Financial Accounting: Journal, Ledger, and Financial Statements

This assignment provides a comprehensive overview of recording business transactions, starting with journal entries and progressing through ledger accounts, trial balances, income statements, and balance sheets. The solution uses a case study of a new business, detailing each step in the accounting cycle. It includes the creation of a journal, the posting of entries to a ledger, and the preparation of financial statements. Furthermore, the assignment calculates and analyzes various financial ratios, such as net profit margin, gross profit margin, current ratio, quick ratio, accounts receivable collection period, and accounts payable payment period, comparing the business's performance to that of its competitors. The analysis includes the treatment of owner's drawings and their impact on financial statements, ensuring a thorough understanding of the accounting principles involved.

RECORDING BUSINESS
TRANSACTION

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY ..................................................................................................................................3
JOURNAL...................................................................................................................................3
LEDGER......................................................................................................................................4
Trial Balance as on 31 October 2020...........................................................................................6
Income Statement for the period ending 31 October 2020..........................................................7
Balance Sheet as at 31 October 2020...........................................................................................7
REFERENCES................................................................................................................................1
CONCLUSION................................................................................................................................1

INTRODUCTION
The present report is prepared for recording various transaction that has been arisen during
economic activity. There are various steps that must be followed by every business owner in
recording transaction of financial nature. The report will depict the step by step procedure in
maintaining financial accounts (Kimmel, Weygandt and Kieso, 2018). A case scenario of Linda
who has started her business currently has been undertaken for financial accounting perspective.
The report will begin with recording of business transaction in journal book, then posting these
transactions to ledger account, summarising the accounts by extracting trial balance depicting
summary of all transactions, and finally analysing profitability of the business by preparing
income statement. At last the balance sheet will be prepared to indicate the financial position of
the business. In second part of the report, we will calculate various ratios like profitability,
liquidity and efficiency ratios and will compare Linda's business performance with that of its
competitor.
MAIN BODY
JOURNAL
Date Particulars Debit Credit
01/10/20 Bank A/c 8000
Cash A/c 5200
Van A/c 3000
To Capital A/c 16200
02/10/20 Laptop A/c 1000
To Bank A/c 1000
04/10/20 Purchase A/c 2450
To Toys Ltd. 2450
05/10/20 Bank A/c 1500
To Sales A/c 1500
12/10/20 Repair A/c 80
To Cash A/c 80
18/10/20 Toys Ltd. A/c 100

To Purchase A/c 100
21/10/20 Bank A/c 500
To Rent for premises A/c 500
23/10/20 Cash A/c 1500
Fred A/c 400
To Sales A/c 1900
23/10/20 Cash A/c 500
To Sales A/c 500
24/10/20 Second-hand car 2500
To Bank A/c 2500
26/10/20 Wages A/c 820
To Bank A/c 820
30/10/20 Rent A/c 1000
To Bank A/c 1000
31/10/20 **Drawings A/c 1600
To Bank A/c 1600
Total 30150 30150
**Note: The trip to Florida undertaken by Linda and its associated expenses will be considered
as business expenses as the question is silent about the cause of the trip. So the given expenses
made by Linda out of her business account will not be treated as business expense and rather
than that, this will be treated as Drawings made by her out of her own capital (Li, 2018).
LEDGER
Capital A/c
Date Particulars Amount Date Particulars Amount
31/10/20 To Drawings a/c 1600 01/10/20 By Bank a/c 8000
By Cash a/c 5200
By Van a/c 3000
31/10/20 To Balance c/f 14600
01/11/20 By Balance b/d 14600
Bank A/c

Date Particulars Amount Date Particulars Amount
01/10/20 To Capital A/c 8000 02/10/20 By Laptop a/c 1000
05/10/20 To Sales A/c 1500 24/10/20
By Second-
hand Car a/c 2500
21/10/20 To Rent for premises A/c 500 26/10/20 By Wages a/c 820
30/10/20 By Rent a/c 1000
31/10/20
By Drawings
a/c 1600
31/10/20 By Balance c/f 3080
01/11/20 To Balance b/d 3080
Cash A/c
Date Particulars Amount Date Particulars Amount
01/10/20 To Capital A/c 5200 12/10/20 By Repairs a/c 80
23/10/20 To Sales A/c 1500
23/10/20 To Sales A/c 500
31/10/20 By Balance c/f 7120
01/11/20 To Balance b/d 7120
Van A/c
Date Particulars Amount Date Particulars Amount
01/10/20 To Capital A/c 3000
31/10/20 By Balance c/f 3000
01/11/20 To Balance b/d 3000
Laptop A/c
Date Particulars Amount Date Particulars Amount
02/10/20 To Bank A/c 1000
31/10/20 By Balance c/f 1000
01/11/20 To Balance b/d 1000

Purchase A/c
Date Particulars Amount Date Particulars Amount
04/10/20 To Toys Ltd. 2450 18/10/20 By Toys Ltd. 100
31/10/20
By Trading &
profit/loss a/c 2350
Sales A/c
Date Particulars Amount Date Particulars Amount
05/10/20 By Bank a/c 1500
23/10/20 By Cash a/c 1500
By Fred a/c 400
By Cash a/c 500
31/10/20 To Trading & Profit/loss a/c 3900
Toys Ltd. A/c
Date Particulars Amount Date Particulars Amount
18/10/20 To Purchase A/c 100 04/10/20 By Purchase a/c 2450
31/10/20 To Balance c/f 2350
01/11/20 By Balance b/d 2350
Fred A/c
Date Particulars Amount Date Particulars Amount
23/10/20 To Sales A/c 400
31/10/20 By Balance c/f 400
01/11/20 To Balance b/d 400
Rent for Premises A/c
Date Particulars Amount Date Particulars Amount
21/10/20 By Bank a/c 500
31/10/20 To Trading & Profit/loss a/c 500

Second-hand Car A/c
Date Particulars Amount Date Particulars Amount
24/10/20 To Bank A/c 2500
31/10/20 By Balance c/f 2500
01/11/20 To Balance b/d 2500
Wages A/c
Date Particulars Amount Date Particulars Amount
26/10/20 To Bank A/c 820
31/10/20
By Trading &
profit/loss a/c 820
Drawings A/c
Date Particulars Amount Date Particulars Amount
31/10/20 To Bank A/c 1600 31/10/20 By Capital a/c 1600
Rent A/c
Date Particulars Amount Date Particulars Amount
30/10/20 To Bank A/c 1000 31/10/20
By Trading &
profit/loss a/c 1000
Repairs A/c
Date Particulars Amount Date Particulars Amount
12/10/20 To Cash A/c 80 31/10/20
By Trading &
profit/loss a/c 80
Trial Balance as on 31 October 2020
Particulars Debit Credit
Capital 14600

Bank A/c 3080
Cash A/c 7120
Van A/c 3000
Laptop A/c 1000
Purchase A/c 2350
Sales A/c 3900
Toys Ltd. A/c 2350
Repair A/c 80
Rent for premises A/c 500
Fred A/c 400
Second-hand car 2500
Wages A/c 820
Rent A/c 1000
Total 21350 21350
Income Statement for the period ending 31 October 2020
Particulars Amount
Sales 3900
Less:
Purchases 2350
Wages 820
Closing Stock (250)
Cost Of Goods Sold -2920
Gross Profit 980
Add: Rent Received 500
Total Income 1480
Less:
Repairs -80
Rent -1000

Net Profit 400
Balance Sheet as at 31 October 2020
Particulars Amount
Assets
Current Assets
Bank 3080
Cash 7120
Debtors (Fred) 400
Closing Stock 250
Fixed Assets
Van 3000
Laptop 1000
Second-hand car 2500
Total 17350
Capital and Liability
Capital 14600
Add: Net Profit 400 15000
Creditors (Toys Ltd.) 2350
Total 17350
f) Drawings refers to the amount withdrawn by the owner of the business say small or sole owner
's business like Linda's one, where she has withdrawn from her business bank account while
travelling to Florida. Now the question here and always arises is whether the expenses borne by
the owner are considered as business expenses and charge them in the profit and loss account of
the business or not (Chaolin and Fengying, 2019). This question has can be best answer as
whether the expenses arises even if the business activities are not undertaken, if yes then these
expenses are of personal nature and cannot be charged in the profit and loss account of the
business and instead these will be treated as drawings of the business and charged to capital of
the owner. If no, then whatever the expenses are incurred will be treated as business expenses

and accordingly will be charged in profit and loss account (Schroeder, Clark and Cathey, 2019).
Here Linda must treat her withdrawal from business bank account during Florida Travel as
drawing made by her out her business capital account which will reduce her capital balance by
that amount.
Part B
Net profit margin=Net income/Revenue*100=400/3900*100=10.25
Gross profit margin=Revenue-Cost of goods sold/Revenue*100=3900-2920/3900*100=25.12
Current ratio=Current Assets/Current Liabilities=10850/2350=4.61
Quick ratio=Current assets-Inventory/Current Liabilities=10850-250/2350=4.51
Accounts receivable collection period=Average accounts receivable/Net credit
sales*365=100/400*365=91 days
As,Average accounts receivable=0+400/2=100
Net credit sales=1900-1500=400
Accounts payable payment period=365/Payable turnover ratio=365/12=30 days
As,Payable turnover ratio=Average accounts payable/Daily cost of sales=1175/97=12
Average accounts payable=2350/2=1175
Daily cost of sales=2920/30=97.33
Net profit margin denotes how much revenue is converted in profit. It is denoted in percentage
form. Net profit can also be called net income statement for the company. It denotes how well a
company is containing its operational costs and able to generate profit from sales. The net profit
margin is an important indicator of company's financial health. By tracking it a company is able
to assess whether current practices of the company are moving in the right direction. Company
can also forecast its future growth (Rodrigues and Rodrigues, 2018).
Investors see it as a prominent factor considering profits of the previous few years to see
the growth of the company. They assess by the ratio how well the company has been controlling
its operational costs and whether it can pay timely dividends.
Here the company's profit margin is around 10% which is very less compared to the
competitors. Company will have to lessen its operation costs and increase revenue. Being a new
business, it is acceptable that it will take time for the company to generate profits.
Gross profit margin is expressed as a percentage of sales. It is basically the amount of profit
made before deduction of selling, general and administrative costs. It tells about the quality of

management practices followed and quality of products used. Company can lessen on factors
influencing cost of goods without compromising on the quality to increase on the gross profit.
In the company's scenario, company has registered a gross profit margin of around 25% which is
decent but very low compared to that of competitors which is 54%. Being a new business it will
take some time to register a higher gross margin. Company needs to increase the revenue while
trying to control the costs on goods (Mubashir and Bin Tariq, 2017).
Current ratio is also known as working capital ratio. It considers the current assets and current
liabilities. It is generally a measure of whether a company can pay off its current liabilities with
help of current assets. It denotes whether the company has sufficient working capital to carry on
with its operations. This also signifies the liquidity of the company. Investors use it as a tool to
gauge whether company has sufficient liquidity to pay off its current debts.
Company has registered a current ratio of 4.61 which is higher to that of competitor's which
stands at 2.87%. This means company has enough current assets at hand to pay off its current
liabilities. However, it is still not a good sign for the company as a ratio of 1 is considered ideal
for the companies. A ratio higher than 3 means that company is not able to utilise the assets
optimally for its benefit which can increase its revenue. This will mean less of dividend for the
investors. To increase investment company will have to increase use of assets optimally. The
company can think of utilising fixed assets like car and laptop for business operations and help
increase business.
Quick ratio means the company possessing exact how much resources that can be liquefied.
Therefore, the inventory is subtracted from the current assets as it can take time for inventory to
be sold and converted in cash. The name itself tells how quickly assets can be converted to cash
and pay off its liabilities. Investors check on this ratio as to in time of crisis how quickly can
their invested money can be paid back.
Company registers a quick ratio of 4.51 while the competitors ratio is 1.35. This shows
that company is in a good position to liquefy its current assets without selling off inventory.

Accounts receivable collection period is the time period taken to get back the credit owed to the
company by its debtors. It is common in business that suppliers do not have cash in hand always
to pay for the goods and may want credit period. For an organisation, it is necessary to have the
receivables back in minimum or allotted time period. The longer time period taken will mean
company having less capital in hand for operations (Supriyanto and Darmawan, 2018).
Company's collection period is 91 days which is way more than 50 days of competitors.
Company needs to review its credit policy to get back credit on time.
Accounts payable payment period is the time in which company pays back its creditors. The
company has to utilise the credit time to its advantage to expand business operations.
Company's payment period is 30 days which is less compared to 72 days of competitors. It is
advised that if a company can extend their credit period with its creditors it will have more
capital in hand. However, it is also advisable to pay off credit dues on time for ethical business
(Purba and Septian, 2019).
CONCLUSION
It can be concluded that financial assessment helps small businesses check on their assets
function as well as areas where company can do cost reduction. The ratio analysis also highlights
present situation of the company and where it can make improvement to stay in competition.
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REFERENCES
Books and journals
Azar, N., Zakaria, Z. and Sulaiman, N. A., 2019. The Quality of Accounting Information:
Relevance or Value-Relevance?. Asian Journal of Accounting Perspectives, 12(1), pp.1-
21.
Chaolin, C. and Fengying, Y., 2019. Improve the Basic Standard of Accounting Standard for
Business Enterprises by Learning from IASB Conceptual Framework. Accounting
Research, (9), p.4.
Darma, J., and et. al., 2018. The Role of Top Management Support in the Quality of Financial
Accounting Information Systems. Journal of Applied Economic Sciences, 13(4).
Kimmel, P. D., Weygandt, J. J. and Kieso, D. E., 2018. Financial accounting: Tools for business
decision making. John Wiley & Sons.
Li, Z., 2018. Research on the Innovation of Accounting Concept and Financial Accounting
System under the Background of Knowledge Economy.
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Wild, J., 2019. Financial Accounting: Information for Decisions, 9e.
Rodrigues, L. and Rodrigues, L., 2018. Economic-financial performance of the Brazilian
sugarcane energy industry: An empirical evaluation using financial ratio, cluster and
discriminant analysis. Biomass and bioenergy, 108, pp.289-296.
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.
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Supriyanto, J. and Darmawan, A., 2018. The effect of financial ratio on financial distress in
predicting bankruptcy. Journal of Applied Managerial Accounting, 2(1), pp.110-120.
Purba, J.H.V. and Septian, M.R., 2019. Analysis of Short Term Financial Performance: A Case
Study of an Energy Service Provider. Journal of Accounting Research, Organization
and Economics, 2(2), pp.113-122.
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