Recording Business Transactions: Accounting Process, Financial Statements, and Ratio Analysis

This report outlines the accounting process for recording business transactions, including journalizing, ledger accounts, trial balance, income statement, and balance sheet. It also covers ratio analysis for evaluating profitability, liquidity, and efficiency. The report concludes that proper accounting practices are essential for business success.

Recording Business
Transaction

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
a. Double entry recording............................................................................................................3
b. Balancing the accounts............................................................................................................6
c. Extracting the trial balance....................................................................................................12
d. Preparation of the income statement for the period ending 31st October..............................13
e. Preparing the statement for Financial position as on 31st October........................................14
f. Letter to Linda explaining the concern relating to drawings for a small business................15
PART B..........................................................................................................................................16
a. Calculaiton of the ratios........................................................................................................16
b. Analysing the position of Anne in compariosn to the competitors.......................................17
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................20

INTRODUCTION
For any business to keep successfully most essential or spec is to record each and every
transaction within the business. Accounting is being referred to as theme process through which
all the transactions of financial nature a be recorded and analysed in order to calculate the profit
and to communicate the outcomes with the intended users. The use of accounting is very
important for the business to get successful as it provides the base that how much profit has been
earned by the company. The current report will outline whole process of accounting that is
starting with journal to preparing the financial statements and then calculating the ratios.
PART A
a. Double entry recording
Journal is being referred to as the books of accounts where in all the transactions of
financial nature are being recorded in order to analyse profitability of the business. For any kind
of business it is very necessary that proper books of accounts are being maintain in order to
analyse that whether the business has attend the profit or not . Further analysis relating to
analysing and reaching to the amount of profit or lost being incurred by the company
journalising all the transactions of financial nature is very important for the business and do
analysis by the company.

b. Balancing the accounts
Further the next step involves undertaken the use of ledger accounts. These ledger
accounts are the second stage of the accounting process where in all the transactions being
recorded in journal a posted into this Pacific accounts. This is very important in order to ensure
that all the transactions have been recorded in proper manner and there is a dual entry relating to
each and every account being involved (Giovanni and et.al., 2019). Within the ledger every
transaction is being recorded into the specific account. For example there are two accounts being
involved that is sales and cash then in this case the entry of the transaction will be recorded and
both accounts that is sales and cash.

c. Extracting the trial balance
The trial balance is being referred to as the book keeping worksheet which assists
company order to balance the amount of all the different ledger accounts being compiled in form
of debit and credit columns. It is mandatory that the total of both the columns is being equal
within the trial balance. The reason behind the fact that the total of both column need to be equal
is that the accounting is based on the concept of dual aspect (Dechsupa and et.al., 2021). Hence
this simply means that every transaction has a dual affect that is one on debit side and another on
credit side. Thus for the accounting to be perfect it is necessary that in the trial balance both the
debit and credit column are being equal. In case there is both columns are not equal then it
employees that there is some issue relating to the accounting or any error has been occurred.

d. Preparation of the income statement for the period ending 31st October
For the after extracting the trial balance comes the next step which is making the income
statement. The income statement all the profit and loss is a type of statement with outlines t net
income being by the company after paying of all the expenses. In this statement total expenses
are being deducted from the total revenue in order to reach to the net profit earned or net loss
incurred (Casado-Vara and Corchado, 2019). In case amount is positive then it employees that
profit has been earned. On the other hand in case the company is having a negative balance then
it employees that the company has suffered lost. Making of the income statement is very
essential and in order to know the fact that how much money has been earned on the total

amount being invested within the business. In case the companies not earning good profit then it
is necessary for the business to take necessary action in order to improve the performance.
With analysis of the income statement it is clear that the company is facing a loss of 210.
This simply implies that theme indirect expenses of the company are high and because of this net
profit is not being earned by the company. Even though the company has a good amount of gross
profit but the indirect expenses are more and because of this the profit has been converted into
loss.
e. Preparing the statement for Financial position as on 31st October
Balance sheet is being defined as the statement which outlines the total Assets and
liabilities of the company along with the equity. The balance sheet undertakes the use of the
accounting equation with states that asset must be equal to the addition of liabilities and equities.
In case the sum of liabilities and equities is equal to the asset than it implies that balance sheet
has been prepared in proper and effective manner. All the assets that are the things owned by the
company is being listed within the Asset sections. On the other hand, all the obligations of the
company that is which company has to pay are being listed within the liabilities section. Also the
equity that is the amount being brought by the owner is being outline within the equity section
along with the retained earnings.

f. Letter to Linda explaining the concern relating to drawings for a small business
To Linda,
Subject- Issue relating drawing in small business
Dear sir/ mam
The present letter is being written in order to inform you some details relating to the drawings.
The drawing is being referred to as the amount withdrawn by the owner from the company. The
drawings is the personal expense with the owner undertakes and takes it from the business itself.

In the present case you have paid 1 200 from the business bank account in order to book the
hotel and flight for your own personal holiday. Hen this expense will not be treated as the
business expense as it is a drawing. This drawing will be deducted from the capital amount in the
balance sheet. The reason behind this factors that the capital is the amount of money which is
being brought by the owner in order to run the business. And in case the owner takes anything
from the business with respect to the personal use then it will be reducted from the capital and
not to be treated as the expense. This is particularly because of the reason that the expense has
been incurred by the business for the personal use and not for the relating to the business. Hens
because of this reason the expenses done by the owner for the personal uses always being treated
as the drawings. Thus this drawing is being adapted from the capital and is not the business
expense. Hence it must be clear that the expense done for the personal holidays of the owner is
being treated as the drawings. Even in case of business being small the drawings that is the
amount withdrawn for the personal expenses is always being treated as drawings and not as the
business expense. The letter is helpful in order to clear all your doubts relating to them drawing
and how it is being treated with in the business. In case of any query you can feel free to contact
any time.
Thank you
PART B
a. Calculaiton of the ratios
Ratio
Calculation of ratios for Anne's business for October, 2021
Particulars Formula Oct-21
Net Profit -210
Net Sales 5600
Net Profit margin Net Profit / Net sales *100 -4%
Gross profit 770
Net Sales 5600

Gross Profit margin 14%
Current assets 15840
Current liabilities 5150
Current ratio Current assets/ Current liabilities 3.08
Quick assets Current assets - Inventory 15520
Current liabilities 5150
Acid-test ratio Quick assets / Current liabilities 3.01
Accounts receivable 150
Net sales 5600
Accounts receivable collection
period
Accounts receivable / Net sales * 365
days 10
Accounts payable 5150
Cost of sales 4830
Accounts payable payment period
Accounts payable / cost of sales * 365
days 389
b. Analysing the position of Anne in compariosn to the competitors
With analysis of the ratios calculated for any business it is clear that the net profit margin
of the company is a loss of 4%. On the other hand as compared to the competitors average the
net profit is 0.02 in the year 20 21. This simply implies that the net performance of the company
is not good as the company suffering the loss and for this it is essential for business to improve
with working. On the other hand, profit margin of the companies October month is 14% where as
the industry average is 8%. Just simply implies that the performance of the companies quite good
and as compared to the other competitors average company is performing well in case of direct
revenue that is gross profit. Moreover with the analysis of the profitability ratio it is clear those
companies having high indirect expenses and because of this company is not in position to on a
net profit.

But with help of the liquidity ratio it is clear that the company is having high liquidity
which is not good for the company. Currently the companies having 3.08 current ratio and 3.01
times the quick ratio. On the other hand competitors are rich involves 2.8 current ratio and 1.38
quick ratio. This simply implies that the average of competitors is better in compared to the
company. As per the ideal ratio the company must have a twice the current asset for every
current liability but in case of any business companies having the current asset which is for more
than the ideal ratio.
In addition to this the efficiency ratio evaluate that the performance of companies not as
good as the competitor. In case of the accounts receivable collection period the number of days
are 10 for the business which is good. This is good for the reason that company is in position to
collect all the receivable within the time frame of 10 days. Where as in case of the competitors’
average it is 26 days which is very high (Wulanditya and Aprillianita, 2018). But in case of the
accounts payable payment period the company is having the days of total 389 which is very high.
In case of the competitors average the account payment period is 17 days only. Very high
account payable period also affect the credit for dinners of the company as people do not rely to
lend money to them.
Also the decline in the performance can be because of the current pandemic situation.
The reason behind this fact is that because of the pandemic the sales of the company has been
affected and also the expenses have increased (Malau, Teguh and Muda, 2022). Hence as a result
of this week over 19 has affected the property and working efficiency of the company to a great
extent. Also with the help of the competitors average it is clear that all the competitors
performance as also been affected because of the pandemic. But the only difference is that the
competitors average has not witnessed loss within their business.
CONCLUSION
In the end above report concluded the accounting is very important for the businesses to
get successful. The reason behind this fact is that accounting involves the whole process of
recording and posting the transactions into ledger which are of financial nature. After posting the
trial balance is being extracted and the profitability is being assessed of the company. Hence it is
very essential for the different businesses to have proper accounting practices being used in order
to evaluate the profitability of the company appropriately. The above report summarised the fact
that following the process of journal, ledger than making trial balance and income statement and

at the end of the financial position statement is very important in order to evaluate performance.
In the end it was analyse that the ratio analysis is very essential in order to summary of the
performance of company on the basis of profitability, liquidity and efficiency.

REFERENCES
Books and Journals
Casado-Vara, R. and Corchado, J., 2019. Distributed e-health wide-world accounting ledger via
blockchain. Journal of Intelligent & Fuzzy Systems. 36(3). pp.2381-2386.
Dechsupa, C. and et.al., 2021. An Applying Colored Petri Net for Computerized Accounting
System and Ledger Accounts Instruction. Computers. 10(12). p.169.
Giovanni, N. and et.al., 2019. Electronic Accounting: Electronic Journal and Ledger with
Decision Support System. In 2019 IEEE 11th International Conference on Humanoid,
Nanotechnology, Information Technology, Communication and Control, Environment, and
Management (HNICEM) (pp. 1-6). IEEE.
Malau, A., Teguh, M. and Muda, I., 2022. The Accrual Basis of Accounting and The Reasons
for Adjusting Entries. Journal of Positive School Psychology. 6(3). pp.2401-2404.
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.