Recording Business Transaction

This document provides a comprehensive guide on recording business transactions, balancing accounts, extracting trial balance, preparing profit and loss account, making financial position statement, and analyzing financial ratios. It covers topics such as journal entries, ledger posting, net profit ratio, gross profit margin, current ratio, acid test ratio, accounts receivable collection period, and accounts payable payment period.

RECORDING BUSINESS
TRANSACTION

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Recording transaction.................................................................................................................3
Balancing the account.................................................................................................................3
Extraction of trial balance...........................................................................................................7
Preparation of profit and loss account.........................................................................................8
Making financial position statement...........................................................................................9
Letter explaining drawings relating to small business..............................................................10
PART B..........................................................................................................................................10
Calculation of various ratios of business..................................................................................10
Analysis and comparison of the ratios with its competitor.......................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
For analysing success of the business accounting is very essential as it assist company in
calculating the profitability of business. Accounting is defined as the process through which
transaction of financial nature are being recorded and then posted in ledger for analysing and
assessing the financial position and profitability of the company. Present report is also based on
assessing the financial health and position of the company. For this process will start by
recording the transaction in journal and then posting them in order to make trial balance. Further
with help of the trial balance profit and loss and balance sheet will be prepared. In the end use of
ratio analysis will be done for analysing the actual profitability and solvency of the business
against the industry competitors.
PART A
Recording transaction
Recording business transaction is defined as listing out all the financial transaction and
recording them in the books of account. The recording is done in the books of account wherein
all the financial transactions are being recorded within the books. This is done in order to assess
the fact that all the transactions are being recorded in proper and effective manner so that it can
be carried forward and posted in ledger (Hanifatunnisa and Rahardjo, 2017). If the recording is
wrong, then complete transaction and its impact will affect the whole profitability of company to
a great extent.
Journal is attached in appendix
Balancing the account
After recording the business transaction in books of account, all the entries are posted in
leader accounts. This is a process through which all the journal entries are being posted in their
individual accounts (Basic accounting, 2021). Under this all the transaction are being posted and
then it is balanced and carried forward in making trial balance.

Van A/C
Date Details Amount Date Details Amount
01/10/20 To Capital A/C 3000
31/10/20 By bal. c/d 3000
3,000 3,000
11/1/2020 Bal. b/d 3,000
Purchase A/C
Date Details Amount Date Details Amount
04/10/20 To Toy Ltd. A/C 2450
31/10/20 By bal. c/d 2450
2,450 2,450
11/1/2020 Bal. b/d 2,450

Purchase return A/C
Date Details Amount Date Details Amount
18/10/20 Toy Ltd. A/C 100
31/10/20 To bal. c/d 100
100 100
11/1/2020 Bal. b/d 100
Fred A/C
Date Details Amount Date Details Amount
23/10/20 To sales A/C 400
31/10/20 By bal. c/d 400
400 400
11/1/2020 Bal. b/d 400
Wages A/C
Date Details Amount Date Details Amount
26/10/20 To Bank A/C 820
31/10/20 By bal. c/d 820
820 820
11/1/2020 Bal. b/d 820

Laptop A/C
Date Details Amount Date Details Amount
02/10/20 To Bank A/C 1000
31/10/20 To bal. c/d 1000
1,000 1,000
11/1/2020 Bal. b/d 1,000
Toys. Ltd A/C
Date Details Amount Date Details Amount
18/10/20 To Purchase return A/C 100 04/10/20 Purchase A/C 2450
31/10/20 To bal. c/d 2350
2,450 2,450
11/1/2020 Bal. b/d 2,350
Repairs A/C
Date Details Amount Date Details Amount
12/10/20 To Cash A/C 80
31/10/20 By bal. c/d 80
80 80
11/1/2020 Bal. b/d 80
Rent A/C
Date Details Amount Date Details Amount
30/10/20 To Bank A/C 1000 21/10/20 By Bank A/C 500

31/10/20 By bal. c/d 500
1,000 1,000
11/1/2020 Bal. b/d 500
Second had car A/C
Date Details Amount Date Details Amount
24/10/20 To Bank A/C 2500
31/10/20 By bal. c/d 2500
2,500 2,500
11/1/2020 Bal. b/d 2,500
Drawings A/C
Date Details Amount Date Details Amount
31/10/20 To Bank A/C 1600
31/10/20 By bal. c/d 1600
1,600 1,600
11/1/2020 Bal. b/d 1,600
Extraction of trial balance
This is an account which involves the list of balances of ledger account including every type of
account. This list involves name of every nominal ledger along with this values and are placed at
debit or credit side of the trial balance.
Linda's Account Trial Balance as at 31st October 2020
Particulars Debit Credit
Bank 3080
Cash 7120
Van 3000
Laptop 1000
Purchase 2450
Toys ltd 2350
Sales 3900
Repairs 80
Purchase return 100
Rent 500
Fred 400

Second hand car 2500
Wages 820
Drawings 1600
Capital 16200
Grand Total 22,550 22,550
Preparation of profit and loss account
This is an account which assist the company in analysing the profitability of the
company. under this statement all the income and expenses are listed. From the total of income
all the expenses are deducted and if the amount comes in negative then it means that company is
suffering loss. On the other side, if the amount comes in profit then this is good for the company
and is not then this will affect working of company.
Details £ £
Revenue 3,900.00
Less Cost of Goods Sold
+ Opening stock 0.00
+ Goods purchased 2,450.00
- Purchase return 100.00
- Closing stock 250.00
2,100.00
Gross Profit 1,800.00
Less Expenses
Wages 820.00
Repair 80.00
Rent 500.00
1,400.00
Net Profit 400.00
With the above profit and loss, it can be inferred that the company has earned a profit of 400.
This is good for the company but there is high difference in the gross profit and net profit which
is not good for the company. the gross profit of the company is 1800 but net profit is 400. This

reflects that indirect expenses of company are more high and not good for company. hence, in
order to improve profitability of the company, Linda must try to limit their indirect expenses.
Making financial position statement
This is a statement which assist business in recording of all the asset and liabilities of the
company along with the shareholder’s equity (Utama and et.al., 2018). This statement is being
created by the owner at a specific point of time and helps business in analysing the financial
position of the company.
Linda's Account Statement of Financial Position as at 31st October 2020
Particulars £ £
Non-Current Assets
Laptop 1,000.00
Van 3,000.00
Second hand car 2,500.00
6,500.00
Current Assets
Closing balance 250
Accounts Receivable 400.00
Bank 3,080.00
Cash in Hand 7,120.00
10,850.00
Less Current Liabilities
Accounts Payable 2,350.00
2,350.00
Net Current Assets 8,500.00
Total Assets 15,000.00
Financed By:
Capital 16,200.00
Add Net Income 400.00
16,600.00
Less Drawings 1600.00
Total Equity 15,000.00

With this statement of position, it can be seen that the financial position of company is stable and
both asset and shareholders’ equity are same. This in turn reflects that the performance of
company is good and this will assist in managing performance of company.
Letter explaining drawings relating to small business
To Linda
Subject: Explaining treatment of drawing and impact on profitability
This letter is written in order to solve your query relating to the fact that whether she can class
her holiday in the business expense or not. So this is to bring to your notice that when you use
any type of money or goods of business for personal use then it is regarded as drawing for the
business. in the present case you have used the money for the holiday and this cannot be treated
as a business expense. The reason underlying this fact is that when expense is of personal use
then it is classified as drawing. This is treated as a deduction from the capital and this is due to
the reason that capital is also brought by the owner. Hence, the money used for personal use is
subtracted from the capital only. On the other side, if this was treated as a business expense then
it would have been deducted from the gross profit.
Thank you
PART B
Calculation of various ratios of business
Net profit Ratio
Particulars Formula Ratio
Net profit Ratio
Particulars 400
sales 3900
Net profit Ratio Net Profit /sales *100 10.26
Gross profit margin
Particulars Formula Ratio
gross Profit 1800
sales 3900
Gross profit margin Gross Profit /sales *100 46.15

Current ratio
Particulars Formula Ratio
Current asset 10850
current liability 2350
Current ratio Current asset /current liability 4.617
Acid Test ratio
Particulars Formula Ratio
Quick asset 10600
current liability 2350
Acid Test ratio Quick asset /current liability 4.511
Account receivable collection period
Particulars Formula Ratio
Account receivable 400
COGS 400
Account receivable collection period Account receivable /Sales*365 365
Account payable payment period
Particulars Formula Ratio
Account payable 2350
COGS 2350
Account payable payment period Account payable /COGS*365 365
Analysis and comparison of the ratios with its competitor
Ratio Linda Competitors
Net profit margin 10.26 % 31 %
Gross profit margin 46.15 % 54 %
Current ratio 4.617 times 2.87 times

Acid test ratio 4.511 times 1.35 times
Accounts receivable collection
period
365 days 50 days
Accounts payable payment
period
365 days 72 days
From the calculation it is clearly visible that position of competitor is much better in
comparison with the Linda’s business. It is clearly visible with help of net profit ratio that it is
more of the competitors. For Linda’s business, NP ratio is 10.26 % and in comparison to this
competitor is having 31 % NP ratio. This means that company is lacking behind with the
competitor in terms of net profit. This also implies that indirect expenses of the company are
higher and because of this the profit of company is low in comparisons with the competitor
(Jabbar and Dani, 2020). Further on basis of gross profit ratio as well Linda’s business is not
performing in better and effective manner. This can be reflected that GP of company is 46.15 %
and competitor gross profit ratio is 54 %. This in turn implies that the profitability of company is
less as compared to the competitors.
Furthermore, the current ratio is the one which reflects the liquidity of the company. with
help of the ratios it is clearly visible that the CR of Linda is high and this is not good position for
company. the ideal ratio need to be 2:1 that is double current asset for every current liability. For
competitor the ratio is 2.87 times which is good as company is near about the ideal ratio and this
is good for managing liquidity of the company. But in case Linda the ratio is 4.617 times which
reflects the fact that company is not in position to manage the current asset in order to pay off its
current liabilities. Along with this, another ratio to assess the liquidity of company is the acid test
ratio. For competitor it is 1.35 times and for Linda it is 4.511 time which is way too higher. This
also reflects that the position of company is not much liquid and more of the money is blocked in
the current asset of the company.
Further with help of the turnover ratio the company can effectively assess the fact that
again the position of the company is not good. This is pertaining to the fact that account
receivable is 365 days and this is not good for the company (Rechtman, 2017). the reason
pertaining to the fact is that the amount of money provided on credit to the suppliers and

consumer will come after 365 days which is very high. but on the other side, competitor is
having 50 days as account receivable collection period. Further with help of account payable
payment period was good for the company. the reason pertaining to the fact is that payable
period reflects the time in which company need to payback its liabilities (Chen and et.al., 2020).
This is 365 days but this is not good for the company. The reason pertaining to the fact is that if
company will take more time in paying off its liabilities then the supplier will not provide credit
to the company as they make delay within the payment.
CONCLUSION
The above report summarised that for managing and evaluating position of the company
it is essential for business to record all the transaction in such a manner that they are clearly
mentioned in books of accounts. The present report highlighted the fact that if financial
transaction will not be recorded in proper manner then making of profit and loss and balance
sheet will be affected to a great extent. Hence, for analysing actual position of the company it is
essential for the company to record all the financial transaction in clear and effective manner.

REFERENCES
Books and Journals
Chen, C.M., and et.al., 2020. BLOCKCHAIN TECHNOLOGY AND BUSINESS
TRANSACTION: FROM SECURITY AND PRIVACY PERSPECTIVES. International
Journal of Organizational Innovation, 13(2).
Hanifatunnisa, R. and Rahardjo, B., 2017, October. Blockchain based e-voting recording system
design. In 2017 11th International Conference on Telecommunication Systems Services
and Applications (TSSA) (pp. 1-6). IEEE.
Jabbar, A. and Dani, S., 2020. Investigating the link between transaction and computational costs
in a blockchain environment. International Journal of Production Research, 58(11),
pp.3423-3436.
Rechtman, Y., 2017. Blockchain: The making of a simple, secure recording concept. The CPA
Journal, 87(6), pp.15-17.
Utama, A.A.G.S., and et.al., 2018. QR CODE-BASED E-MONEY APPLICATION IN
HOMESTAY AS THE EASY OF PAYMENT TRANSACTION. Journal of Management
and Business, 17(2).
Online
Basic accounting. 2021. [Online]. Available through: <
https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/daily-
recording-of-business-transactions>

APPENDIX
Date Particulars L/F Debit(£) Credit(£)
01/10/20 Bank A/c Dr
Cash A/c Dr
Van A/c Dr
To capital A/c
(Being capital introduced within business in
form of bank , cash and van)
8000
5200
3000
16200
02/10/20 Laptop A/c Dr
To Bank A/c
(Being laptop purchased in exchange of
cheque)
1000
1000
04/10/20 Purchased A/c Dr
To Toys Ltd
(Being products purchased on credit)
2450
2450
05/10/20 Bank A/c Dr
To Sales A/c
(Being sale of good undertaken and received
cheque)
1500
1500
12/10/20 Repairing A/c Dr
To Cash a/c
(Being laptop repaired with paying cash )
80
80
18/10/20 Toys Ltd A/c Dr
To Purchase Return A/c
(Being purchased goods returned back to
supplier )
100
100
21/10/20 Bank A/c Dr
To Rent A/c
(Being rent received in form of cheque)
500
500

23/10/20 Cash A/c Dr
Fred A/c Dr
To Sales A/c
(Being sale of goods on credit and 80 %being
paid in cash )
1500
400
1900
23/10/20 Cash A/c Dr
To sales A/c
(Being goods sold against cash)
500
500
24/10/20 Car A/c Dr
To Bank A/c
(Being second hand car purchased From
Oxford motor vehicle auction sale)
2500
2500
26/10/20 Wages A/c Dr
To Bank A/c
(Being wages paid with cheque)
820
820
30/10/20 Rent A/c Dr
To Bank A/c
(Being rent paid by cheque)
1000
1000
31/10/20 Drawing A/c Dr
To Bank A/c
(Being drawing done by Linda)
1600
1600