Recording Business Transactions & Accounting Report for Kool Kit Ltd

This report analyzes the accounting practices of Kool Kit Ltd, a small business manufacturing kilts. Part 1 provides a management report, discussing the importance of accounting information, differentiating between gross and net profit with a numerical example, and explaining the differences b...Read More

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Recording Business transaction
Resit Assignment A1

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Contents
Part 1: Management Report.............................................................................................................3
A: Importance of accounting information in the business organization......................................3
B: Difference between gross profit and net profit through using the numerical example...........3
C: Difference between non-current assets and current assets; and non-current liabilities and
current liabilities..........................................................................................................................4
D: Double entry bookkeeping system..........................................................................................5
E: History of double entry bookkeeping......................................................................................5
F: Meaning of debit and credit.....................................................................................................5
Part 2: Recording Business Transactions........................................................................................7
A: Journal Entries.........................................................................................................................7
B: T-Accounts of Kool Kit Limited.............................................................................................9
C: Trial Balance of Kool Kit Limited........................................................................................11
References......................................................................................................................................12

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Part 1: Management Report
A: Importance of accounting information in the business organization
Accounting refers to as systematic process of recording and preparing book of accounts
for all the financial transactions related with the business organization. Accounting comprises of
recording, analyzing, summarizing and reporting of financial transactions so that information can
be used by various stakeholders of the business organization. Information gathered through
accounting can be used in different ways by the users of financial information. Management uses
financial information to ascertain the financial performance and financial position of the business
organization at the given point of time. Accounting information helps ion decision making
process, planning and also helps in controlling other processes. Through use of accounting
information such as profit & loss account, balance sheet and other information management can
make plans to formulate the budgets. Government officials required accounting information to
calculate the tax and also assess the financial position of the company. Information gathered
through accounting is used by the investors to make the investment decision. Information
provided in the financial statements is used by investors, business managers and creditors to
analysis the financial performance of the company and make decision accordingly. So it can be
said that accounting information is highly important for any business organization (Brigham and
Michael, 2013).
B: Difference between gross profit and net profit through using the numerical example
Profit is regarded as the difference between revenue earned and total cost for the
particular period. So profit is monetary reward that business receives during the normal conduct
of the business. Total cost of the business process can be divided into two major parts and they
are cost of goods sold and operating expenses including finance cost and tax. Gross profit
referred to as profit which is calculated by deducting cost of goods sold from sales revenue. Cost
of goods sold include expenses such as purchases, custom duty, inward carriage, labour expenses
and other expenses directly related with the product or services. On the other hand net profit is
calculated after deducting all the indirect expenses or operating expenses from gross profit.
Operating expenses includes expenses required to pay for running the business and selling the
goods. It can be said that gross profit is not the true profit of the company but net profit is the
true profit of the company. Gross profit cannot be used by the investors to judge the profitability
performance of the business but net profit reflects the actual profitability position of the company
(Damodaran, 2011).
Numerical Example: Suppose, a company made net sales $ 115,000 during the year and
expenses include $25000 purchases, $20000 labour charges, $10500 other direct expense and
$36000 operating expenses. Calculate gross profit and net profit.
Gross profit: Sales – cost of goods sold

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= $115,000 – ($25000+$20000+$10500)
= $59500
Net Profit = Gross Profit – all indirect expenses (operating expenses)
= $59500-$ 36000
= $23500
C: Difference between non-current assets and current assets; and non-current liabilities
and current liabilities
Non-Current asset and current asset
Assets that are used within the business can be divided into two major parts; current
assets and non-current assets. Current assets are referred to those items that have capability to be
converted into cash and cash equivalents within one fiscal year. It includes financial items such
as cash, bank balance, short term investments, account receivable, inventory etc. On the other
hand non-current asset are those assets that have life for more than 1 year and they are easily
convertible into cash. Some of important non-current assets are fixed assets like plant, equipment
etc, intangible assets, long term investment etc.
Current liabilities and non-current liabilities
Current liabilities referred to the payments that need to pay within one year time period
and non-current liabilities refers to payments that need to be settled after one year on the balance
sheet date. Current liabilities are generally paid through current assets and difference between
current assets and current liabilities is regarded as working capital.
Numerical Example: Consider the below balance sheet and divide all items into current assets,
non-current assets, current liabilities and non-current liabilities (Davies and Crawford, 2011)
Liabilities Amount Assets Amount
Account payable (short term) £ 15,000.00 Prepaid expenses £ 1,500.00
Unearned income £ 5,000.00 Bank Balance £ 25,500.00
Bank Loan (Long Term) £ 50,000.00 Plant and equipments £ 65,000.00
Tax expenses £ 6,500.00 Furniture £ 22,500.00
Long term investment £ 50,000.00
Goodwill £ 35,000.00
Inventory £ 35,000.00
Current Liabilities Amount Current Assets Amount
Account payable (short term) £ 15,000.00 Prepaid expenses £ 1,500.00
Unearned income £ 5,000.00 Bank Balance £ 25,500.00
Inventory £ 35,000.00

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Non-Current Liabilities Amount Non-Current Assets Amount
Bank Loan (Long Term) £ 50,000.00 Plant and equipments £ 65,000.00
Tax expenses £ 6,500.00 Furniture £ 22,500.00
Long term investment £ 50,000.00
Goodwill £ 35,000.00
D: Double entry bookkeeping system
Double entry bookkeeping is the modernized system of recording the accounting
transaction in the books of accounts. Through use of this system management can trace and cross
check the transactions posted in the books of accounts. Double entry bookkeeping means every
financial transaction must be recorded in two accounts so that it can be cross checked. As per
double entry bookkeeping for every debit transaction there will equal credit transaction. For
example, if capital of $100000 is introduced that there will be credit entry of owner’s capital and
debit entry of bank balance. Double entry bookkeeping increases the efficiency as well as
accuracy of maintaining the books of accounts (Krantz, 2016).
E: History of double entry bookkeeping
The double entry bookkeeping has been first introduced by the Italian mathematician Fra
Luca Pacioli and one of his best friend Leonardo da Vinci. Both these writers uses practical
examples to explain how double entry bookkeeping can be done (Krantz, 2016).
F: Meaning of debit and credit
Debit refers to accounting entry that increases the value of assets or expense account and
decrease the value of liability or equity. All the assets and expenses have debit balance in books
of account. Credit refers to the accounting entry that increases the liability or equity balance and
it decreases the balance of assets or expense account.
Numerical example: Classify the following financial items with debit and credit balance?
Account payable (short term) £ 15,000.00
Unearned income £ 5,000.00
Bank Loan (Long Term) £ 50,000.00
Tax expenses £ 6,500.00
Prepaid expenses £ 1,500.00
Bank Balance £ 25,500.00
Plant and equipments £ 65,000.00
Furniture £ 22,500.00
Long term investment £ 50,000.00
Goodwill £ 35,000.00
Inventory £ 35,000.00
(Moles and Kidwekk, 2011)

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Debit Items Amount Credit Items Amount
Prepaid expenses £ 1,500.00 Account payable (short term) £ 15,000.00
Bank Balance £ 25,500.00 Unearned income £ 5,000.00
Inventory £ 35,000.00 Bank Loan (Long Term) £ 50,000.00
Plant and equipments £ 65,000.00 Tax expenses £ 6,500.00
Furniture £ 22,500.00
Long term investment £ 50,000.00
Goodwill £ 35,000.00

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Part 2: Recording Business Transactions
A: Journal Entries
Journal Entries in the books of account of Kool Kit Limited
Date Particulars Debit Credit
2017
28-
Jan Bank Account £ 355,000.00
Capital Account £ 355,000.00
(Capital was introduced within the business)
29-
Jan Delivery Van Account £ 30,000.00
Bank Account £ 10,500.00
Account Payable Account £ 19,500.00
(Delivery Van purchased from Vauxhall
Motors, 35% has been paid through cash and
rest is on credit)
02-
Feb Building Rent Account £ 3,000.00
Bank Account £ 3,000.00
(Building rent has been paid by cash)
14-
Feb Account Payable Account £ 10,500.00
Bank Account £ 10,500.00
(Another 35% of cost of delivery van has been
paid by cash)

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15-
Feb Bank Account £ 40,000.00
Loan from bank Account £ 40,000.00
(Loan has been taken from bank)
15-
Feb Employee Salary Account £ 60,000.00
Bank Account £ 60,000.00
(Salary has been paid to employees)
16-
Feb Account Receivable Account £ 40,000.00
Sales Account £ 40,000.00
(Sales has been made to Rabbie Souter Ltd. on
credit)
17-
Feb Looms Equipment Account £ 50,000.00
Account Payable Account £ 50,000.00
(Looms has been purchased on credit)
19-
Feb Loan from bank Account £ 20,000.00
Bank Account £ 20,000.00
(Half of bank loan being repaid)
20-
Feb Maintenance Account £ 5,000.00
Bank Account £ 5,000.00
(Plumber maintenance has been paid by cash to
Big Rab)

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B: T-Accounts of Kool Kit Limited
Bank Account
Date Particulars Debit Date Particulars Credit
2017 2017
28-
Jan Capital Account £ 355,000.00
29-
Jan
Delivery Van
Account
£
10,500.00
15-
Feb
Loan from bank
Account
£
40,000.00
02-
Feb
Building Rent
Account
£
3,000.00
14-
Feb
Account Payable
Account
£
10,500.00
15-
Feb
Employee Salary
Account
£
60,000.00
19-
Feb
Loan from bank
Account
£
20,000.00
20-
Feb
Maintenance
Account
£
5,000.00
28-
Feb Balance C/D £ 286,000.00
£ 395,000.00 £ 395,000.00
Capital Account
Date Particulars Debit Date Particulars Credit
2017 2017
28-
Feb Balance C/D £ 355,000.00
28-
Jan Bank Account £ 355,000.00
£ 355,000.00 £ 355,000.00
Delivery Van Account
Date Particulars Debit Date Particulars Credit
2017 2017
29-
Jan Bank Account
£
10,500.00
29-
Jan
Account Payable
Account
£
19,500.00
28-
Feb Balance C/D
£
30,000.00
£ 30,000.00 £ 30,000.00
Account Payable Account
Date Particulars Debit Date Particulars Credit
2017 2017
14- Bank account £ 29- Delivery Van £

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Feb 10,500.00 Jan Account 19,500.00
28-
Feb Balance C/D
£
59,000.00
17-
Feb
Looms Equipment
Account
£
50,000.00
£ 69,500.00 £ 69,500.00
Building Rent Account
Date Particulars Debit Date Particulars Credit
2017 2017
02-
Feb Bank Account
£
3,000.00
28-
Feb Balance C/D
£
3,000.00
£ 3,000.00 £ 3,000.00
Loan from bank Account
Date Particulars Debit Date Particulars Credit
2017 2017
19-
Feb Bank Account
£
20,000.00
15-
Feb Bank Account
£
40,000.00
28-
Feb Balance C/D
£
20,000.00
£ 40,000.00 £ 40,000.00
Employee Salary Account
Date Particulars Debit Date Particulars Credit
2017 2017
15-
Feb Bank Account
£
60,000.00
28-
Feb Balance C/D
£
60,000.00
£ 60,000.00 £ 60,000.00
Account Receivable Account
Date Particulars Debit Date Particulars Credit
2017 2017
16-
Feb Sales Account
£
40,000.00
28-
Feb Balance C/D
£
40,000.00
£ 40,000.00 £ 40,000.00
Sales Account
Date Particulars Debit Date Particulars Credit
2017 2017
28-
Feb Balance C/D
£
40,000.00
16-
Feb
Account Receivable
Account
£
40,000.00

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£ 40,000.00 £ 40,000.00
Looms Equipment Account
Date Particulars Debit Date Particulars Credit
2017 2017
17-
Feb
Account Payable
Account
£
50,000.00
28-
Feb Balance C/D
£
50,000.00
£ 50,000.00 £ 50,000.00
Maintenance Account
Date Particulars Debit Date Particulars Credit
2017 2017
20-
Feb Bank Account
£
5,000.00
28-
Feb Balance C/D
£
5,000.00
£ 5,000.00 £ 5,000.00
(Weston and Brigham, 2015)
C: Trial Balance of Kool Kit Limited
Trial Balance as on 28 Feb, 17 in the book of Kool Kit Ltd.
Particulars Debit Credit
Bank Account £ 286,000.00
Capital Account £ 355,000.00
Delivery Van Account £ 30,000.00
Account Payable Account £ 59,000.00
Building Rent Account £ 3,000.00
Loan from bank Account £ 20,000.00
Employee Salary Account £ 60,000.00
Account Receivable Account £ 40,000.00
Sales Account £ 40,000.00
Looms Equipment Account £ 50,000.00
Maintenance Account £ 5,000.00
Total Balance £ 474,000.00 £ 474,000.00
(Arnold, 2013)

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References
Arnold, G., 2013. Corporate financial management. USA: Pearson Higher Ed.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. USA: Cengage
Learning.
Damodaran, A, 2011. Applied corporate finance. Canada: John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
Krantz, M. 2016. Fundamental Analysis for Dummies. Canada: John Wiley & Sons.
Moles, P. and Kidwekk, D. 2011. Corporate finance. Canada: John Wiley &sons.
Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Australia: Hinsdale, IL: Dryden
Press.