Recording Business Transactions and Financial Statement Preparation

This practical assignment demonstrates the process of recording business transactions through journal entries, creating a trial balance, preparing a statement of profit and loss, and constructing a statement of financial position. It includes calculations of key financial ratios such as net profit margin, gross profit margin, current ratio, acid test ratio, accounts receivables collection period, and accounts payables payment period. The assignment also provides an analysis of these ratios in comparison to competitors, highlighting the strengths and weaknesses of the business's financial performance. The document further explains the treatment of drawings within a small business context, emphasizing its impact on the capital account.

RECORDING BUSINESS

Table of Contents
PART A...........................................................................................................................................3
a. Preparation of Journal to record the double entry....................................................................3
Trial balance................................................................................................................................6
Statement of profit and loss.........................................................................................................8
Statement of financial position..................................................................................................10
Calculation of ratios...................................................................................................................11

PART A
a. Preparation of Journal to record the double entry
Date Particulars
Debit
Amount
in £
Credit
Amount
in £
1/10/2021 Bank a/c 10000
Cash a/c 4800
Flat a/c 45000
Car a/c 12000
To Capital a/c 71800
(Business started
with cash in hand
and bank, flat and
car)
2/10/2021 Purchase a/c 5400
To Home Ltd. 5400
(Goods purchased
on credit)
4/10/2021 Computer a/c 800
Printer a/c 200
To Bank a/c 1000
(Purchase
Computer and
Printer for
business.)
5/10/2021 Bank a/c 2800
To Sales a/c 2800
(Sold goods for
cash)
12/10/202
1 Repairs a/c 110
To Cash a/c 110
(Cash paid for
repairing printer)
18/10/202
1 Home Ltd. a/c 250
To Purchase a/c 250
(Goods returned to
Home Ltd. that was
purchased on credit

earlier)
21/10/202
1 Bank a/c 800
To Rent Received
a/c 800
(Rent received on
Flat)
23/10/202
1 Cash a/c 1800
Rayan a/c 300
To sales a/c 2100
(Sold goods to
Rayan partly for
cash and partly on
credit)
23/10/202
1 Cash a/c 700
To Sales a/c 700
(Sold goods to
David for cash)
24/10/202
1 Laptop a/c 1700
To Bank a/c 1700
(Bought Laptop for
business use)
26/10/202
1 Wages a/c 820
To Bank a/c 820
(Paid wages to part
time shopkeeper)
30/10/202
1 Rent a/c 850
To Bank a/c 850
(Paid rent for office
place)
31/10/202
1 Drawings a/c 1200
To Bank a/c 1200
(Withdrew by
owner for spending
towards holiday)

31/10/202
1 Cash a/c 150
To Rayan a/c 150
TOTAL
(Received 50%
payment against
credit sale)
89680 89680
Bank a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
1/10/2021 To Capital a/c 10000 4/10/2021 By computer 800
5/10/2021 To Sales a/c 2800 By Printer 200
21/10/202
1
To Rent received 800 26/10/202
1
By wages 820
30/10/202
1
By Rent 850
By Drawings 1200
24/10/202
1
By Laptop 1700
31/10/202
1
By Balance Carried
forward
11430
1/11/2021 To Balance Brought
forward
8030
Cash a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
1/10/2021 To Capital a/c 4800 12/10/202
1
By Repairs 110
23/10/202
1
To sales a/c 1800
31/10/202
1
To Rayan a/c 150 31/10/202
1
By Balance Carried
forward
7340
23/10/202
1
To sales a/c 700
1/11/2021 To Balance Brought
forward
7340
Flat a/c

Date Particulars Amoun
t
Date Particulars Amoun
t
1/10/202
1
To Capital a/c 45000 31/10/202
1
By Balance Carried
forward
45000
1/11/202
1
To Balance Brought
forward
45000
Car a/c
Date Particulars Amount Date Particulars Amount
1/10/2021 To Capital a/c 12000 31/10/202
1
By Balance Carried
forward
12000
1/11/2021 To Balance Brought
forward
12000
Capital a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
1/10/202
1
By Bank 10000
By Cash 4800
By Flat 45000
31/10/202
1
To Balance carried
forward
71800 By Car 12000
1/11/202
1
To Balance Brought
forward
71800
Purchase a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
2/10/2021 To Home Ltd. 5400 18/10/202
1
By Home Ltd. 250
1/11/2021 To Balance Brought
forward
5150 31/10/202
1
By Balance carried
forward
5150
Home Ltd. a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
18/10/202 To Purchase a/c 250 2/10/2021 By Purchase a/c 5400

1
31/10/202
1
To Balance carried
forward
5150 1/11/2021 By Balance Brought
forward
5150
Computer a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
4/10/2021 To Bank 800 31/10/202
1
By Balance Carried
forward
800
1/11/2021 To Balance Brought
forward
800
Printer a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
4/10/2021 To BanK 200 31/10/202
1
By Balance Carried
forward
200
1/11/2021 To Balance Brought
forward
200
sales a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
5/10/2021 By Bank a/c 2800
23/10/202
1
By cash a/c 1800
By Rayan a/c 300
31/10/202
1
To balance carried
forward
5600 23/10/202
1
By cash a/c 700
1/11/2021 By Balance brought
forward
5600
Repairs a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
12/10/202
1
To Cash a/c 110 31/10/202
1
By Balance carried
down
110
1/11/2021 To Balance brought
forward
110

Rent received a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
31/10/202
1
To Balance carried
forward
800 21/10/202
1
By Bank a/c 800
1/11/2021 By balance brought
forward
800
Rayan a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
23/10/202
1
To Sales 300 31/10/202
1
By Cash 150
1/11/2021 To Balance brought
forward
150 31/10/202
1
By Balance carried
forward
150
Laptop a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
24/10/202
1
To Bank a/c 1700 31/10/202
1
By Balance carried
forward
1700
1/11/2021 To Balance brought
forward
1700
Wages a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
26/10/202
1
To Bank a/c 820 31/10/202
1
By Balance carried
forward
820
1/11/2021 To Balance brought
forward
820
Rent a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
30/10/202
1
To Bank 850 31/10/202
1
By Balance carried
forward
850
1/11/2021 To Balance brought
forward
850
Drawings a/c
Date Particulars Amoun
t
Date Particulars Amoun
t
31/10/202 To Bank 1200 31/10/202 By Balance carried 1200

1 1 forward
1/11/2021 To Balance brought
forward
1200
c. Trial balance
Particulars Debit Credit
Drawings 1200
Rent 850
Wages 820
Laptop 1700
Rayan 150
Rent received 800
Repairs 110
Sales 5600
Printer 200
Computer 800
Home Ltd. 5150
Purchases 5150
Car 12000
Flat 45000
Cash 7340
Bank 11430
Capital 71800
TOTAL 83350 83350
d. Statement of profit and loss
Particulars Amount Amount
Sales 5600
Purchase 5150
Less: Closing Stock 320

Less: Cost of Goods sold 4830
Gross profit 770
Add: Rent received 800
Total Income 1570
Less: Expenses
Rent 850
Wages 820
Repairs 110 1780
Net Loss 210
e. Statement of financial position
Particulars Amount
Assets
Current assets
Inventory 320
Debtor (Rayan) 150
Bank 8030
Cash 7340
15840
Non-current assets
Computer 800
Printer 200
Laptop 1700
Flat 45000
Car 12000
TOTAL 75540
Current liabilities
Home Ltd. 5150
Equity

Capital 71800
Less: Drawings - 1200
Less: Net Loss -210 70390
TOTAL 75540
f. Within small business drawings is the amount withdrawn by the owner for meeting their
personal expenses out of the business bank account. In the given case, the amount of 1200
withdrawn for meeting holiday expenses will be treated as drawings and accordingly, gets
deducted from the capital account of the business.
Part B
a. Calculation of ratios
Net profit margin = Net loss / Sales * 100 = -210/5600*100 = -3.75%
Gross profit margin = Gross profit/Sales*100 = 770/5600*100 = 13.75%
Current ratio = Current assets / current liabilities = 15840/5150 = 3.07 times
Acid test ratio = current assets – inventories/current liabilities = 15840-320/5150 = 3.01 times
Accounts receivables collection period = account receivables /Sales *365 = 150/5600*365 = 9.77
days
Accounts payables payment period = accounts payables/purchases*365 = 5150/5150*365 = 365
days
b. Net profit margin of competitors is better than Anne’s business while her gross profit margin
is quite better. Current and acid test ratios are indicating that liquidity of Anne’s business is
better than that of competitor’s business. Also, debtors are making payment earlier than
competitor’s debtors while payment to creditors has not been made on time as compared to
competitor’s average.