Recording Transactions in Business: A Comprehensive Guide

This document provides a comprehensive guide on recording financial transactions in a business. It covers topics such as preparation of double entry T-accounts, balancing accounts, trial balance, income statement, and statement of financial position. It also explains the concept of drawings in small business entities and analyzes the financial performance of Linda's business using key ratios.

Recording Business
Transaction

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Part A...........................................................................................................................................3
Part B.........................................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
In a business a range of transactions are done on a daily basis under which both financial and non
financial activities are included. This is essential for companies to record the financial
transactions in a systematic manner so that financial statements can be produced effectively and
correctively (Tillman, 2017). The report is based on different kinds of financial transactions on
which various types of financial reports are produced like income statements, balance sheet and
many more. Apart from this, such produced statements are used to compute ratios in order to
assess financial performance of given business.
MAIN BODY
Part A
(a) Preparation of double entry in T-accounts.
Double entry system can be understood as a form of fundamental concept which is used to record
day to day business transactions in the accounting books of a business (Harkiolakis and Halkias,
2016). These prepared journal entries are used for further basis like preparation of trial balance,
ledger accounts and many more. Below preparation of double entries is done in such manner:
Date Particulars
L.
F Debit Amount Credit Amount
2020
01/10/20 …...Bank A/c Dr…... 8000
…...Cash A/c Dr…... 5200
…...Van A/c Dr…... 3000
…...To Capital A/c 16200
(Being business started)

02/10/20 …...Laptop A/c Dr…... 1000
…...To Bank A/c 1000
(Being laptop purchased)
04/10/20 …...Purchase A/c Dr…... 2450
…...To Toy Ltd 2450
(Being purchase made)
05/10/20 …...Bank A/c Dr…... 1500
…...To Sales A/c 1500
(Being sales made)
12/10/20 …...Repairs A/c Dr…... 80
…...To Cash A/c 80
(Being cash paid for repairs)
18/10/20 …...Toy Ltd A/c Dr…... 100
…...To Purchase Return A/c 100
(Being purchase return made)
21/10/20 …...Bank A/c Dr…... 500
…...To Rent A/c 500
(Being rent received)

23/10/20 …...Cash A/c Dr…... 1500
…...Fred A/c Dr…... 400
To Sales A/c 1900
(Being sales made)
23/10/20 …...Cash A/c Dr…... 500
…...To Sales A/c 500
(Being sales made)
24/10/20 …...Car A/c Dr…... 2500
…...To Bank A/c 2500
(Being car purchased)
26/10/20 …...Wages A/c Dr…... 820
…...To Bank A/c 820
(Being wages paid)
30/10/20 …...Rent A/c…... Dr…... 1000
…...To Bank A/c…... 1000
(Being rent paid)
31/10/20 …...Drawings A/c Dr…... 1600
…...To Bank A/c 1600
(Being drawings made)

(b) Balancing of accounts and take down an opening balance.
Ledger account can be defined as form activity which is used to maintain financial data in an
effective manner (Hladika, Mokošová and Molín, 2017). This is used to manage the debit and
credit balance of each account or activity in an effective manner so that closing balance can be
used to prepare the trial balance. Below some ledger accounts are prepared in such manner:
Bank account
Date Particular J.F Amount Date Particular J.F Amount
…...To
capital…... …...8000
…...To sales…... …...1500 …....By laptop …...1000
…...To rent
received…... …...500 …...By Car …...2500
…...By wages …...820
…...By Rent …...1000
…...By drawing …...1600
….By balance c/d …...3080
Total …...10000 Total …...10000
Rent received account
Date Particular J.F Amount Date Particular J.F Amount
…...By bank 500
500 500
Cash account
Date Particular J.F Amount Date Particular J.F Amount
…...To capital 5200 …...By repair 80
…...To sales 1500 …...By balance 7120

c/d...
To sales 500
7200 7200
Fred a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To sales 400
…...By balance
b/d... 400
Repair a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To
cash... 80
…...By balance
b/d... 80
Purchase a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To Toys
limited 2450
…...By balance
c/d 2450
Rent a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To Bank 1000
…...By
balance b/d 1000
Van a/c
Date Particular J.F Amount Date Particular J.F Amount

…...To
capital 3000
…...By
balance b/d... 3000
Capital a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To balance
b/d... 16200 …...By bank 8000
…...By cash 5200
…...By van 3000
Sales a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To balance
b/d... 3900 …...By bank 1500
…...By cash 1500
…...By Fred 400
…...By cash 500
Laptop a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To bank 1000
…...By balance
b/d 1000
Car a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To 2500 …...By balance 2500

Bank b/d
Wages a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To
Bank 820
…...By balance
b/d 820
Drawing a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To
Bank 1600
…...By balance
b/d 1600
Toys limited a/c
Date Particular J.F Amount Date Particular J.F Amount
…...To purchase
return 100 …......By purchase 2450
…...To balance
b/d 2350
2450 2450
(c) Preparation of trial balance.
The trial balance can be defined as a form of financial statement which is used to list all the
ledger balances including income and expenses (Rahwani, 2017). Under this statement, heading
of each individual ledger is included so that complexity can be reduced. Below a trial balance is
produced in accordance of given data set which is as follows:
Accounts Debit Credit
...Bank... 3080

...Cash... 7120
...Van... 3000
...Laptop... 1000
...Toys limited... 2350
...Purchase... 2450
...Purchase return... 100
...Sales... 3900
...Rent received... 500
...Rent paid... 1000
...Wages... 820
...Drawing... 1600
...Capital... 16200
...Repairing
account... 80
...Fred account... 400
...Car account... 2500
22550 22550
(d) Preparation of income statement.
The term income statement may be known as a type of statement that is applied to analyse
financial health of a company during a financial year (Corcoran, 2016). There are different kinds
of methods and approaches which are used to prepare income statements. Below an income
statement is prepared in such manner:

(e) Preparation of statement of financial position.

(f) Explaining Linda about which drawings are concerning small business entities.
The term drawings can be understood as an expenses which is done by business owner for
his/her personal purpose using funds of business (North, International Business Machines Corp,
2016). In the context of above business of Linda, there is an expense of 1600 pounds which is
done for travelling and it should be considered as drawings. This is so because expenses is done
for personal purpose which is to reduce stress by travelling in Florida.
Part B
Ratio calculations

Analysis of financial performance of Linda's business.

The term ratio assessment is characterized as a form of financial matrix through which a
company by using different kinds of matrices like profitability ratio, liquidity ratio and many
more (Sun, 2017). Below financial performance of above company has been analysed in such
manner that is as follows:
Net profit ratio-This may be understood as a type of ratio that is applied to assess financial health
of a company in an effective manner. On the basis of above table this can be stated that net profit
ratio of Linda's business is of 10.26% while net margin of industry is of 31%. This shows that
company's is not so good in compare to industry's performance.
Gross profit ratio- It is known as a form of ratio which is used to measure gross profit of a
company over cost of sales during a particular time period (Hanifatunnisa and Rahardjo, 2017).
On the basis of above table, this can be stated that Linda's business performance is poor as
compared to industry's performance. As Linda is able to produce gross margin of 46.15% while
industry's ratio is of 54%. The rationale behind such performance is due to higher amount of cost
of sales.
Current ratio- It is a ratio that is measured by companies to know efficiency of companies to
make payment to their short term expenses. This is a mandatory ratio that is measured mostly by
different companies in an accounting period. This On the basis of above table this can be stated
current ratio of company is not in ideal form as it needs to be of 2:1 times while Linda's business
current ratio is of 4.62:1 times. Apart from this current ratio of industry is of 2.87:1 times. This
shows that Linda's business has enough amount of current assets to make payment of current
liabilities but there is limit to keep current assets which is double of current liabilities. Hence,
above business entity need reduce number of current assets so that they can meet with ideal form
of current ratio.
Quick ratio- It can be characterized as a form of financial matrix that can be assessed for
evaluating liquidity condition of a business for an accounting cycle. The perfect form of such
proportion is of 1.5 times while in aspect of Linda's business we can see that their ratio is of
4.51:1 times that is too much compare to ideal ratio. On the other hands, industry's ratio is of
1.35:1 times which seems appropriate. Hence above company needs to overcome their quick
assets.

Accounts receivable collection period- It is known as a type of financial matrix that is used to
assess time period taken by a business in order to collect debt amount from their debtors. This
ratio is measured in terms of time and days. This ratio need to be lower as much as possible as it
indicates efficiency of a company to collect debt from debtors.. In regards of such ratio it can be
find out which company is able to recover their debts in less time compared to industry's ratio. It
is so because of their efficiency to get back amount from debtors.
Accounts payable ratio- It is known as a type of financial matrix that is used to assess time
period taken by a business in order to make payment to their creditors. This ratio is measured in
terms of time and days. This ratio need to be lower as much as possible as it indicates efficiency
of a company to pay the creditors. In terms of such ratio, company's performance is poor
compared to industry's ratio. This is so because Linda's business is taking too much time to pay
their creditors.
CONCLUSION
In accordance of above performed report this can be articulated that making systematic record of
financial transactions is too crucial for companies so that they can find out a particular outcome.
The report articulates about financial analysis of given data set by preparing various kinds of
financial reports. While in the end of report ratio analysis of Linda's business has been which
concludes that their performance is not so effective compared to industry's performance.

REFERENCES
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