BODY
Question 1a)
(a) Bob's Trading Account for year ended 30th April 2020
Particular Amount
Sales 30000
-Opening Stock -4700
-Purchases -15700
Closing Stock 4400
Gross Profit 14000
(b) Bob's Profit and Loss account
Particulars Amount
Gross Profit 14000
-Light and Heat -260
-Rent -4500
-Insurance -120
-Shop Wages -4420
Net Profit 4700
(c)Balance Sheet for year ended 30th April 2020
Particulars Amount
Assets:
Fixed Assets:
Fittings 13000

Current Assets:
Cash at Bank 610
Cash in Hand 100
Debtors 120
Inventory 4400
Total Assets 18230
Liabilities:
Capital 15000
-Drawings -3500
Net Profit 4700 16200
Current Liability
Creditors 2030
Total Liability 18230
Question 2a)
Ratio Analysis:
Ratio Year 1 Year 2
Gross Profit Margin = (Revenue – COGS)/ Revenue 0.38 0.32
ROCE = EBIT/ Capital Employed 0.12 0.07
Current Ratio= Current assets/ Current Liabilities 3.16 2.84
Trade Payable Period= (Trade Payable/ COGS) x 365 67.68 65.93
Trade Receivable Period= (Trade Receivables/ net sales) x 365 60.58 65.54
Gross Profit Margin = (Revenue – COGS)/ Revenue
Year 1 Year 2

Revenue= 4940 Revenue= 6850
COGS = 3020 COGS = 4650
GPM = (4940 – 3020)/ 4940 GPM = (6850-4650)/ 6850
= 0.38 = 0.32
ROCE = EBIT/ Capital Employed
Capital Employed = Total Asset – Current Liability
Year 1 Year 2
Capital Employed = 4370 – 560 Capital Employed = 5600 – 840
= 3810 = 4760
EBIT= 460 EBIT= 350
ROCE= 460/ 3810 ROCE = 350/ 4760
= 0.12 = 0.07
Current Ratio= Current assets/ Current Liabilities
Year 1 Year 2
Current Assets= 1770 Current Asset= 2390
Current Liabilities = 560 Current Liability = 840
Current Ratio = 3.16 Current Ratio= 2.84
Trade Payable Period= (Trade Payable/ COGS) x 365
Year 1 Year 2
Trade Payable= 560 Trade Payable= 840
COGS= 3020 COGS = 4650
TPP= (560/3020) x 365 TPP= (840/ 4650) x 365
= 67.68 = 65.93
Trade Receivable Period= (Trade Receivables/ net sales) x 365
Year 1 Year 2
Trade Receivable= 820 Trade Receivable= 1230
Net Sales= 4940 Net Sales= 6850

TRP = (820/4940) x 365 TRP = (1230/6850) x 365
= 60.58 = 65.54
Interpretation:
Gross Profit Margin
Gross Profit Margin is the profitability margin which measures how efficiently business is using
their material and labour to manufacture and sell products. From the above analysis it can be
seen that for year 1 the ratio was 0.38 which becomes 0.32 in year 2, which shows that the ratio
is in declining mode. The business has reduced their prices and increased sales which results in
decrease in gross profit margin ratio. Company is earning less profit to cover there expenses
which can result in less distribution of profit among investors.
Return On Capital Employed:
Return on Capital employed is financial ratio that shows how much efficiently business is using
their capital. From the analysis it can be seen that in year 1 the ratio was0.12 which became
0.07in year. This shows that the ratio is declining stage as company is using their resources to get
more sales irrespective of reduced prices. This will lead to fewer profits for distribution among
shareholders.
Current Ratio:
Current ratio is a financial ratio that measures company's ability to meet their short term
obligations. From the analysis it was found that in year1 the ratio was 3.16 and in year2 it
became 2.84, which shows that the ratio is in declining mode. The business is spending cash
more frequently for promoting sales which automatically reduces assets which results in low
current ratio.
Trade Payable Period:
Trade Payable Period is a financial ratio that measures average rime taken by the business to pay
their bills. From the analysis it can be seen that the ratio in year1 was 67.68 which become 65.93
in year 2, which shows a de4clibnuing trend. As company is utilizing more cash to pay of their

bills and less was use for operations. This reduces profitability for distribution among
shareholders.
Trade Receivable Period:
Trade Receivable Period is a financial ratio that measures time taken by business to receive
payments from their clients. From the ratio it can be seen that in year1 the ratio was 60.58 which
becomes 65.54 in year 2. This shows the ratio is inclining as business is focusing on more sales
and takes more time to collect payments from customer. This reduces the cash inflow which
results in fewer profits.
Question 2b)
(a) Bank Account
Bank Account as on 30 march 2020
Date Particular L/
F
Debit Date Particulars L/
F
Credit
01/03/20 To Capital 500 01/03/21 To Purchase 150
10/03/21 To sales 290 05/03/21 To Rent 50
27/03/21 To Sales 240 22/03/21 To Advertising 25
26/03/21 To Drawing 100
30/03/21 To Balance c/d 705
1040 1040
Bank Account as on 30 April 2020
Date Particular L/
F
Debit Date Particulars L/F Credi
t
01/04/20 To Balance b/d 705 02/04/21 To Purchase 100
14/04/21 To Loan L lock 450 05/04/21 To rent 50
16/04/21 To Sales 330 23/04/21 To Drawing 75

26/04/21 To Sales 180 29/04/21 To Advertising 30
30/04/21 To balance c/d 1410
1665 1665
b) Other Accounts
Sales A/c
Date Particular L/
F
Debit Date Particulars L/F Credi
t
10/03/21 To bank 290
27/03/21 To bank 240
16/04/21 To bank 330
30/04/21 To balance c/d 1040 26/04/21 To bank 180
1040 1040
Purchase a/c
Date Particular L/
F
Debit Date Particulars L/F Credi
t
01/03/21 To Bank 150
02/04/21 To Bank 100 30/04/21 To Balance c/d 250
250 250
Rent A/c
Date Particular L/
F
Debit Date Particulars L/F Credi
t
05/03/21 To Bank 50
05/04/21 To Bank 50 30/04/21 To Balance c/d 100

100 100
Advertising A/c
Date Particular L/
F
Debit Date Particulars L/F Credi
t
22/03/21 To Bank 25
29/04/21 To Bank 30 30/04/21 To Balance c/d 55
55 55
Drawing a/c
Date Particular L/
F
Debit Date Particulars L/F Credi
t
26/03/21 To bank 100
23/04/21 To bank 75 30/04/21 To Balance c/d 175
175 175
(c) Trial Balance
Particular Debit Credit
Capital 500
Bank 1410
Loan L lock 450
Drawing 175
Advertising 55
Sales 1040
Purchase 250
Rent 100

1990 1990
Question 2c)
(I) Straight-line method
Provision for depreciation
Date Particular L/
F
Debit Date Particulars L/F Credit
01/01/18 By Machinery 16000 31/12/18 To depreciation 2000
31/12/18 To balance c/d 14000
16000
31/12/19 To balance c/d 14000 31/12/19 To depreciation 2000
31/12/19 To balance c/d 12000
14000
31/12/20 To balance c/d 12000 31/12/20 To depreciation 2000
31/12/20 To balance c/d 10000
12000
01/01/21 To balance c/d 10000
(II) Reducing Balance Method
Date Particular L/
F
Debit Date Particulars L/F Credit
01/01/18 By Machinery 16000 31/12/18 To depreciation 2400
31/12/18 To balance c/d 13600
16000

31/12/19 To balance c/d 13600 31/12/19 To depreciation 2040
31/12/19 To balance c/d 11560
13600
31/12/20 To balance c/d 11560 31/12/20 To depreciation 1734
31/12/20 To balance c/d 9826
11560
01/01/21 To balance c/d 9826
CONCLUSION

REFERENCES
Books and journals
Henard, F. and Leprince-Ringuet, S., 2008. The path to quality teaching in higher
education. París: OCDE. Recuperado de https://www1. oecd. org/edu/imhe/44150246. Pdf.
Online references
A, B., 2018. [Online]. Available through <>
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