Accounting Fundamentals: Journal Entries, Statements, and Analysis

This essay provides a comprehensive overview of accounting fundamentals, starting with an introduction to key concepts and principles. The main body of the essay is divided into four tasks. Task 1 focuses on completing journal entries, preparing an updated trial balance, and constructing a statement of profit and loss account, along with a statement of financial position. Task 2 critically assesses the relevance of financial literacy to business managers, highlighting its importance in decision-making and understanding financial impacts. Task 3 involves journal entries, trial balance updates, and the creation of financial statements with additional adjustments. Task 4 compares the results of two businesses, identifying the better performer. The essay concludes with a summary of the key findings and references supporting the analysis.

Essay on accounting
fundamentals

INTRODUCTION...........................................................................................................................2
MAIN BODY..................................................................................................................................2
TASK 1............................................................................................................................................2
1. Complete the Journal entries required to use additional information......................................2
2. Updated trial balance...............................................................................................................3
3. Statement of profit and loss account........................................................................................4
TASK 2............................................................................................................................................5
Critically assess the relevance of financial literacy to business managers..................................5
TASK 3............................................................................................................................................8
1. Journal entries by using additional adjustment........................................................................8
2. Updated Trial balance..............................................................................................................9
3. Statement of Profit or Loss and Statement of Financial position............................................9
TASK 4..........................................................................................................................................11
Compare results and identify the better of the two businesses..................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
1

INTRODUCTION
Accounting fundamentals includes the several financial terms or concepts which helps the
organization as well as managers to make sound decisions to maximise their operational
performance and profitability (Adekola, Samy and Knight, 2017). It expresses the financial
status of a corporation or sector to everyone who wants to know about it. It helps to convert the
activities of a firm into concrete documents which can be evaluated. It is therefore important
to know the definition of accounting. Generally accepted accounting principles (GAAPs) are
the basic accounting principles and concepts. Financial reporting is really about a mechanism
that helps to monitor, summarise, analyse and disclose data related to financial transactions. This
assessment covers the several accounting activities which include passing journal entry, making
updated trial balance and producing income statement or balance sheet. In addition, it includes
the relevancy of financial reports to the business managers and compares results with the help of
profitability and liquidity.
MAIN BODY
TASK 1
1. Complete the Journal entries required to use additional information
S. No Particulars Dr Cr
1 Depreciation account… £ 8,400
To Motor Vehicle £ 8,400
2 Depreciation Account £ 1,000
To Computer Equipment £ 1,000
3 Electricity bill paid £ 1,000
To Electricity account £ 1,000
4 Prepaid Insurance payment £ 500
To Insurance account £ 500
2

5 Tax Expenses £ 1,920
To Outstanding Tax Expenses £ 1,920
2. Updated trial balance
Particulars Debit Credit
Accounts Payable £ 16,120
Accounts Receivables. £ 16,480
Carriage Inwards £ 2,440
Computer Equipment at cost £ 10,000
Carriage Outwards £ 4,000
Drawings £ 6,500
Electricity £ 7,000
Loan Interest £ 480
Provision for Doubtful Debts £ 1,000
Insurance £ 1,000
Motor Vehicle at Cost £ 51,200
Capital £ 84,760
Opening Inventory £ 3,600
Accumulated Depreciation -Motor Vehicle £ 17,600
Depreciation on Motor Vehicle £ 8400
Depreciation on Computer Equipment £ 1,000
Petty Cash £ 40
Bank Overdraft £ 59,120
Purchases £ 26,400
Rent £ 5,600
Sales £ 60,600
Telephones £ 4,320
Tax Expenses £ 1,920
3

Long term loan £ 27,000
Prepaid Insurance £ 500
Outstanding Tax Expenses £ 1,920
Electricity Expenses Payable £ 1,000
Total £ 210,000 £ 210,000
3. Statement of profit and loss account
Trial Balance & Statement of Profit & Loss
Particulars Amount Particulars Amount
Opening Inventory £ 3,600 Sales £ 60,600
Purchases £ 26,400 Closing Inventory £ 10,200
Carriage Inwards £ 2,440
Gross Profit £ 38,360
£ 70,800 £ 70,800
Carriage Outwards £ 4,000 Gross Profit £ 38,360
Electricity £ 7,000 Net Loss £ 3,360
Loan Interest £ 480
Insurance £ 1,000
Depreciation on Motor Vehicle £ 8,400
Rent £ 5,600
Depreciation on Computer
Equipment
£ 1,000
Electricity £ 8,000
Tax Expenses £ 1,920
Telephone £ 4,320
Total £ 41,720 Total £ 41,720
Statement of Financial Position
4

Liabilities Amount Assets Amount
Capital £ 84,760 Motor Vehicle at Cost £ 51,200
Less: Drawings £ 6,500 Less: Accumulated
Depreciation
£ 17,600
£ 78,260 33,600
Less: Net Loss £ 3,360 Computer Equipment at
cost
£ 10000
£ 74,900 Less: Depreciation £ 1000
Long term loan £ 27,000 £ 9,000
Accounts Payable £ 16,120
Electricity account payable £ 8,000 Accounts Receivables £ 16,480
Outstanding Tax Expenses £ 1,920 Less: Provision for
doubtful debts
£ 1,000
Electricity Expenses Payable £ 1,000 £ 15,480
Prepaid Insurance £ 500
Petty Cash £ 40
Closing Inventory £ 10,200
Bank £ 59,120
Total £ 128,940 Total £ 128,940
Motor vehicle
51200 motor vehicle cost -(minus) 9200 accumulated depreciation = 42000*20%=8400 motor
vehicle depreciated
computer cost 10000*10%=1000
Account payable + Electricity account payable + Outstanding Tax Expenses + Electricity
Expenses Payable = 16120+8000+1920+1000 = 27040
5

TASK 2
Critically assess the relevance of financial literacy to business managers
It is true that, primary objective of financial statement or related information is to informed
their users about the business performance throw-out the period (Burger and Curtis, 2017). In
addition, business managers are the primary users of financial reports because they has to made
several decisions in relation to the organization or it will helps in maximising business
performance and outcomes.
Financial literacy is a comprehension of financial terms, claims and definitions, and
awareness about how this knowledge can be used to make a financial impression while making
any business decision by managers. There are five ways which shows that how financial literacy
relevant for business managers and these are discussed below:
Understand the impact of their actions: Once business manager understand company's
financial statements, so they can track particular items which have an effect
on their organisation's bottom line. If applicable to the day to day tasks, knowledge into the
company's financial reporting can be a motivational factor for managers and their team. Knowing
the effect of decisions have on financial wellbeing of the larger company will help manager to
keep a big picture in mind.
Make informed decisions: In relation to manager of organization, financial literacy will
help them to grips with issues with a fresh toolkit. When confronted with a tough strategic move,
manager can comfortably understand the financial consequences before evaluating their choices
and making right choice for their team and company (Dewi, Azam and Yusoff, 2019). Financial
literacy will encourage manager to become an excellently-rounded leader who recognizes several
aspects of any problems that arise.
Support Team’s Budget: When team members are in need of funds for any project or
product, business managers understanding related to finance requirement could even help them
to build a strong argument. For instance, if the team is demanding fund for project management
tool, managers could measure the expected financial return predicated on how much more
effectively the software can enable their workers to focus. Demonstrating the impact on
company's bottom line will make manager's case more interesting.
Improve their Negotiation Skills: Financial knowledge can help business managers thrive
at the bargaining table. Whether people are negotiating wage, perks, or the scale of the project,
6

having a clear understanding of larger financial image can represent users well. If the issue of
negotiating process will affect the monetary well-being of the organisation, acknowledging how
to actually speak about the financial consequences of their desired outcome can influence the
discussion in their favour.
Become financially efficient: Financial literacy helps the business managers to understand
how each of their team’s expenses needs to play into obligations on the organisation's balance
sheet which can allow managers to assess to be more efficient and profitable. Sometimes there's
a team who previously subscribed and no longer allows, or perhaps they can find a free variant of
a tool their team already has to pay for (Baksaas and Stenheim, 2019).
When business manager aware of how each expenditure factors into balance sheet, this can be
better to spot strategies to become more cost-effective (Hermuningsih, Kirana and Erawati,
2019).
There are some other different types of users who interested in the financial report of the
organizations and these are discussed below:
 Management: They are interested in the financial reports of company. Even if they are
people who are beginning to prepare the financial reports of board & members as a
whole, they must relate to them when taking into account the growth/ performance of the
company. The Board of Directors evaluates financial statement from perspective of
equity, efficiency, cash sales, income and expenditures, capital assets, budget
requirements, loans to be paid, finance or economics and several other daily basis
operations. Organisation must be able to make sound decisions on financial reports.
 Investors: They really like to know and stay up-to - date with financial status of the
company. They would also like make investment decision on the basis of their
profitability and financial performance. Because of this, investors are interested in the
financial reports.
 Customers: These users also have to view financial position of the business where they
purchase products and services. Large consumers will want to maintain a long-term
agreement or contract with the company, and they'd like to engage with a company that is
financially stable. In addition, profitable company might provide its customers with
services at a discount rate relative to the industry.
7

 Competitors: These are another kind of users which also have to examine financial
position of entity & business. Customers who are stick with brand for longer time interval
mainly wants to know about how strong is position of a brand on basis of which they are
able to take interest in company.
 Government: Some agencies like tax department, corporate tax etc. really have to go
through company's balance sheet to verify if the firm pays correct taxes or not. They
would like to charge tax estimates on the basis of the performance of the company and
the rules lay down.
 Employees: These are the internal stakeholders who are interested in the company's
financial statement across various perspectives. They would just want to know how the
business does the award and sums are highly dependent on the earnings of the firm
(Hutton, 2017). They will also be looking for an in-depth summary of the market
situation and the current situation of the business sector that will be the consumers of the
financial statements. It would also want employees to understand entirely the finances.
Organisation can involve employees in decision-making process.
Above discuss parties are the users who are interested in the financial statement of company
but primary user is business managers who have to manage everything in the business
operations. They are updated with the every changes and business transection to make effective
decisions which helps in maximising productivity as well as profitability. It further helps in
increasing business objectives and goals.
TASK 3
1. Journal entries by using additional adjustment
Particulars Debit Credit
Depreciation account £ 864
To Fittings £ 864
Bad debts £ 850
To Trade Receivables £ 850
Prepaid Rates £ 540
8

To Rates £ 540
Drawings £ 450
To Bank £ 450
Trade Receivables £ 690
To Allowance for Doubtful debts £ 690
2. Updated Trial balance
Particulars Debit (£) Credit (£)
Fittings 10,950
Accumulated dep. Fittings 4614
Depreciation on Fittings 864
Buildings 45,000
Accumulated dep. Buildings 15,104
Depreciation on Buildings 5400
Inventory 22,500
Trade Receivables 13,800
Bad debts 850
Allowance for doubtful debts 690
Cash in Hand 75
Cash at Bank 1875
Trade Payables 27000
Capital 28,575
Drawings 7,125
Purchases 120,000
Sales 180,000
Wages 18,000
Advertis3,750ing 300
Rates 6000
9

Bank Charges 2,700
Prepaid Rates 540
Total 255974 255974
Value of depreciation =
Fitting = 10950* 12/100 = 1314
Depreciation = 864
Initial balance = 3750
Deprecation = 3750*12/100 = 450
1314-450 = 864
Building = 45000
Accumulated depreciation opening balance value = 9000
Depreciation on building = 5400
Accumulated depreciation 15104
3. Statement of Profit or Loss and Statement of Financial position
3,750Statement of Profit & Loss
Particulars Amount
(£)
Particulars Amount (£)
Opening Inventory 22,500 Sales 180,000
Purchases 120,000 Closing Inventory 31,500
Wages 18,000
Gross Profit 51,000
Total 211,500 211,500
Bank Charges 2,700 Gross Profit 51,000
Rates 5460
10

Advertising 300
Depreciation on Fittings 864
Depreciation on Buildings 5400
Allowance for Doubtful debts 690
Bad debts 850
Net Profit 16,264
Total 34000 Total 51,000
Statement of Financial Position
Liabilities Amount Assets Amount
Capital 28,575 Fittings 10,950
Less: Drawings 7,125 Accumulated dCash at Bankep.
Fittings
2886
21,450 8064
Add: Net Profit 16,264 Buildings 45000
37,714 Accumulated dep. Buildings 20,504
24,496
Trade Payable 27,000
Suspense account 14976 Trade Receivables 15,000
Less: Provision for doubtful debts 1890
13,110
Inventory 31,500
Prepaid Rates 540
Cash in HandCash at Bank 75
Cash at Bank 1875
Total 79,660 Total 79,660
TASK 4
Compare results and identify the better of the two businesses
Profitability ratio:Cash at Bank
11

It is defined as ratio in which it is used by entities to examine profits to sales, operating
expenses, balance sheet assets & liabilities of a firm using of credentials within specific period of
time (Nichols, Wahlen and Wieland, 2017).
Gross margin ratio:
Formula: Gross profit margin ratio = Gross Profit / Net sales * 100
Ratio Danny Ltd Amber
Gross profit 38,360 51,000
Net sales 60,600 180,000
Gross profit margin ratio 63.30% 28.33%
On the basis of gross profit ratio analysis, it has been evaluated that Danny Ltd performs
well in comparison to Amber organization. Gross profit margin ratio of Danny Ltd is 63.30%
and Amber is 28.33%. Higher the gross profit margin is beneficial for the organizations.
Net profit ratio:
Formula: Net profit margin ratio = Gross Profit / Net sales * 100
Ratio Danny Ltd Amber
Net income -3360 16,264
Net sales 60,600 180,000
Net profit margin ratio 5.54% 9.03%
Cash at Bank
With the help of above ratio calculation, it has been analysed that Amber Company
generate more net profit in comparison to Danny Ltd. Higher the Net profit ratio is considered to
be better and also helps in attracting more people towards organization. Net profit margin of
Danny ltd is 5.54% because of net loss but Amber Company net profit ratio is 9.03% because of
generating profit.
Liquidity ratio:
It is an essential class of financial metrics that used assess ability of debtor to repay
existing debt without spending much money (Ogneva, Piotroski and Zakolyukina, 2019). Current
liabilities are evaluated for liquid assets in order to determine the protection of short-term
obligations in the emergency situations.
Current ratio:
12

Formula: Current ratio = Current assets / Current liability
Ratio Danny Ltd Amber
Current assets 85,340 47,100
Current liability 27,040 27,000
Current ratio 3.15 times 1.74 times
Value of current assets of Danny Limited :
Account receivables + Prepaid insurance + Petty cash + Closing inventory + Bank =
15480+500+40+10200+59120 = 85340
Current liability : Account payable + Electricity account payable + Outstanding Tax
Expenses + Electricity Expenses Payable = 16120+8000+1920+1000 = 27040
Value of current assets of Amber: Trade Receivables + Inventory + Prepaid rates +
Cash in Hand + Cash at Bank = 13110+31500 + 540+75+1875 = 47100
Value of current liability: Trade payable = 27000
Above table shows the current ratio results and it has been identify that current ratio of
Danny Ltd is 3.15 times and Amber Company is 1.74 times. It is obvious that, Danny Ltd
performs well and they have ability to fulfil their short term obligations. In addition they have
more potential to use their resources in effective manner.
Acid test ratio:
Formula: Acid test ratio = Quick assets / Current liability
Quick assets = Current assets – inventory – prepaid
Danny Ltd = 85,340 – 10,200 – 500
= 74,640
Amber = 47,100 - 31,500 – 540
= 15,060
Ratio Danny Ltd Amber
Quick assets Account
receivables + Prepaid
insuanrace + Prtty cash +
Closing inventory + Bank =
15480+500+40+10200+59120
74,640 15,060
13

Current liability 27,040 27,000
Current ratio 2.76 times 0.55 times
On the basis of above analysis, it has been interpreted that idea ratio of acid test ratio is
1:1 but Danny ltd has 2.76 and Amber Company has 0.55 times. On the basis of comparison,
Danny Ltd performance is better in relation to Amber and it also shows that Danny Ltd has more
than required liquidity (Sari and Heryanto, 2019). It is suggested that, managers of Danny Ltd
should use their resources to generate more revenue or spend their money somewhere for more
benefits.
Draft of topic: The topic of report was “Essay on Accounting fundamentals” that contains
different kinds of financial practices. The report was categorized into four parts and in first one I
did basic accounting practice in order to produce journal entries, trial balance and balance sheet.
This was done by help of using excel spreadsheet in which I entered the value of given
transactions as per rule of accounting and got the final outcome. Coming next to the second task,
it was related to analysing importance of accounting information for users. For this task, I used
secondary data available on internet to get an idea. In the third task, requirement was same as to
first and I prepared similar accounts and statements but with different information. The last task
of report was about calculation of ratio in accordance of produced financial statement under task
one and three.
CONCLUSION
From the above discussion it has been analysed that, accounting includes the collecting,
classifying and summarising the recorded transaction is essential. If accounting entries has been
established, these activities are properly reported in the respected books of account in a
structured manner via a fundamental accounting method. The relevance and importance of
accounting is to properly record all financial and reporting transactions engaged into by the
corporation. The finance manager keeps a list of accounts for accounting purposes. Management
is responsible to investors on the state of the affairs of the company. The activities financed with
the capital of investors must be reviewed on a regular basis. For this reason, the results of a year
submitted to them are summed up annually through daily reports.
14

REFERENCES
Books & Journals
Adekola, A., Samy, M. and Knight, D., 2017. Efficient working capital management as the tool
for driving profitability and liquidity: a correlation analysis of Nigerian
companies. International Journal of Business and Globalisation, 18(2), pp.251-275.
Baksaas, K. M. and Stenheim, T., 2019. Proposal for improved financial statements under
IFRS. Cogent Business & Management, 6(1), p.1642982.
Burger, M. and Curtis, A., 2017. Aggregate margin debt and the divergence of price from
accounting fundamentals. Contemporary Accounting Research, 34(3), pp.1418-1445.
Dewi, N., Azam, S. and Yusoff, S., 2019. Factors influencing the information quality of local
government financial statement and financial accountability. Management Science
Letters, 9(9), pp.1373-1384.
Hermuningsih, S., Kirana, K.C. and Erawati, T., 2019. DOES GROWTH OPPORTUNITIES
MODERATE THE RELATIONSHIP BETWEEN PROFITABILITY AND
LIQUIDITY TOWARD FIRM VALUE?. JBFEM, 2(1), pp.1-8.
Hutton, A. P., 2017. Discussion of “Aggregate Margin Debt and the Divergence of Price from
Accounting Fundamentals”. Contemporary Accounting Research, 34(3), pp.1446-1452.
Nichols, D.C., Wahlen, J.M. and Wieland, M.M., 2017. Pricing and Mispricing of Accounting
Fundamentals in the Time‐Series and in the Cross Section. Contemporary Accounting
Research, 34(3), pp.1378-1417.
Ogneva, M., Piotroski, J. D. and Zakolyukina, A. A., 2019. Accounting fundamentals and
systematic risk: Corporate failure over the business cycle. The Accounting Review,
pp.0000-0000.
Sari, N. and Heryanto, H., 2019. The Effect Of Training And Utilization Of SIPKD On
Competency And Its Impact On The Quality Of Financial Statements In Dharmasraya
Regency SKPD. Archives of Business Research, 7(7), pp.112-121.
15