Recording Business Transaction: Tools and Financial Performance Analysis

This report discusses the tools used for recording business transactions such as journal, ledger, trial balance, income statement, and balance sheet. It also analyzes the financial performance of Linda's business compared to the industry using financial ratios. The report provides insights into net profit ratio, gross profit ratio, current ratio, quick ratio, account receivables ratio, and account payable ratio.

Recording business transaction

Table of Contents
INTRODUCTION................................................................................................................................3
PART A.................................................................................................................................................3
a) Journal..........................................................................................................................................3
b) Preparation of ledger...................................................................................................................4
c) Trial balance.................................................................................................................................7
d) Formulation of income statement................................................................................................8
e) Preparation of balance sheet .......................................................................................................8
f) brief description about drawing .................................................................................................9
PART B.................................................................................................................................................9
b)Analysis and compare financial performance of Linda's business with industries performance
.......................................................................................................................................................10
CONCLUSION..................................................................................................................................12
REFERENCES...................................................................................................................................12

INTRODUCTION
Accounting is part of managerial process. Manager use this process for record their business
transaction and represent theses in systematic formulate. This report has been formulated to define
those tools which organizations use for record, collect, manage and represent business transaction to
their users. It is divided into two parts. One part represent how journal , ledger, trial balance use for
formulate financial statements and in the second part this report define relevance of financial ratio
for measuring financial performance of Linda's organization with industry.
PART A
a) Journal
Date Particular Debit Credit
01/10/20 Bank a/c ... 8000.....
Cash a/c.. 5200...
Van a/c..... 3000....
To capital a/c.... 6300....
02/10/20 Laptop a/c... 1000...
To bank a/c... 1000...
04/10/20 Purchase a/c.... 2450.........
To Toys limited
a/c.......
2450.....
05/10/20 Bank a/c........ 1500.....
To sales a/c..... 1500.......
12/10/20 Repairing expenses
a/c....
80........
To cash a/c.... 80......
18/10/20 Toys limited a/c.... 100....
To purchase
return a/c......
100........
21/10/20 Bank a/c....... 500......
To rent received a/c.... 500........

23/10/20 Cash a/c...... 1500.....
Fred a/c... 400....
To sales a/c …... 1900....
21/10/20 Cash a/c... 500...
To sales a/c.. 500......
24/10/20 Car a/c... 2500..
To bank a/c... 2500.
26/10/20 Wages a/c...... 820...
To bank a/c.. 820.......
30/10/20 Rent a/c... 1000......
To bank a/c...... 1000
31/10/20 Drawing a/c... 1600..
To bank a/c.... 1600..
b) Preparation of ledger
Bank
account
Date Particular J.F Amount Date Particular J.F Amount
To capital 8000
To sales 1500 By laptop 1000
To rent
received
500 By Car 2500
By wages 820
By Rent 1000
By
drawing
1600
By balance
c/d
3080
10000 10000
Cash
account
Date Particular J.F Amount Date Particular J.F Amount

To capital 5200 By repair 80
To sales 1500 By balance
c/d
7120
To sales 500
7200 7200
Purchase
account
Date Particular J.F Amount Date Particular J.F Amount
To Toys
limited
2450 By balance
c/d
2450
Toys
limited
account
Date Particular J.F Amount Date Particular J.F Amount
To
purchase
return
100 By
purchase
2450
To balance
b/d
2350
2450 2450
purchase
return
account
Date Particular J.F Amount Date Particular J.F Amount
To balance
b/d
100 By toy's
limited
100
Rent
received
account
Date Particular J.F Amount Date Particular J.F Amount
By bank 500
500 500
Fred
account
Date Particular J.F Amount Date Particular J.F Amount
To sales 400 By balance 400

b/d
Rent
account
Date Particular J.F Amount Date Particular J.F Amount
To Bank 1000 By balance
b/d
1000
Van
account
Date Particular J.F Amount Date Particular J.F Amount
To capital 3000 By balance
b/d
3000
Laptop
account
Date Particular J.F Amount Date Particular J.F Amount
To bank 1000 By balance
b/d
1000
Capital
account
Date Particular J.F Amount Date Particular J.F Amount
To balance
b/d
16200 By bank 8000
By cash 5200
By van 3000
Sales
account
Date Particular J.F Amount Date Particular J.F Amount
To balance
b/d
3900 By bank 1500
By cash 1500
By Fred 400
By cash 500
Car

account
Date Particular J.F Amount Date Particular J.F Amount
To Bank 2500 By balance
b/d
2500
Wages
account
Date Particular J.F Amount Date Particular J.F Amount
To Bank 820 By balance
b/d
820
Drawing
account
Date Particular J.F Amount Date Particular J.F Amount
To Bank 1600 By balance
b/d
1600
Repair
Date Particular J.F Amount Date Particular J.F Amount
To cash 80 By balance
b/d
80
c) Trial balance
Trial balance
Accounts Debit Credit
Bank 3080
Cash 7120
Van 3000
Laptop 1000
Toys limited 2350
Purchase 2450
Purchase return 100
Sales 3900
Rent received 500
Rent paid 1000
Wages 820
Drawing 1600
Capital 16200
Repairing account 80

Fred account 400
Car account 2500
22550 22550
d) Formulation of income statement
Profit and loss Statement
Particular Amount
Sales 3900
Less : Cost of goods sold
Opening stock Nil
Purchase 2450
Less: Purchase return 100
Less: Closing stock 250
Gross revenue 1800
Less: Operating expenses
Expenses on repairing 80
Wages 820
Rent paid 1000
Add: Operating income
Rent received 500
Net profit 400
e) Preparation of balance sheet
Balance sheet
Particular Amount Total
Fixed assets
Car 2500
Van 3000
Laptop 1000 6500
Current Assets
Cash account 7120
Bank account 3080
Debtor 400
Stock 250
Total assets 17350

Equity and liabilities
Equity
Capital 16200
Less: Drawing 1600 14600
Retain earnings 400
Current liabilities
Toys limited account 2350
Total equities and liabilities 17350
f) brief description about drawing
Accounting in general term use for recording each and every business transaction which
directly and indirectly impacted on business performance. Various accounts are formulated to
systematically manage and record business transaction which further help in managing business
cash assets. When individual withdraw money from business bank account and they use this only
for their personal use then these types of business transaction is recorded in drawing account
(Hoyos and Nunez-del-Prado, 2018).
This account is formulated for control insider business trading activities as personal take
unfair trade advantages by using business money. Amount of drawing is deducted from capital
account and in case if individual use goods for their person use then value of these goods are
deducted from stock account. In this case Linda use its money from their business account to go on
holiday trip, this trip will not be beneficial for their organization as the main motive of this trip is to
reduce her stress thus expenses incurred for holiday trip is treated and includes in drawing account.
This amount will be deducted from capital account.
PART B
Calculation of financial ratio.
Particular Formula Linda
organization
Industry ratio
Net profit ratio Net profit/ Net
sales*100
400/3900*100 10.26% 31
Gross profit ratio Gross profit/ Net
revenue* 100
1800/3900*100 46.15% 54
Current ratio Current assets / 10850/ 2350 4.62 2.8

Current liabilities
Quick ratio Quick assets /
Current liabilities
10600/2350 4.51 1.5
Account
receivable
collection period
Sales/ Average
account
receivables*365
3900/400*365 37.44 days Gross profit ratio
Account payable
ratio
Average payable/
Average creditors
2450/2350*365 350 days 72 days
b)Analysis and compare financial performance of Linda's business with industries performance
Financial ratio are part of financial management, this technique is used for , measure
performance of organization on the basis of calculating relation between two variables of financial
statements. Following are some ratio through which help in measure financial performance of Linda
and industries
 Net profit ratio: Organizations use net profit ratio to measure their level of profitability . On
the basis of that they can able to recognize the value of net profit an organization can
generate by selling their products. This ratio define relationship between net profit with sales
(Ryoo, 2017).
Higher net profit ratio showcase high rate of efficiency level that an organization have to attract
and influence their customers to buy products. Which will useful in raise profitability rate of
organization. In this case, net profit ratio of Linda's organization is valued at 10.26 % and on the
other side value of net profit of industries was valued at 31 % which means that as compare to
Linda industries able to generate more net profit. Linda need to focus on implement their selling
strategy through which she can able to improve profitability rate of their businesses.
 Gross profit ratio: This ratio is calculated to showcase relation between gross profit with
sales. This is useful to assess financial health of business by evaluating or measuring
relationship with gross profit ratio. This ratio define ability of organization to generate profit
before adjustment of any kind of operating and selling business expenses. Higher ratio
represent better position of organization. Linda's organization generate 46 % of gross profit
ratio and on the other side 54% gross profit ratio measure of industries which represent that
Linda's business's not able to generate high rate of gross profit ratio which showcase that

organization need to focus on their trading business strategies to increase rate of gross profit
ratio.
This ratio help in define the rate of gearing profit on the basis of selling their business products.
Value of gross profit is help in maintaining net profit ratio as this value is use by organizations to
deduct or bear all the essential business operating expenses. Thus business organizations focus on
enhance the rate of their gross [profit ratio.
 Current ratio:This ratio measure the relation between current asset with current business
liabilities, through which manager can analysis ability of organization to pay their current
debt by using their current business assets (Tsai, Wang, Ting and Hong, 2020). Current
ratio help in recognize liquid business position of organization which used for manage
balance of working capital.
The value of current ratio was measure at 4.62 of Linda's organization and on the other hand in
industries, current ratio was measure at 2.5 % which means that industry as well as Linda's business
able to fulfil their debt liabilities within given time by using their current assets resource however
Linda's current ratio is comparatively high then ideal current ratio which is 2 :1 , which depicts that
Linda need to manage their current assets to control the wastage use of theses assets. Quick ratio: This ratio define the ration between quick asset and current liability. Qui9ck
assets include only cash and cash relevance assets. Higher ratio showcase high rate of
liquidity and efficiency to manage their cash assets. Value of quick ratio of Linda's
organization was 4.51 and on the other side industrial ratio valued at 1.35 which showcase
that Lind's business is in much better position in fulfil their debt liability as they have
comparatively more cash assets to fulfil their current debt business liability (Wangerin,
2019). Account receivables ratio: This ratio is calculated to define required by organizations to
collect money from their debtors for selling their products at credit rate. Long time of
account receivable ratio showcase that organization require more time for collection of
money and vice versa. In this case Linda's account receivable ratio is valued at 37 days and
Industries valued at 50 days which showcase that as compare to financial performance
Linda' s organization is able to receive money from their debtors in less time as compare to
industry. Linda use effective management policies which help in influence their debtors to
fulfill their debt liability in short time period.
 Account payable ratio: This ratio is useful for recognize financial performance of business
entities by recognize time required by organizations to pay their creditors. It is define
relationship between credit sales and average account payable. Long time required showcase
that organization need to take more time for fulfil their debt liability. In this case Linda's

organization took 350 days in order to fulfil their current debt ability and on the other side
industries took 72 days in order to fulfill their debt business ability. Theses ratio are useful to
represent credit enterprise performance which useful for represent organization 's position
in running business environment. On the basis of calculating this ratio it analysis that Linda'
organization took long time which showcase that they face cash liquidity issue or working
capital related problem thus they are not able to fulfil their debt liability. They need to start
working on formulating those policies wand control wastage of accessibility of current asset
to manage their account payable ratio.
From the evaluation of all the financial ratio it recognized that Linda need to work on her
organizations operational businesses and financial policies in order to maintain its liquid position as
well as increase profitability business rate. Only then they can able to maintain sustainability of
their organization in market and enhance their financial performance as compare with their rival
business companies (Zaza, Bimonte, Faccilongo, La Sala, Contò and Gallo, 2018)
CONCLUSION
From the above analysis it has been concluded that accounting is essential part of
management process. Through accounting procedure, organization able to collect , record and
manage their monetary business transaction by formulating , trial balance and financial statements,
theses statements. Theses statement help in formulating or calculating financial ratio through which
manager able to recognizance or measure performance of their business organization for specific
period of time and able to compare it with other organization to evaluate their position in market
economy.

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