Financial Report: Recording Business Transactions and Ratio Analysis

This report provides a comprehensive financial analysis of a business, Linda's business, detailing the recording of business transactions. It begins with an introduction to financial accounting and its importance, followed by a detailed presentation of journal entries, ledger accounts, a trial balance, income statement, and balance sheet for the period ending October 31, 2020. The report also includes a letter to Linda addressing the implications of drawing business funds for personal use. Part B of the report focuses on ratio analysis, calculating and comparing key financial ratios such as net profit margin, gross profit margin, current ratio, acid test ratio, account receivable collection period, and account payable payment period for Linda's business against its competitors. The analysis provides insights into the company's financial performance, liquidity, and efficiency, concluding with recommendations for improvement and strategic adjustments.

RECORDING BUSINESS
TRANSACTION

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY .................................................................................................................................3
Part A...............................................................................................................................................3
a). Journal Entries ......................................................................................................................3
b) Ledger accounts......................................................................................................................4
c) Trial balance sheet as on 31st Oct 2020..................................................................................8
d)Income statement for the year ended 31st Oct 2020................................................................8
e) balance sheet as on 31st Oct 2020 .........................................................................................9
f) Letter to Linda.........................................................................................................................9
Part B.............................................................................................................................................10
1.Calculation of ratios of Linda's business................................................................................10
2. Comparison of Linda's business ratios with competitors ratios............................................10
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
APPENDIX ...................................................................................................................................16
1.................................................................................................................................................16

INTRODUCTION
Financial accounting helps business to record each transaction in summarize
way. It assists the management of company to analyse its financial position with
help of those summarized data. The present report shows the journal entry of Linda
business. It also provides ledger, trial balance, income statement and balance sheet,
which is useful for firm for calculating ratios. Ratio provides assistance in decision
making. The reports represent the net profit, gross profit, current ratio, acid test
ratio, account receivable and payable ratio. These ratios can help Lind's Business
to compare its performance with competitors.
MAIN BODY
Part A
a). Journal Entries
Date Particulars L.F Debit Credit
01/10/20 Bank A/C 8000
Cash A/C 5200
Van A/C 3000
To Capital A/C 16200
(Being Capital introduced)
02/10/20 Laptop A/C 1000
To Bank A/C 1000
(Being Laptop bought)
04/10/20 Purchase A/C 2450
To Toy Ltd. A/C 2450
(Being toys are purchased on credit)

05/10/20 Bank A/C 1500
To sales A/C 1500
(being goods sold)
12/10/20 Repairs A/C 80
To Cash A/C 80
(Being laptop is repaired )
18/10/20 Toy Ltd. A/C 100
To purchase return 100
(Being goods returned to toys Ltd)
21/10/20 Bank A/C 500
To Rent A/C 500
(Being rent received)
23/10/20 Cash A/C 1500
Fred A/C 400
To sales A/C 1900
(Being Goods sold on cash and credit it
partly)
23/10/20 Cash A/C 500
To sales A/C 500
(Being goods sold to David)
24/10/20 Second hand car A/C 2500
To Bank A/C 2500
(Being car purchased by issuing cheque)
26/10/20 Wages A/C 820

To Bank A/C 820
(Being wages paid to part-time workers)
30/10/20 Rent A/C 1000
To Bank A/C 1000
(Being rent paid)
31/10/20 Drawings A/C 1600
To Bank A/C 1600
(being business funds used by owner for
paying expenses of holiday)
Total 13950 30150
b) Ledger accounts
Dr. Capital Account Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
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
Dr. Laptop A/C Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
02/10/20 To Bank A/C 1000 31/10/20 To balance C/d 1000

1000 1000
Dr. Bank A/C Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amou
nt
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 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/d 3080
10000 10000
Dr. Cash A/C Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
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/d 7120
7200 7200
Dr. Van A/C Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
01/10/20 To Capital A/C 3000 31/10/20 By balance C/d 3000

3000 3000
Dr. Purchase A/C Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
04/10/20 To Toy Ltd. A/C 2450 31/10/20 by balance C/d 2450
2450 2450
Dr. Toy Ltd. A/C Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
18/10/20 ToPurchase return A/C 100 04/10/20 Purchase A/C 2450
31/10/20 To balance C/d 2350
2450 2450
Dr. Sales A/c Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
31/10/20 To balance C/d 3900 05/10/20 By Bank A/C 1500
23/10/20 By Cash A/C 1500
23/10/20 By Fred A/C 400
23/10/20 By Cash A/C 500
3900 3900
Dr. Repairs A/c Cr.
Date Particulars J.F Amou Date Particulars J.F Amo

nt unt
12/10/20 To Cash A/C 80 31/10/20 by balance C/d 80
80 80
Dr. Rent A/c Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
30/10/20 To Bank A/C 1000 21/10/20 By Bank A/C 500
31/10/20 by balance C/d 500
1000 1000
Dr. Fred A/c Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
23/10/20 To sales A/C 400 31/10/20 by balance C/d 400
400 400
Dr. Second hand car A/C Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
24/10/20 To Bank A/C 2500 31/10/20 by balance C/d 2500
2500 2500

Dr. Wage A/c Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
26/10/20 To Bank A/C 820 31/10/20 by balance C/d 820
820 820
Dr. Drawings A/C Cr.
Date Particulars J.F
Amou
nt Date Particulars J.F
Amo
unt
31/10/20 To Bank A/C 1600 31/10/20 by balance C/d 1600
1600 1600
Dr. Purchase return A/C Cr.
Date
Particular
s J.F Amount Date
Particular
s J.F Amount
31/10/20
To balance
C/d 100 18/10/20
Toy Ltd.
A/C 100
100 100
c) Trial balance sheet as on 31st Oct 2020
Particulars Debit Credit
Capital 16200
laptop 1000

bank 3080
Cash 7120
van 3000
purchase 2450
Toys Ltd account 2350
sales 3900
Repairs 80
rent 500
Fred Account 400
Second hand car account 2500
wage 820
drawings 1600
Purchase return 100
Total 22550 22550
d)Income statement for the year ended 31st Oct 2020
Particulars Amount Amount
sales 3900
Opening stock 0
Purchase 2450
Purchase return 100
Closing stock 250 2100
Gross Profit 1800
Repairs 80
rent 500
wage 820 1400

Net Profit 400
e) balance sheet as on 31st Oct 2020
Liabilities Amount Assets Amount
Capital 16200 laptop 1000
(Drawings) -1600 bank 3080
Net Profit 400 Cash 7120
van 3000
creditor 2350 Fred Account 400
Second hand car account 2500
Closing Account 250
17350 17350
f) Letter to Linda
To Linda
Drawings refers to that business transaction in which proprietor of firm withdraw
organisation's funds for personal use. It declines the capital of organization. Linda being an
owner of small business withdrew some amount of money for some non-business use. It not only
make the firm's capital weak but also shows that you are not properly adhering rules of business
(Ray, 2018). It a sole proprietor business as no information regarding partners has been given.
That is the biggest advantage that it easily took money from business. Using capital of
organization for purpose of holiday is non advisable expenditure. As such expenses can be
avoided to make the process of business transaction accurate. Principles of accounting also
suggest that every time an owner takes decision it should match with ethical principles.
Being a responsible person for business success and failure. It is duty of owner to
maintain every transaction fair and ethical to suit circumstances of organization (Pepple and
Ejiogu, 2021). It is also recommended to payback amount of drawings to business so that you
can save the money which you need to pay to as interest of borrowings. And not using money of

organization for personal stuff to neglect complications in recording business transaction. It can
also affect the current position of firm. So it is advisable to return business fund.
Part B
1.Calculation of ratios of Linda's business
There are various ratios that can be calculated for the purpose of effective analysis of
business (Accounting tools, 2021). Creditors, customers, investors, lenders, debtors, banks and
other financial institutions are interested in checking these ratios for decision-making.
Enclosed in appendix.
2. Comparison of Linda's business ratios with competitors ratios
Ratio analysis helps business to get the statistical data that ease the process of analysing
business position with other firms. There are several ratios have been calculated to identify
working of an organization that is suitable to stakeholders or not (Kadim, Sunardi and Husain,
2020).
Particulars Linda Ltd Competitors
Net Profit ratio 10.26% 31.00%
Gross profit margin 46.15% 54.00%
Current ratio 4.62 times 2.87 times
Acid Test ratio 4.51 times 1.35 times
Account receivable collection period 365 Days 50 days
Account payable payment period 425.83 days 72 days
Net profit margin is an important ratio. Stakeholders are mostly interested in it to check
the organization's ability to generate profit from sales. Ideal ratio is 10% which makes company's
image good in market (Linares-Mustarós, Coenders and Vives-Mestres, 2018). The ratio of
Linda's business is 10.25% which is more than ideal but less than competitors ratio. The ratio of
net profit of competitors is 31%. That is more than 10%, so they are more powerful in generating
profit from sales. It can distract the stakeholders from taking interest of investing in Linda's
organization.

Gross profit margin is measurement of company's efficiency and execution. It helps
organization to estimate that how much it can earn after reducing cost of goods sold from sales
(Islam, 2020). The Gross profit ratio of Linda's business is 46.15%, which is more than the ideal
ratio. The perfect ratio of business differs from firm to firm but it is considered to be ideal when
it is between 15-20%. Competitors ratio is 54% which is greater than ratio of the company. So it
indicates that company need to make changes in prevailing strategies and make the process of
working smooth for achieving efficiency of organization .
Linda Ltd Competitors
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
Net Profit ratio

Current ratio indicates company's ability of paying its current liability without any facing
any issue. The ideal ratio is from 1.2 to 2. It shows that company have 2 times more asset that its
liability. It helps the analyst, creditors and other interested party to measure performance of
business on the basis of this ratio so that they can take proper decision regarding lending,
investing etc. the current ratio of the company is 4.6 times that represents that company have
invested its monetary resources in current assets 4 times more than its liability. The competitors'
ratio is 2.87 times which is less than mentioned company. The comparison between firms of
competitor and Linda's business shows that the company has more power as compared to other
organization.
Linda Ltd Competitors
0.42
0.44
0.46
0.48
0.5
0.52
0.54
0.56
Gross profit margin

Acid test ratio helps the analyst to check the liquidity of organization. The ratio of
Linda's firm is 4.5 times (Mongwe and Malan, 2020). The ideal ratio is 1 Which is less than
Company's ratio. It shows that company has been performing good as it is more than the perfect
ratio. Competitors acid test ratio is 1.35 times which also less than the company's ratio. From this
it can be interpreted that the company has maintain better liquid position than the competitors of
industry.
Linda Ltd Competitors
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
4.51
1.35
Acid Test ratio
Linda Ltd Competitors
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5 4.62
2.87
Current ratio

Account receivable collection period is the measurement of the duration that company is
ready to give to its debtors. So that it can obtain good relationship with them. There is no
specified account receivable collection period. It depends on scale of business that how often
they sell goods on credit. The mention company have 365 days of collection period, which is
more than competitors ratio of collection period. That can rise the case of bad debt in Linda's
company.
Account payable payment period is the specified that creditors allow us to pay their
money in limited duration (Yhip and Alagheband, 2020). The Linda company have the ratio of
account payable payment period of 425 which is more than competitors . The ratio of other firm
is 72 days which represents them more creditworthy than Linda's business.
Linda Ltd Competitors
0
50
100
150
200
250
300
350
400 365
50
Account receivable collection
period

CONCLUSION
From the above calculation it can be concluded that Linda's business is good at managing
its current assets, current liability as it has good quick and current ratio. The report also shows
letter to Linda for using business funds for personal tour expenses. It also analyses its
performance with competitors. It can also be interpreted that Linda's firm is good growing
organization.
Linda Ltd Competitors
0
50
100
150
200
250
300
350
400
450 425.83
72
Account payable payment
period

REFERENCES
Books and Journals
Islam, M. S., 2020. Predictive capability of Financial Ratios for forecasting of Corporate
Bankruptcy. Available at SSRN 3637184.
Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial
ratios, intellectual capital and dividend policy. Accounting. 6(5). pp.859-870.
Linares-Mustarós, S., Coenders, G. and Vives-Mestres, M., 2018. Financial performance and
distress profiles. From classification according to financial ratios to compositional
classification. Advances in Accounting. 40. pp.1-10.
Mongwe, W. T. and Malan, K. M., 2020, December. The Efficacy of Financial Ratios for Fraud
Detection Using Self Organising Maps. In 2020 IEEE Symposium Series on
Computational Intelligence (SSCI) (pp. 1100-1106). IEEE.
Pepple, D. and Ejiogu, C., 2021. Income Statement and Balance Sheet. Financial and
Managerial Aspects in Human Resource Management: A Practical Guide, Emerald
Publishing Limited, pp.11-22.
Ray, K., 2018. One size fits all? Costs and benefits of uniform accounting standards. Journal of
International Accounting Research. 17(1). pp.1-23.
Yhip, T. M. and Alagheband, B. M., 2020. Financial Statement Analysis. In The Practice of
Lending (pp. 47-94). Palgrave Macmillan, Cham.
Online
Accounting tools. 2021. [Online] Available through:
<https://www.accountingtools.com/articles/ratio-analysis.html>

APPENDIX
Part B
1.
Net profit ratio
Particulars Formula Ratio
Net profit Ratio 400
sales 3900
Net profit Ratio Net Profit /sales *100 10.26
Gross profit Ratio
Particulars Formula Ratio
Gross Profit 1800
sales 3900
Gross profit margin Gross Profit /sales *100 46.15
Current Ratio
Particulars Formula Ratio
Current asset 10850
Current liability 2350
Current ratio Current asset /current liability 4.617
Acid test ratio
Particulars Formula Ratio
Quick asset 10600
Current liability 2350
Acid Test ratio Quick asset /current liability 4.511

Account receivable collection period
Particulars Formula Ratio
Account receivable 400
Net credit sales 400
Account receivable collection period
Account receivable
/COGS*365 365
Account payable payment period
Particulars Formula Ratio
Account payable 2450
COGS 2100
Account payable
payment period Account payable /COGS*365 425.83