Recording Business Transactions: Journal, Ledger, and Financials

This assignment solution details the process of recording business transactions for Linda's toy business, starting from initial investments to the end-of-month financial statements. It includes the creation of journal entries, ledger accounts, and a trial balance to systematically record transactions. The solution then presents an income statement and balance sheet to assess the business's financial position. Furthermore, the assignment addresses the relevance of adjusting the drawing account, emphasizing that personal expenses are not business expenses. Part B involves calculating and evaluating various financial ratios, such as net profit ratio, gross profit ratio, current ratio, quick ratio, accounts receivable collection period, and accounts payable ratio, to assess Linda's organization's financial performance. The analysis reveals insights into the company's profitability, liquidity, and efficiency, comparing it to industry benchmarks and providing recommendations for improvement. The conclusion summarizes the importance of accounting tools for effective financial reporting and decision-making.

Recording Business transaction

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
A) Journal entry...........................................................................................................................3
B) Formulation of ledger.............................................................................................................6
C)Formulation of Trial balance.................................................................................................10
D)Income statement...................................................................................................................10
E) Balance Sheet........................................................................................................................11
F) Relevance of adjustment of drawing account........................................................................12
PART B..........................................................................................................................................12
A) Calculation of financial ratios...............................................................................................12
B) Evaluation of financial performance of Linda's organization...............................................13
CONCLUSION..............................................................................................................................14
REFERENCE.................................................................................................................................16

INTRODUCTION
Accounting is defined as procedure which useful in record each & every business
transaction in effective manner. This report is formulated to represent how tools and technique of
accounting is used for systematically collect, record and represent transaction in effective
manner. It is also defines how financial ratio use to evaluate performance of organization.
PART A
A) Journal entry.

B) Formulation of ledger
LEDGER ACCOUNT
DR. BANK A/C CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR 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 CAR A/C 2500
21/10/20 TO RENT A/C 500 26/10/20 BY WAGES A/C 820
30/10/20 BY RENT A/C 1000
31/10/20 BY DRAWING A/C 1600
31/10/20 BY BALANCE C/D 3080
TOTAL 10000 TOTAL 10000
DR. CASH ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
01/10/20 TO CAPITAL A/C 5200 12/10/20 BY MISSILARY EXPENSES 80
23/10/20 BY SALES 1500
23/10/20 BY SALES 500 31/10/20 BY BALANCE C/D 7120
TOTAL 7200 TOTAL 7200
DR. PURCHASE ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
04/10/20 TO TOYS LTD. 2450 31/10/20 BY BALANCE C/D 2450
TOTAL 2450 TOTAL 2450
DR. PURCHASE RETURN CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
31/10/20 TO BALANCE C/D 100 18/10/20 BY TOY LTD. 100
TOTAL 100 TOTAL 100

DR. SALES ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
05/10/20 BY BANK A/C 1500
23/10/20 BY FRED A/C 400
23/10/20 BY CASH A/C 1500
31/10/20 TO BALANCE C/D 3900 23/10/20 BY CASH A/C 500
TOTAL 3900 TOTAL 3900
DR. CAPITAL ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
01/10/20 BY CASH A/C 5200
01/10/20 BY BANK A/C 8000
31/10/20 TO BALANCE C/D 16200 01/10/20 BY VAN A/C 3000
TOTAL 16200 TOTAL 16200
DR. LAPTOP ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
02/10/20 TO BANK A/C 1000 31/10/20 BY BALANCE C/D 1000
TOTAL 1000 TOTAL 1000
DR. VAN ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
01/10/20 TO CAPITAL A/C 3000 31/10/20 BY BALANCE C/D 3000
TOTAL 3000 TOTAL 3000
DR. CAR ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
24/10/20 TO BANK A/C 2500 31/10/20 BY BALANCE C/D 2500
TOTAL 2500 TOTAL 2500
DR. WAGES ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
26/10/20 TO BANK A/C 820 31/10/20 BY BALANCE C/D 820
TOTAL 820 TOTAL 820
DR. RENT ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
30/10/20 TO BANK A/C 500 21/10/20 BY BANK A/C 1000
31/10/20 TO BALANCE C/D 500
TOTAL 1000 TOTAL 1000
DR. DRAWING ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
31/10/20 TO BANK A/C 1600 31/10/20 BY BALANCE C/D 1600
TOTAL 1600 TOTAL 1600
DR. TOY LTD. CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
18/10/20 TO PURCHASE RETURN A/C 100 04/10/20 BY PURCHASE A/C 2450
31/10/20 TO BALANCE C/D 2350
TOTAL 2450 TOTAL 2450
DR. FRED ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
23/10/20 TO SALES A/C 400 31/10/20 BY BALANCE C/D 400
TOTAL 400 TOTAL 400
DR. MISSILERY ACCOUNT CR.
DATE PARTICULAR JR AMOUNT DATE PARTICULAR JR AMOUNT
12/10/20 TO CASH A/C 80 31/10/20 BY BALANCE C/D 80
TOTAL 80 TOTAL 80

C)Formulation of Trial balance:

D)Income statement:

E) Balance Sheet.
F) Relevance of adjustment of drawing account.
The term drawing is used while recording transactions when owner took money from
bank account of organization for their personal use. In that case the amount which they taken is
not consider or treated as business expenses moreover it is adjusted as drawing account
(Duţescu, 2019).
This concept based on the assumption of matching concept of accounting, accounting to
this, every transaction should be recorded in the account from which it belongs, in order to cut
throat risk regarding error of omission. In the case of Linda, she took 1600 from bank account to
going on her own vacation, to relive her stress. This trip is not related with business; thus this
expense is treated as personal expense which is known as drawing account. 1600 would be

deducted from the capital of Linda. The main purpose of formulating this account is to control
issue arises related with unethical using property of business.
PART B
A) Calculation of financial ratios.
Ratio is considered as tool which is implemented by manager in order to find out accurate
position of organization for given time period. By calculating of different kinds of ratio manager
able to analysis profit which organization generate for given period of time. Following are the
ratio calculated which use for evaluate performance of organization. These ratios are defined
below:
B) Evaluation of financial performance of Linda's organization.
Net profit ratio: This ratio is used for finding out ability of business organization to
generate profit by running their business operations. It is calculated by analysis relation between
net profit and sales. On the basis of that manager able to determine how much revenue,
organization generate for specific period of time as well an as it provide base for future

forecasting. Net profit of Linda 's organization was 10.26 % on the other side organization's
gross profit was measure at 31 % which states that Linda need to focus on implement those
strategies which useful in order to enhance profitability rate of organization (Gichuki, and Mulu-
Mutuku, 2018).
Gross profit ratio: This ratio is also considered as part of profitability ratio analysis. It is
calculated on the basis of determine relation between gross profit and sales. By calculating this
ratio, ability of business, to generate gross revenue before deducting any kind of tax or other
advertisement expenses.
In this case Linda's organization 's gross profit ratio is valued at 10.26 % on the other side
industry's current ratio is evaluated at 31 %, which states that as compare with industry, Linda
need to work on controlling their cost regarding with manufacturing of goods in order to increase
their cash related assets (Pishva, 2017).
Current ratio: It is a part calculating financial ratio, on the basis of that relation between
current assets and current liability can be determine. Ideal ratio is evaluated at 2:1. Which states
that organization in order to maintain its stability need to maintain excess of current assets as
compare with current liability. Ideal current ratio showcase that organization have sufficient
current assets for fulfil their short term debt liability.
Quick ratio: This ratio is part of liquidity ratio which is computed for the purpose of find
out relation between quick asset and current liability. On the basis of that manager able to find
out how much quantity of cash, organization have to fulfil their debt liability. Value of quick
ratio of Linda's organization was measure at 4.15 and on the other side, industries ratio was
evaluated at 1.35, which mean that as compare with industrialised ratio. Linda able to manage
their assets in such a way that as can overall run her organization in effective manner.
Account receivable collection period: By calculating this ratio, manager recognize time
require for their organization to collect cash from their debtors. Longer time period interprets
that organization not able to collect money from their customers and vice versa (Guerreiro,
Marques, and Gaaloul, 2016).
In case of Linda' organization, they are able to collect their debtor debt amount of
purchase related with them on organization in within 37 days on the other side, industry require
50 days for the purpose to collect cash from their relevant debtors. Which states that Linda is in
good position of cover up their running business cost by collecting funds from debtors.

Account payable ratio: This ratio is calculated for the purpose of find out number of data
which business entity require for pay their debt liability. On the basis of that it has been find out
that long time period showcase organization have lack of availability of cash assets and
managerial skills thus they are not able to fulfil their short term debt liability (Kaal, and
Calcaterra, 2017).
Industry require only average of 72 days for fulfil their short term credit liability on the
other side in case of Linda's organization as compare with their competitors this organization
need to 350 days in order to full-fill their debt liability. AS compare to industry Linda's
organization require more time for full-fill their debt liability as compare with other competitor.
From the calculation of ratio, it is recognized that, Linda's able to run their business in
effective manner however she only needs to concentrate towards management policies of
increases their profitability ratio as well as managing balance of creditors for fulfil their debt
liability in effective manner and increase their cash inflow rate.
CONCLUSION
From the above analysis it has been concluded that personal need to use tools of
accounting for the purpose of recording transaction in such a manner which help in formulation
of systematic report. Ledger, trial balance are tools which use for providing base to preparing
final accounts. Income statement helpful in determine annual value of generating profit and with
the formulation of final account manager able to understand recognised value of assets and
liabilities.
They also use to calculate financial ratio through which they are able to evaluate and
measure financing performance of organization for given specific time period and they also use
these tools for compare performance with rival industries. Which useful in take decision for the
purpose of completion of future projects.

REFERENCE
Books and journals

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