Analyzing Business Transactions: Financial Statement Preparation

This assignment provides a comprehensive analysis of recording business transactions for a company owned by Linda. The solution includes journal entries, T-accounts, a trial balance, an income statement, and a statement of financial position. The assignment further delves into financial ratio analysis, calculating and interpreting key ratios such as net profit margin, gross profit margin, current ratio, quick ratio, accounts receivable collection period, and accounts payable turnover ratio. A comparison of Linda's business ratios with industry benchmarks is presented, along with an overall evaluation of the company's performance and recommendations for improvement. The document concludes with references to relevant academic sources.

Recording business
transactions

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1. Recording the transactions of a company that Linda owns in a T- account in an effective and
efficient manner...........................................................................................................................1
2. Balancing the accounts so as to bring down an opening balance............................................2
3. Extracting a trial balance as at 31st October 2020....................................................................6
4. Preparing an Income statement................................................................................................6
5. Preparing a statement of financial position.............................................................................7
6. Detailed evaluation of all the answers in an appropriate and impactful way..........................8
PART 2............................................................................................................................................8
1. Calculation and interpretation of different ratios for the firm that is mentioned above..........8
2. Comparison of the above calculated ratios including their interpretation...............................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Recording all business transactions is among the most integral and critical aspects because it
can help a company grow and prosper in today's market while also having the potential to harm
and destruct the company's operations if not evaluated in a consistent and effective manner
(Barry, 2016). With effect from October 1, 2020, this report extracts the balance of a business
owned by an individual called Linda. Aside from the ledger accounts, trial balance, and income
statement of the aforementioned corporation, various ratios are estimated and interpreted
appropriately in this study.
PART 1
1. Recording the transactions of a company that Linda owns in a T- account in an effective and
efficient manner
Journal entry in the books of Linda from 1st October 2020
Date Particulars DR CR
1/10/2020 Bank a/c DR
Cash a/c DR
Van a/c DR
To capital a/c
(Being capital in the business invested)
8000
5200
3000
16200
2/10/2020 Laptop a/c DR
To bank a/c
(Being Laptop purchased on credit)
1000
1000
4/10/2020 Purchase a/c DR
To Toys limited
(Being Toys purchased on credit)
2450
2450
5/10/2020 Bank a/c DR
To sales a/c
(Being goods sold in cash)
1500
1500
12/10/2020 Repairing laptop a/c DR
To cash a/c
80
80

(Being amount paid for repairing laptop in
cash)
18/10/2020 Toys limited a/c DR
To purchase return a/c
(Being goods returned to Toys limited)
100
100
21/10/2020 Bank a/c DR
To rent a/c
(Being rent received)
500
500
23/09/2020 Cash a/c DR
Fred a/c DR
To sales a/c
(Being goods sold on cash and credit)
1500
400
1900
23/10/2020 Cash a/c DR
To sales a/c
(Being goods sold in cash)
500
500
24/09/2020 Car a/c DR
To bank a/c
(Being car purchased)
2500
2500
26/10/2020 Wages a/c DR
To bank a/c
(Being wages paid)
820
820
31/10/2020 Rent a/c DR
To bank a/c
(Being rent paid)
1000
1000
30/09/2020 Drawings a/c DR
To bank a/c
(being amount withdraw from bank for
holiday)
1600
1600
2. Balancing the accounts so as to bring down an opening balance
Bank a/c
Date Particulars Amount Date Particulars Amount

1/10/2020 To capital a/c 8000 2/10/2020 By Laptop a/c 1000
5/10/2020 To sales a/c 1500 24/09/2020 By Car a/c 2500
21/10/2020 To rent a/c 500 26/10/2020 By Wages a/c 820
31/10/2020 By Rent a/c 1000
30/09/2020 By Drawings a/c 1600
31/10/2020 By balance
carried down
3080
Cash a/c
Date Particulars Amount Date Particulars Amount
1/10/2020 To capital a/c 5200 12/10/2020 By Repairing
laptop a/c
80
23/09/2020 To sales a/c 1500 31/10/2020 By balance
carried down
7120
23/10/2020 To sales a/c 500
Van a/c
Date Particulars Amount Date Particulars Amount
1/10/2020 To capital a/c 3000 31/10/2020 By balance
carried down
3000
Capital a/c
Date Particulars Amount Date Particulars Amount
31/10/2020 To balance carried
down
16200 1/10/2020 By bank a/c 8000
1/10/2020 By Cash a/c 5200
1/10/2020 By Van a/c 3000
Laptop a/c
Date Particulars Amount Date Particulars Amount

2/10/2020 To bank a/c 1000 31/10/2020 By balance
carried down
1000
Purchase a/c
Date Particulars Amount Date Particulars Amount
4/10/2020 To Toys limited 2450 31/10/2020 By balance
carried down
2450
Toys limited
Date Particulars Amount Date Particulars Amount
18/10/2020 To purchase return
a/c
100 4/10/2020 By Purchase a/c 2450
31/10/2020 To balance carried
down
2350
Sales a/c
Date Particulars Amount Date Particulars Amount
31/10/2020 To balance carried
down
3900 05/10/2020 By Bank a/c 1500
23/09/2020 By cash a/c 1500
23/09/2020 By Fred a/c 400
23/10/2020 By Cash a/c 500
Repairing laptop a/c
Date Particulars Amount Date Particulars Amount
12/10/2020 To cash a/c 80 31/10/2020 By balance
carried down
80
Purchase return a/c
Date Particulars Amount Date Particulars Amount

31/10/2020 To balance carried
down
100 18/10/2020 By Toys limited
a/c
100
Rent a/c
Date Particulars Amount Date Particulars Amount
31/10/2020 To bank a/c 1000 21/10/2020 By Bank a/c 500
31/10/2020 By balance
carried down
500
Fred a/c
Date Particulars Amount Date Particulars Amount
23/09/2020 To sales a/c 400 31/10/2020 By balance
carried down
400
Car a/c
Date Particulars Amount Date Particulars Amount
26/09/2020 To bank a/c 2500 31/10/2020 By balance
carried down
2500
Wages a/c
Date Particulars Amount Date Particulars Amount
26/10/2020 To bank a/c 820 31/10/2020 By balance
carried down
820
Drawings a/c
Date Particulars Amount Date Particulars Amount
30/09/2020 To bank a/c 1600 31/10/2020 By balance
carried down
1600

3. Extracting a trial balance as at 31st October 2020
Particulars DR CR
Bank a/c 3080
Cash a/c 7120
Van a/c 3000
Capital a/c 16200
Laptop a/c 1000
Purchase a/c 2450
Toys limited a/c 2350
Sales a/c 3900
Repairing laptop a/c 80
Purchase return a/c 100
Rent a/c 1000
Rental Income a/c 500
Fred a/c 400
Car a/c 2500
Wages a/c 820
Drawings a/c 1600
Total 23050 23050
4. Preparing an Income statement
Particulars Amount
Sales 3900
Less: cost of goods sold
Opening stock 0
Purchases 2450

Less: Purchase return 100
Less: Closing stock 250
Gross profit 1800
Less: Operating expenses
Laptop repairing 80
Wages 820
Rent 1000
Add: Operating income
Rent received 500
Net Profit 400
5. Preparing a statement of financial position
Assets Amount
Fixed Assets
Laptop 1000
Second-hand car 2500
Van 3000
Current Assets
Bank 3080
Cash 7120
Fred 400
Inventory 250
Total Assets 17350

Equity and Liabilities
Equity
Capital 16200
Less: Drawings -1600
Retained earnings 400
Current liabilities
Toys Ltd. 2350
Total equity and Liabilities 17350
6. Detailed evaluation of all the answers in an appropriate and impactful way
The sketches taken from the company will be considered as a personal expense, and the
vacations taken will also be treated as personal nature expenses and will be treated as such (Brijs,
2016).
PART 2
1. Calculation and interpretation of different ratios for the firm that is mentioned above
Net profit margin Net profit/sales*100
Net profit 400
sales 3900
Net profit margin 10.26 %
Gross profit margin Gross profit/sales*100
Gross profit 1800
sales 3900
Gross profit margin 46.15%
Current ratio Current assets/current
liabilities
Current assets 10850

Current liabilities 2350
Current ratio 4.62 times
Acid test ratio Quick assets/current
liabilities
Quick assets 10600
current liabilities 2350
Acid test ratio 4.51 times
Accounts receivable collection period Sales/accounts receivables
sales 3900
accounts receivable 400
Accounts receivable collection period 9.75
Days 37.44
Accounts payable turnover ratio Purchase/accounts payables
Purchase 2450
Accounts payable. 2350
Accounts payable turnover ratio 1.042553191
days 350
2. Comparison of the above calculated ratios including their interpretation
Particulars Industry’s ratio Linda’s business ratio
Net profit margin 31% 10.26%
As can be seen from the above, Linda's company is not doing very well in comparison to
the industry, with a ratio of 10.26% versus 31% for the industry, and therefore it needs to change
in order to achieve long-term growth. Also, based on the above, it is very important and essential
for Linda's company to enhance this aspect by employing and enforcing various possible steps so
that it does not negatively impact the firm's overall results (Orlov, 2016).
Particulars Industry’s ratio Linda’s business ratio

Gross profit margin 54% 46.15%
This ratio is almost identical in both, but Linda's business is still lagging behind, with a
ratio of 46.15 percent compared to 54 percent for the industry. Although this small margin is
often overlooked, it is critical for the above listed company to increase these ratios in order to
expand and succeed in a highly competitive and diverse industry (Pipattanasomporn, Kuzlu and
Rahman, 2018).
Particulars Industry’s ratio Linda’s business ratio
Current ratio 2.87 times 4.62 times
Linda's company has performed extremely well in this regard, with a high ratio of 4.62
times compared to the industry's 2.87 times. This ratio aids in assessing an enterprise's short-term
paying potential, and Linda's company has done an outstanding job in this regard, which is one
of the reasons for its enormous business success.
Particulars Industry’s ratio Linda’s business ratio
Quick ratio 1.35 times 4.51 times
Linda's company is also doing well in the industry, with a 4.51 times return compared to
1.35 times. Similarly to the previous ratio, the firm has performed admirably in this one,
indicating that it has a high repayment potential (Reid, 2020).
Particulars Industry’s ratio Linda’s business ratio
Account receivable days 50 days 37 days
Linda's company collects the money owed within a short period of time, on average 37
days versus 50 days for the industry, indicating that the former is doing a good job of recovering
money from its debtors and, as a result, it is also useful in maintaining the supply chain, which is
critical in the current situation.
Particulars Industry’s ratio Linda’s business ratio
Account payable days 72 days 350 days
Linda's company keeps the money from creditors for a longer period of time, which adds to
the firm's value, as its average is 350 days, compared to the industry's average of 72 days. The
money that is kept can be reinvested in a place that will yield higher returns, which will benefit
the firm in the long run (Ryu and Kim, 2016).