Recording Business Transaction

This document provides a detailed explanation of recording business transactions, including examples of journal entries. It covers topics such as trial balance, income statement, balance sheet, and financial ratios. The document also includes a letter discussing issues related to drawings and an analysis of the business's performance.

Recording Business Transaction

TABLE OF CONTENTS
PART A...........................................................................................................................................3
a)..................................................................................................................................................3
b)..................................................................................................................................................4
c)..................................................................................................................................................8
d)..................................................................................................................................................9
e)..................................................................................................................................................9
f) ..................................................................................................................................................9
PART B..........................................................................................................................................10
I. Computation of ratios.............................................................................................................10
ii. Analysing the performance of the business...........................................................................11
REFERENCES..............................................................................................................................13

PART A
a)
Date Particulars L.F Debit Credit
01/10/20 Bank A/C 8000
Cash A/C 5200
Van A/C 3000
To Capital A/C 16200
(Being Capital introduced)
02/10/20 Laptop A/C 1000
To Bank A/C 1000
(Being Laptop bought )
04/10/20 Purchase A/C 2450
To Toy Ltd. A/C 2450
(Being toys are purchased on credit)
05/10/20 Bank A/C 1500
To sales A/C 1500
(being goods sold)
12/10/20 Repairs A/C 80
To Cash A/C 80
(Being laptop is repaired )
18/10/20 Toy Ltd. A/C 100
To purchase return 100
(Being goods returned to toys ltd)

21/10/20 Bank A/C 500
To Rent A/C 500
(Being rent received)
23/10/20 Cash A/C 1500
Fred A/C 400
To sales A/C 1900
(Being Goods sold on cash and credit
partly )
23/10/20 Cash A/C 500
To sales A/C 500
(Being goods sold to David)
24/10/20 Second hand car A/C 2500
To Bank A/C 2500
(Being car purchased by issuing
cheque)
26/10/20 wages A/C 820
To Bank A/C 820
(Being wages paid to part time
workers )
30/10/20 Rent A/C 1000
To Bank A/C 1000
(Being rent paid)
31/10/20 Drawings A/C 1600
To Bank A/C 1600
(being business funds used by owner

for paying expenses of holiday)
Total 13950 30150
b)
Dr. Capital Account Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
31/10/20 To balance C/d
1620
0
01/10
/20 By Bank A/C 8000
01/10
/20 By Cash A/C 5200
01/10
/20 By Van A/C 3000
1620
0 16200
Dr. Bank A/C Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
01/10/20 To Capital A/C 8000
02/10
/20 By Laptop A/C 1000
05/10/20 To sales A/C 1500
24/10
/20 By Second hand car A/C 2500
21/10/20 To Rent A/C 500
26/10
/20 By wages A/C 820
30/10 By Rent A/C 1000

/20
31/10
/20 By Drawings A/C 1600
31/10
/20 by balance C/d 3080
1000
0 10000
Dr. Laptop A/C Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
02/10/20 To Bank A/C 1000
31/10
/20 To balance C/d 1000
1000 1000
Dr. Purchase A/C Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
04/10/20 To Toy Ltd. A/C 2450
31/10
/20 by balance C/d 2450
2450 2450
Dr. Cash A/C Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t

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/d 7120
7200 7200
Dr. Van A/C Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
01/10/20 To Capital A/C 3000
31/10
/20 by balance C/d 3000
3000 3000
Dr. Sales A/c Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
31/10/20 To balance C/d 3900
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 By Cash A/C 500

/20
3900 3900
Dr. Toy Ltd. A/C Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
18/10/20
To Purchase return
A/C 100
04/10
/20 Purchase A/C 2450
31/10/20 To balance C/d 2350
2450 2450
Dr. Fred A/c Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
23/10/20 To sales A/C 400
31/10
/20 by balance C/d 400
400 400
Dr. Repairs A/c Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
12/10/20 To Cash A/C 80
31/10
/20 by balance C/d 80
80 80

Dr. Second hand car A/C Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
24/10/20 To Bank A/C 2500
31/10
/20 by balance C/d 2500
2500 2500
Dr. Rent A/c Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
30/10/20 To Bank A/C 1000
21/10
/20 By Bank A/C 500
31/10
/20 by balance C/d 500
1000 1000
Dr. Wage A/c Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
26/10/20 To Bank A/C 820
31/10
/20 by balance C/d 820
820 820

Dr. Drawings A/C Cr.
Date Particulars J.F
Amo
unt Date Particulars J.F
Amoun
t
31/10/20 To Bank A/C 1600
31/10
/20 by balance C/d 1600
1600 1600
c)
Trial balance
Particulars Debit Credit
Capital 16200
laptop 1000
bank 3080
Cash 7120
van 3000
purchase 2450
Toys ltd account 2350
sales 3900
Repairs 80
rent 500
Fred Account 400
Second hand car account 2500
wage 820
drawings 1600
Purchase return 100
Total 22550 22550

d)
Income statement
Particulars Amount Amount
sales 3900
Opening stock 0
Purchase 2450
Purchase return 100
Closing stock 250 2100
Gross Profit 1800
Repairs 80
rent 500
wage 820 1400
Net Profit 400
e)
Balance sheet
Liabilities Amount Assets Amount
Capital 16200 laptop 1000
(Drawings) -1600 bank 3080
Net Profit 400 Cash 7120
van 3000
creditor 2350 Fred Account 400
Second hand car account 2500
Closing Account 250

17350 17350
f)
To Linda,
Subject: Issues pertaining to drawings
Dear Linda, this is to inform you that the increase in the drawings results into a decrease in the
capital of the business which is a point of concern. This will reduce the capital which can be
further utilized in the meeting the business requirement and without any need to take additional
funds on which interest is to be paid.
Along with that, in your query, the amount withdrawn for a week-long holiday cannot be
considered as the business expenses even if it was taken to get relaxed from the stress due to the
business. The amount is utilized for the personal use and not for the business use therefore, it
cannot be considered as the business expenses.
Thank You
PART B
I. Computation of ratios
Particulars Formula Amount
Net profit 400
Net sales 3900
Net profit margin Net profit/net sales 10.26%
Particulars Formula Amount
Gross profit 1800
Net sales 3900
Gross profit margin Gross profit/net sales 46.15%
Particulars Formula Amount
Current assets 10850
Current liabilities 2350

Current ratio Current assets/ current liabilities 4.62
Particulars Formula Amount
Current assets 10850
Current liabilities 2350
Inventory 250
Acid test ratio Quick assets/current liabilities 4.51
Particulars Formula Amount
Account receivables 400
Net sales 400
Average collection period Account receivable balance/Net sales * 365 365 days
Particulars Formula Amount
Accounts payable 2350
Net credit purchases 2350
Accounts payable payment
period Accounts payable/ Net credit purchase * 365 365 days
ii. Analysing the performance of the business
Net profit margin: On comparing the Linda's business's and its competitors ratio it can be
stated that the ratio of Linda's business is much lower than that of its competitors. The main
reason behind this might the less revenue or the higher cost of goods sold and the higher
operating expenses which has resulted into reduction in the net profit. Thus, the performance of
competitors is better in comparison to the Linda.
Gross profit margin: The GP margin of Linda is good even though it is less than it
competitors but on an overall basis it is good (BOLKVADZE, 2018). The company requires
putting more efforts in increasing its sales and further decreasing it cost of sales for achieving
higher GP margin. The GP margin of Linda's business is 46.15% while that of competitors is
54%.

Current ratio: This ratio is very high of Linda which is 4.62 times as against the 2.87
times of competitors average. The higher ratio indicates that the business has hold much of the
amount in its current assets and this increases its chances of risk as there can be situation that the
company might not be able to recover the money from its debtors or quickly sell of its inventory
at the time of emergence.
Acid test ratio: This is considered more conservative form of current ratio which
excludes inventory from the current assets which derives the quick assets. The ratio of Linda's
business is 4.51 times and that of competitors is 1.35 times which means that the liquidity
position of the company is not good (Serly and Eddy, 2020). The company has employed less
amount in its inventory but is having greater amount in its debtors which can cause the situation
of bad debts if not recovered on time, consequently leading to situation of cash crunch.
Accounts receivable collection period: The collection period of Linda's business is 365
days which sounds very risky and that of competitors average is 50 days which is very low. It is
highly desirable to have lower figure as it depicts that business has locked up fewer funds in its
accounts receivables and therefore, can make use of it in meeting other business requirements
(Jude and JeyaAni, 2020). But in other situation, it is completely opposite which means that the
company has blocked much of its funds in its debtors. Thus, the company is required to take
immediate action for collecting the due amount from its debtors.
Accounts payable payment period: The shorter payment days accounts for the prompt
payment to the accounts payable while the longer period refers to taking time in making payment
to the creditors. In the given situation, the Linda's business is taking 365 days in comparison to
its competitor's average which is 72 days. This is having a negative impact over the business
functioning as the suppliers might not be willing to provide discounts to the company in future
dealing resulting into affecting its reputation. Therefore, the business is required to implement
strategy which can help it in making payment to its accounts payables early.

REFERENCES
Books and Journals
BOLKVADZE, B., 2018. THE IMPORTANCE OF FINANCIAL RATIOS IN FINANCIAL
ANALYSIS OF BUSINESS ENTITIES. Globalization & Business.
Jude, P. A. and JeyaAni, J., 2020. The Use of Financial Ratios For the Assessment of the
Performance and the Profitability of Itc Ltd. Studies in Indian Place Names. 40(50).
pp.4047-4056.
Serly, S. and Eddy, E., 2020. The Effect of Financial Ratios in Detecting Fraudulent Company
Listed on The Indonesia Stock Exchange. Global Financial Accounting Journal. 4(2).
pp.39-55.