Recording Business Transaction

RECORDING BUSINESS
TRANSACTION

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
PART A...........................................................................................................................................3
Journal..........................................................................................................................................3
Ledger..........................................................................................................................................4
Trial balance as at 31st October 2020..........................................................................................8
Statement for Profit and Loss Account for the period ended 31st October 2020........................9
Balance sheet as at 31st October 2020.........................................................................................9
Drawings concerning small business.........................................................................................10
PART B..........................................................................................................................................10
Ratio estimation.........................................................................................................................10
Comparative evaluation of performance of the businesses........................................................12
CONCLUSION..............................................................................................................................12
REFERENCES................................................................................................................................1

INTRODUCTION
Financial statement shows the financial position of the company and the proper recording
of transaction is the basic requirement in order to prepare FS. This report will help us to
understand how proper recording of business transaction by following double entry system help
owner to analyse the performance of the business. In this report we will also calculate the
different ratios by taking the figures from income statement. In this report we also analyse
performance of Linda's business with her competitors by analysing the ratios.
MAIN BODY
PART A
Journal
Date Particular Debit(£) Credit(£)
01/10/20 Bank a/c
Cash a/c
Van a/c
To capital a/c
(Being business started)
8000
5200
3000
16200
02/10/20 Laptop a/c
To bank a/c
(Being laptop bought)
1000
1000
04/10/20 Purchase a/c
To toys limited a/c
(Being stock purchase)
2450
2450
05/10/20 Bank a/c
To sales a/c
(Being goods sold and received payment
through cheques)
1500
1500
12/10/20 Repairing expense a/c
To cash a/c
80
80

(Being repairing expenses paid by cash)
18/10/20 Toys ltd. a/c
To purchase return a/c
(Being returned goods to toys ltd.)
100
100
21/10/20 Bank a/c
To rent income
(Being rent received through cheque)
500
500
23/10/20 Cash a/c
Fred a/c
To sales a/c
(Being sold goods on cash as well credit)
1500
400
1900
23/10/20 Cash a/c
To sales a/c
(Being sold goods on cash)
500
500
24/10/20 Second hand car a/c
To bank
(Being bought second hand car)
2500
2500
26/20/20 Wages a/c
To bank a/c
(Being wages paid through cheques)
820
820
30/10/20 Rent a/c
To bank a/c
(Being rent paid through cheques)
1000
1000
31/10/20 Drawings a/c
To bank a/c
(Being holiday expenses of linda is drawings
from the business)
1600
1600
TOTAL 30150 30150

Ledger
Capital a/c
Date Particulars Amount(£) Date Particulars Amount(£)
01/10/20 By bank a/c
By cash a/c
By van a/c
8000
5200
3000
31/10/20 To balance c/f 16200
16200 16200
01/11/20 By balance b/d 16200
Bank a/c
Date Particulars Amount(£) Date Particulars Amount(£)
01/10/20
05/10/20
21/10/20
To capital a/c
To sales a/c
To rent a/c
8000
1500
500
02/10/20
24/10/20
26/10/20
30/10/20
31/10/20
By laptop
By second
hand car a/c
By wages a/c
By rent a/c
By drawing
a/c
1000
2500
820
1000
1600
31/10/20 By balance c/f 3080
10000 10000
01/11/20 To balance b/d 3080
Cash a/c
Date Particulars Amount(£) Date Particulars Amount(£)
01/10/20 To capital a/c 5200 12/10/20 By repairing 80

23/10/20
23/10/20
To sales a/c
To sales a/c
1500
500
expenses a/c
31/10/20 By balance c/f 7120
7200 7200
01/11/20 To balance b/d 7120
Van a/c
Date Particulars Amount(£) Date Particulars Amount(£)
01/10/20 To capital a/c 3000
31/10/20 By balance c/f 3000
3000 3000
01/11/20 To balance b/d 3000
Laptop a/c
Date Particulars Amount(£) Date Particulars Amount(£)
02/10/20 To bank 1000
31/10/20 By balance c/f 1000
1000 1000
01/11/20 To balance b/d 1000
Purchase a/c
Date Particulars Amount(£) Date Particulars Amount(£)
04/10/20 To toys
limited a/c
2450
31/10/20 By balance c/f 2450
2450 2450

01/11/20 To balance b/d 2450
Toys limited a/c
Date Particulars Amount(£) Date Particulars Amount(£)
18/10/20 To purchase
return a/c
100 04/10/20 By purchase 2450
31/10/20 To balance c/f 2350
2450 2450
01/11/20 By balance b/d 2350
Sales a/c
Date Particulars Amount(£) Date Particulars Amount(£)
05/10/20
23/10/20
23/10/20
By bank a/c
By cash a/c
By fred a/c
By cash a/c
1500
1500
400
500
31/10/20 To balance c/f 3900
3900 3900
01/11/20 By balance b/d 3900
Repairing expense a/c
Date Particulars Amount(£) Date Particulars Amount(£)
12/10/20 To cash a/c 80
31/10/20 By balance c/f 80
80 80
01/11/20 To balance b/d 80

Purchase return a/c
Date Particulars Amount(£) Date Particulars Amount(£)
18/10/20 By toys
limited a/c
100
31/10/20 To balance c/f 100
100 100
01/11/20 By balance b/d 100
Rent a/c
Date Particulars Amount(£) Date Particulars Amount(£)
30/10/20 To bank a/c 1000 21/10/20 By bank a/c 500
31/10/20 By balance c/f 500
1000 1000
01/11/20 To balance b/d 500
Fred a/c
Date Particulars Amount(£) Date Particulars Amount(£)
23/10/20 To sales a/c 400
31/10/20 By balance c/f 400
400 400
01/11/20 To balance b/d 400
Second-hand car a/c
Date Particulars Amount(£) Date Particulars Amount(£)
24/10/20 To bank a/c 2500
31/11/20 By balance c/f 2500

2500 2500
01/11/20 To balance b/d 2500
Wages a/c
Date Particulars Amount(£) Date Particulars Amount(£)
26/10/20 To bank a/c 820
31/10/20 By balance c/f 820
820 820
01/11/20 To balance b/d 820
Drawings a/c
Date Particulars Amount(£) Date Particulars Amount(£)
31/10/20 To bank a/c 1600
31/10/20 By balance c/f 1600
1600 1600
01/11/20 To balance b/d 1600
Trial balance as at 31st October 2020
Particulars Debit(£) Credit(£)
Capital a/c 16200
Bank a/c 3080
Cash a/c 7120
Van a/c 3000
Laptop a/c 1000
Purchase a/c 2450

Toys ltd. a/c 2350
Sales a/c 3900
Repairing expenses a/c 80
Purchase return a/c 100
Rent a/c 500
Fred a/c 400
Second hand car a/c 2500
Wages a/c 820
Drawings a/c 1600
TOTAL 22550 22550
Statement for Profit and Loss Account for the period ended 31st October 2020
Particulars Amount(£)
Net sales
Less COGS
(Purchase + Wages - Purchase return – Closing stock)
(2450 + 820 – 100 - 250)
3900
(2920)
Gross Profit 980
Add Operating income
(Rent income)
500
1480
Less Operating expenses
(Repairing expenses + Rent expenses)
(80 + 1000)
-1080
Net Profit 400

Balance sheet as at 31st October 2020
Particulars Amount(£)
ASSETS
Fixed assets
Van
Laptop
Second-hand car
Current assets
Bank
Cash
Closing stocks
Debtors
3000
1000
2500
3080
7120
250
400
TOTAL 17350
LIABILITIES
Capital
( Capital + Net profit - Drawing)
(16200 + 400 - 1600)
Current liabilities
Creditors
15000
2350
TOTAL 17350
Drawings concerning small business
When owner withdraw cash or assets of the company for their personal use it is known as
drawings. Drawings are not considered as business expense of the company. Drawings are
shown on the assets side of the company. Every business expense of the company is recorded as
expense on debit side of P&L account. In case if any personal expense of the owner when
considered and recorded as business expenses it shows companies are trying to manipulate the
users of the financial statement. It must be considered as drawings from the company and
recorded on the assets side of the balance sheet. (Julien, 2018). In that case the profit of the
business will reduce and tax expense of the company will also reduce. This will show the

misrepresentation of the financial statement i.e. window dressing. So the holiday expense of
Linda is considered as her personal expense not as business expense. Linda must separate its
personal account and business account in order to properly maintain the books of accounts.
PART B
Ratio estimation
 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 + Closing stock + Debtors
= 3080 + 7120 + 250 + 400 = 10850
 Acid test ratio = Quick assets* / Current liabilities
= 10600 / 2350
= 4.51x
Quick assets = Current assets - stock
= 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
Average debtor* = Opening debtors + Closing debtors / 2
= 0 + 400 / 2
= 200

 Accounts payable payment ratio = 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
Average creditors* = Opening creditors + Closing creditors / 2
= 0 + 2350 / 2
= 1175
Comparative evaluation of performance of the businesses
GP and NP ratio is help the business to determine the profit percentage of the company.
The difference between gross profit and net profit is operating and non operating expenses. By
analysing gross profit margin and net profit margin of the Linda's business we interpret that the
internal performance of the business are low. She is required to increase the profit margin of
business and in order to do that she has to focus towards decreasing its cost price by reducing the
wastage of resources(MUSALLAM, 2018). Increasing average order value, reducing operating
expenses, reducing inventory, reducing overheads, increasing conversion cost etc. are some
factors by adopting it Linda's profit margin can be increased.
Current ratio and acid test ratio help to determine ability of the CA to pay companies CL.
Current and acid test ratio of the companies, help us to know the ability of the business to pay its
CL is 4.62 times and pay it more quickly i.e. by acid test ratio is 4.52 times. This indicates that
the external performance of the business is better.
ARCP says that in how many days in a year company receive its money back from the
debtors. It is better for the company when the accounts receivable collection period is
less(Morales-Díaz and Zamora-Ramírez, 2018). Accounts payable payment period says that in
how many days in a year company pays its debt to its creditors. It is better if the Accounts
payable payment period is high. Linda's overall performance is good but there is need of much
more improvement in efficiency of the business.
CONCLUSION
In this report, we understand how the day to day transaction of the business is properly
recorded into journal and then posting of those entries into ledger account. We studied the format

of preparing trial balance, income statement and statement of financial position. We calculate
different financial ratios and analysis it to know the internal and external performance of the
business. In this report, we also understand the term drawings and how drawings are concerning
small business.

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
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