Recording Business Transaction: T-Accounts, Trial Balance, Financial Statements, Ratios, and COVID-19 Impact

This article discusses the process of recording business transactions, including journalizing, posting to ledger accounts, creating trial balance, preparing income and financial statements, calculating ratios, and analyzing the impact of COVID-19 on business performance. It also includes a letter to Anne explaining the treatment of drawings as business expenses. The article provides insights into the importance of accounting for businesses and how it helps in decision-making.

Recording Business
Transaction

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Recording of transaction in T- accounts.....................................................................................3
Balancing the accounts and bringing down the opening balance...............................................5
Extracting the trial balance........................................................................................................11
Preparing the income statement................................................................................................12
Preparation of financial statement.............................................................................................13
Letter to Anne...........................................................................................................................14
PART B..........................................................................................................................................15
Calculating the ratios of company.............................................................................................15
Comparing the performance with that of competitor’s average and impact of COVID 19
outbreak on average ratio..........................................................................................................16
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................19

INTRODUCTION
Recording the business transaction is being stated as recording of each and every
business activity within the company. This is necessary for the reason that when the company
will be recording each and every transaction then this will provide net profit or loss being faced
by the company. in the present case the company will outline the recording of different
transaction which business incurred within a month. Further the posting will take place into the
ledger and thereafter trial balance will be created. After this the preparation of financial
statement will be undertaken in order to assess the profitability of the company and financial
position. In the end the ratios will be calculated for the company and comparison with the
competitor’s average ratio will be undertaken.
PART A
Recording of transaction in T- accounts
The accounting is being defined as the process of recording, posting and summarising the
transaction of business which are in financial terms are being recorded and communicated. For
the business to be successful it is necessary for the company that they implement effective
accounting within the company (Thottoli, 2020). Hence, the first step in accounting involves
making journal wherein company records each and every financial transaction within the books
of accounts.
Journal

Balancing the accounts and bringing down the opening balance
After the journalising of transaction, it is necessary for company to post them into ledger
account. Within the ledger the individual transactions are being posted into the relevant accounts
for making the trial balance further. The reason behind this fact is that it will assist the company
in analysing and knowing the individual balance of each and every account (Tanujaya and Reny,

2022). Within the ledger all the individual account is being created and then balance is brought
down for the future undertaking.

Extracting the trial balance
After posting, comes the making up of trial balance as it is referred to as the statement
relating to noting down all the balances of the ledger in debit and credit column. The trail
balance is being referred to as the statement which contains the details of all ledger balances and
totalling the debit and credit sides (Zhang, Pourroostaei Ardakani . and Han, 2021). This trial
balance is important for the company in order to check the fact that whether the debit and credit
side of the trial balance. The trial balance for Anne is as follows-

Preparing the income statement
The income statement is very crucial for companies to prepare because it summarise the
financial performance of company. This statement outlines the profit earned or loss incurred by
company. under the income statement all the expenses of company are deducted from the total
income. In case the income is more than expenses then profit is earned and in case expenses are
more than loss is being faced by the company. this income statement assists the company in
evaluating the performance of the company and take proper decision for improving the
profitability of company.

Preparation of financial statement
The financial statement is being referred to as the statement of position which outlines the
balance of total asset and liabilities which company is possessing. This is because of the reason
that with help of balance sheet the company can identify that how much liabilities they have to
pay and how much assets the company is having (Cotter, 2022). The statement of financial
position helps company to analyse that for paying off the liability the company is having good
amount of asset.

Letter to Anne
To Anne
Subject: Solving query relating to drawings of business.
Dear mam,
This letter is being shared to you for clearing the doubt relating to considering the drawings as
business expenses. With respect to the business, drawings are being referred to as the money of
the business which is being used by owner for their personal use and not official. This is being

referred to as drawing because the owner is drawing the money which they have invested in form
of capital. When a person starts the business then at that time they invest capital into the
business. hence, in the similar manner when the owner is taking back the money for their
personal use. Thus this will be reduced from the capital as it is brought by owner and is also
being taken by the owner for their personal use only. In the present case, Anne is paying the
amount for booking the hotel and flight ticket for her holiday in Scotland. Thus, this is a clear
case of drawings as the holidays is being done for the personal use and purpose only. This simply
means that the company is not responsible for the personal expenses which owner is being doing.
Hence, as a result of this, the amount of £1200 will not be treated as business expenses and rather
it will be recorded as drawing.
Hope all the doubts relating to the drawing would have been cleared and in case you have any of
the query please feel free to communicate at any point of time.
Thank you
PART B
Calculating the ratios of company
Ratio analysis is being defined as the accounting method which help company in
analysing its performance and compare it with others. The use of ratio analysis is important for
the reason that this assist the company in taking proper decision for better working of companies.
Further the ratio is also used for improving the current performance by comparing it with the past
year performance and take proper decision. The ratio involves analysis of different aspect of
business like solvency, efficiency, profitability, liquidity and overall solvency as well. along with
this company can also identify the trend and pattern relating to the performance in comparison to
other competitor and past years as well. The ratio for the company are as follows-
Particular Formula 2021
Net profit margin Net profit/ sales * 100 -3.75
Net profit -210
Sales 5600
Gross profit margin Gross profit/ sales * 100 13.75

Gross profit 770
Sales 5600
Current ratio Current asset/ current liabilities 3.08
Current asset 15840
Current liabilities 5150
Acid test ratio
(Current asset- inventory)/ current
liabilities 3.01
Current asset 15840
Current liabilities 5150
Inventory 320
Account receivable collection
period Account receivable/ sales * 365 10
Account receivable 150
Sales 5600
Account payable payment period Account payable/ COGS * 365 389
Account Payable 5150
COGS 4830
Comparing the performance with that of competitor’s average and impact of COVID 19 outbreak
on average ratio
With the analysis of Anne’s performance, it is clear that the net profit margin of company
is not good as it is facing net loss. On comparison with the competitors average it is clear that
performance of competitor is better as they are having profit, but Anne is facing loss. Further,
with respect to the gross profit margin it is clear that the performance of Anne’s business is much
better (Cao, 2022). The company is having 13.5 % gross profit margin which is high from all the
three years of competitor average. This implies that company is having good gross profit but the
indirect expenses of company are high. hence, this simply result in decline in net profit and as a
result of this, the company is having net loss.

Further with respect to the liquidity, the current ratio of Anne outlines 3.08 times which
is very high. The average of competitor is around 2.5 and nearby but Anne is having very high
ratio which is not good for the company. in accordance to the ideal ratio the company must have
twice the current asset for paying off current liability. But Anne is having approximately thrice
the current asset for paying a single current liability. Similarly, in context of acid test ratio as
well, Anne is having very high ratio which is not good for the company. the company is having
3.01 times whereas competitor’s average is 1.32- 1.34 times.
Moreover, with respect to the efficiency ratio it is clear that the company is having better
performance in comparison with the competitor average. Anne is having 10 days as account
receivable whereas the competitor average is having 26 days. This simply means that company
will be getting their account receivable in 10 days whereas competitor will get it in 26 days.
Thus, this is good for Anne as they will convert their asset into cash faster and this will provide
better efficiency (Cai, 2021). Along with this the account payable days for Anne is very high that
is 389 days and competitor average is 27 days, 12 days and 17 days respectively for past three
years. With this it can be stated that when company takes more time to pay to the creditors then
creditworthiness of company declines. hence, Anne need to work in reducing the payable
payment period.
Along with this it can also be stated that the current pandemic outbreak has also affected
the working and profitability of the business to a great extent. the reason behind this fact is that
after outbreak of COVID, people were not going out and this affected the sales of company to a
great extent. hence, this decline in sales resulted in the company suffering loss (Hassan and et.al.,
2019). Moreover, many a times business was running without any profit and this resulted in
unnecessary expenses and as a result of this total expenses hiked. Hence, it can be stated that the
pandemic outbreak has affected the working of company negatively and this affects the financial
position as well.
CONCLUSION
In the end, it is concluded that accounting is being referred to as the process of recording
and summarising the transaction pertaining to financial nature and communicating the outcome
to the intended users. The use of accounting is very important for the company as it provides
details relating to the profitability and financial position of company. The above study evaluated
the fact that use of journal and posting in ledger is very important. This is because of the reason

it builds the base for the further accounting that is making trial balance. Further with the help of
trial balance income statement and statement of financial position is being created. Hence, it can
be inferred that the use of accounting is very important for the company to effectively follow the
process of accounting and gather the accounting information. Moreover, this information is being
used by company in taking proper decision for the success of the company.

REFERENCES
Books and Journals
Cai, C.W., 2021. Triple‐entry accounting with blockchain: How far have we come?. Accounting
& Finance. 61(1). pp.71-93.
Cao, L., 2022. AI in Finance: Challenges, Techniques, and Opportunities. ACM Computing
Surveys (CSUR). 55(3). pp.1-38.
Cotter, T.S., 2022. General Accounting and Finance Fundamentals. In Engineering Managerial
Economic Decision and Risk Analysis (pp. 37-62). Springer, Cham.
Hassan, M.K. and et.al., 2019. A survey on Islamic Finance and accounting standards. Borsa
Istanbul Review. 19. pp. S1-S13.
Tanujaya, K. and Reny, R., 2022, February. PREPARATION OF ACCOUNTING SYSTEM IN
JEWEL JOURNEY AUTO WASH. In ConCEPt-Conference on Community Engagement
Project (Vol. 2, No. 1, pp. 416-427).
Thottoli, M.M., 2020. Knowledge and use of accounting software: evidence from Oman. Journal
of Industry-University Collaboration.
Zhang, Y., Pourroostaei Ardakani, S. and Han, W., 2021. Smart ledger: The blockchain‐based
accounting information recording protocol. Journal of Corporate Accounting &
Finance. 32(4). pp.147-157.