Accounting in Context and Budgetary Control

This document provides an overview of accounting principles, conventions, and standards. It covers topics such as preparing financial statements, making adjustments, calculating financial ratios, and evaluating organizational performance. The document also includes examples and explanations for better understanding. Study material and solved assignments on these topics are available on Desklib.

Unit 5: Accounting Principles
Accounting in Context and Budgetary Control
Part-2 (LO2&3)
Table of Contents

Introduction......................................................................................................................................3
Preparing financial statements from a given trial balance for sole traders, partnerships and not-
for-profit organizations, to meet accounting principles, conventions and standards......................3
Producing financial statements from a given trial balance, making appropriate adjustments.........5
Calculating and presenting financial ratios from a set of final accounts.........................................7
Financial ratios compare a company's performance over time......................................................10
The evaluation financial statements to assess organizational performance using a range of
measures and benchmarks to make justified conclusions..............................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
Introduction
The steps of recognizing, measuring, documenting, categorizing, summarizing, and evaluating
financial data are all part of the accounting process. The accounting department of a corporation

is accountable for maintaining precise records of the firm's income and expenditures, in addition
to providing quantitative financial information.
Preparing financial statements from a given trial balance for sole traders,
partnerships and not-for-profit organizations, to meet accounting principles,
conventions and standards.
Sole traders, partnerships, and not-for-profit organizations are the three most common legal
forms of business in the United Kingdom. To get a handle on the status of the business, they'll
need to put together a set of financial statements.
Financial Statement: There are two types of financial statements: public and internal. The latter
is a public account of the company's financial performance. It gives a complete picture of the
company's performance, standing, operations, and so on (Murugan, 2021).
Income statement: When calculating a corporation's net income or loss, the income statement is
the best place to start.
The amount of "profit" a company makes varies greatly. Sole proprietorships and partnerships:
To put it simply, gross profit is the difference between what a company makes in sales and what
it pays out in expenses. The operational profit is calculated by subtracting the company's gross
profit from its overall operating expenses. Net profit is the consequence of deducting (or
growing) operating profit and deducting (or raising) finance costs.
When we emphasize not-profit-organization, it is achieved by subtracting (or raising) the
operating profit's financing charges from the operating profit. Taxes are deducted from operating
earnings to arrive at net profit. When calculating a company's yearly retained profit, dividends
given to shareholders are subtracted from the company's net profit after tax.
Balance sheet: The balance sheet is a snapshot that details all of an organization's assets,
liabilities, and shareholders' equity. Every asset must have the same value as the total liabilities
and equity held by shareholders. It indicates the whole value of the firm.
Cash Flows: All of the company's cash and cash equivalents are shown on this document, which
is known as a cash flow statement. Non-cash transactions are not shown. It displays the cash
flows of operational, financial, and investment operations (Murugan, 2021).

Accounting principles, conventions, and standards
To regulate financial accounting, a number of accounting principles, conventions, and standards
have emerged over time.
Controversial conventions with two sides: Financial statements are affected by two unique
components of every transaction in accordance with this standard. Getting a bank loan to expand
a firm's office space, for example, would raise both the assets and liabilities in the report of
financial condition of the organization in question.
Precedented cost-based convention: Consequently, assets are listed in the financial statement at
their historical performance. There are many who think the current market value of an asset
should be the primary consideration for valuing an asset. These efforts to appraise the assets at
their present values have been fruitless.
With the continuation of the business convention: When you observe this, you could reason
that the business will continue to operate out of the same location for some time to come. As a
consequence of making this assumption, assets will be evaluated at what they were worth in the
past. In order to successfully liquidate a business, all of the assets need to have their net
realizable value determined. A different approach will have to be used in order to create the
financial statements.

Producing financial statements from a given trial balance, making
appropriate adjustments.
Accounts Debit Credit
Sales 750,123$
Creditors 24,850$
Debtors 79,306$
Premises 220,850$
Fixtures and Fittings 42,100$
Wages 35,920$
Opening Stock 48,510$
Motor vehicle 42,000$
Miscellinuous Exp. 8,760$
Repairs 1,870$
Advertisinng 7,850$
Purchases 387,256$
Bank interest & Charges 560$
Phone & Internet 7,850$
Cash in Hand 1,250$
Stationary 2,750$
Drawings 45,400$
Bank 5,390$
Heat and Light 7,590$
Loan (All repayable 30 April 2022) 45,000$
Capital 130,379$
Insurance 15,920$
Total 955,742$ 955,742$
Trial Balance
The following further pieces of information have also been supplied:
The value of the closing stock as of December 31 was 47650. A December advertising campaign
that was not included in the above should have an additional advertising budget of 1,070 dollars
accumulated to cover its costs. The total amount paid for insurance throughout the year includes
$700 that is applied to the next year's premium.

Accounts Amount Total
Sales 750,123$
Less: Cost of Goods Sold
Opening Stock 48,510$
Add: Purchases 387,256$
435,766$
Less: Closing Stock 47,650$
388,116$
362,007$
Wages 35,920$
Miscellinuous Exp. 8,760$
Repairs 1,870$
Advertising 8,920$
Bank interest & Charges 560$
Phone & Internet 7,850$
Stationary 2,750$
Heat and Light 7,590$
Insurance 15,170$
Total Expenses 89,390$
Net Profit 272,617$
Gross Profit
Income Statement (31 Dec.2022)
Less: Expenses
Stock 47,650$
Debtors 79,306$
Prepaid insurance 750$
Cash 1,250$
Current Assets 128,956$
Premises 220,850$
Fixtures and Fittings 42,100$
Motor vehicle 42,000$
Fixed Assets 304,950$
433,906$
Bank 5,390$
Accruals advertising 1,070$
Creditors 24,850$
31,310$
Long term Liabilities: Loan 45,000$
Capital 130,379$
Add: Profit 272,617$
402,996$
Less: Drawings 45,400$
357,596$
Total Liabilities & Equity 433,906$
Balance Sheet (31 Dec.,2022)
Total Assets
Liablilities and Owner's Equity
Current Liabilities
Equity

Calculating and presenting financial ratios from a set of final accounts.
Financial Ratio: The use of financial ratios simplifies the analysis and comparison of financial
relationships between accounts on the financial statements of a corporation. A company's
financial performance, an industry, or even a retail sector may be studied using these techniques.
Assessing a company's profitability, solvency, liquidity, etc. may be aided by doing a financial
ratio analysis. An evaluation of the firm's internal analysis, as well as its prospects for fiscal
growth in the industry, may be accomplished via ratio analysis (Carlson, 2020).
How Does Financial Ratio Analysis Work?
Simply glancing at the numbers in a company's financial records is not enough to provide us
with all of the information we want about how well the firm is performing. In most instances, a
length of time ranging from three months to one year is used to calculate ratios. The results of
these comparisons should then be weighed against those of other companies operating in the
same market sector. It is essential to make analogies and parallels. It is impossible for a financial
manager to draw any conclusions about the success of a company without first comparing the
company's financial figures to those of its rivals and to those of other businesses operating in the
same industry. Financial managers may be able to offer an accurate image of the success of the
firm by using the aforementioned calculations and comparisons.
A single computation of a ratio won't teach you anything much by itself. If management does not
compare the present debt-to-asset ratio to prior periods in the history of the firm, such as when
the debt-to-asset ratio was lower or bigger, then this does not provide an interesting narrative. In
this scenario, the debt-to-asset ratio reveals that debt is responsible for funding fifty percent of
the company's total assets. You won't be able to determine if that ratio is outstanding or terrible
unless you examine it in respect to other firms in the same industry or other companies in the
same industry.
In addition to using financial ratio analysis, financial managers may also employ common size
analysis and a more in-depth review of the statement of cash flows in order to get more insights

into a company's financial situation. Both of these approaches are valid possibilities to consider.
Financial data (“Source: Yahoo-Finance, 2021).
Liquidity Ratio:
Short-term loan repayment ability is gauged by a financial statistic known as the liquidity ratio.
Spectroscopic studies show if ARAMCO can satisfy its short-term obligations if it uses its
current assets.
Liquidity ratio for ARAMCO 2020
Current Liquidity ratio= (Current Asset/Current Liability) 1.64
Quick Liquidity ratio= (Current asset - Inventory)/ Current liability 1.423
Cash Ratio = Cash/Current Liability 0.852

Leverage Ratio:
A company's equity/debt ratio is another way of referring to financial ratios. In ARAMCO's
financial records, the equity-to-debt ratio is used to measure the firm's equity. The debt-to-equity
ratio measures how much a firm owes in debt relative to the total amount of its assets and bank
interest each year.
Leverage ratio for ARAMCO 2020
Total debt ratio = (Total Asset-Total Equity)/Total Assets 0.43
Long term debt ratio = Long-term debt/(Total debt + Total equity) 0.298
Profitability ratio:
The profitability ratio evaluates a company's performance in terms of its capacity to generate a
profit by taking into account the expenses, assets, and shareholder equity of the company. After
doing research on ARAMCO's profitability, the following ratios have been determined:
Profitability ratio for ARAMCO 2020
Profit Margin = Net income/Seles 0.21
Return on assets = Net income/Total assets 0.096
Asset management ratio:
An efficient and effective approach to management is implied when the term "management" is
spoken. This ratio is used to assess the health of ARAMCO by measuring how successfully and
profitably its assets are utilised to generate income.
Asset management ratio for ARAMCO 2020
Inventory turnover = COGS/inventory 8.27
Day sales in inventory = 365/inventory turnover 44
Receivable turnover = Sales/AR 10

Financial ratios compare a company's performance over time.
Liquidity ratio for ARAMCO 2019
Current Liquidity ratio= (Current Asset/Current Liability) 1.89
Quick Liquidity ratio= (Current asset - Inventory)/ Current liability 1.70
Cash Ratio = Cash/Current Liability 0.82
When the company's current and quick liquidity ratios are calculated, the results show a positive
outcome, which is a number that is greater than 1. It is said that the performance of the firm is
good; but, when compared to the performance of the previous year, the performance of the
current year falls short. The cash ratio evaluates a company based on the quantity of liquid assets
it has relative to the total amount of its liabilities. That doesn't provide a challenge for the
company in any way. Additionally, compared to the previous year, it has improved.
Leverage ratio for ARAMCO 2019
Total debt ratio = (Total Asset-Total Equity)/Total Assets 0.43
Long term debt ratio = Long-term debt/(Total debt + Total equity) 0.298
According to the data presented, the organization has a high total debt ratio, which has been
becoming even higher in recent years, such as 2019 and 2020, in comparison to prior years. A
ratio of 0.5 or below is considered to be acceptable for long-term debt. It has come to our
attention that the estimated worth of the company is lower. As a result of this, we have grounds
for believing that the company is sound.
Profitability ratio for ARAMCO 2019
Profit Margin = Net income/Seles 0.21
Return on assets = Net income/Total assets 0.096
By looking into ARAMCO's profit margin, you can see how profitable business is. Determined
by dividing ARAMCO's net profits by the company's total sales, there are several metrics used to
measure a company's profit margin, including gross margin, net margin, and operating margin.
Profit margin ratios can't be defined as good or bad, although a 5-10 percent profit margin is
considered preferable. An unremarkable profit margin ratio characterizes the company.

Asset management ratio for ARAMCO 2019
Inventory turnover = COGS/inventory 12
Day sales in inventory = 365/inventory turnover 31
Receivable turnover = Sales/AR 13
To put it simply, inventory turnover is a measure of how quickly ARAMCO's inventory is sold
or consumed and refilled. The firm is performing well if the ratio is greater than. The company's
present performance, in our opinion, is not strong enough. In order to assess ARAMCO's ability
to recover receivables, Receivable Turnover records the periods in which receivables were
converted into cash. The ARAMCO receivables turnover rate is excellent. Even though the
company's financial health is good, it has improved this year.
The evaluation financial statements to assess organizational performance
using a range of measures and benchmarks to make justified conclusions.
Examining the balance sheet of a company is one way to evaluate the state of the company's
finances. It is imperative that this point be driven home once again. An income statement may
reflect a company's total sales, costs, and earnings for a certain time period, although this
information varies from period to period. The current operational and financial health of a
company may be shown via the use of a cash flow statement. Utilize this application if the
activity level at your firm fluctuates throughout the year, both in high and low points. When it
comes to the amount of money, there is no one number that stands out to me as being either
excellent or awful in my opinion. Comparing your company's financial performance to those of
other businesses operating in the same sector might provide insight into whether or not things are
moving in the right direction for your business.
Conclusion
An organization cannot function effectively without accounting. It comprises the preparation of
an income statement, a balance sheet, and a cash flow statement, as well as the analysis of these
financial statements. A good financial plan is developed in this way. Accounting and financial
planning are impossible without good plan management. Because of this, accounting systems
depend on it greatly. It is possible to reliably calculate financial statements when businesses have

a structured framework in place for doing so. In order to make sure that a business' overall
reports are reliable.
References
Nandhini Murugan, (2021), what is the easiest way to learn how to analyze financial statements?
[Online] Available at: https://www.quora.com/What-is-the-easiest-way-to-learn-how-to-analyze-
financial-statements?q=what%20is%20financial%20statement, [Accessed on: 9 June 2022].
Rosemary Carlson, (2020), what is financial ratio analysis? [online] Available at:
https://www.thebalancesmb.com/what-is-financial-ratio-analysis-393186, [Accessed on: 10 June
2022].
Nandhini Murugan, (2021), what is the easiest way to learn how to analyze financial statements?
[Online] Available at: https://www.quora.com/What-is-the-easiest-way-to-learn-how-to-analyze-
financial-statements?q=what%20is%20financial%20statement, [Accessed on: 9 June 2022].