Recording Business Transactions

This document provides an overview of recording business transactions, including double entry transactions, balancing accounts, trial balance, income statement, and statement of financial position. It also explains the concept of drawings in small businesses and provides clarification on a specific query. The document includes examples and calculations for better understanding. Study material and expert guidance on recording business transactions are available on Desklib.

Recording Business
Transactions

Table of Contents
INTRODUCTION ..........................................................................................................................3
PART A...........................................................................................................................................3
(a) Double entry transactions in T-Accounts..............................................................................3
b) Balance the Accounts..............................................................................................................5
c) Extract of Trial Balance as on 31st October 2020..................................................................9
d) Prepare an Income Statement for the period ended 31st October 2020..................................9
e) Prepare a Statement of Financial Position as at 31st October 2020......................................10
f) What are drawings concerned for small business and clarification of the query..................11
PART B..........................................................................................................................................11
a) Ratios Calculation.................................................................................................................11
b) Ratio Analysis of Linda's firm in comparison with the Industry Ratios trends....................12
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Business transactions are the economic events done with the related third parties of the
organisation which are recorded as per the accounting system followed. These transactions are
usually measured in terms of money. An accounting system facilitates recording of transactions
in a usable data from the company's financial information. This helps in assessing and evaluating
firm's financial position, profitability and operations. Business transaction are firstly recorded in
the primary books of accounts and then are transferred to the secondary books. Primary books
includes Journals, cash book, purchase book, sales book. And the secondary books consists of
ledgers and other financial statements (Adekola and Sergi, 2016). Financial statements are the
final products of all the data entered in the primary books of accounts. In the double entry
Accounting system every entry affects two accounts, one having a debit effect and another
having credit effect.
PART A
(a) Double entry transactions in T-Accounts
Journal is referred as the detailed account for recording all the financial transactions
occurring in the business (Allen, 2018). These transactions are recorded as and when they
happen. These business transactions are recorded as Journal entries.
Date Particulars L.F. Dr. Amt. Cr. Amt.
October 1, 2020 Bank A/C. DR. 8000
Cash A/C. DR. 5200
Van A/C. DR. 3000
To Capital A/c. 16200
(Being business initiated by cash, van & bank)
October 2, 2020 Laptop A/c. DR. 1000
To Bank A/c. 1000
(Being amt. paid by bank for buying laptop)

October 4, 2020 Purchase A/c. DR. 2450
To Toy Ltd. 2450
(Being credit purchase made from Toy Ltd.)
October 5, 2020 Bank A/c. DR. 1500
To Sales A/c. 1500
(Being sales made and amt. received in bank)
October 12, 2020 Repairs A/c. DR. 80
To Cash A/c. 80
(Being repairs made by cash)
October 18, 2020 Toy Ltd. A/c. DR. 100
To Purchase Return A/c. 100
(Being goods return made to Toy Ltd.)
October 21, 2020 Bank A/c. DR. 500
To Rent A/c. 500
(Being rent amt. received in bank)
October 23, 2020 Cash A/c. DR. 1500
Fred A/c. DR. 400
To Sales A/c. 1900

(Being sales made to Fred in cash & credit)
October 23, 2020 Cash A/c. DR. 500
To Sales A/c. 500
(Being sales made for cash)
October 24, 2020 Car A/c. DR. 2500
To Bank A/c. 2500
(Being amt. Paid from bank for buying car)
October 26, 2020 Wages A/c. DR. 820
To Bank A/c. 820
(Being wages paid from bank)
October 30, 2020 Rent A/c. DR. 1000
To Bank A/c. 1000
(Being amt. paid from bank for rent)
October 31, 2020 Drawings A/c. DR. 1600
To Bank A/c. 1600
(Being amt. withdrawn for personal use)
b) Balance the Accounts
Ledger is the books of accounts which are prepared after classification and
summarization of the journal entries posted. These contained data which is essential for

preparation of financial statements (Black, 2019). It is also called secondary books of accounts
and Chart of Accounts.
Bank A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 1, 2020 To Capital A/c. 8000
October 2,
2020 By Laptop A/c. 1000
October 5, 2020 To Sales A/c. 1500
October 24,
2020 By Car A/c. 2500
October 21, 2020 To Rent A/c. 500
October 26,
2020 By Wages A/c. 820
October 30,
2020 By Rent A/c. 1000
October 31,
2020 By Drawing A/c. 1600
October 31,
2020 By Balance c/d. 3080
Total 10000 Total 10000
Cash A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 1, 2020 To Capital A/c. 5200
October 12,
2020 By Repair A/c. 80
October 23, 2020 To Sales A/c. 1500
October 31,
2020 By Balance c/d. 7120
October 23, 2020 To Sales A/c. 500
Total 7200 Total 7200
Fred A/c.

Date Particular J.F. Amt. Date Particular J.F. Amt.
October 23, 2020 To Sales A/c. 400
October 31,
2020 By Balance c/d. 400
Total 400 Total 400
Purchase A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 2, 2020
To Toys Ltd.
A/c. 2450
October 31,
2020 By Balance c/d. 2450
Total 2450 Total 2450
Toys limited A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 18, 2020
To Purchase
Ret. A/c. 100
October 4,
2020
By Purchase
A/c. 2450
October 31, 2020 To Balance c/d. 2350
Total 2450 Total 2450
Rent A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 30, 2020 To Bank A/c. 1000
October 30,
2020 By Bank A/c. 500
October 31,
2020 By Balance c/d. 1000
Total 1000 Total 1000
Van A/c.

Date Particular J.F. Amt. Date Particular J.F. Amt.
October 1, 2020 To Capital A/c. 3000
October 31,
2020 By Balance c/d. 3000
Total 3000 Total 3000
Capital A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 31, 2020 To Balance c/d. 16200
October 1,
2020 By Bank A/c. 8000
October 1,
2020 By Cash A/c. 5200
October 1,
2020 By Van A/c. 3000
Total 16200 Total 16200
Sales A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 31, 2020 To Balance c/d. 3900
October 5,
2020 By Bank A/c. 1500
October 23,
2020 By Cash A/c. 1500
October 23,
2020 By Fred A/c. 400
October 23,
2020 By Cash A/c. 500
Total 3900 3900

Laptop A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 2, 2020 To Bank A/c. 1000
October 31,
2020 By Balance c/d. 1000
Total 1000 Total 1000
Car A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 24,
2020 To Bank A/c. 2500
October 31,
2020 By Balance c/d. 2500
Total 2500 Total 2500
Drawing A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 31, 2020 To Bank A/c. 1600
October 31,
2020 By Balance c/d. 1600
Total 1600 Total 1600
Wages A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 25, 2020 To Bank A/c. 820
October 31,
2020 By Balance c/d. 820
Total 820 Total 820
Repair A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 12, 2020 To Cash A/c. 80 October 31, By Balance c/d. 80

2020
Total 80 Total 80
Purchase Ret. A/c.
Date Particular J.F. Amt. Date Particular J.F. Amt.
October 31, 2020 To Balance c/d. 100 October 18,
2020
By Toy Ltd
A/c.
100
Total 100 Total 100
c) Extract of Trial Balance as on 31st October 2020
Trial balance is the presentation of all accounts which are prepared in Ledger Book. It
contains a list of year end closing balances of all the ledgers compiled with their respective debit
or credit balance (Hoerl and Snee, 2020). It is usually prepared at the end of a financial year and
ensures accuracy of all the entries in the bookkeeping system of the organisation.
Accounts Debit Amount Credit Amount
Bank A/c. 3080
Cash A/c. 7120
Van A/c. 3000
Laptop A/c. 1000
Toys Ltd. A/c. 2350
Purchase A/c. 2450
Purchase Ret. A/c. 100
Sales A/c. 3900
Rent A/c. 500
Wages A/c. 820
Drawing A/c. 1600

Capital A/c. 16200
Repairs A/c. 80
Fred A/c. 400
Car A/c. 2500
Total 22550 22550
d) Prepare an Income Statement for the period ended 31st October 2020
Income Statements is the financial statement that illustrates the profitability of the
company in a specific accounting period. It indicates the financial position of the company as
whether the firm is making profits or losses on the given period of time (Newell and Holland,
2018). It is also called as Profit and Loss Statements and have primarily focus on the revenues
and expenditures made by the organisation.
Particular Amount
Sales 3900
Less : Cost of Good Sold
Op. Stock Nil
Add: Purchases 2450
Less: Purchase Ret. 100
Less: Cl. Stock 250 2100
Gross Profits 1800
Less: Operating expenses
Expenses for Repairs 80
Wages 820
Rent Paid 1000 1900
Add: Operating income

Rent Received 500
Net Profits 400
e) Prepare a Statement of Financial Position as at 31st October 2020
Balance Sheet is the financial statement which conveys the balances of total assets and
liabilities held by the firm at a particular date (Pierce, 2017). It gives a snapshot of what the
company owes and what it owns including the amount invested by the shareholders.
Particular Amount
Fixed Assets
Car. 2500
Van. 3000
Laptop. 1000 6500
Current Assets
Cash. 7120
Bank. 3080
Debtor. 400
Stock. 250 10850
Total Assets 17350
Equity and Liabilities
Equity.
Capital. 16200
Less: Drawing 1600
Add: Net Profits 400 15000
Current liabilities
Creditors. 2350

Total Equities and Liabilities 17350
f) What are drawings concerned for small business and clarification of the query
Drawings are the cash or goods withdrawn by the owner from the business for personal
use. It is a ledger that maintains a record of amount taken by proprietor for his own use from
business funds (Rekarti and Doktoralina, 2017). It is a sort of contra entry which affects the
capital investment of the owner. It is recorded in the balance sheet i.e. deducted from the capital
and reduced from the cash or goods as the case may be. Also in the case Linda has extracted the
amount of £ 1600 for her own holiday tour. If it would be an official trip then the amount will be
charged from the profits of the firm.
PART B
a) Ratios Calculation
Financial Ratios are results of the numeric values taken the financial statement of the
company for giving a meaningful information which can be used for comparing the performance
of the organisation with its past performance or with the ratio trends of the industry (Storey,
2016).
Ratios Linda's Firm Industry Ratio
Net Profit Ratio
=(Net Profit / Net sales)*100
=(400 / 3900)*100
=10.26%
31.00%
Gross Profit Ratio
=(Gross Profit / Net Sales)*100
=(1800 / 3900)* 100
=46.15%
54.00%
Current Ratio
=(Current Assets / Current Liabilities)
=10850 / 2350
=4.62
2.87 Times
Quick Ratio
=(Quick Asset / Current Liabilities)
=10600 / 2350
=4.51
1.35 Times
Accounts Receivable Collection Period =(3900 / 400)* 365 50 Days.

=(Sales / Ave. Receivable)*365 =37.44 Days
Accounts Payable Ratio
=(Sales / Average Payable)*365
=(2450 / 2350)* 365
=350 Days
72 Days.
b) Ratio Analysis of Linda's firm in comparison with the Industry Ratios trends.
Ratio Analysis is the process of finding the financial ratios that indicated the financial
and operational position of an enterprise. It is a quantitative tool used to evaluate the financial
well being of the firm in terms of liquidity, debt paying capacity and profitability, etc.. The
above calculated ratios are analysed as:
 Net Profit Ratio- It is the profitability ratio used to measure the profits earned by the
organisation in comparison to the sales made (Tracy, 2016). It takes into consideration all
operating and non-operating incomes earned by business operations. The higher the NP
ratio the better it is for the company. In the given case Linda is not performing well on
comparison with the industrial trends.
 Gross Profit Ratio- It is the ratio used for assessing the financial health of the company.
It illustrates the relationship between the gross profit with the total revenue earned by the
organisation. It is the most effective tool for evaluating the operational efficiency of the
firm. Linda's firm GP ratio is good in relation with that of the industry's GP ratio.
 Current Ratio- It is the liquidity ratio that measures the organisation's ability to pay its
short term obligations. The ideal current ratio is 2:1 and it gives a sense of efficiency of
the operating cycle of the firm. It is also referred as working capital ratio. Linda's current
ratios are not up to the mark, she should work for its improvement.
 Quick Ratio- Also called as Acid test ratio, which indicates the company's ability for
paying off its short term debts without the use of its inventory and other financial
instruments. The ideal quick ratio is 1:1, it includes coverage of current liabilities with
the quick assets of the company. In the given case the firm's quick ratio is good enough
when compared with industry trends.
 Accounts Receivable Collection Period Ratio- It demonstrates the period the company
takes for realisation of the credit sales made over a period of time. It is computed for

facilitating the firms in making sure to have availability of enough cash balance for
meeting its financial obligations.
 Accounts Payable Ratio- It measures the efficiency of the business in paying off its
creditors (Warren and Jones, 2018). It calculates the average time the company takes for
settling off all accounts payable over a specified period of time. This ratio is in poor
position for Linda's business, and needs immediate improvement.
CONCLUSION
From the above report it is analysed that recording business transaction and preparation
of financial statements using its data is a crucial part for an organisation to perform. It facilitates
the comparison of firm's performance with its past presentation and also with that of its
competitors prevailing in the industry. Also it helps in finding deviations, reasons for such
deviations and take corrective measures for overcoming them.

REFERENCES
Books and Journals
Adekola, A. and Sergi, B.S., 2016. Global business management: A cross-cultural perspective.
Routledge.
Allen, P., 2018. Artist management for the music business. Routledge.
Black, K., 2019. Business statistics: for contemporary decision making. John Wiley & Sons.
Hoerl, R.W. and Snee, R.D., 2020. Statistical thinking: Improving business performance. John
Wiley & Sons.
Newell, P. and Holland, K., 2018. Loudspeakers: For music recording and reproduction.
Routledge.
Pierce, J.M., 2017. Writing at the Speed of Sound: Music Stenography and Recording beyond
the Phonograph. 19th-Century Music. 41(2). pp.121-150.
Rekarti, E. and Doktoralina, C.M., 2017. Improving business performance: A proposed model
for SMEs.
Storey, D.J., 2016. Understanding the small business sector. Routledge.
Tracy, J.A., 2016. Accounting for dummies. John Wiley & Sons.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.