Recording Business Transactions

This report provides a detailed explanation of recording business transactions, including journal entries, ledger accounts, trial balance, income statement, and financial position. It also covers ratio analysis and the impact of drawings in financial statements. Suitable for accounting students and professionals.

Recording business
transactions

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
PART A...........................................................................................................................................3
(a) Journal entries for the year ended 31st October 2020............................................................3
(b) Ledger accounts for the year ended 31st October 2020.........................................................4
(c) Trial balance as at 31st October 2020....................................................................................8
(d) Income statement for the year ended 31st October 2020.......................................................9
(e) Balance Lindaet as at 31st October 2020.............................................................................10
(f) Drawings concept in accounting...........................................................................................11
PART B..........................................................................................................................................11
(i) Ratio Analysis.......................................................................................................................11
(ii) Analysis of Linda’s performance in contrast with competitor’s performance through ratio
averages......................................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES................................................................................................................................1

INTRODUCTION
Preparing financial statement as per the financial reporting framework is the primary role
of the accounts department. This report will show the journal entries, ledger accounts, trial
balance, income statement and financial position of Linda's business. This report will also state
the different ratio analysis and the impact of drawings in the financial statement.
MAIN BODY
PART A
(a) Journal entries for the year ended 31st October 2020
Date Particulars Debit(£) Credit(£)
01/10/20 Bank account
Cash account
Van account
To Capital account
(Being business started with cash, bank and van)
8000
5200
3000
16200
02/10/20 Laptop account
To bank account
(Being laptop bought from local shop)
1000
1000
04/10/20 Purchase account
To toys ltd. Account
(Being goods purchase from creditors)
2450
2450
05/10/20 Bank account
To sales account
(Being goods sold and received payment through
cheques)
1500
1500
12/10/20 Repairing expense account
To cash account
(Being cash paid against repairing laptop)
80
80
18/10/20 Toys ltd. Account 100

To purchase returned
(Being purchased goods returned to creditors)
100
21/10/20 Bank account
To rent income
(Being rent received through bank)
500
500
23/10/20 Cash account
Fred account
To sales account
(Being goods sold to debtors and received part
payment in cash)
1500
400
1900
23/10/20 Cash account
To sales account
(Being received payment against goods sale)
500
500
24/10/20 Second-hand car account
To bank account
(Being bought second-hand car for business use)
2500
2500
26/10/20 Monthly wages account
To bank account
(Being wages paid to part-time shopkeeper)
820
820
30/10/20 Rent expenses account
To bank account
(Being rent expenses paid via cheques)
1000
1000
31/10/20 Drawing Account
To bank account
(Being drawing made by Linda from Business
account)
1600
1600
Total 30150 30150

(b) Ledger accounts for the year ended 31st October 2020
Capital account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
01/10/20 By van account
By bank account
By cash account
3000
8000
5200
31/10/20 To balance c/f 16200
16200 16200
01/11/20 By balance b/d 16200
Cash account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
01/10/20
23/10/20
To capital account
To sales account
(1500 + 500)
5200
2000
12/10/20 By repairing
expense account
80
31/10/20 By balance c/f 7120
7200 7200
01/11/20 To balance b/d 7120
Bank account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
01/10/20
05/10/20
21/10/20
To capital account
To sales account
To rent (income)
8000
1500
500
02/10/20
24/10/20
26/10/20
30/10/20
By laptop account
By second-hand
car account
By wages account
By rent (expense)
account
1000
2500
820
1000

31/10/20 By drawing
account
1600
31/10/20 By balance c/f 3080
10000 10000
01/11/20 To balance b/d 3080
Laptop account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
02/10/20 To bank account 1000
31/10/20 By balance c/f 1000
1000 1000
01/11/20 To balance c/f 1000
Van account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
01/10/20 To capital account 3000
31/10/20 By balance c/f 3000
3000 3000
01/11/20 To balance b/d 3000
Sales account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
05/10/20
23/10/20
By bank account
By cash account
(1500 + 500)
By Fred account
1500
2000
400

31/10/20 To balance c/f 3900
3900 3900
01/11/20 By balance b/d 3900
Toys ltd. Account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
18/10/20 To purchase return
account
100 01/10/20 By purchase
account
2450
31/10/20 To balance c/f 2350
2450 2450
01/11/20 By balance b/d 2350
Purchase account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
04/10/20 To toys ltd.
Account
2450
31/10/20 By balance c/f 2450
2450 2450
01/11/20 To balance b/d 2450
Purchase return account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
18/10/20 By toys ltd.
Account
100
31/10/20 To balance c/f 100

100 100
01/11/20 By balance b/d 100
Fred account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
23/10/20 To sales account 400
31/10/20 By balance c/f 400
400 400
01/11/20 To balance b/d 400
Second-hand car account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
24/10/20 To bank account 2500
31/10/20 By balance c/f 2500
2500 2500
01/11/20 To balance b/d 2500
Drawing account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
31/10/20 To bank account 1600
31/10/20 By balance c/f 1600
1600 1600
01/11/20 To balance b/d 1600
Wages account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)

26/10/20 To bank account 820
31/10/20 By balance c/f 820
820 820
01/11/20 To balance b/d 820
Rent account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
30/10/20 To bank account 1000 21/10/20 By bank account 500
31/10/20 By balance c/f 500
1000 1000
01/11/20 To balance b/d 500
Repairing expense account
Dates Particulars Amounts(£) Dates Particulars Amounts(£)
12/10/20 To cash account 80
31/10/20 By balance c/f 80
80 80
01/11/20 To balance b/d 80
(c) Trial balance as at 31st October 2020
Particulars Debit(£) Credit(£)
Capital Account 16200
Cash Account 7120
Bank Account 3080
Laptop Account 1000

Van Account 3000
Sales Account 3900
Toys ltd. Account (Creditor) 2350
Purchase Account 2450
Purchase Return Account 100
Fred Account (Debtors) 400
Second-hand Car Account 2500
Drawing Account 1600
Wages Account 820
Rent Account 500
Repairing Expense Account 80
Total 22550 22550
(d) Income statement for the year ended 31st October 2020
Particulars Amounts(£)
Net Sales 3900
Less COGS** -2920
Gross Profit 980
Less Net Operating Expenses** -580
Net Income 400
Calculation of Cost of goods sold**
Particulars Amounts(£)
Opening Inventory 0
Add Purchase 2450

Add Wages 820
Less Purchase return -100
Less Closing Inventory -250
COGS 2920
Calculation of operating expenses**
Particulars Amounts(£)
Repairing expense 80
Net Rent expense (1000-500) 500
Total Net operating expenses 580
(e) Balance sheet as at 31st October 2020
Particulars Notes Amounts(£)
ASSETS
Non-current assets:
Fixed and Tangible assets 1 6500
Current assets:
Trade Receivables 400
Closing Inventory 250
Bank 3080
Cash 7120
Total Assets 17350
Liabilities
Capital 2 15000

Current liabilities:
Trade payables 2350
Total liabilities 17350
Notes to account:
1 Fixed and tangible assets
Particulars Amounts(£)
Second-hand car 2500
Van 3000
Laptop 1000
Total 6500
2 Capital
Particulars Amounts(£)
Opening capital 16200
Add Net profit 400
Less Drawings -1600
Total 15000
(f) Drawings concept in accounting
In order to keep accurate books of account, company have to prepare drawings account
when company's owner withdraw any amount from the business for their personal use. The
impact of preparing the drawing account on financial statement is that it decreases the assets
equivalent to the amount withdrawn by owner (Nicholls, 2018). It will also consider while
preparing the cash flow statement because it is a type of financial activity. In the given case, if
Linda's personal expense is recorded as business expense it will reduce the profit of the company
which shows the misrepresentation of the financial statement. So it is recommended to the Linda
to consider owners personal expense as drawings from the business.

PART B
(i) Ratio Analysis
Particulars Formulas 2020
Net Profit 400
Gross Profit 980
Net sales 3900
Inventory 250
Current Assets 10850
Current Liabilities 2350
Net credit sales 400
Net credit purchase 2350
Average debtors 200
Average creditors 1175
Quick Assets Current Assets- Inventory 10600
ADTR Net credit sales/ Average debtors 2 times
ACTR Net credit purchase/ Average creditors 2 times
Net Profit Margin Net Profit/ Net Sales* 100 10.26%
Gross Profit Margin Gross Profit/ Net Sales* 100 25.13%
Current Ratio Current Assets/ Current Liabilities 4.62x
Acid Test Ratio Quick Assets/ Current Liabilities 4.51x
Accounts Receivable
Collection Period
No. Of days/ Average Debtors Turnover Ratio 182.5 days
Accounts Payable
Payment Period
No. Of days/ Average Creditors Turnover Ratio 182.5 days

(ii) Analysis of Linda’s performance in contrast with competitor’s performance through ratio
averages
On considering profitability ratios, that is Net and Gross profit margin, the competitor of Linda
has very good profit margin as compared to Linda's profit margin, as Linda has only 10.26%
against 31% of competitor’s net profit margin. The reason behind such a lower net profit margin
can be regarded as inefficiency in management of business operations, poor strategy towards
pricing of products and services and high operating expenses (Mubashir and Bin Tariq, 2017).
Also, Linda's GPM is poor in contrast with Linda's competitor, as Linda has just 25.13% which
is less than the half of Linda's competitors GP margin which is, 54%. A very poor Gross margin
means Linda’s business is facing challenges in generating sales or Linda's products are priced
with low profit margin due to high COGS.
Now looking at Linda's liquidity ratios and comparing the same with that of Linda's competitor’s
liquidity status, where two ratios that is, current and acid test ratio are calculated indicating the
short term solvency of Linda and Linda's competitor, again Linda has inappropriate average over
Linda's competitor. Linda’s current ratio is 4.62 times against 2.87 times of Linda's competitor.
Such a high current ratio indicates idle liquidity over the required liquid assets according to
current liability of the business. This ratio is actually calculated to determine the ability of
business in terms of its current assets to meet its short term liability (Zolfani, Yazdani and
Zavadskas, 2018). A very high ratio indicates that the business has kept idle cash, inability to
collect payments from debtors and piled up inventory. A very low ratio shows that the business
will be going to face problems in meeting its obligations arising in short run. Also, Linda's acid
test ratio is much higher than required. Linda has 4.51 times in contrast with 1.35 times of
Linda's competitor. This liquidity ratio is calculated to know how promptly a business can meet
its liability without any delay. In terms of this ratio too, Linda has much higher level of current
assets to meet instant liability. Such short term assets can be utilized through investing in short
term investments which can generate income for the business.
Along with profitability and liquidity ratios, there are two another ratio commonly known as
efficiency ratio, that is accounts receivable collection and accounts payable payment period.
These ratios are calculated to know the performance of businesses in short term perspectives. It
indicates the internal management and their efficiency in terms of utilizing its various short term
assets and liabilities towards generating sales. Here in case of Linda and their competitor, both

account receivable and account payable ratios are higher for Linda as compared to Linda's
competitor. This inappropriateness in efficiency ratios indicates Linda’s inability both in
collecting payment from debtors and making payments to creditors.
In this way, Linda’s conduction is poor in comparison to its competitor as reflected through
profitability, liquidity and efficiency ratios. For the improvement of Linda's performance, Linda
needs to devise new pricing and managerial strategy.
CONCLUSION
This report concludes that how properly understanding and recording business and
personal expenses of owner is crucial for representing financial statement of the company. This
report also concludes that how ratio analyses help the company to evaluate their business
financial position. The report also interpret that the performance of the Linda's business is poor
and needs to implement strategy to cope with the poor performance.

REFERENCES
Books and journals
Bergner, R. A. and et.al., 2020. Method and system for recording point to point transaction
processing. U.S. Patent 10.659.227.
Wang, Y. and Kogan, A., 2018. Designing confidentiality-preserving Blockchain-based
transaction processing systems. International Journal of Accounting Information
Systems. 30. pp.1-18.
Wilson, R., Xard Group Pty Ltd, 2019. Transaction recording. U.S. Patent Application
16/073.483.
Trianita, M. and et.al., 2020. Optimization of the Use of Transaction Processing Systems in
Minimarkets. KnE Social Sciences. pp.66-80.
Nicholls, A., 2018. A general theory of social impact accounting: Materiality, uncertainty and
empowerment. Journal of Social Entrepreneurship. 9(2). pp.132-153.
Mubashir, A. and Bin Tariq, D., 2017. Application of financial ratios as a firm's key
performance and failure indicator: Literature review. Mubashir, Afeera and Bin
Tariq, Yasir, Application of Financial Ratios as a Firm's Key Performance and
Failure Indicator: Literature Review, Journal of Global Economics, Management and
Business Research. 8(1). pp.18-27.
Zolfani, S. H., Yazdani, M. and Zavadskas, E. K., 2018. An extended stepwise weight
assessment ratio analysis (SWARA) method for improving criteria prioritization
process. Soft Computing. 22(22). pp.7399-7405.
Online
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