Recording Business Transaction

This report discusses the importance of recording business transactions and the process of double entry recording, balancing accounts, trial balance, income statement, and financial position. It also includes a brief letter to Linda regarding drawing treatment and a ratio analysis of Linda's business performance compared to competitors.

RECORDING BUSINESS
TRANSACTION

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
a. Double entry recording transaction.........................................................................................3
b. Balancing accounts..................................................................................................................3
c. Trial balance............................................................................................................................7
d. Income statement....................................................................................................................8
e. Financial position....................................................................................................................9
f. Brief letter to Linda.................................................................................................................9
PART B..........................................................................................................................................10
a. Ratio calculation for Linda’s business..................................................................................10
b. Analysis of performance of Linda’s business in comparison to competitors.......................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14
APPENDIX....................................................................................................................................15

INTRODUCTION
Recording business transaction is defined as recording of all the financial transaction
within the books of accounts in order to calculate and summaries the profitability of company
within the financial statements of company (OVSIUK, 2020). For any organization recording all
business transaction is the most crucial step as this is the base for making the financial statements
and articulating the profit or loss incurred. the present report is based on the recording of
transaction based on transaction occurred in business. then the report will highlight ledger
accounts prepared and after that trial balance will be extracted and profit and loss account will be
created. in addition to this the profitability of company will be assessed with help of the ratio
analysis. ratio analysis is a technique which assist company in comparing the profitability,
liquidity and solvency of company with the competitor within the industry. this will assist the
company in managing and improving its financial position to a great extent.
PART A
a. Double entry recording transaction
For the making of financial statement, the most essential thing is the recording of
business transaction in proper and effective manner. This is particularly because of the reason
that when the company will record all financial transaction in journal then they will have been
posted in ledger and trial balance will be prepared. Hence, effective making of financial
statement only crucial thing required is recording transaction in proper and effective manner.
(journal entry in appendix)
b. Balancing accounts
Just recording the business is not enough for making the financial statements rather it is
essential to post the transaction in correct manner in ledger accounts. The ledger account is a
type of account which records all entries in the particular accounts (Wulanditya and Aprillianita,
2018). From here the balance are taken and with help of this trial balance is prepared and further
financial statement is being prepared.
Bank A/C
Date Details
Amount
£ Date Details
Amount
£
1/10/2020 To capital 8,000 2/10/2020 By laptop 1,000
5/10/2020 To sales 1,500 24/10/20 By second hand car 2,500

21/10/20 To rent 500 26/10/20 By wages 820
30/10/20 By rent 1,000
31/10/20 By drawing 1,600
31/10/20 By bal. C/D 3,080
10,000 10,000
11/1/2020 Balance B/D 3,080
van A/C
Date Details
Amount
£ Date Details
Amount
£
01/10/20 To Capital A/C 3000
31/10/20 By bal. C/D 3000
3,000 3,000
11/1/2020 Balance B/D 3,000
Purchase A/C
Date Details
Amount
£ Date Details
Amount
£
04/10/20 To Toy Ltd. A/C 2450
31/10/20 By bal. C/D 2450
2,450 2,450
11/1/2020 Balance B/D 2,450
Sales A/C
Date Details
Amount
£ Date Details
Amount
£
05/10/20 By Bank A/C 1500
23/10/20 By Cash A/C 1500
23/10/20 By Fred A/C 400
23/10/20 By Cash A/C 500
31/10/20 By bal. C/D 3900
3,900 3,900
11/1/2020 Balance B/D 3,900
Purchase return A/C

Date Details
Amount
£ Date Details
Amount
£
18/10/20 Toy Ltd. A/C 100
31/10/20 To bal. C/D 100
100 100
11/1/2020 Balance B/D 100
Fred A/C
Date Details
Amount
£ Date Details
Amount
£
23/10/20 To sales A/C 400
31/10/20 By bal. C/D 400
400 400
11/1/2020 Balance B/D 400
Wages A/C
Date Details
Amount
£ Date Details
Amount
£
26/10/20 To Bank A/C 820
31/10/20 By bal. C/D 820
820 820
11/1/2020 Balance B/D 820
Capital A/C
Date Details
Amount
£ Date Details
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 bal. C/D 16200
16,200 16,200
11/1/2020 Balance B/D 16,200
Cash A/C
Date Details Amount Date Details 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 31/10/20 By bal. C/D 7,120
23/10/20 To sales A/C 500
7,200 7,200
11/1/2020 Balance B/D 7,120
Laptop A/C
Date Details
Amount
£ Date Details
Amount
£
02/10/20 To Bank A/C 1000
31/10/20 By bal. C/D 1000
1,000 1,000
11/1/2020 Balance B/D 1,000
Toys. Ltd A/C
Date Details
Amount
£ Date Details
Amount
£
18/10/20 To Purchase return A/C 100 04/10/20 Purchase A/C 2450
31/10/20 To bal. C/D 2350
2,450 2,450
11/1/2020 Balance B/D 2,350
Repairs A/C
Date Details
Amount
£ Date Details
Amount
£
12/10/20 To Cash A/C 80
31/10/20 By bal. C/D 80
80 80
11/1/2020 Balance B/D 80
Rent A/C
Date Details
Amount
£ Date Details
Amount
£
30/10/20 To Bank A/C 1000 21/10/20 By Bank A/C 500

31/10/20 By bal. C/D 500
1,000 1,000
11/1/2020 Balance B/D 500
Second had car A/C
Date Details
Amount
£ Date Details
Amount
£
24/10/20 To Bank A/C 2500
31/10/20 By bal. C/D 2500
2,500 2,500
11/1/2020 Balance B/D 2,500
Drawings A/C
Date Details
Amount
£ Date Details
Amount
£
31/10/20 To Bank A/C 1600
31/10/20 By bal. C/D 1600
1,600 1,600
11/1/2020 Balance B/D 1,600
c. Trial balance
Linda's Account Trial Balance as at 31st October 2020
Date Details Debit £ Credit £
31/10/20 Bank 3080
31/10/20 Cash 7120
31/10/20 Van 3000
31/10/20 Laptop 1000
31/10/20 Purchase 2450
31/10/20 Toys ltd 2350
31/10/20 Sales 3900
31/10/20 Repairs 80
31/10/20 Purchase return 100
31/10/20 Rent 500
31/10/20 Fred 400
31/10/20 Second hand car 2500

31/10/20 Wages 820
31/10/20 Drawings 1600
31/10/20 Capital 16200
Grand
Total 22,550 22,550
d. Income statement
Details £ £
Sales 3,900.00
Less COGS (Cost of Goods Sold)
+ Opening inventory 0.00
+ Purchases 2,450.00
- Purchase return 100.00
- Closing inventory 250.00
2,100.00
Gross Profit 1,800.00
Less Operating Expenses
Wages 820.00
Repair 80.00
Rent 500.00
1,400.00
Net Profit 400.00
The present income statement reflects a profit of 400 and the gross profit is 1800. This
position reflect that the company is not having much direct expenses and because of this gross
profit is higher. On the other side the indirect expenses of company are higher and because of
this the net profit of the company has decreased to a great extent. For managing this position
company need to control indirect expenses and try to reduce it and increase the profitability
(Weigand, Blums and de Kruijff, 2020).
e. Financial position
Linda's Account Statement of Financial Position as at 31st October 2020

£ £
Non-Current Assets
Laptop 1,000.00
Van 3,000.00
second hand car 2,500.00
6,500.00
Current Assets
Closing balance 250
Accounts Receivable 400.00
Bank 3,080.00
Cash in Hand 7,120.00
10,850.00
Less Current Liabilities
Accounts Payable 2,350.00
2,350.00
Net Current Assets 8,500.00
Total Assets 15,000.00
Financed By:
Capital 16,200.00
Add Net Income 400.00
16,600.00
Less Drawings 1600.00
Total Equity 15,000.00
f. Brief letter to Linda
To Linda
Respected sir/ mam
Subject: Explanation relating to drawing
This letter is to inform you that there is a major concern regarding treatment of drawing which
need to be discussed urgently. The expense which you have treated has a business expense for
your holiday trip is not an expense of business rather your personal expense. In accounting terms
this is a drawing which means the amount taken by the owner for their personal use. As this is a
personal expense so it cannot be treated as a business expense and is not deducted from income

of company. Rather it is treated as a deduction from capital in the balance sheet. This is deducted
from the capital as this is the amount which owner has brought and if they are taking money back
for personal use then it is subtracted from the capital.
Thank you
PART B
a. Ratio calculation for Linda’s business
Net profit Ratio
Particulars Formula Ratio
Net profit Ratio
Particulars 400
sales 3900
Net profit Ratio Net Profit /sales *100 10.26
Gross profit margin
Particulars Formula Ratio
gross Profit 1800
sales 3900
Gross profit margin Gross Profit /sales *100 46.15
Current ratio
Particulars Formula Ratio
Current asset 10850
current liability 2350
Current ratio Current asset /current liability 4.617
Acid Test ratio
Particulars Formula Ratio
Quick asset 10600
current liability 2350
Acid Test ratio Quick asset /current liability 4.511
Account receivable collection period
Particulars Formula Ratio
Account receivable 400

COGS 2100
Account receivable collection period
Account receivable
/COGS*365 69.52
Account payable payment period
Particulars Formula Ratio
Account payable 2450
COGS 2100
Account payable payment period Account payable /COGS*365 425.83
b. Analysis of performance of Linda’s business in comparison to competitors
Ratio Linda Competitors
Net profit margin 10.26 % 31 %
Gross profit margin 46.15 % 54 %
Current ratio 4.617 times 2.87 times
Acid test ratio 4.511 times 1.35 times
Accounts receivable collection
period
365 days 50 days
Accounts payable payment
period
365 days 72 days
With the analysis of the comparison of Linda with its competitors it is clear that the with
respect to the profitability aspect the competitors are in better position. The major reason for this
is that both the profitability ratios are not good of Linda in comparison to its competitors. With
the help of net profit ratio, it is evident that the competitor is having almost 20 % higher net
profit margin. Hence, this states that the competitors are in better position as compared to the
business of Linda (Bunker, Cagle and Harris, 2019). For improving the net profit of company the
most essential thing for Linda is to manage the indirect expenses and try to reduce it so that
income of company can be increased. Further in addition to this company can also focus on the
management of the company and make its strategies in accordance with the changes taking place
in the market and implementing in business to improve sales.
From the analysis of the gross profit ratio of Linda it is evident that it is less than average
of competitors within the market. hence, it can be stated that the direct expenses of company are

higher and because of this the profitability of company is low (Purba and Septian, 2019). For this
it is recommended to the company that they must focus on managing their direct expenses so that
they can increase their profitability. in addition to this it is essential for Linda to also try to
increase its sales by different ways like working on marketing strategy and improving sales of
company.
Further the performance was evaluated on basis of the liquidity ratios which is essential
to be monitored. Under this the current ratio and acid test ratio was high of Linda’s business in
comparison to the competitors which is not good. This is particularly because of the fact that if
the current and acid test ratio is too high then this reflects that the company is not in position to
effectively allocate and use current asset. For this it is suggested to company that they must take
out their investment from current asset and use that cash in some productive areas and improve
efficiency of company.
In addition to this with the help of the efficiency ratios it was evident that the
performance of competitor is much better. For Linda both account payable and receivable is 365
days and this is not that good for the company. in addition to this high receivable and payable
ratio reduces the credibility of company (Amalina, Amelia and Alfatah, 2019). This is due to the
reason that creditors and debtors might think that company will take a lot of time to pay off their
liabilities.
CONCLUSION
The above report summarized that for assessing the profit earned or loss incurred the
most important thing is the proper recording of business transaction within the books of
accounts. under the books of account all the financial transaction is recorded and posted in ledger
and further with help of trial balance income statement and balance sheet is being prepared. from
the above report it was summarized that for the proper assessment of profitability every
transaction need to be recorded in proper manner. this is due to the reason that if the transaction
will not be recorded in correct manner then profit will not be calculated in right way. further with
help of the report it was also reflected that for comparing the performance with the competitor it
is essential for company to effectively calculate all the ratios. this is particularly because under
this two or more companies are compared on a single common basis such as profitability or
liquidity.

REFERENCES
Books and Journals
Amalina, N., Amelia, F. and Alfatah, W., 2019. Analysis Effect of Profitability Ratio, Leverage
Ratio, Audit Committee and Public Accounting Firm Size on Audit Delay. Indonesian
Management and Accounting Research, 17(1), pp.36-52.
Bunker, R.B., Cagle, C. and Harris, D., 2019. A Liquidity Ratio Analysis of Lean vs. Not-Lean
Operations. Management Accounting Quarterly, 20(2), pp.10-16.
OVSIUK, N., 2020. Valuation and Recording the Value of Innovation Objects in the Accounting
System. Scientific Bulletin of the National Academy of Statistics, Accounting and Audit,
(3), pp.47-54.
Purba, J.H.V. and Septian, M.R., 2019. Analysis of Short Term Financial Performance: A Case
Study of an Energy Service Provider. Journal of Accounting Research, Organization and
Economics, 2(2), pp.113-122.
Weigand, H., Blums, I. and de Kruijff, J., 2020. Shared Ledger Accounting—Implementing the
Economic Exchange Pattern. Information Systems, 90, p.101437.
Wulanditya, P. and Aprillianita, R., 2018. The Development of Accounting Information System
Based on Excel in Helping CV. Ladi Collection Preparing Their Financial Statement.
JEMA: Jurnal Ilmiah Bidang Akuntansi dan Manajemen, 15(1), pp.71-84.

APPENDIX
Journal entries
Date Particulars L/F Debit(£) Credit(£)
01/10/20 Bank A/c Dr
Cash A/c Dr
Van A/c Dr
To capital A/c
(Being Linda introduced capital in the form of
bank, cash and van)
8000
5200
3000
16200
02/10/20 Laptop A/c Dr
To Bank A/c
(Being Laptop purchased from Oxford local
shop by paying cheque)
1000
1000
04/10/20 Purchased A/c Dr
To Toys Ltd
(Being goods purchased on credit from toys
limited)
2450
2450
05/10/20 Bank A/c Dr
To Sales A/c
(Being goods sold and received amount in
bank)
1500
1500
12/10/20 Repairing A/c Dr
To Cash a/c
(Being cash paid for repairing laptop )
80
80
18/10/20 Toys Ltd A/c Dr
To Purchase Return A/c
(Being goods return to Toys Ltd )
100
100
21/10/20 Bank A/c Dr 500

To Rent A/c
(Being Rent received from the premises)
500
23/10/20 Cash A/c Dr
Fred A/c Dr
To Sales A/c
(Being good sold on credit to Fred and 80 %
cash revived )
1500
400
1900
23/10/20 Cash A/c Dr
To sales A/c
(Being goods sold to David in cash)
500
500
24/10/20 Car A/c Dr
To Bank A/c
(Being second hand car purchased From
Oxford motor vehicle auction sale)
2500
2500
26/10/20 Wages A/c Dr
To Bank A/c
(Being wages paid to part time shopkeeper)
820
820
30/10/20 Rent A/c Dr
To Bank A/c
(Being rent paid by cheque)
1000
1000
31/10/20 Drawing A/c Dr
To Bank A/c
(Being Linda withdraw amount from business
for personal use)
1600
1600