Recording Business Transaction

This document provides a comprehensive guide on recording business transactions, including journal entries, ledger accounts, trial balance, profitability statement, financial position statement, and financial performance analysis. It covers topics such as the importance of recording transactions, calculating ratios, and analyzing financial performance. The content is suitable for students studying accounting or business-related courses.

RECORDING BUSINESS
TRANSACTION

Table of Contents
INTRODUCTION...........................................................................................................................2
PART A...........................................................................................................................................2
(a) Journal Entries in the books of Linda Ltd..............................................................................2
(B) Ledger A/c.............................................................................................................................4
(c). Extracting a trial balance.......................................................................................................5
(d). Preparing profitability statement for the year ended on 31st Oct 2020.................................7
(e). Drafting statement of financial position for Linda business Ltd...........................................7
(f). Presenting a brief letter to Linda Ltd for explaining concerns about drawings.....................8
PART B...........................................................................................................................................9
(i) Calculating ratios for Linda Ltd..............................................................................................9
(ii) Analysis of Linda's financial performance..........................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
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INTRODUCTION
Recording the business transaction is defined as the recording of all the financial
transaction in the books of accounts and then reaching to profit or loss incurred. For the business
to reach to the fact that whether they have earned profit or loss the most essential thing is the
recording of the financial transaction in effective manner. The present report will deal with
recording the various transaction of the business and then posting them in ledger and extracting
trial balance from it. Further for analysing the financial position of the company the ratio
analysis will also be used and this will also be compared with the competitors. This comparison
will assist the company in managing their performance so that it can be improved.
PART A
(a) Journal Entries in the books of Linda Ltd
Date Particular Debit(£) Credit(£)
01/10/20 Bank A/c Dr
Cash A/c Dr
Van A/c Dr
To Capital A/c
(Being capital introduced in the business in the form of
cash, bank and Van)
8000
5200
3000
16200
02/10/20 Laptop A/c Dr
To bank A/c
(Being laptop purchased in the business )
1000
1000
04/10/20 Purchase A/c Dr
To Toys Ltd A/c
(Being goods purchased from Toys Limited On Credit)
2450
2450
05/10/20 Bank A/c Dr
To Sales A/c
(Being goods sold and money received)
1500
1500
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12/10/20 Repairing A/c Dr
To cash A/c
(Being laptop Repaired and paid in cash)
80
80
18/10/20 Toys Ltd A/c Dr
To Purchase Return A/c
(Being goods return To Toys limited)
100
100
21/10/20 Bank A/c Dr
To Rent A/c
(Being Rent received for premises By cheque)
500
500
23/10/20 Cash A/c Dr
To sales A/c
(Being good sold to David And received cash)
500
500
23/10/20 Cash a/c Dr
Fred A/c Dr
To sales a/c
(being goods sold to Fred in cash and credit both)
1500
400
1900
24/10/20 Car A/c Dr
To Bank A/c
(Being car purchased from Ox Ford motor vehicle
Auction)
2500
2500
26/10/20 Wages A/c Dr
To Bank A/c
(Being wages paid By cheque)
820
820
30/10/20 Rent A/c Dr
To Bank a/c
(being wages paid to the part time shopkeeper)
1000
1000
31/10/20 Drawings A/c Dr
To bank a/c
1600
1600
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(being Linda withdraw amount 1600 for his personal use
from bank)
(B) Ledger A/c
Bank A/c
Date Particular Amount Date Particular 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
21/10/20 To Rent A/c 500
24/10/20 By Car A/c 2500
26/10/20 By Wages A/c 820
30/10/20 By Rent A/c 1000
31/10/20 By Drawings A/c 1600
31/10/20 By Balance c/d 3080
10000 10000
01/11/20 To Balance b/f 3080
Cash A/c
Date Particulars Amount Date Particular Amount
01/10/20 To Capital A/c 5200 12/10/20 By Repairing A/c 80
23/10/20 To Sales A/c 1500
23/10/20 To Sales A/c 500
31/10/20 By Balance c/d 7120
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7200 7200
01/11/20 To Balance b/d 7120
Van a/c
Date Particular Amount Date Particular Amount
01/10/20 To Capital A/c 3000 31/10/20 By Balance c/d 3000
3000 3000
01/11/20 To Balance b/d 3000
Capital A/c
Date Particular Amount Date Particular Amount
01/10/20 By Bank A/c 8000
01/10/20 By Cash A/c 5200
01/10/20 By Van A/c 3000
31/10/20 To Balance c/d 16200
16200 16200
01/11/20 By Balance B/d 16200
(c). Extracting a trial balance
Particular Debit Credit
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Bank A/c 3080
Cash A/c 7120
Van a/c 3000
Capital A/c 16200
Laptop A/c 1000
Purchase A/c 2450
Toys Ltd A/c 2350
Sales A/c 3900
Repairing A/c 80
Purchase Return A/c 100
Rent A/c 500
Fred A/c 400
Car A/c 2500
wages A/c 820
drawing A/c 1600
Total 22550 22550
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(d). Preparing profitability statement for the year ended on 31st Oct 2020
Income Statement Amount (£) Amount (£)
Revenue 3900
( -) Cogs -2100
Gross profit 1800
Operating expenses
Repairing expense 80
Rent 500
Wages 820
Total Expenses 1400
Earning Before Tax 400
( -) Tax 0
Earning After Tax 400
(e). Drafting statement of financial position for Linda business Ltd
Liability Amount (£) Assets Amount (£)
Capital 16200 Bank 3080
+Net profit 400 Cash 7120
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-Drawings 1600 Van 3000
Net capital 15000 Laptop 1000
Car 2500
Creditors 2350 Debtors (Fred) 400
Closing Stock 250
17350 17350
(f). Presenting a brief letter to Linda Ltd for explaining concerns about drawings
Linda's Business
Dear sir,
Subject: Explaining about what drawings are concerning for small businesses.
This letter is being written in order to inform you about the financial position of your
company. The Firms profit will start declining if the firm does not recognize this points which
are highlight in this letter. Drawings are those resources which are taken by owner for personal
use only and it declines capital of the owner. If any amount withdrawn by the owner for his
personal use is neither considered the business expenses. so if Linda withdraw any amount either
for holidays or anything it contemplated that personal expenses only (Lee and Lee, 2018). In
small business capital introduced by only single person Just in case continuously owner
withdraw the amount then it reduces capital and after that firm have to take loan for day to day
business activities. On loan Amount high interest rate is charged by the person whom company
takes loan so it is better to reduce the drawings for smooth functioning of the businesses. Further
all the amount of drawing is being reduced from the capital within the balance sheet of the
company.
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PART B
(i) Calculating ratios for Linda Ltd
NP margin
Particular Formula Linda's
Net Profit 400
Net Sales 3900
NPR NP / revenue x 100 10.25%
GP ratio
Particular Formula Linda's
Gross profit 1800
Net Sales 3900
Gross profit Margin
Ratio
Gross Profit / Net sales x
100 46.15%
Current ratio
Particular Formula Linda's
Current Assets 10850
Current liability 2350
Current ratio
Current Assets / Current Liability
x 100 4.62 times
Quick ratio
Particular Formula Linda's
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Quick assets 10550
Current liability 2350
Acid Test ratio
Quick assets/Current
liability 4.49 times
Debtors collection period
Particular Formula Linda's
Net Credit sales 400
debtors 400
Account receivable collection
period
Debtors/ net credit sales x
365 365 days
Creditors payment period
Particular Formula Linda's
Net Purchase 2350
Creditors 2350
Account Payable Payment
Period
Creditors / net purchase x
365 365 days
(ii) Analysis of Linda's financial performance
Ratios Linda's Competitor's
Net Profit margin Ratio 10.25% 31.00%
Gross profit Margin Ratio 46.15% 54.00%
Current ratio 4.62 2.87
Acid Test ratio 4.49 1.35
Account receivable collection period 365 days 50 days
Account Payable Payment Period 365 days 72 days
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On the basis of Ratio Analysis Financial performance of Linda's business is being
calculated. From the above calculation it was shown that Linda profit margin ratio for the year
ended is 10.25% which shows that company is earning high profit and maximize its revenue.
while on the other side in comparison with competitors firm Linda's net profit shows lower.
Competitors NP ratio is 31% which is 20% higher from Linda's business (Kim and Im, 2017). So
company need to be mainly focused on increasing profit by declining its operating expenses and
expanding sales. In order to increase the net profit of the company it is required for the effective
and efficient reduction in the indirect expenses of the company. the major reason for this is that if
the indirect expense will be low then the net profit of the company will be increased.
As shown in above table companies GP ratio is low from its competitor. It is necessary
for the company to reduced expenses and implement strategies to maximize sales. The reason
behind the lower gross margin may be a higher cost of production or declining sales price, or if
there is any change in the sales mix. All these factors need in-depth analysis and watch
throughout the year to avoid a situation of lower gross margins. For increasing gross profit firm
need to identify those areas where company bears high expenses so only by controlling those
expenses firm increasing GP. Further in addition to this for increasing the profitability of the
company, it can go for the option of marketing so that the company can improve the sales. This
result in increase in the sales of the company and as a result of this the profitability of the
company will increase.
It was further evaluated that company’s current and quick asset ratio is very high this
shows firm has more investment in the current assets and block the funds on that assets. For
Improving this firm have to pay of its current obligations on time and can withdraw the amount
from current assets and invest the fund in that portfolio that gives higher returns to the company.
whiles the competitors firm shows that they have higher liquidity for paying off its short term
liabilities. For the management of liquidity of company, the major recommendation to the
company is that they must focus on utilising the current asset in such a manner that all the
current liabilities of the company are being utilised in the proper and effective manner (Kahn and
Baum, 2020).
Account receivable Collection period of the company is 365 days which is too high for
the company. If payments from debtors does not collect on time, then they may increase the
chances of bad debts. So it is necessary for the company to reduced its credit sales and better to
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expand its cash sales. Competitor firm's Collection period is only 50 days which is more
adequate as compared to Linda's business. this is particularly because of the reason that the
competitor will recover their money within the time frame of 50 days only. On the other side the
Linda will have to wait of around 365 days as the account receivable collection period is 365
days.
It is further reflected that firms account collection period is 365 days which means
company paid once in a year to its creditors. It declines companies position and goodwill in the
market. So company have to pay its current obligation on time only then firm can easily get
goods on credit. It is closely related to the account receivable turnover ratio. This is not a good
position for the company as the creditors will not allow this much of time for clearing the debts.
Hence, for this it is essential for Linda to manage the allocation of the funds in such a manner
that all the debt of the business are cleared in lesser time and the good image is being created
within the credit market.
From the above analysis it is clear that the firm’s financial performance is not good from
its competitors. for long run sustainability of Linda's business firstly firm have to Decline its cost
of production and make strategy for enlarging its sales (Basioudis, 2019). Only through this
company increased its profitability ratio. after that company will withdraw the amount from
current assets and invest that fund in any profitable portfolio. Further The firm have to pay off its
all creditors and increase creditors collection period.
CONCLUSION
From the above study it is interpreted that correct financial statement of a company is
very helpful in identifying the exact financial performance and position of the company. This
statements help in making policies and future decision makings. Further the study reflected that
financial position of Linda limited is not good as compared to its competitor firm. For company's
better position Linda's firm have to reduces its operating expenses and expand its revenue for
Better growth and maximize its profit. Firm also have to pay its current obligations on time and
withdraw the same amount from current assets and invest in the profitable outcomes. Further it is
also concluded from the report that the ratio analysis is very helpful in managing and comparing
the position of the company. this is necessary because of the reason that this will list out the
actual financial position and with comparison with the competitors the position can be improved.
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REFERENCES
Books and journals
Basioudis, I. G., 2019. The Interpretation of Financial Statements. In Financial Accounting (pp.
274-308). Routledge.
Kahn, M. J. and Baum, N., 2020. Basic Accounting and Interpretation of Financial Statements.
In The Business Basics of Building and Managing a Healthcare Practice (pp. 13-18).
Springer, Cham.
Kim, J. and Im, C., 2017. Study on corporate social responsibility (CSR): Focus on tax
avoidance and financial ratio analysis. Sustainability. 9(10). p.1710.
Lee, B. H. and Lee, S. H., 2018. A study on financial ratio and prediction of financial distress in
financial markets. The Journal of Distribution Science. 16(11). pp.21-27.
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