Recording Business Transactions Assignment - University of West London

This assignment solution focuses on the practical application of accounting principles through a case study involving the recording of business transactions. It begins with the creation of T-accounts to illustrate debit and credit entries for various transactions. The solution then progresses to the preparation of a trial balance, income statement, and statement of financial position, demonstrating the process of summarizing financial data. The assignment also includes a ratio analysis, comparing key financial metrics like net profit margin, gross profit margin, current ratio, quick ratio, and accounts receivable collection period. The analysis evaluates the company's financial health and performance, with a discussion on the impact of owner drawings. The solution covers topics such as the double-entry bookkeeping system, general ledger, assets, liabilities, equity, revenue, and expenses. Furthermore, the assignment provides an in-depth understanding of how different financial statements work together to give a complete financial picture of a business.

Recording Business
Transaction

Table of Contents
INTRODUCTION...........................................................................................................................3
Part a................................................................................................................................................4
T accounts...................................................................................................................................4
Trial balance as on 31 October 2020..........................................................................................8
Income Statement as on 31 October 2020..................................................................................9
Statement of Financial Position ................................................................................................9
Part b..............................................................................................................................................10
Ratio Analysis...........................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................13

INTRODUCTION
The case study is about recording of business entries and transactions in various forms like T-
accounts, trial balance, profit and loss statement and Balance sheet. It depicts how the
transactions are recorded following accounting principles of the country. Each form of statement
records entry in a different way but in the end helps a company keep order of its transactions,
the capital involved, its remaining dues to creditors, the debtors and reflects the profit earned by
the company in a financial term. These statements are also evaluated by shareholders to check
the financial status of the company and form decision to invest. The study also does a ratio
analysis and compares with competitors to reflect the standing of the company on various
parameters to the competitors.
Part a
T accounts
It is a method of booking entries double side viz. Debit and Credit. It follows double entry book
keeping where all financial transactions are known to affect at least two of the company's
accounts. One account gets recorded as a debit entry while other one is recorded as a credit
entry. These entries are recorded in a general ledger form where account balances have to
match. The debit side generally represents an increase in the account while the credit side
represents a decrease in the account (Glushchenko, Yarkova and Kucherova, 2017).
The components of the balance sheet like assets, liabilities and shareholder's equity can
be reflected in T-account. It can be used to record changes to the income statement.

Journal
Date Particulars Debit Credit
01/10/20 Bank A/c 8000
Cash a/c 5200
Van a/c 3000
To capital a/c 16200
02/10/20 Laptop a/c 1000
To bank a/c 1000
04/10/20 Purchase a/c 2450
To Toys Ltd. 2450
05/10/20 Bank a/c 1500
To sales a/c 1500
12/10/20 Repair a/c 80
To cash a/c 80
18/10/20 Toys Ltd a/c 100
To purchase a/c 100
21/10/20 Bank a/c 500
To rent for premises
a/c
500
23/10/20 Cash a/c 1500
Fred a/c 400
To sales a/c 1900
23/10/20 Cash a/c 500

To sales a/c 500
24/10/20 Second hand car a/c 2500
To Bank a/c 2500
26/10/20 Wages a/c 820
To bank a/c 820
30/10/20 Rent a/c 1000
To bank a/c 1000
31/10/20 Drawings a/c 1600
To bank a/c 1600
Total 30150 30150
Ledger
Capital a/c
Date Particulars Amount Date Particulars Amount
31/10/20 To drawings
a/c
1600 01/10/20 By bank a/c 8000
By cash a/c 5200
By van a/c 3000
31/10/20 To balance c/f 14600
01/11/20 By balance b/d 14600
Bank a/c
Date Particulars Amount Date Particulars 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 24/01/20 By second 2500

hand car a/c
21/10/20 To rent for
premises a/c
500 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/f 3080
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 repairs 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/f 7120
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
01/11/20 To Balance b/d 3000
Laptop A/c
Date Particulars Amount Date Particulars Amount

02/10/20 To Bank A/c 1000
31/10/20 By Balance c/f 1000
01/11/20 To Balance b/d 1000
Purchase A/c
Date Particulars Amount Date Particulars Amount
04/10/20 To Toys Ltd. 2450 18/10/20 By Toys Ltd. 100
31/10/20
By Trading &
profit/loss a/c 2350
Sales A/c
Date Particulars Amount Date Particulars Amount
05/10/20 By Bank a/c 1500
23/10/20 By Cash a/c 1500
By Fred a/c 400
By Cash a/c 500
31/10/20 To Trading & Profit/loss a/c 3900
Toys Ltd. A/c
Date Particulars Amount Date Particulars Amount
18/10/20 To Purchase A/c 100 04/10/20 By Purchase a/c 2450
31/10/20 To Balance c/f 2350
01/11/20 By Balance b/d 2350
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
01/11/20 To Balance b/d 400
Rent for Premises A/c
Date Particulars Amount Date Particulars Amount
21/10/20 By Bank a/c 500
31/10/20 To Trading & Profit/loss a/c 500
Second-hand Car A/c
Date Particulars Amount Date Particulars Amount
24/10/20 To Bank A/c 2500
31/10/20 By Balance c/f 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 Trading &
profit/loss a/c 820
Drawings A/c
Date Particulars Amount Date Particulars Amount
31/10/20 To Bank A/c 1600 31/10/20 By Capital a/c 1600
Rent A/c
Date Particulars Amount Date Particulars Amount
30/10/20 To Bank A/c 1000 31/10/20 By Trading & 1000

profit/loss a/c
Repairs A/c
Date Particulars Amount Date Particulars Amount
12/10/20 To Cash A/c 80 31/10/20
By Trading &
profit/loss a/c 80
c) Trial balance as on 31 October 2020
Particulars Debit £ Credit £
Capital 14600
Bank a/c 3080
Cash a/c 7120
Van a/c 3000
Laptop a/c 1000
Purchase a/c 2350
Sales a/c 3900
Toys Ltd a/c 2350
Repair a/c 80
Rent for premises a/c 500
Fred a/c 400
Second hand car 2500
Wages 820
Rent 1000
Total 21350 21350

Trial balance lists the balances of general ledger accounts at a certain point of time. The
accounts on the trial balance relate to different categories which include assets, liability, equity,
revenue and other expenses, gains and losses.
d) Income Statement as on 31 October 2020
Particulars Revenue Expenses
Sales 3900
Less purchases
Purchases 2350
Closing stock 250
Wages 820
Cost of goods sold -2920
Gross Profit 980
Add: Rent Received 500
Total Income 1480
Less: Repairs 80
Rent 1000
Net Income 400
An income statement shows the company's income and expenditures. It depicts whether the
company is moving in profit or loss. It helps a company to identify the sources of revenue for the
company in a given time period. It helps to know the expenditure on various aspects and helps
identify areas where the costs can be reduced (Smith, 2020).
e) Statement of Financial Position
Assets Amount Liabilities Amount
Current assets Current Liabilities
Cash 10200 Accounts Payable 2350

Account receivables 400 Long term liabilities
Inventory 250 Capital 14600
Total 10850 Net profit 400
Fixed assets
Van 3000
Laptop 1000
Car 2500
Total Assets 17350 Total Liabilities 17350
Balance sheet is a financial statement which is also known as the book value of the
organization. It lists all the company's assets, shareholder's equity and liabilities. The
shareholder's equity and liabilities are deducted from company's assets.
A business has to make optimum utilization of its fixed assets for e.g. a vacant room can
be used for storing inventory. This can save additional costs for the company. Secondly the
business has to value its fixed assets like land and property as per the current market rates to
realize their true value. Secondly, assets like equipment and machinery would have to be
valued every fixed intervals deducting depreciation over a period of time (Smith,2020).
f) The effect of drawings by owner on a business is that it will affect the company's balance
sheet on the assets side by decreasing the amount of asset withdrawn. However, it will not
affect the company's income statement as the transaction of drawing is not recorded there. It
may affect company's operational efficiency as it will lead to a loss in capital (Quinn and Hiebl,
2018). A small business does not have much capital thus it is important that it has sufficient
funds to carry on business. The owner's responsibility also increases if there is a partnership
with others in the business. The best way would be to repay the amount taken for personal use
so that the company does not have to go for debt. The drawings which have been taken by the
owner cannot be classified as business expenses in income statement according to accounting
terminologies. Company is considered as a separate entity than owner and owner's expenses
cannot be considered for the business as per the rules.

Part b
Net profit margin Net profit/revenue*100 400/3900*100=10.25
Gross profit margin Revenue-cost of
goods/revenue*100
3900-2920/3900*100=25.12
Current ratio Current assets/current
liabilities
10850/2350=4.61
Quick ratio Current
assets-Inventory/current
liabilities
10850-250/2350=4.51
Accounts receivable collection
period
Average Accounts
receivable/Net credit
sales*365
100/400*365=91 days
Accounts payable payment
period
365/Payable turnover ratio* 365/12=30 days
Payable turnover ratio= Average Accounts payable/Daily cost of sales=1175/97=12.
Daily cost of sales=2920/30=97.33
Ratio Analysis
Speaking of net profit, it is the profit generated as a percentage of revenue. It illustrates how
much a company has been able to generate profit from revenue. It shows whether a company is
able to control its operational costs and generate sales. It is useful for investors to see whether
the company is efficient in able to convert sales into profit and is considered a very important
tool for evaluation of the company. Since it is expressed in percentage form it can be compared
with other competitors. Here the company’s net profit margin is around 29 % which is close to
that of competitors. Thus it is in safe zone (Butuner,2019).
The gross profit margin is revenue minus the cost of goods. It is before operational expenses
are deducted. It is also used to assess the company’s financial health. It is higher when a
company’s costs of goods get lowered. Here company’s gross profit is around 25%. It is