Recording Business: Transactions, Journal, Ledger, Trial Balance, Income Statement, Balance Sheet, Ratios

This report provides a comprehensive overview of recording business transactions, including the process of journalizing and posting entries, preparing a trial balance, income statement, and balance sheet. It also explains the concept of drawings in small businesses. Additionally, it includes the calculation of ratios to analyze the performance of Linda's business compared to her competitor.

RECORDING BUSINESS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
PART A...........................................................................................................................................3
JOURNAL...................................................................................................................................3
LEDGER......................................................................................................................................5
Trial balance as at 31 October 2020............................................................................................8
Income statement for the year ending 31st October 2020...........................................................9
Balance Sheet as at 31st October 2020........................................................................................9
Explaining what drawings are concerning small businesses.....................................................10
PART B..........................................................................................................................................10
Calculation of ratios...................................................................................................................10
Comparison of performance between the Linda's business and her competitor by analysing the
ratios...........................................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES................................................................................................................................1

INTRODUCTION
The report titled as “recording Business” will be prepared to record various monetary
transactions arises during business activity. The report will depict the snapshot of Linda's newly
established business by recording transaction pertaining to the month of October. Business
transactions of her business will be firstly recorded in journal book, then it will be posted in
ledger book, after that in order to check numerical accuracy all ledger accounts are compiled into
one account that is, trial balance and then to know the profit earning ability of the business profit
and loss account will be prepared and financial balance sheet will show the financial health of
the business. In order to know the market position of Linda's business, with the help of ratio
analysis her performance will be compared with her competitors performance.
MAIN BODY
PART A
JOURNAL
Date Particulars Debit£ Credit£
01/10/20 Bank Account 8000
Cash Account 5200
Van Account 3000
To Capital Account
(Being business started with
bank, cash and van) 16200
02/10/20 Laptop Account 1000
To Bank Account
(Being laptop purchased for
business) 1000
04/10/20 Purchase Account 2450
To Toys Ltd. Account
(Being goods purchased on
credit) 2450
05/10/20 Bank Account 1500

To Sales Account
(Being goods sold for cash) 1500
12/10/20 Repairs Account 80
To Cash Account
(Being laptop repaired and paid
in cash) 80
18/10/20 Toys Ltd. Account 100
To Purchase Account
(Being goods returned to Toys
Ltd.) 100
21/10/20 Bank Account 500
To Rent recieved account
(Being rent received for
premises) 500
23/10/20 Cash Account 1500
Fred Account 400
To Sales Account
(Being goods sold partly in cash
and partly on credit) 1900
23/10/20 Cash Account 500
To Sales Account
(Being Goods sold for cash) 500
24/10/20 Second-hand Car account 2500
To Bank Account
(Being second-hand car
purchased in auction) 2500
26/10/20 Wages Account 820
To Bank Account
(Being wages paid to shopkeeper) 820
30/10/20 Rent account 1000
To Bank Account 1000

(Being rent paid)
31/10/20 **Drawings Account 1600
To Bank Account
(Being drawings made out of
business bank account) 1600
Total 30150 30150
*Note: Linda cannot class her holiday expenses as business expense as her travel to Florida is
just for her entertainment and pleasure and not for the purpose of business activity. So, she must
show this figure as drawings in her books if accounts.
LEDGER
Capital Account
Date Particulars Amount£ Date Particulars Amount£
01/10/20 By bank A/c 8000
By Cask A/c 5200
By Van A/c 3000
31/10/20 To Drawings
A/c
1600
To Balance
C/f
14600
01/11/20 By Balance
B/d
14600
Bank Account
Date Particulars Amount£ Date Particulars Amount£
01/10/20 To Capital A/c 8000 02/10/20 By Laptop A/c 1000
05/10/20 To Sales A/c 1500 24/10/20 By second-
hand car A/c
2500

21/10/20 To Rent
received A/c
500 26/10/20 By wages A/c 820
30/10/20 By Rent A/c 1000
31/10/20 By Drawings
A/c
1600
By Balance
C/f
3080
01/11/20 To Balance
b/d
3080
Cash Account
Date Particulars Amount£ Date Particulars Amount£
01/10/20 To Capital A/c 5200 12/10/20 By Repairs
A/c
80
23/10/20 To Sales A/c 1500
To Sales A/c 500 31/10/20 By Balance
C/f
7120
01/11/20 To Balance
B/d
7120
Van Account
Date Particulars Amount£ Date Particulars Amount£
01/10/20 To Capital A/c 3000 31/10/20 By Balance
C/f
3000
01/11/20 To Balance
B/d
3000

Laptop Account
Date Particulars Amount£ Date Particulars Amount£
02/10/20 To Bank A/c 1000 31/10/20 By Balance c/f 1000
01/11/20 To Balance
B/d
1000
Purchase Account
Date Particulars Amount£ Date Particulars Amount£
04/10/20 To Toys Ltd. 2450 18/10/20 By Toys Ltd. 100
31/10/20 By Trading &
P/L A/c
2350
Toys Ltd. Account
Date Particulars Amount£ Date Particulars Amount£
18/10/20 To Purchase A/c 100 04/10/20 By Purchase A/c 2450
31/10/20 To Balance c/f 2350
01/11/20 By Balance b/d 2350
Sales Account
Date Particulars Amount£ Date Particulars Amount£
05/10/20 By bank a/c 1500
23/10/20 By Cash A/c 1500
By Fred a/c 400
By Bank A/c 500
31/10/20 To Trading &
P/L A/c
3900

Repairs Account
Date Particulars Amount£ Date Particulars Amount£
12/10/20 To Cash A/c 80 31/10/20 By P/L A/c 80
Rent received Account
Date Particulars Amount£ Date Particulars Amount£
21/10/20 By Bank a/c 500
31/10/20 To P/L A/c 500
Fred Account
Date Particulars Amount£ Date Particulars Amount£
23/10/20 To Sales a/c 400
31/10/20 By balance C/f 400
01/11/20 To Balance
b/d
400
Second-hand Car Account
Date Particulars Amount£ Date Particulars Amount£
24/10/20 To bank a/c 2500 31/10/20 By balance c/f 2500
01/11/20 To balance b/d 2500
Wages Account
Date Particulars Amount£ Date Particulars Amount£
26/10/20 To bank a/c 820 31/10/20 By Trading &
P/L a/c
820
Rent Account

Date Particulars Amount£ Date Particulars Amount£
30/10/20 To bank a/c 1000 31/10/20 By Trading &
P/L a/c
1000
Drawings account
Date Particulars Amount£ Date Particulars Amount£
31/10/20 To bank a/c 1600 31/10/20 By Capital a/c 1600
Trial balance as at 31 October 2020
Particulars Debit Amount£ Credit Amount£
Capital 14600
Bank 3080
Cash 7120
Van 3000
Laptop 1000
Purchases 2350
Sales 3900
Creditors(Toys ltd.) 2350
Debtors(Fred) 400
Repairs 80
Rent received 500
Second-hand car 2500
Rent 1000
Wages 820
Total 21350 21350

Income statement for the year ending 31st October 2020
Particulars Amount £
Sales 3900
Less:COGS
Purchases 2350
Wages 820
Closing Stock (250)
-2920
Gross margin 980
Add: Rent received 500
Less: Rent 1000
Repairs 80
-1080
Net Profit 400
Balance Sheet as at 31st October 2020
Particulars Amount£
ASSETS
Current Assets
Bank 3080
Cash 7120
Debtors 400
Closing Stock 250
Fixed Assets
Van 3000
Laptop 1000

Second-hand car 2500
TOTAL 17350
CAPITAL & LIABILITY
Capital 14600
Add: Net profit 400
15000
Current Liability
Creditors 2350
TOTAL 17350
Explaining what drawings are concerning small businesses
It is quite important for the businessman to understand the difference between personal
expenses and business expenses. Business expenses are the expense which are ordinary and
necessary for any businesses with proper recording by following double record system. On the
other hand personal expenses are all the other expenses which are not ordinary and necessary to
operate. All the day to day transactions of the business must be record by double entry system.
Properly separating Business and personal expenses with accurate record keeping help the owner
to avoid tax audit(Julien, 2018). Tax audit is done by income tax department as it is mandatory
for all the companies. In case if any owner didn't separate the business and personal expense the
ITR start questioning the owner for manipulating them. Any personal expenses when recorded as
business expense will considered as drawing from the company. Drawing is recorded in balance
sheet by reducing capital of the company but any personal expense is directly transfer to profit
and loss account which reduces the profit of the company. In order to take tax benefits most of
the owner do record personal expense because less profit gives them tax benefits. So in order to
avoid triggering an IRS audit it is better for the owner to clearly separate the expenses between a
business and personal bank account. So the holiday expense of Linda must be considered as
drawings because it is her personal expense which he recorded as business expense and transfer
such expense to profit and loss account.

PART B
Calculation of ratios
 Net Profit Margin = [Net Profit / Net Sales] * 100
= [400 / 3900] * 100
= 10.26%
 Gross Profit Margin = [Gross Profit / Net Sales] * 100
= [980 / 3900] * 100
= 25.13%
 Current Ratio = [Current Assets* / Current Liabilities*]
= [10850 / 2350]
= 4.62x
* Current assets = Bank + Cash + Debtors + Closing stocks
= 3080 + 7120 + 400 + 2350
= 10850
*Current Liabilities = Creditors
= 2350
 Acid Test Ratio = [Quick Assets* / Current Liabilities]
= [10600 / 2350]
= 4.51x
* Quick Assets = Current Assets - Stocks
= 10850 - 250
= 10600
 Accounts Receivable Collection Period = No. of days / Debtors turnover ratio*
= 365 days / 2 times
= 182.5 days
*Debtors turnover ratio = Net credit sales / Average debtors
= 400 / 200

= 2 times
NOTE: Debtors turnover ratio is calculated when net credit sales is divided by average debtors
i.e. opening debtors + closing debtors / 2. It is assumed that in case if net credit sales is not given
we take total sales as net credit sales and if opening debtor is not given we take closing debtor as
total debtor. So, 400 / 2 = 200 is average debtors.
 Accounts Payable Payment Period = No. of days / Creditors turnover ratio*
= 365 days / 2 times
= 182.5 days
*Creditors turnover ratio = Net credit purchase / Average creditors
= 2350 / 1175
= 2 times
NOTE: Creditors turnover ratio is calculated when net credit purchase is divided by average
creditors i.e. opening creditors + closing creditors / 2. It is assumed that in case if net credit
purchase is not given we take total purchase as credit purchase and if opening debtor is not given
we take closing debtor as total debtor. So, 2350 / 2 = 1175 is average creditors.
Comparison of performance between the Linda's business and her competitor by analysing the
ratios
Gross profit margin is indicate that how much gross profit a company earn by making
£100 of sales. Gross profit is different from net profit as it does not includes the fixed cost and
operating expenses of the company. After analysing the Linda's GP ratio with her competitor GP
ratio, we conclude that Linda's business earn gross profit of £25.13 on sale of £100. While her
competitors earn gross profit of £54 on sale of £100. Net profit margin is indicate that how much
net income a company earn by making £100 of sales. After analysing the Linda's NP ratio with
her competitor NP ratio, we conclude that Linda's business earn net income of £10.26 on sales of
£100. While her competitors earn the net income of £32 on sales of £100. So from analysing GP
and NP ratio, the performance of the Linda's business is low and in order to take the competitive
advantages she has to focus towards increasing the sales production and decreasing the cost of
production(by reducing wastage of resources) and also managing the fixed cost and operating
expenses in the premises.

Current ratio indicates the ability of the business to pay its short term obligations that
become due within a year(Morales-Díaz and Zamora-Ramírez, 2018). After analysing the current
ratio of Linda's business with the ratio of her competitors, we conclude that the ability to pay
shot term obligation of Linda businesses is 4.62 times while her competitors is 2.87 times. Acid
test ratio indicates that how much the current assets of the business is dependent on its inventory
because inventory are difficult to liquidate quickly. Acid test ratio of Linda business is 4.51
times while acid test ratio of her competitor is 1.35 times. So by analysing the acid test ratio of
both the business, we interpret that the financial performance of the Linda's business is much
better than her competitor.
Accounts receivable collection period is the time period in which company receive its
money from the debtors. Accounts payable payment period is the time period in which company
pay money to its creditors(MUSALLAM, 2018). Debtors collection period and creditors
payment period of Linda's business is same i.e. 182.5 days while the debtors collection period of
her competitor is 50 days and creditors payment period of her competitors is 72 days. As debtors
collection period of Linda's business is high it shows inefficient performance of the business. As
creditors payment period of Linda's business is also high which shows the better performance of
the business because in order to maximize its cash flow every business has to pay its bills in
longer period.
CONCLUSION
From the above report it has been concluded that if all the business transactions are
recorded in a meaningful and appropriate manner, then it will depict more clear and true picture
of business activity. We have seen how by properly recording and maintaining books of
accounts, Linda's business become comparable with its competitors. Hence, appropriate
maintenance of books of accounts reveal true picture of business performance and allow for
possible changes in operations for better results.

REFERENCES
Books and journals
Fischer-Pauzenberger, C. and Schwaiger, W. S., 2017. The OntoREA Accounting Model:
Ontology-based Modeling of the Accounting Domain. CSIMQ. 11. pp.20-37.
Uddin, R. and et.al., 2017. Accounting practices of small and medium enterprises in
Rangpur. Bangladesh. Journal of Business and Financial Affairs. 6(4). pp.1-7.
Yu, T., Lin, Z. and Tang, Q., 2018. Blockchain: The introduction and its application in financial
accounting. Journal of Corporate Accounting & Finance. 29(4). pp.37-47.
Morales-Díaz, J. and Zamora-Ramírez, C., 2018. The impact of IFRS 16 on key financial ratios:
A new methodological approach. Accounting in Europe. 15(1). pp.105-133.
O’Donnell, C. J., Fallah-Fini, S. and Triantis, K., 2017. Measuring and analysing productivity
change in a metafrontier framework. Journal of Productivity Analysis. 47(2). pp.117-
128.
MUSALLAM, S. R., 2018. Exploring the relationship between financial ratios and market stock
returns. Eurasian Journal of Business and Economics. 11(21). pp.101-116.
Julien, P. A. ed., 2018. The state of the art in small business and entrepreneurship. Routledge.
Online
The process of recording business transactions, 2021 [Online]. Available
through:<https://opentuition.com/fia/fa1/the-process-of-recording-business-transactions/>
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