Business Transactions and Financial Ratio Analysis Report

This report provides a comprehensive financial analysis of Linda's business, beginning with the recording of business transactions through journal entries, the creation of ledger accounts, and the extraction of a trial balance. The report then details the preparation of an income statement and balance sheet, presenting a clear view of the company's financial position. Furthermore, it delves into financial ratio analysis, calculating and interpreting key ratios to assess the company's performance, liquidity, and efficiency, comparing it to competitors. The report also includes a letter to Linda explaining the accounting treatment of personal drawings. The conclusion summarizes the findings, emphasizing the importance of financial reporting and analysis for informed decision-making.

Recording Business
Transactions
(Portfolio 2)

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
a. Recording journal entries of business:.....................................................................................3
b. Preparing company's ledger accounts:.....................................................................................5
c. Extraction of Trial Balance:.....................................................................................................7
d. Preparing Income Statement for year ending 31st October 2020:...........................................8
e. Preparation of Financial statement:..........................................................................................8
f. Writing brief letter to Linda in relevance to drawing:..............................................................9
PART B..........................................................................................................................................10
a. Calculation of financial ratios:...............................................................................................10
Working note:............................................................................................................................10
b. Interpretation and comparison of ratio analysis:....................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Recording business transactions indicates noting, summarising or reporting business
transactions in terms of money (Kamburova, 2020). While considering characteristics of
business transactions it can be noted that it is a requirement for transactions in relevance to
business to entitle support of some source document , for example sales invoice, receipt etc. and
it is necessary for them to pertain two fold effect (Lessambo, 2018).
This report evaluates financial information of Linda's business and interprets it to gain
knowledge about financial health of company. In this report, journal entries of Linda's business
is recorded. Further, its ledger, trial balance and income statement is prepared. Motive is to
compute its ratio analysis and identify its financial position in comparison to competitors.
PART A
a. Recording journal entries of business:
Journal Entries of Linda's Business
Date Particulars L.F Dr. Cr.
01.10.20 Van... a/c….. Dr. 3,000
Cash a/c….. Dr. 5,200
Bank a/c…… Dr. 8,000
To Capital….. a/c…… 16,200
(Made capital investment in company)
02.10.20 Laptop a/c…… Dr. 1,000
To…. Bank….. a/c…… 1,000
(purchase of laptop )
04.10.20 Purchase….. a/c.….. Dr. 2,450

To…Toys…. Ltd… a/c… 2,450
(Purchase of goods from Toy Ltd.)
05.10.20 Bank….. a/c….. Dr. 1,500
To …..Sales….. a/c……. 1,500
(Sold goods and receive amount through
bank)
12.10.20 Repair…. a/c.... Dr. 80
To Cash a/c 80
(paid cash for repair of laptop)
18.10.20 Toys….. Ltd…. a/c…… Dr. 100
To…. Purchase… Return… a/c… 100
(purchase returned)
21.10.20 Bank… a/c…. Dr. 500
To…. Rent….. a/c….. 500
(received rent by cheque)
23.10.20 Fred…. a/c….. Dr. 400
Cash…… a/c…… Dr. 1,500
To….. Sales….. a/c…… 1,900
(Goods sold)

23.10.20 Cash…… a/c….. Dr. 500
To….. Sales….. a/c…… 500
(Sold goods on cash)
24.10.20 Car…. a/c……… Dr. 2,500
To…. Bank….. a/c…. 2,500
(purchase of car by bank)
26.10.20 Wages….. a/c…. Dr. 820
To… Bank….. a/c….. 820
(paid wages)
30.10.20 Drawings….. a/c……. Dr. 1,600
To…. Bank….. a/c……. 1,600
(Amount withdrawn)
31.10.20 Rent….. a/c…. Dr. 1,000
To….. Bank….. a/c….. 1,000
(rent payment)
Total 30,150 30,150
b. Preparing company's ledger accounts:
Ledger Accounts
Bank Account

Date Particular J.F Amount Date Particular J.F Amount
01.10.20 To… Capital……. 8,000 02.10.20 By… Laptop…. 1,000
05.10.20 To…. Sales……. 1,500 24.10.20 By….. Car…. 2,500
21.10.20 To…. Capital…. 500 26.10.20 By…. Wages….. 820
30.10.20
By…
Drawings….. 1,600
31.10.20 By…. Rent….. 100
31.12.20
By… Balance…
c/d 3,080
Total… 10,000 Total… 10,000
01/11/20 To Balance b/d 3,080
Van Account
Date Particular J.F Amount Date Particular J.F Amount
01.10.20 To… Capital….. 3,000 31.10.20
By… Balance…
c/d.. 3,000
Total…. 3,000 Total….. 3,000
01.11.20 To Balance b/d 3,000
Laptop Account
Date Particular J.F Amount Date Particular J.F Amount
02.10.20 To… Bank….. 1,000 31/10/20
By… Balance…
c/d 1,000
Total 1,000 Total 1,000
01.11.20 To Balance b/d 1,000
Toys Ltd. Account
Date Particular J.F Amount Date Particular J.F Amount
18.10.20
To… Purchase….
Return 100 04.10.20
By…
Purchase… 2,450
31.10.20 To Balance c/d 2,350
Total…. 2450 Total…. 2450
01.11.20 By.. Balance…. 2350

b/d
Purchase Return Account….
Date Particular J.F Amount Date Particular J.F Amount
31.10.20 To… Trading.. 100 18/10/20 By Toys Ltd. 100
Total 100 Total 100
Fred's Account…
Date Particular J.F Amount Date Particular J.F Amount
23. 10. 20 To Sales 400 31/10/20 By Balance c/d 400
Total 400 Total 400
400
Car Account…
Date Particular J.F Amount Date Particular J.F Amount
24. 10. 20 To Bank…. 2,500 31/10/20
By Balance…
c/d 2,500
Total…. 2,500 Total… 2,500
01. 11. 20 To Balance b/d 2,500
Drawings Account
Date Particular J.F Amount Date Particular J.F Amount
30. 10. 20 To bank 1,600
By Profit and
Loss 1,600
Total 1,600 Total 1,600
Cash Account
Date Particular J.F Amount Date Particular J.F Amount
01. 10. 20 To capital… 5,200 12. 10. 20 By Repair 80
23. 10. 20 To sales…. 1,500 31. 10. 20 By balance c/d 7,120
To sales… 500

Total 7,200 Total 7,200
01. 11. 20 To balance b/d 7,120
Capital Account…
Date Particular J.F Amount Date Particular J.F Amount
31. 10. 20 To Balance c/d 16,200 01. 10. 20 By Bank….. 8,000
By Cash… 5,200
By Van… 3,000
Total 16,200 Total 16,200
01. 11. 20 By Balance b/d 16,200
Purchase Account
Date Particular J.F Amount Date Particular… J.F Amount
04. 10. 20 To toys Ltd 2,450 31. 10. 20 By Trading 2,450
Total 2,450 Total 2,450
Sales Account
Date Particular J.F Amount Date Particular J.F Amount
31. 10. 20 To Trading 3,900 05. 10. 20 By Bank 1,500
23. 10. 20 By Fred 400
By Cash 1,500
By Cash 500
Total 3,900 Total 3,900
Rent Account
Date Particular J.F Amount Date Particular
J.
F Amount
31. 10. 20 To bank 1,000 21. 10. 20 By Bank 500
31. 10. 20
By Profit and
Loss 500
Total 1,000 Total 1,000
Wages Account
Date Particular…. J.F Amount Date Particular…
J.
F Amount

26. 10. 20 To sales 820 31. 10. 20
By Profit and
Loss 820
Total 820 Total 820
Repair Account
Date Particular.. J.F Amount Date Particular…
J.
F Amount
12. 10. 20 To cash…. 80 31. 10. 20
By Profit and
Loss…. 80
Total… 80 Total…… 80
c. Extraction of Trial Balance:
TRIAL BALANCE
Debit Trail Balance Credit
Particulars Amount Particular Amount
Bank 3,080 Capital 16,200
Cash 7,120 Toys Ltd. 2,350
Van 3,000 Sales 3,900
Laptop 1,000 Purchase Return 100
Purchase 2,450
Rent 500
Fred 400
Wages 820
Car 2,500
Repair 80
Drawings 1,600
Total 22,550 Total 22,550

d. Preparing profit and loss Statement :
e. Preparation of Financial statement:
Balance Sheet
Liabilities Amount Assets Amount
Capital
16,200 Bank 3,080
Less: Drawings 1,600 14600 Cash 7,120
Creditor (Toys Ltd) 2350 Van 3,000

Net Profit 400 Laptop 1,000
Car 2,500
Debtor (Fred) 400
Closing Inventory 250
Total 17,350 Total 17,350
f. Writing brief letter to Linda in relevance to drawing:
BRIEF LETTER
Dear Linda,
In context to your drawing of £1600 for holiday in Florida, it is necessary to explain you that
this amount will be considered as personal drawing. As, owner and company are two separate
entity as per accounting concept. According to which, owner's personal expenses should not be
involved in financial transactions of business.
Thanking you,
Financial Advisor

PART B
a. Calculation of financial ratios:
Working note:
Current assets= Cash+bank + inventory
Quick assets= current assets- inventory
Net credit purchase= Purchase – return outward.

b. Interpretation and comparison of ratio analysis:
Ratio analysis can be defined as a technique or method of analysing of financial
statements of a company (Schmidt, 2018). This tool helps in comparing financial status of
company with its competitors., which enables firm to identify its position and gain financial
sustainability. Ratio analysis provides broader picture about financial health of an organization
(Martins Noriller and Tibúrcio Silva, 2019). It pertains management of an enterprise to overview
interpreted financial information and formulate best strategies for further expansion or growth of
entity.
While comparing ratio analysis of Linda's business with its competitors it is interpreted
that net profit of Linda's business is 10.26% while net profit margin of competitors is 31%. It
states that operating expenses of company is high as compared to competitors. Hence, firm
should focus on eliminated or deducting unnecessary costs. Further, gross profit shows that
efficiency of an entity in generating revenue from its core competencies. Gross profit on Linda's
business is 46.15% while that of competitors is 54%. hence, management team of business
should focus more on reducing production expenses and improving its proficiency. While
discussing about current ratio, it can be seen that current ratio of company is higher than its
competitors, that is, current ratio of Linda's business is 4.6 while current ratio of competitors is
2.87. it pinpoints that liquidity of business is highly capable of paying short term obligations.
Acid test ratio of competitors is 1.35 while that of Linda's business is 4.51, which is again a good
sign as it shows that liquidity position of company is good. Organization takes 37 days for
collecting receivables, on the other hand, its competitors takes 50 days. It indicates that payments
are collected faster, hence, chances of bad debts reduces. On the contrary, creditors payment
period of an organization is high in comparison to competitors which declines its credit
worthiness (Zaidi, Akhter and Akhtar, 2018). Overall, company financial health of company is
good and its liquidity position is also better. But, management of firm need to focus more on
reducing expenses and improving profit margin.
CONCLUSION
Above report concludes that business transactions must be recorded in monetary terms to
gain information about firm's financial transactions. For this purpose journal entries are recorded
in the books of account by accounting department. On the basis of these entries, ledger accounts
are prepared. Further, trial balance of company is prepared to list or summarise such ledger

accounts. Income statements shows the profitability position of company and balance sheet is an
indicators of liability and assets that company holds. These are termed as financial statements,
which conveys the financial status of business. For interpreting such statement, ratio analysis is
conducted. Ratio analysis is the indicator of company's financial position.

REFERENCES
Books and Journals:
Kamburova, L., 2020. The Development of Practices for the Preparation of Consolidated
Financial Statements. Ikonomiceski i Sotsialni Alternativi. (1). pp. 123-133.
Lessambo, F. I., 2018. Analysis of the Statements of Cash Flows. In Financial Statements (pp.
195-206). Palgrave Macmillan, Cham.
Martins Noriller, R. and Tibúrcio Silva, C. A., 2019. IMPACT OF MACROECONOMIC
VARIABLES ON THE COMPONENTS OF FINANCIAL STATEMENTS OF LATIN
AMERICAN PUBLIC COMPANIES. Revista Universo Contábil. 15(3).
Schmidt, M., 2018. A Note on the Proprietary and Entity Perspectives in Financial Statements:
The Implications for two Current Controversial Issues. Accounting in Europe. 15(1), pp.
134-147.
Servicing, M., Notes to the Financial Statements. Policy. 1(1,136), pp. 1-136.
Yuesti, A., Adnyana, I. M. D. and Pramesti, I. G. A. A., Management information systems and
the quality of financial statements in local government. Journal of Public Affairs,
p.e2462.
Zaidi, U. K., Akhter, J. and Akhtar, A., 2018. Window Dressing of Financial Statements in the
Era of Digital Finance: A Study of Small Cap Indian Companies. Metamorphosis.
17(2). pp. 67-75.