Financial Accounting Project: Double-Entry Records and Ratio Analysis

This project presents a comprehensive financial analysis of Linda's Toy Shop. Part A meticulously details the double-entry records for October 2020, followed by balancing the accounts and constructing the trial balance. It culminates in the creation of an income statement and a statement of financial position, providing a clear snapshot of the company's financial performance. Additionally, a brief letter to Linda explains the concept of drawings. Part B shifts focus to ratio analysis, calculating and interpreting key financial ratios such as net profit margin, gross profit margin, current ratio, quick ratio, receivables collection period, and payables payment period. The analysis compares Linda's Toy Shop's performance to industry averages, highlighting areas for improvement and providing insights into the company's financial health and operational efficiency.

Portfolio (2)
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Table of Contents
Part A...............................................................................................................................................3
A. Double entry records.........................................................................................................3
B. Balance the accounts..........................................................................................................4
C. Trial Balance as at 31st October 2020................................................................................9
D. Income Statement for the period ended on 31st October 2020........................................10
E. Statement of Financial Position as at 31st October 2020..................................................11
F. Brief letter to Linda explaining drawings........................................................................11
Part B.............................................................................................................................................12
A. Calculation of ratios.........................................................................................................12
B. Analysis of ratios calculated............................................................................................13
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Part A
A. Double entry records
Journal of Linda’s Toy Shop
(For the month October 2020)
Date Particulars Debit (£) Credit (£)
01st Oct 20 Cash-at-bank_A/c….................................Dr. 8000
Cash-in-hand_A/c.....................................Dr. 5200
Van_A/c....................................................Dr. 3000
To Capital_A/c 16200
(Business initiated)
02st Oct 20 Laptop_A/c...............................................Dr. 1000
To Cash-at-bank_A/c 1000
(Laptop purchased)
04th Oct 20 Purchase_A/c.............................................Dr. 2450
To Toy_Limited_A/c 2450
(Purchases made on credit)
05th Oct 20 Cash-at-bank_A/c......................................Dr. 1500
To Sales_A/c 1500
(Cash sales made)
12th Oct 20 Repairs_A/c...............................................Dr. 80
To Cash-in-hand_A/c 80
(Laptop repaired)
18th Oct 20 Toy_Limited_A/c......................................Dr. 100
To Purchases_Return_A/c 100
(Goods returned)
21st Oct 20 Cash-at-bank_A/c.....................................Dr. 500
To Rent_Received_A/c 500
(Rent received)
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23rd Oct 20 Cash-in-hand_A/c.....................................Dr. 1500
Fred_A/c...................................................Dr. 400
To Sales_A/c 1900
(Sales made part credit part cash)
23rd Oct 20 Cash-in-hand_A/c.....................................Dr. 500
To Sales_A/c 500
(Cash sales made)
24th Oct 20 Motor_Car_A/c.........................................Dr. 2500
To Cash-at-bank_A/c 2500
(Purchased car)
26th Oct 20 Wages_A/c................................................Dr. 820
To Cash-at-bank_A/c 820
(Monthly wages paid)
30th Oct 20 Rent_Paid_A/c..........................................Dr. 1000
To Cash-at-bank_A/c 1000
(Rent paid)
31st Oct 20 Drawings_A/c..........................................Dr. 1600
To Cash-at-bank_A/c 1600
(Drawings made)
31st Oct 20 Capital_A/c……………………………...Dr. 1600
To Drawings_A/c 1600
(drawings transferred to capital account)
31st Oct 20 Purchases_Return_A/c……………………Dr. 100
To Purchases_A/c 100
(Purchases return transferred to purchase
account)
B. Balance the accounts
Cash-at-bank_A/c
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Date Particulars Amount Date Particulars Amount
1st Oct 20 Capital_A/c 8000 02nd Oct 20 Laptop_A/c 1000
05th Oct 20 Sales_A/c 1500 24th Oct 20 Motor_Car_A/c 2500
21st Oct 20 Rent_Received_A/c 500 26th Oct 20 Wages_A/c 820
30th Oct 20 Rent_Paid_A/c 1000
31st Oct 20 Drawings_A/c 1600
31st Oct 20 Balance_c/d 3080
Total 10000 Total 10000
1st Nov 20 Balance_b/d 3080
Cash-in-hand_A/c
Date Particulars Amoun
t
Date Particulars Amount
1st Oct 20 Capital_A/c 5200 12th Oct 20 Repairs_A/c 80
23rd Oct 20 Sales_A/c 1500 31st Oct 20 Balance_c/d 7120
23rd Oct 20 Sales_A/c 500
Total 7200 Total 7200
01st Nov 20 Balance_b/d 7120
Fred (Trade Receivable) A/c
Date Particular Amount Date Particular Amount
23rd Oct 20 Sales_A/c 400 31st Oct 20 Balance_c/d 400
Total 400 Total 400
1st Nov 20 Balance_b/d 400
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Purchases_A/c
Date Particular Amount Date Particular Amount
02nd Oct 20 Toy_Limited_A/c 2450 31st Oct 20 Purchases_Return A/c 100
31st Oct 20 Profit & Loss A/c 2350
Total 2450 Total 2450
Toys_Limited (Trade Payable) A/c
Date Particulars Amount Date Particulars Amount
18th Oct 20 Purchases_Return_A/c 100 04th Oct 20 Purchase_A/c 2450
31st Oct 20 Balance_c/d 2350
Total 2450 Total 2450
1st Nov 20 Balance_b/d 2350
Rent_Paid_A/c
Date Particulars Amount Date Particulars Amount
30th Oct 20 Cash-at-bank_A/c 1000
31st Oct 20 Profit & Loss A/c 1000
Total 1000 Total 1000
Rent_Received_A/c
Date Particulars Amount Date Particulars Amount
30th Oct 20 Cash-at-bank_A/c 500
31st Oct 20 Profit & Loss A/c 500
Total 500 Total 500
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Van_A/c
Date Particulars Amount Date Particulars Amount
01st Oct 20 Capital_A/c 3000 31st Oct 20 Balance_c/d 3000
Total 3000 Total 3000
1st Nov 20 Balance_b/d 3000
Capital_A/c
Date Particulars Amount Date Particulars Amount
31st Oct 20 Drawings_A/c 1600 1st Oct 20 Cash-at-bank_A/c 8000
31st Oct 20 Balance_c/d 14600 1st Oct 20 Cash-in-hand_A/c 5200
1st Oct 20 Van_A/c 3000
Total 16200 Total 16200
1st Nov 20 Balance b/d 14600
Sales_A/c
Date Particulars Amount Date Particulars Amount
31st Oct 20 Profit & Loss A/c 3900 05th Oct 20 Cash-at-bank_A/c 1500
23rd Oct 20 Cash-in-hand_A/c 1500
23rd Oct 20 Fred_A/c 400
23rd Oct 20 Cash-in-hand_A/c 500
Total 3900 3900
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Laptop_A/c
Date Particulars Amount Date Particulars Amount
02nd Oct 20 Cash-at-bank_A/c 1000 31st Oct 20 Balance_c/d 1000
Total 1000 Total 1000
1st Nov 20 Balance_b/d 1000
Motor_Car_A/c
Date Particulars Amount Date Particulars Amount
24th Oct 20 Cash-at-Bank_A/c 2500 31st Oct 20 Balance_c/d 2500
Total 2500 Total 2500
1st Nov 20 Balance_b/d 2500
Drawings_A/c
Date Particulars Amount Date Particulars Amount
31st Oct 20 Cash-at-bank_A/c 1600 31st Oct 20 Capital_A/c 1600
Total 1600 Total 1600
Wages_A/c
Date Particulars Amount Date Particulars Amount
25th Oct 20 Cash-at-bank_A/c 820 31st Oct 20 Profit & Loss A/c 820
Total 820 Total 820
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Repair_A/c
Date Particulars Amt. Date Particulars Amt.
12th Oct 20 Cash-in-hand_A/c 80 31st Oct 20 Profit & Loss A/c 80
Total 80 Total 80
Purchases_Return_A/c
Date Particulars Amount Date Particulars Amount
31st Oct 20 Purchases_A/c 100 18th Oct 20 Toy_Limited_A/c 100
Total 100 Total 100
C. Trial Balance as at 31st October 2020
Trial Balance of Linda’s Toy Shop
(as at 31st October 2020)
Particulars Debit (£) Credit (£)
Cash-at-Bank_A/c 3080
Cash-in-hand_A/c 7120
Van_A/c 3000
Laptop_A/c 1000
Trade Payable_A/c 2350
Purchases_A/c 2450
Purchases_Returns_A/c 100
Sales_A/c 3900
Rent_Paid_A/c 1000
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Rent_Recieved_A/c 500
Wages_A/c 820
Drawings_A/c 1600
Capital_A/c 16200
Repairs_A/c 80
Trade Receivables A/c 400
Motor_Car A/c_ 2500
Total 23050 23050
D. Income Statement for the period ended on 31st October 2020
Profit & Loss Account of Linda’s Toy Shop
(for the period ending on 31st October 2020)
Particulars Amount (in £) Particulars Amount (in £)
Opening Stock 0 Sales:
Purchases: 2450 Credit Sales 400
Less: Purchases Return 100 2350 Cash Sales 3500 3900
Closing Stock 250
Gross Profit 1800
Total 4150 Total 4150
Repairs 80 Gross Profit 1800
Wages 820 Rent received 500
Rent paid 1000
Net Profit 400
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Total 2300 Total 2300
E. Statement of Financial Position as at 31st October 2020
Balance Sheet of Linda’s Toy Shop
(As at 31st October, 2020)
Particulars Amount (in £) Particulars Amount (in £)
Capital: 16200 Motor Car 2500
Add: Net Profit 400 Van 3000
Less: Drawings 1600 15000 Laptop 1000
Cash-at-bank 3080
Trade Payables 2350 Cash-in-hand 7120
Trade receivables 400
Closing Stock 250
Total 17350 Total 17350
F. Brief letter to Linda explaining drawings
Drawings refers to those amount or inventory that has been taken out of business by
proprietor for personal use. Since, proprietor and firm are not distinct entities, drawings out of
business are directly debited to capital account of proprietor. In the given scenario, Linda has
used money from bank account of business for taking a holiday trip which was not concerned to
business but was purely personal leisure trip. Therefore, this has been treated as drawings made
out of business.
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Part B
A. Calculation of ratios
Ratios Linda’s Toy Shop Competitors Average
Net Profit 400
Total Sales 3900
Net Profit Ratio
= Net Profit/ Total Sales * 100
10.26% 31.00%
Gross Profit 1800
Total Sales 3900
Gross Profit Ratio
= Gross Profit / Total Sales * 100
46.15% 54.00%
Current Assets 10850
Current Liabilities 2350
Current Ratio
= Current Assets / Current Liabilities
4.62 times 2.87 times
Quick Assets 10600
Current Liabilities 2350
Quick Ratio
= Quick Asset / Current Liabilities
4.51 times 1.35 times
Average Receivables
= (Opening debtors + Closing debtors) / 2
200
Net Credit Sales 400
Trade Receivables Collection Period
= (Average Receivables / Net Credit
Sales)*365
182.5 days 50 days
Average Payable 1175
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= (Opening creditors + Closing creditors) / 2
Net Credit Purchases 2350
Trade Payables Payment Period
=(Average Payable / Net Credit
Purchases)*365
182.5 days 72 days
B. Analysis of ratios calculated
Net Profit Ratio
= Net Profit/Total Sales * 100
10.26% 31.00%
It is a profitability ratio which is used to assess efficiency of business to generate net
profit out of total revenue earned by business. Therefore, higher it is, better it is considered.
Here, Linda's firm has net profit margin of 10.26% while competitors average is 31.00%. This
reflects that Linda needs to improve efficiency of business administration to at least reach up to
the level of competitors.
Gross Profit Ratio
= Gross Profit / Total Sales * 100
46.15% 54.00%
It is also a profitability ratio which is used to assess operational efficiency of the business
in converting sales into gross profit. Alike net profit margin, higher it is, better it is. Here,
Linda's firm has gross profit margin of 46.15% against 54.00% of competitors. Considering that
business has just started, it has a good gross profit margin but there is clear scope of
improvement if it wants to surpass competitors in future.
Current Ratio
= Current Assets / Current Liabilities
4.62 times 2.87 times
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It is a liquidity ratio which is used to assess capability of business to pay off its current
liabilities with the help of its current assets. It also determines effectiveness of working capital
management of the business. Ideal current ratio is 2:1. Competitors average is 2.87 times while
Linda's firm has 4.62 times which shows that business has more than quadruple current assets for
current liabilities. However, this is not an ideal situation and owes to the fact that business is new
and has only recently started managing its working capital.
Quick Ratio
= Quick Asset / Current Liabilities
4.51 times 1.35 times
Alike current ratio, it is also liquidity ratio which is used to assess capability of business
to pay off its current liabilities. However, it considers quick assets i.e. those assets which can be
converted into cash quickly. Since, inventories do not have time-frame to be converted into cash,
it is deducted out of current assets to come to quick assets. Ideal quick ratio is 1:1. Competitors
average are around 1.35:1 while Linda has 4.51:1 owing to the fact that business is new and has
lesser liabilities in comparison to assets.
Trade Receivables Collection Period
= (Average Receivables / Net Credit
Sales)*365
182.5 days 50 days
It refers to those number of days which business takes for recovering money from its
trade receivables. Therefore, lesser it is better, it is considered for business. Competitors average
is 50 days while Linda's firm has 182.5 days but they are really not comparable as Linda has just
started out business for actual 31 days only and no debtor has paid money back to complete at
least one inventory cycle.
Trade Payables Payment Period
=(Average Payable / Net Credit
Purchases)*365
182.5 days 72 days
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It refers to those number of days which business takes for paying off its trade payables.
Therefore, more the period is, better it is considered as this means funds will stay for longer
period in business and business would be able to enjoy benefit on its interest. Competitors
average is 72 days while Linda's firm has 182.5 days but they are really not comparable as Linda
has just started out business for actual 31 days only and creditor has yet to been paid money back
to complete at least one inventory cycle.
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