Recording Business Transactions and Financial Analysis (Toy Shop)

This project presents a detailed financial analysis of a newly established toy shop in Oxford, focusing on the month of October 2020. It begins by documenting the business transactions through journal entries, followed by the creation of ledger accounts and a trial balance to identify any posting errors. The project then constructs an income statement to assess profitability and a statement of financial position (balance sheet) to evaluate the business's financial health. Furthermore, the project includes the calculation and comparison of various financial ratios to gauge the toy shop's performance against industry standards and competitors. The analysis covers net profit margin, gross profit margin, current ratio, acid test ratio, accounts receivable collection period, and accounts payable payment period. The project concludes with insights into the company's financial standing and future growth prospects, using the financial statements as the basis for its assessment.

RECORDING BUSINESS
TRANSACTION

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
PART A...........................................................................................................................................1
b) Ledger accounts for the month of October 2020 of toy shop in Oxford:-...............................1
c) Trial balance as at 31st October 2020:-...................................................................................4
d) Income Statement for the period ended 31st October 2020:-..................................................4
e) Statement of Financial Position as at 31st October 2020:-......................................................5
f) Meaning of drawings account:-................................................................................................5
PART B............................................................................................................................................6
i) Calculation of ratios:-...............................................................................................................6
ii) Comparison of ratios:-.............................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
This project shall be recording the business transactions of a newly incorporated toy shop in the
Oxford. It shall be demonstrating all the transactions that are carried out in the month of October
2020. The report shall be showing the journal entries of the business transactions and then its
ledger postings. Based on this ledger accounts the trial balance shall be prepared on 31st October
shall be prepared to see the errors in the posting of the transactions. Further the project shall be
including the income statement of the business that shall be showing the profits and losses
incurred for the period. Lastly it shall be depicting the financial position of the business with the
help of balance sheet. Another part of the project shall be including the calculations of the
various ratios reflecting the performance of the business and it shall be compared with that of the
competitors to conduct the comparative analysis.
MAIN BODY
PART A
b) Ledger accounts for the month of October 2020 of toy shop in Oxford:-
Bank A/C
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT
01/10/20 To Capital A/C 8000 02/10/20 By Laptop A/C 1000
05/10/20
To Inventory
A/C 1500 24/10/20 By Car A/C 2500
21/10/20
To Rent received
A/C 500 26/10/20 By Wages A/C 820
30/10/20 By Rent paid A/C 1000
31/10/20 By Drawings A/C 1600
31/10/20 By Balance c/d 3080
10000 10000
Cash A/C
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS
J.F
. AMOUNT
01/10/20 To Capital A/C 5200 12/10/20 By Repairs A/C 80
23/10/20
To Inventory
A/C 1500 31/10/20 By Balance c/d 7120
23/10/20
To Inventory
A/C 500
7200 7200
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Van A/C
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT
01/10/20 To Capital A/C 3000 31/10/20 By Balance c/d 3000
3000 3000
Capital A/C
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT
31/10/20 To Balance c/d 16200 01/10/20 By Bank A/C 8000
01/10/20 By Cash A/C 5200
01/10/20 By Van A/C 3000
16200 16200
Laptop A/C
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT
02/10/20 To Bank A/C 1000 31/10/20 By Balance c/d 1000
1000 1000
Inventory A/C
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT
04/10/20
To Toys Ltd.
A/C 2450 05/10/20 By Bank A/C 1500
31/10/20 To Balance c/d 1550 18/10/20 By Toys Ltd A/C 100
23/10/20 By Cash A/C 1500
23/10/20 By Fred A/C 400
23/10/20 By Cash A/C 500
4000 4000
Toys Ltd. A/C
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT
18/10/20
To Inventory
A/C 100 04/10/20
By Inventory
A/C 2450
31/10/20 To Balance c/d 2350
2450 2450
Repairs A/C
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT
12/10/20 To Cash A/C 80 31/10/20 By Balance c/d 80
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80 80
Rent received A/C
DATE PARTICULARS J.F. AMOUNT DATE
PARTICULAR
S J.F. AMOUNT
31/10/20 To Balance c/d 500 21/10/20 By Bank A/C 500
500 500
Fred A/C
DATE PARTICULARS J.F. AMOUNT DATE
PARTICULAR
S J.F. AMOUNT
23/10/20
To Inventory
A/C 400 31/10/20 By Balance c/d 400
400 400
Car A/C
DATE PARTICULARS J.F. AMOUNT DATE
PARTICULAR
S J.F. AMOUNT
24/10/20 To Bank A/C 2500 31/10/20 By Balance c/d 2500
2500 2500
Wages A/C
DATE PARTICULARS J.F. AMOUNT DATE
PARTICULAR
S J.F. AMOUNT
26/10/20 To Bank A/C 820 31/10/20 By Balance c/d 820
820 820
Rent paid A/C
DATE PARTICULARS J.F. AMOUNT DATE
PARTICULAR
S J.F. AMOUNT
30/10/20 To Bank A/C 1000 31/10/20 By Balance c/d 1000
1000 1000
Drawings A/C
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DATE PARTICULARS J.F. AMOUNT DATE
PARTICULAR
S J.F. AMOUNT
31/10/20 To Bank A/C 1600 31/10/20 By Balance c/d 1600
1600 1600
c) Trial balance as at 31st October 2020:-
S.NO PARTICULARS DEBIT CREDIT
1 Bank A/C 3080
2 Cash A/C 7120
3 Van A/C 3000
4 Capital A/C 16200
5 Laptop A/C 1000
6 Purchase A/C 2450
7 Toys Ltd. A/C 2350
8 Repairs A/C 80
9 Rent received A/C 500
10 Fred A/C 400
11 Car A/C 2500
12 Wages A/C 820
13 Rent paid A/C 1000
14 Drawings A/C 1600
15 Sales A/C 3900
16 Purchase return A/C 100
17 Stock
23050 23050
d) Income Statement for the period ended 31st October 2020:-
PARTICULARS AMOUNT
Net Sales 3900
Purchase 2450
(Purchase return) 100
(Closing Inventory) 250
Less Cost of Goods Sold 2100
Less Wages 820
Add Rent received 500
Gross profit 1480
Less Repairs 80
Less Rent paid 1000
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Net Profit 400
e) Statement of Financial Position as at 31st October 2020:-
£ £
ASSETS LIABILITIES
Current Assets Current Liabilities
Bank 3080 Toys Ltd. 2350
Cash 7120
Stock 250 Non- current liabilities
Fred 400 Capital 16200
Drawings 1600
Fixed Assets Profit 400
Van 3000 15000
Laptop 1000
Car 2500
Total Assets 17350 Total Liabilities 17350
The trial balance of the company is used to check the balances of the accounts at the end of the
year. The debit and credit side of the trial balance matches.
The income statement of the company shows the profitability of the company.
The balance sheet shows the financial position of the company.
f) Meaning of drawings account:-
Drawings are the types of accounts which shows the money or the asset that is withdrawn
by the owner of the business for personal use (Chow and Schoenbaum, 2020). The expenses by
the owner apart from the business purpose are treated as drawings. This amount is further
deducted from the capital in the balance sheet which has been brought in the business by the
owner. As the concept of separate legal entity justifies that the owners and the business are two
separate persons, so the amount withdrawn from the business for private use cannot be an
expense for the business. This account work yearly wherein the previous years balance is
adjusted in the owners equity and next year a separate account is opened (Warren, Jonick and
Schneider, 2020).
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In this business Linda is the owner of the toy shop who has taken a week long holiday in Florida
and pays the expenses from the bank account of the business. And the expense is made in order
to relieve the stress of the business. This amount shall be considered as Linda's drawings from
the business and cannot be considered as the business expense. Since the holiday is taken for
personal purposes and is not related to the business operations it cannot be debited to the expense
account. Indeed, it has to be deducted from the capital account of Linda at the end of the year.
In the above financial statements of the business the effect of the drawings can be seen. A
separate ledger is prepared to post the drawings made by the owner of the business. Apart from
that it is being deducted in the liability side of the balance sheet where owners equity is
mentioned (Dai and Vasarhelyi, 2017).
PART B
i) Calculation of ratios:-
Net Profit 400
Sales 3900
1 NET PROFIT MARGIN Net Profit / Sales *100
10.2564
102564
Gross Profit 980
Sales 3900
2 GROSS PROFIT MARGIN Gross Profit / Sales *100
25.1282
051282
Current Assets 10850
Current Liabilities 2350
3 CURRENT RATIO
Current Assets / Current
Liabilities
4.61702
12766
Current Assets 10850
Inventory 250
Current Liabilities 2350
4 ACID TEST RATIO
Current Assets – Inventory /
Current Liabilities
4.51063
82979
Accounts Receivable 400
Sales 3900
5
ACCOUNTS RECEIVABLE
COLLECTION PERIOD
Accounts Receivable / Sales
*365
37.4358
974359
Accounts Payable 2350
6

Sales 3900
6
ACCOUNTS PAYABLE PAYMENT
PERIOD Accounts Payable / Sales *365
219.935
8974359
ii) Comparison of ratios:-
Ratios are the effective tools that are used to facilitate comparison of the business either
with its past performance or with that of the competitors. The financial status of the company can
be known by comparing any two elements of the business and based on that calculating the
ratios.
Ratio is used to analyse the profitability of company for measuring the results of carrying
out the business. The net profit margin of company is 10.25% where of the competitors is 31%
and it shows that the ratio of company is very low from the industry standards. Lower net profit
means that existing strategies and policies of the company are not effective and also not helping
it to derive the adequate profits from the business (Christensen, Cottrell and Budd, 2016). It is
required that it analyses the current scenarios so that it could frame more effective policies that
will help it to increase the profits. Lower profit margins will affect the confidence of investors in
company and they will tend to move towards competitors giving higher returns.
Gross profit margin reflects the efficiency of management in earning adequate margins
from the main business. It includes trading and manufacturing costs and expenses. Gross margin
should be higher so that company has enough money to carry out the further expenses of the
business. The gross margin of competitors is 54% where of company is 25% only which is very
low (Easton and et.al. 2018). It could be evaluated from the ratio that management is required to
implement more cost effective strategies that will help to increase the gross margins. It is also
required to increase the sales so that it has adequate funds to meet the expenses of business. It
could increase the gross profits by undertaking cost control measures and also adopting
promotional measures that will increase he sales of company.
Current ratio- The current ratio of the business shall be depicting its capacity to pay the
short term obligations of the company (Palepu and et.al. 2020). It shall be comparing the current
assets with the current liabilities with which the liquidity position of the business in the period of
one year shall be seen. The current ratio of the toy business is very good as its current assets are
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4.6 times the amount of its liabilities. In comparison to the competitor also its liquidity position
is better than its current ratio is almost double from that of the competitor (AREAS, 2018).
Acid test ratio- Acid test ratio of the business shall be measuring the highly liquid assets
that the company has to meet its liabilities within one year. The highly liquid assets shall include
the assets which are money or equivalent to the money. It shall not include the stock and the
prepaid expenses. The toy business is highly liquid and efficient as its acid test ratio proves that
it has liquid assets up-to 4.5 times than the short term liabilities. It has excess funds and can
employ them in other activities (Marsha and Murtaqi, 2017). Also, it can be said that the
liquidity position can be a competitive edge over the competitor whose acid test ratio is just 1.35.
Accounts receivable collection period shows the time taken to collect the amount from
the debtors of the business to whom goods were sold on credit. The lesser such time is the better
it is for the company as they shall receive money soon and can employ in the business working
cycle to get benefited from it (Abolfathi and Taebi, 2020). The business takes 37 days to recover
its debts whereas its competitor takes 50 days for the same.
Accounts payable payment period shows the time taken to payback the creditors from
whom we have purchased goods on credit. The higher such time the better it is for the business
as we get leverage in making the payments. The company has very high payable period of 220
days and the competitor has it only for 72 days.
CONCLUSION
The project concludes that the preparation of the financial statements of the company in
order the ascertain its profitability, position and the future growth prospects. Such financial
statements prove to be very crucial for the stakeholders of the business like the owners,
managers, investors, customers, creditors and the government bodies. These stakeholders use
these financial statements to analyse and make decisions. The report depicts the complete
process of accounting wherein firstly journal is prepared and based on that ledger posting and the
trial balance is formed. Post this preparation the profitability shall be known by the income
statement and the financial position shall be known by the balance sheet of the company. To
analyse the position in comparison with other competitors ratios are calculated and the
inefficiencies are known.
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REFERENCES
Books and Journals
Abolfathi, E. and Taebi, P., 2020. Modern Analysis of Financial Statements: Pharmaceutical
companies in Iran. Journal of management and accounting studies. 8(2).
AREAS, B., 2018. Financial analysis. growth, 30, p.10.
Chow, D. C. and Schoenbaum, T. J., 2020. International business transactions: problems, cases,
and materials. Wolters Kluwer Law & Business.
Christensen, T. E., Cottrell, D. M. and Budd, C., 2016. Advanced financial accounting. NY
McGraw-Hill/ Irwin,.
Dai, J. and Vasarhelyi, M. A., 2017. Toward blockchain-based accounting and
assurance. Journal of Information Systems. 31(3). pp.5-21.
Easton, P. D. and et.al. 2018. Financial statement analysis & valuation. Boston, MA: Cambridge
Business Publishers.
Marsha, N. and Murtaqi, I., 2017. The effect of financial ratios on firm value in the food and
beverage sector of the IDX. Journal of Business and Management, 6(2), pp.214-226.
Palepu, K. G. and et.al. 2020. Business analysis and valuation: Using financial statements.
Cengage AU.
Warren, C. S., Jonick, C. and Schneider, J., 2020. Accounting. Cengage Learning.
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