Unit 5 Accounting Principles: Financial Statements, Ratios, and Decision Making

This report discusses the fundamentals of accounting principles and their role in decision making for businesses. It covers financial statements such as trading account, profit and loss account, balance sheet, and cash flow statement. It also includes the computation of financial ratios and their interpretation for BAJ Shop. Additionally, the report evaluates the ethical constraints of BAJ Shop and the function of accounting in informing decision making. Course code and college/university not mentioned.

Unit 5 Accounting
Principles

Table of Contents
INTRODUCTION ..........................................................................................................................4
TASK ..............................................................................................................................................4
1. Determine the objective of accounting principles in meeting, societal, organizational ,
investors and shareholders necessity and belief in revealing business decision making within
in a dynamic surroundings......................................................................................................4
2. Evaluate the regulative and ethical constraints of BAJ shop.............................................5
3. Function of accounting in informing decision making to meet business enterprises, societal
and stakeholder requirement within a complex management system ...................................5
4. Computation of financial statement of BAJ Shop..............................................................7
4.1 Trading Account, Profit and Loss Account......................................................................7
4.2 Calculate the Financial Ratio ...........................................................................................9
4.3 Compare both the year financial ratio of BAJ Shop.......................................................13
4.4 Cash Budget ...................................................................................................................14
4.5 Demerits of Budgetary Planning, Budgetary Control and Budgets for BAJ shop.........15
5. Prepare the partnership trading accounting, profit & loss account and balance sheet.....16
6. Prepare an income statement and balance sheet of Creative Kids...................................18
CONCLUSION .............................................................................................................................18
REFERENCES..............................................................................................................................20

INTRODUCTION
Management accounting plays a huge role in every organization and enterprises for future
forecasting. It is like an occupation which helps to supports business management in terms of
planning, directing, managing performance and decision-making. Management accounting
regulate gives evaluation in financial control and reporting to assist the operation in the
regulation and formulation of an firm strategy by giving accurate financial data and undertaking
that relates the department of accounts. The main purpose of this report is to defining the
fundamentals of accounting principles within the financial operations or to assist better and
useful budgets and decision making (Jordan and Samuels., 2020). The following report contains
the both calculation and theories of accounting and business management methods that include
profit and loss accounts, trading account, balance sheet and cash flow statement. After that
financial ratio of the BAJ shop are calculated and their results are interpreted and compared for
analysing the performance of running business.
TASK
1. Determine the objective of accounting principles in meeting, societal, organizational ,
investors and shareholders necessity and belief in revealing business decision
making within in a dynamic surroundings
The main aim or objectives of financial statements are to give the accurate and
reliable information so that outsiders or stakeholder have belief on them. The word objective
in accounting indicated the collected data are free from error or unbiased and is subjects to
check and verify.
a) Recording of Financial transactions: It is a day to day financial transaction recordings
which is generally said as Bookkeeping that includes information of goods and services such
as receipts, purchases, payment and sales as well as movement of receivables and payables.
It is the first stage or foremost step that helps the business firm in making the financial
statement in the year ending (Rosa., 2018) . This practice is done by the every organization
department of accounts where they ensure to record the data without getting any mistake.
b) Reporting Financial information: All the organization include stakeholders in its business
which is basically two types such as internal or external whereas, internal include business
manager, director or employees and external stakeholders include investors, clients,

shareholders and suppliers. Both the shareholder are connected with the company personally
through investments that is why they wanted to assess the company financial statement or
performance for calculating its profit or gains at the end of the year. This reporting is take
place in three ways in every company are monthly, yearly or quarterly period (Liu And et.al.,
2021). In context of organization, they used financial statement for decision making. In other
hand, the investor uses statement for making future investment decision on behalf of the
outcomes.
2. Evaluate the regulative and ethical constraints of BAJ shop
Ethics are seen to be the rule that the business needs to conform to so their working
should be completed in the orderly way. The office really should diagram and embrace
positive morals for their work space and should guarantee that their association should work
consequently by means of agreeing them. The bookkeeper of the endeavor should ensure
that business need to agree with all the lawbreaker and administrative consistence on due
time. The model might need to be that to record benefits expense form of the organization
and merchandise and supplier government form on ideal way, the undertaking assessment
ought to be saved to the local expert on customary premise and so on that in the long run
should that hard working attitude for the endeavor has been conformed to. Morals are
viewed as the moral ideas that show the way of behaving of a person towards the hobby they
are conveyed upon (Eldenburg And et.al., 2020) . Morals ought to be consented to at business
venture stage too through agreeing with every one of the regulations and prerequisite that
business endeavor oversees, making all around planned expense to the obligation holders
from whom business owes sure amount of asset, standard charge of compared month-to-
month portion to banks and public monetary association from which the business gain
monetary organization credits, etc.
3. Function of accounting in informing decision making to meet business enterprises,
societal and stakeholder requirement within a complex management system
Accounting plays a necessary role in the commercial enterprise decision-making
process. It maintains eyes on the economic things to do and documents them in a number
statement. These statements in addition used to measure the monetary function of the
company. Financial statements help a firm to measure the overall performance of every
department. This file is supplied to investors, stakeholders, and management to make

decisions. Accounting helps the manager to manipulate fees and expenses incurred in the
commercial enterprise operations. There are some goals which furnish more support to above
subject matter are as follows:
 Increased Regulation: In the creating economy, the requirement for bookkeeping
regulation is reliably expanding (Wasserman and Madrid-Morales., 2019) . There are
numerous outrages in the mid-2000s which harm the bookkeeping way and
methodology. It alludes to the criminal guideline, principles, and strategies which is
essential to continue in the strategy of bookkeeping.
 IFRS Standard: IFRS is stand for International financial reporting standard and it
alludes to the arrangement of bookkeeping guidelines and rules which guide how
exact kind of leisure activity and exchange ought to be comprise of in money related
explanations. These necessities are formed and settled by the International
bookkeeping well known board (IASB). These norms are moulded to give financial
reports of every association to the merchants and other business undertaking which
assist them with looking at its money related audits to the various organizations.
 Risk Management: It is a technique for assurance, size and acknowledgement of
risks or vulnerabilities in the business tasks. Risk is unbreakable construction of
return in a business. Risk imply in every single activity of an organization it
comprises of in excess of a couple of kinds of hazard, for example, subsidizing risk,
market risk, in general execution possibility and monetary possibility, etc.
 Reputation: It alludes to the public enthusiasm for the organization and its exercises,
all together words it alludes to the organization's picture according to individuals. It
comprises of individuals' perspectives on the product and administrations, and they
may likewise be terrible or positive (Popkova And et.al., 2019) . The
acknowledgement of an organization changes after some time. It is an extremely
essential thing for any business to arrive at the most ideal job on the lookout. It
influences the endeavour tasks top expense increment the offer of the business
venture and furthermore captivate a generally number of individuals. It moreover
characterizes the accept and trust of the people in the organization.
 Sustainability: It alludes to the ability to keep a system or position generally over a
period of time. With regards to big business association it alludes to the capacity to

stand firm on a district or foothold in the constant changing commercial center or
climate.
 Governance: It is the mixture of guidelines, practices, rules, and approaches which
help association to control its activities (Dargent., 2020) . Leading body of executives
of an organization is ordinarily affecting the administration.
4. Computation of financial statement of BAJ Shop
4.1 Trading Account, Profit and Loss Account
TRADING and P&L ACCOUNT
PARTICULARS AMOUNT (£’000) PARTICULARS AMOUNT (£’000)
Opening stock 400 Sales 10000
Purchases 2500 Closing stock 10
Wages 1225
Gross profit 5885
10010 10010
Rent 1000 Gross Profit 5885
Lighting and expenses 175
Insurance 20
Donation 100
Depreciation 370
Net profit 4220
5885 5885
BALANCE SHEET
PARTICULARS AMOUNT (£’000)
Assets
Current Assets
Cash & cash equivalents 4090
Accounts receivable 1200
Inventories 10
Insurance prepaid 5
Property, plant & equipment 7530
Total assets 12835
Equity and Liabilities
Capital 12260
Accounts payable 550
Wages accrued 25

Total liabilities 12835
WORKING NOTES
Wages 1200
Add: Accrued wages 25
1225
Depreciation
Shop fixtures 150
Machinery & Equip 120
Motor Vehicle 100
370
Cash & cash equivalents
Cash 50
Bank 4040
4090
Property, plant &
equipment
Premises 4200
Depreciation 0
accumulated depreciation 0
4200
Shop fixtures 1950
Depreciation 150
accumulated depreciation 450
1350
Machinery & Equip 1560
Depreciation 120
accumulated depreciation 360
1080
Motor Vehicle 700
Depreciation 100
accumulated depreciation 300
300
Computer 600
Depreciation 0
accumulated depreciation 0

600
Total 7530
Capital 5000
Net profit 4220
Retained earnings 4290
Drawings 1250
12260
4.2 Calculate the Financial Ratio
a) Profitability Ratio
Profitability ratios are those ratios which help the business entity to assess its revenue
generating ability from the operations. These ratios indicate the business entity's ability to
create value for the stakeholders
 Gross Profit: It measures the percentage of each sale in currency after payment of
goods sold. Gross profit margin depends on the relationship between sale price,
volume and costs (He and Kou., 2018) . A high gross profit margin is a favourable sign
of good management
Gross Profit Margin= (Revenue - COGS) / Revenue *100
(Amounts in £’000)
Years Revenue Cost of goods sold
2018 7565 3000
2019 7000 4000
2020 10000 2890
In the year 2018,
= (7565 - 3000) / 7565 * 100
= 60.34%
In the year 2019,
= (7000 - 4000) / 7000 * 100
= 42.86%

In the year 2020,
=(10000-2890) / 10000 * 100
= 71.1%
 Net Profit Ratio: It measures the relationship between net profit and sales of the
business (Clausing., 2020) . Net profit ratio finds the proportion of revenue that finds
its way into profit after meeting all expenses.
Net Profit Margin = (Net profit / Sales)*100
(Amounts in £’000)
Years Net Profit Sales
2018 2725 7565
2019 1080 7000
2020 4220 10000
In the year 2018,
= 2725 / 7565 *100
= 36.02%
In the year 2019,
= 1080/ 7000 * 100
= 15.43%
In the year 2020,
= 4220/10000 *100
= 42.2%
b) Liquidity Ratio
It is the ratios which help the business entity to assess its ability to pay short term liabilities.
Inability to pay-off short term liabilities affects its credibility as well as its credit
rating(Deegan., 2019).

 Current Ratio: Current ratio is known as measure of short term solvency. It shows the
company has enough current assets to meet the payment schedule of its current debt
with a margin of safety for possible losses in current assets (Jabbour And et.al., 2020) .
Current ratio = Current assets / Current liabilities
(Amounts in £’000)
Years Current assets Current liabilities
2018 1285 400
2019 1620 600
2020 5305 575
In the year 2018,
= 1285 / 400
= 3.21:1
In the year 2019,
= 1620 / 600
= 2.7:1
In the year 2020,
= 5305 / 575
= 9.23:1
 Quick Ratio: Quick ratio is sometimes called the acid test ratio and is one of the best
measures of liquidity (Stone, Cox and Gavin., 2020) .
Quick Ratio= (Current assets - Inventory) / Current liabilities
(Amounts in £’000)
Years Current assets Inventory Current liabilities
2018 1285 10 400
2019 1620 400 600
2020 5305 10 575
In the year 2018,
= 1285-10/ 400
= 3.2:1

In the year 2019,
= 1620-400/ 600
= 2.03:1
In the year 2020,
= 5305-10/ 575
= 9.21:1
c) Efficiency Ratio
 Inventory Turnover Ratio:
Inventory turnover days = (opening stock + closing stock/2) / cost of sales * 365
(Amounts in £’000)
Years Opening stock Closing stock Cost of sales
2018 250 10 3000
2019 10 400 4000
2020 400 10 2890
In the year 2018,
= ((250+10/2) / 3000) *365
= 15.82 days
In the year 2019,
= ((10+ (400/2)) / 4000) *365
= 18.71 days
In the year 2020,
= ((400+(10/2)) / 2890) *365
= 25.9 days
 Fixed Assets Turnover Ratio:
Fixed asset turnover period = (Revenue / fixed assets) *365
(Amounts in £’000)
Years Revenue Fixed assets
2018 7565 8640

2019 7000 8270
2020 10000 7530
In the year 2018,
= 7565/8640 *365
= 319.6 days
In the year 2019,
=7000/8270 *365
= 309 days
In the year 2020,
= 10000/7530 *365
= 484.72 days
 Accounts Receivable turnover:
Receivable collection period = (Accounts receivable from trade/ sales) * 365
(Amounts in £’000)
Years Accounts receivable from trade Sales
2018 1100 7565
2019 1000 7000
2020 1200 10000
In the year 2018,
= (1100 / 7565) * 365
=53.07 days
In the year 2019,
= (1000 / 7000) * 365
= 52.14 days
In the year 2020,
= (1200 / 10000) *365
= 43.8 days

4.3 Compare both the year financial ratio of BAJ Shop
From the above calculation of proportion, it is found that the organization BAJ shop sole
ownership is recorded to be 60.34% in the a year 2019 when conversely, with the year 2018
which has been recorded to decline by a huge degree, though in the year 2020 it has been
recorded to rise. Gross benefit ought to be ascending in deals related activities which are being
joined through a reducing down expenses, as well as charges sold per unit, which would final
product in a higher gross profit edge. Fixed resource proportion is recorded to decline and
afterwards take a vertical bump in the stage which might need to be because of the reality of the
explanation that organization can produce an adequate number of incomes from its possessions.
The record receivable proportion is situated to decline and it put away declining which would
show that it would end up being an interesting situation for a client would demonstrate that the
open door cost for keeping up with receivable for a more drawn out period isn't helpful. Stock
proportion is recorded to stretch out with each passing yr the reason at its rear ought to be
because of riding input worth to be lesser and pay completed to be higher. The current proportion
has furthermore brought about the equivalent way as has been found in the rapid proportion, it
has declined at first and expanded on a quick premise, the thought processes at the rear of such
circumstances can be covering contemporary liabilities and declining amount of state of the art
resources. Net profit is useful as they are figured in the wake of deducting all expenses and costs
and can be utilized for additional functional activities and arranging financial plans also.
4.4 Cash Budget
BAJ SHOP Cash Budget
Cash Inflow 2020 2021 2022 2023 2024 2025
£’ 000 £’000 £’000 £’000 £’000 £’000
Sales 10000 11000 12100 13310 14641 16105.1
Receivables 0 1200 0 0 0 0
Other receipt 0 0 250 0 0 0
total cash outflow 10000 12200 12350 13310 14641 16105.1
Cash outflow
Wages 1225 1286.25 1350.5625 1418.09063 1489 1563.44491

Rent 1000 1050 1102.5 1157.625 1215.50625 1276.28156
Lightning and
heating expenses 175 183.75 192.9375 202.584375 212.713594 223.349273
Insurance 20 20 20 20 20 20
Prepayment 5 5 5 5 5 5
Donation 100 110 121 133.1 146.41 161.051
Other payment 0 0 10000 20000 0 0
total cash outflow 2525 2655 12792 22936.4 3088.625 3249.12675
Net cash flow 7475 9545 -442 -9626.4 11552.375 12855.9733
Opening balance of
cash 4090 11565 21110 20668 11041.6 22593.975
Closing balance of
cash 11565 21110 20668 11041.6 22593.975 35449.9483
4.5 Demerits of Budgetary Planning, Budgetary Control and Budgets for BAJ shop
 Budget: Budget is a term which is used by the business firms for future financial
planning. It is a practice that shows the movement or expression of inflows or
outflows of money over a specific time period (Davis and Rhodes., 2020) . It also
occupies the entire activity of the business organization for a given period.
Demerits of Budgets
1. Based on Assumption: The budgets are prepared on the basis of assumptions that
are why it is not always accurate and realistic. Sometimes, these planned budgets
create the problem for future business failure.
2. Time consuming and costly activity: To prepare a budget business needs more time
and more work forces especially when the firm are huge and contains large number
of departments. Organization hires the candidate for making the good budget and the
hired candidate demands more money because this practice contains more
knowledge and skills (Hermes, Behne and Rakoczy., 2018) .
 Budgetary Planning: It is the activity of making a future budget plan and then
makes use of it as controlling the business day to day operation practice. The main

motive of budgetary planning is to reduce the risk which are faced by the company
financial statements or results.
Demerits of Budgetary Planning
1. Budgeting, planning or gauging is honestly not a cautious science; it makes use of
approximations and judgment which may additionally now not be penny percentage
precise.
2. Budgetary planning are not exact or flexible as per global or environmental changes
 Budgetary control: Business organization generally refers budgetary control as
budgetary techniques because it provides the comparison or analysis between actual
and budgeted expenditures and also the accurate variations. Budgetary control is
done after the planning of budget (Hunter and Cook., 2018) . This practice involves
verifying cost, income or expenditure
Demerits of Budgetary control
1. It is Uncertain for the future because all the planning are prepared on behalf of the
assumption.
2. It creates the problem at the time of coordinating with other department person.
Coordination is the key to prepare the budgetary control without them failure are to
be made.
5. Prepare the partnership trading accounting, profit & loss account and balance sheet
Trading and Profit and Loss A/c
for the year ended December, 2020
Particulars Amount Particulars Amount
To Opening Stock 50000 By Sales 132000
To Purchases 85416 By Carriage Outward 1288
To Gross Profit 54212 By Closing Stock 56340
189628 189628
To Interest on King's Loan 4000 By Gross profit 54212

To Interest on Capital
Matthew 3500
Mark 2950 6450
By provision for bad debts 80
To discount allowed 110 By Interest on Drawings
Matthew 180
Mark 120 300
To office expense 2550
Add : Accrued expense 96 2646
By provision for depreciation 3300
To Salary and Wages 18900
Add : Accrued Wages 200 19100
To bad debts 450
To depreciation
Fixtures 770
Buildings 1000 1770
To Salary to Matthew 800
To net profits 22566
57892 57892
Balance Sheet
as on 31 December 2020
Liabilities Amount Assets Amount
Current A/c Matthew 1306
Mark 298 1604
Building 50000
less : depreciation 1000 49000
Capital A/c
Matthew 32280
Mark 26920
59200
Add : Net Profit 22566 81766
Fixtures 11000
less : depreciation 770
10230

Creditors 11150 Debtors 16240
less :Provision for Bad Debts 80 16160
Loan from J Ling 40000 Cash 950
Accrued expenses 296 Closing Stock 56340
Other Assets 2136
Total 134816 Total 134816
Capital A/c
Matthew 35000
Add : Interest On capital 3500
38500
Less : Drawings 6400
Add : Interest On Drawings 180
32280
Mark 29500
Add : Interest on capital 2950
32450
Less : Drawings 5650
Add : Interest On drawings 120
26920
6. Prepare an income statement and balance sheet of Creative Kids
STATEMENT OF ACTIVITIES
Particulars Amount
Income
Profit from raffle 4980
subscription 18760
Total Income (A) 23740
Expenses
Staff wages 7600
General expenses 420

Depreciation of equipment 139
Insurance 93
Total expenses (B) 8252
Change in Net Assets (A - B) 15488
BALANCE SHEET
Assets Amount
Club house 21000
Prepaid assets 160
Equipment 6700
Cash at bank 1570
Total Assets 29430
Liabilities
Creditor 25
Accumulated funds 13917
Change in Net Assets 15488
Total Liabilities 29430
CONCLUSION
The report assists with having a superior comprehension of bookkeeping rules that would
consider the turn of events and planning of monetary records and statements. It would
additionally assist with having a thought of where the business firm is missing and slacking. The
report would be helpful to have a superior perspective on correlations being made and the
proportions which are to be considered. It is further valuable to give proposals and ideas with
respect to how the business can work on its outcomes.

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