Financial Statement Analysis: Recording and Analyzing Transactions

This assignment provides a comprehensive solution to a financial accounting problem. It begins with recording business transactions, including journal entries for various financial activities such as capital contributions, sales, purchases, and expenses. The solution then proceeds to balance these transactions, creating a trial balance to ensure the equality of debits and credits. Subsequently, the assignment constructs an income statement to determine net profit and a statement of financial position to assess the company's assets, liabilities, and equity. Finally, the assignment calculates and analyzes key financial ratios, including net profit margin, gross profit margin, current ratio, acid-test ratio, accounts receivable collection period, and accounts payable payment period, comparing the company's performance to competitors and offering insights for improvement. The assignment also includes a letter to Linda explaining the correct accounting treatment of drawings.

RECORDING BUSINESS
TRANSACTIONS

TABLE OF CONTENTS
PART A...........................................................................................................................................3
a. Record transaction...................................................................................................................3
b. Balancing transaction..............................................................................................................6
c. Extract trial balance...............................................................................................................10
d. Income statement..................................................................................................................11
e. Statement of financial position..............................................................................................11
f. Brief letter to Linda...............................................................................................................12
PART B..........................................................................................................................................13
Calculation of ratios..................................................................................................................13
Analysis of performance...........................................................................................................14
REFERENCES..............................................................................................................................15

PART A
a. Record transaction
Bank A/C
Date Details
Amount
£ Date Details
Amount
£
1/10/2020 To capital 8,000 2/10/2020 by laptop 1,000
5/10/2020 to sales 1,500 24/10/20 by second hand car 2,500
21/10/20 To rent 500 26/10/20 by wages 820
30/10/20 by rent 1,000
31/10/20 by drawing 1,600
10,000 10,000
van A/C
Date Details
Amount
£ Date Details
Amount
£
01/10/20 To Capital A/C 3000
3,000 3,000
Purchase A/C
Date Details
Amount
£ Date Details
Amount
£
04/10/20 To Toy Ltd. A/C 2450
2,450 2,450
Sales A/C
Date Details
Amount
£ Date Details
Amount
£
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
3,900 3,900
Purchase return A/C
Date Details
Amount
£ Date Details
Amount
£
18/10/20 Toy Ltd. A/C 100
100 100
Fred A/C
Date Details
Amount
£ Date Details
Amount
£
23/10/20 To sales A/C 400
400 400
Wages A/C
Date Details
Amount
£ Date Details
Amount
£
26/10/20 To Bank A/C 820
820 820
Capital A/C
Date Details
Amount
£ Date Details
Amount
£
01/10/20 By Bank A/C 8000
01/10/20 By Cash A/C 5200
01/10/20 By Van A/C 3000
16,200 16,200

Cash A/C
Date Details
Amount
£ Date Details
Amount
£
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
7,200 7,200
Laptop A/C
Date Details
Amount
£ Date Details
Amount
£
02/10/20 To Bank A/C 1000
1,000 1,000
Toys. Ltd A/C
Date Details
Amount
£ Date Details
Amount
£
18/10/20 To Purchase return A/C 100 04/10/20 Purchase A/C 2450
2,450 2,450
Repairs A/C
Date Details
Amount
£ Date Details
Amount
£
12/10/20 To Cash A/C 80
80 80
Rent A/C
Date Details Amount Date Details Amount

£ £
30/10/20 To Bank A/C 1000 21/10/20 By Bank A/C 500
1,000 1,000
Second had car A/C
Date Details
Amount
£ Date Details
Amount
£
24/10/20 To Bank A/C 2500
2,500 2,500
Drawings A/C
Date Details
Amount
£ Date Details
Amount
£
31/10/20 To Bank A/C 1600
1,600 1,600
b. Balancing transaction
Bank A/C
Date Details
Amount
£ Date Details
Amount
£
1/10/2020 To capital 8,000 2/10/2020 by laptop 1,000
5/10/2020 to sales 1,500 24/10/20 by second hand car 2,500
21/10/20 To rent 500 26/10/20 by wages 820
30/10/20 by rent 1,000
31/10/20 by drawing 1,600
31/10/20 by balance c/d 3,080
10,000 10,000
11/1/2020 Balance B/D 3,080
van A/C

Date Details
Amount
£ Date Details
Amount
£
01/10/20 To Capital A/C 3000
31/10/20 by balance C/d 3000
3,000 3,000
11/1/2020 Balance B/D 3,000
Purchase A/C
Date Details
Amount
£ Date Details
Amount
£
04/10/20 To Toy Ltd. A/C 2450
31/10/20 by balance C/d 2450
2,450 2,450
11/1/2020 Balance B/D 2,450
Sales A/C
Date Details
Amount
£ Date Details
Amount
£
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
31/10/20 By balance C/d 3900
3,900 3,900
11/1/2020 Balance B/D 3,900
Purchase return A/C
Date Details
Amount
£ Date Details
Amount
£
18/10/20 Toy Ltd. A/C 100

31/10/20 To balance C/d 100
100 100
11/1/2020 Balance B/D 100
Fred A/C
Date Details
Amount
£ Date Details
Amount
£
23/10/20 To sales A/C 400
31/10/20 by balance C/d 400
400 400
11/1/2020 Balance B/D 400
Wages A/C
Date Details
Amount
£ Date Details
Amount
£
26/10/20 To Bank A/C 820
31/10/20 by balance C/d 820
820 820
11/1/2020 Balance B/D 820
Capital A/C
Date Details
Amount
£ Date Details
Amount
£
01/10/20 By Bank A/C 8000
01/10/20 By Cash A/C 5200
01/10/20 By Van A/C 3000
31/10/20 To balance C/d 16200
16,200 16,200
11/1/2020 Balance B/D 16,200
Cash A/C
Date Details
Amount
£ Date Details
Amount
£
01/10/20 To Capital A/C 5200 12/10/20 By Repairs A/C 80
23/10/20 To sales A/C 1500 31/10/20 by balance C/d 7,120

23/10/20 To sales A/C 500
7,200 7,200
11/1/2020 Balance B/D 7,120
Laptop A/C
Date Details
Amount
£ Date Details
Amount
£
02/10/20 To Bank A/C 1000
31/10/20 To balance C/d 1000
1,000 1,000
11/1/2020 Balance B/D 1,000
Toys. Ltd A/C
Date Details
Amount
£ Date Details
Amount
£
18/10/20 To Purchase return A/C 100 04/10/20 Purchase A/C 2450
31/10/20 To balance C/d 2350
2,450 2,450
11/1/2020 Balance B/D 2,350
Repairs A/C
Date Details
Amount
£ Date Details
Amount
£
12/10/20 To Cash A/C 80
31/10/20 by balance C/d 80
80 80
11/1/2020 Balance B/D 80
Rent A/C
Date Details
Amount
£ Date Details
Amount
£
30/10/20 To Bank A/C 1000 21/10/20 By Bank A/C 500
31/10/20 by balance C/d 500

1,000 1,000
11/1/2020 Balance B/D 500
Second had car A/C
Date Details
Amount
£ Date Details
Amount
£
24/10/20 To Bank A/C 2500
31/10/20 by balance C/d 2500
2,500 2,500
11/1/2020 Balance B/D 2,500
Drawings A/C
Date Details
Amount
£ Date Details
Amount
£
31/10/20 To Bank A/C 1600
31/10/20 by balance C/d 1600
1,600 1,600
11/1/2020 Balance B/D 1,600
c. Extract trial balance
Linda's Account Trial Balance as at 31st October 2020
Date Details DR £ CR £
31/10/20 Bank 3080
31/10/20 Cash 7120
31/10/20 Van 3000
31/10/20 Laptop 1000
31/10/20 Purchase 2450
31/10/20 Toys ltd 2350
31/10/20 Sales 3900
31/10/20 Repairs 80
31/10/20 Purchase return 100
31/10/20 Rent 500
31/10/20 Fred 400
31/10/20 Second hand car 2500
31/10/20 Wages 820
31/10/20 Drawings 1600
31/10/20 Capital 16200

Grand
Total 22,550 22,550
d. Income statement
Details £ £
Sales 3,900.00
Less COGS (Cost of Goods Sold)
+ Opening inventory 0.00
+ Purchases 2,450.00
- Purchase return 100.00
- Closing inventory 250.00
2,100.00
Gross Profit 1,800.00
Less Operating Expenses
Wages 820.00
Repair 80.00
Rent 500.00
1,400.00
Net Profit 400.00
e. Statement of financial position
Linda's Account Statement of Financial Position as at 31st October 2020
£ £
Non-Current Assets
Laptop 1,000.00
Van 3,000.00
second hand car 2,500.00
6,500.00
Current Assets
Closing balance 250
Accounts Receivable 400.00

Bank 3,080.00
Cash in Hand 7,120.00
10,850.00
Less Current Liabilities
Accounts Payable 2,350.00
2,350.00
Net Current Assets 8,500.00
Total Assets 15,000.00
Financed By:
Capital 16,200.00
Add Net Income 400.00
16,600.00
Less Drawings 1600.00
Total Equity 15,000.00
f. Brief letter to Linda
To Linda,
This is to inform you that drawing is the amount or the goods which the business owner has
taken for their personal use. Within the accounting of business drawing are not treated as
expense and they are deducted from the capital as it was being withdrawn by the owner for their
personal use (Van Calster and et.al., 2018). In the present case as well Linda has recorded the
expense of holiday in business expense which is wrong. Hence, in this case the accounting
treatment was to debit the drawing and not expense and in end deduct that amount from capital.
Thank you
PART B
Calculation of ratios
Net profit Ratio
Particulars Formula Ratio
Net profit Ratio
Particulars 400
sales 3900
Net profit Ratio Net Profit /sales *100 10.26