Business Finance: Analysis of Transactions and Ratio Analysis

This report provides a comprehensive analysis of business finance, starting with the detailed analysis of a set of transactions for a sole trader, including the preparation of journal entries, ledger accounts, and a trial balance. The report then progresses to the preparation of the trading and profit and loss account, and the balance sheet. Furthermore, it includes an evaluation of final accounts for LMC plc, comparing financial performance between 2016 and 2017. Finally, the report incorporates a thorough ratio analysis, encompassing current ratio, acid test ratio, debtors collection period, creditors payment period, stock turnover ratio, and gearing ratio for C plc and D plc, providing insights into the financial health and performance of the businesses. The analysis includes interpretation of the ratios and their implications for financial decision-making.

BUSINESS FINANCE
ACCOUNTS

Table of Contents
INTRODUCTION.................................................................................................................................4
TASK....................................................................................................................................................4
1. Analysis of set of transactions by preparing T accounts................................................................4
2.1 Preparation of trading and P&L account and balance sheet.........................................................8
2.2 Evaluation of final accounts of LMC plc.....................................................................................9
3.1 Ratio Analysis...........................................................................................................................12
CONCLUSION...................................................................................................................................15
REFERENCES....................................................................................................................................16

INTRODUCTION
Financial accounting is that branch of accounting which is concerned with the
collecting, recording, summarising, analysing, interpreting and reporting the financial
information of an organisation (Macve, 2015). The present project report is about analysis of
set of transactions of a sole trader which will include preparing journal entries, ledgers, trial
balance. It will also cover the evaluation of business’s final accounts in which trading profit
and loss account and balance sheet will be prepared and lastly, there will be a ratio analysis of
the concerned business.
TASK
1. Analysis of set of transactions by preparing T accounts
Journal entries
Journa
l
Date Particulars Db Cr
02-Jan Bank 740
To J Jennings 740
(Being Cheque received from Debtor)
03-Jan Purchases A/C
104
0
To G Frazer
104
0
(Being goods brought on credit)
04-Jan Office Equipment 560
To bank 560
(Bring office equipment bought by paying
cheque)
05-Jan A hussain 930
To sales 930
(Bring goods sold on credit)
08-Jan G Frazer 880
To bank 880
(Bring amount paid)
11-Jan Sales return 37
To A Hussain 37

(Bring goods returned by A Hussain)
14-Jan J Jennings 590
To Sales 590
(Bring goods sold to J Jennings)
17-Jan Drawings 500
To Bank 500
(Brings drawings made)
20-Jan Purchses 760
To G Frazer 760
(Bring goods purchsed on credit)
22-Jan Bank A/c
110
0
To A Hussain
110
0
(Bring amount received from A hussain
26-Jan A Hussain 710
To Sales 710
(Bring goods sold on credit to A Hussain)
28-Jan G Frazer 98
To purchase Return 98
(Bring goods returned to G Frazer)
31-Jan Wages 480
To bank 480
(Being wages paid)
Ledger accounts
Dr Capital A/C Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To balance c/f 6800
####
#
By Opening Balance
b/f 6800
6800 6800

Dr G Frazer Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To Bank 880
####
#
By Opening Balance
bf 880
####
# To Purchase Return 98
####
# By Purchases 1040
####
# To Balance c/f 1702
####
# By Purchases 760
2680 2680
Dr Motor Vehicle Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
#
To Opening Balance
b/f 3800 ####
# By Balance c/f 3800
3800 3800
Dr
A
Hussain Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
#
To Opening Balance
b/f 1100 ####
#
By Opening Balance
b/f 1100
####
# To sales 930
####
# By Sales return 37
####
# To sales 710
####
# By Bank A/c 1100
####
# By balance c/f 503
2740 2740
Dr
J
Jennings Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
#
To Opening Balance
b/f 740 ####
# By Bank 740
####
# To Sales 590
####
# By balance c/f 590
1330 1330
Dr Bank Cr

A/C
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
#
To Opening Balance
b/f 2040 ####
#
By Office
Equipment 560
####
# To J Jennings 740
####
# By G Frazer 880
####
# To A Hussain 1100
####
# By Drawings 500
####
# By Wages 480
####
# By balance c/f 1460
3880 3880
Dr
Office
Equipment Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To bank 560
4349
6 By balance c/f 560
560 560
Dr
Drawing
s Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To Bank 500
####
# By balance c/f 500
500 500
Dr By Purchase return Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To Balance c/f 98
####
# G Frazer 98
98 98
Dr Purchase Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To G Frazer 1040
####
# By Balance c/f 1800

####
# To G Frazer 760
1800 1800
Dr Sale Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To balance c/f 2230
####
# By A hussain 930
####
# By J Jennings 590
####
# By A Hussain 710
2230 2230
Dr Sale Return Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To A Hussain 37
####
# By Balance c/f 37
37 37
Dr Wages Cr
Date Particulars
Amount
£ Date Particulars
Amoun
t £
####
# To bank 480
####
# By Balance c/f 480
480 480
Trial balance for the year 31st December
Trial
Balance
Dr Cr
Capital A/c 6800.00
G Frazer 1702.00
Motor Vehicle 3800.00
A Hussain 503.00
J Jennings 590.00
Bank A/c 1460.00
Office
Equipment 560.00
Drawings 500.00
Purchase 98.00

return
Purchase 1800.00
Sale 2230.00
Sale return 37.00
Wages 480.00
Total 10830.00
10830.0
0
2.1 Preparation of trading and P&L account and balance sheet
Trading and P&L a/c of Adya Kumar for 31st December
Particulars Dr Particulars Cr
To opening stock 13250 By sales 85500
To purchases 55000 By closing stock 18100
To wages and salaries 9220
To gross profit (b/f) 8030
103600 103600
To office expenses 850 By gross profit (c/f) 103600
To rates 1200
To travel expenses 330
To net profit (b/f) 23750
103600 103600
Balance sheet as on 31st December
Liabilities
Amoun
t Assets
Amoun
t
Trade payable 7550 Premises 65000
Capital : 70000
Drawings : (8100)
Net profit : 23750 85650 Delivery Van 5250
Telephone 800
Trade receivables 1350
Bank 2700
Stock 18100
Total 93200 Total 93200
2.2 Evaluation of final accounts of LMC plc
Evaluation of Trading and Profit and Loss a/c

Particular
s 2017 2016
Differe
nce % Change Analytical review
%
250.0
0 150.00 100.00 66.67%
Revenue is increased by 66.7% which means
that sales of the company has increased
less :
COGS
175.0
0 100.00 75.00 75.00%
Along with increase in sales, cost of sales
has also increased by 75%
Gross
profit 75.00 50.00 25.00 50.00%
Gross profit has been increased by 50% as
compared to previous year.
less :
operating
expense 49.00 38.00 11.00 28.95%
Because the sales have increased, operating
expenses has also increased as more
expenses have to be incurred for selling
more goods and services.
operating
profit 26.00 12.00 14.00 116.67%
Operating profit has increased by 116.67%
which means that sales has remarkably
increased in comparison to operating profit.
less:
interest 1.00 - 1.00 0.00%
interest expense in 2017 incurred which
means that company borrowed funds in
2017.
net profit
before tax 25.00 12.00 13.00 108.33%
net profit before tax also increased by 108%
in current year.
less: tax 11.00 5.00 6.00 120.00% tax liability increased in the current year.
Net profit
after tax 14.00 7.00 7.00 100.00%
profitability of company increased by 100 %
which means that company has
exceptionally performed in the year 2017.
Evaluation of Balance sheet as on 31st December

2017
£ (m)
2016
£ (m) Difference %
Change
Analytical
Review
Non-Current Assets
(Fixed Assets)
Plant & Equipment
85.00 52.00 33.00
63.46% Fixed assets has
increased by
around 63.46%
which mean
that company
has made
investments in
its assets and
which also
means that
company is
growing.
Current Assets
Inventory
16.00 12.00 4.00
33.33% stock of the
company has
increased by
33.33% which
means that
ccompany is
producing more
Trade Receivables
40.00 18.00 22.00
122.22% debtors of the
company have
increased
122.22% which
is a great
difference that
shows that
company is
taking long time
to recover its
debts.
Cash
4.00 10.00
-
6.00
-60.00%
60.00 40.00
TOTAL ASSETS 1
45.00 92.00
Capital
Share Capital
60.00 60.00 -
0.00%
Reserves
20.00 12.00 8.00
66.67% reserves have
increased in the
current with
amount 8

million pounds
and this
increased
reserve is result
of increased net
profits made by
company.
Shareholder’s Equity
80.00 72.00
Current Liabilities
Trade Payables
28.00 11.00 17.00
154.55% creditors have
also incraesed
by 154.55% that
shows that
company's short
term liabilities
have incraesed
significantly in
curreent year.
Overdraft
17.00 9.00 8.00
88.89%
45.00 20.00
Non-current liabilities
Loans
20.00 - 20.00
100.00% company has
borrwoed fund
in curret year
which is the
reason that
operating
expenses also
increassed in
the form of
interets
expense.
Total Liabilities
65.00 20.00
TOTAL CAPITAL &
LIABILITIES
1
45.00 92.00

3.1 Ratio Analysis
Ratio analysis is an accounting tool that assists the users of financial information of a
company to gain meaningful insights of the financial health of a corporation (Dutta and
Patatoukas, 2016). Following is the ratio analysis of C plc and D plc.
Current ratio: This ratio measure the capability of company to payback its short term
liabilities within the period one year.
It is calculated by: Current assets/current liabilities
Particulars C plc D plc
Current assets 8.30 11.10
Current
liabilities 5.50 10.70
Current ratio 1.51 1.04
Interpretation: The ideal current ratio is 1.1. From the above calculation,, it can be seen that
C plc have 1.51 which is higher than the ideal ratio and D plc have 1.04 ratio which is just
above ideal ratio. Both the company have ability of paying their short term liabilities.
Acid test ratio : This ratio measures the liquidity of company to pay back its short term
liabilities. It is calculated by :
Acid test ratio : Current assets- stock- prepaid expenses/ current liabilities
Particulars C plc D plc
Current assets -
stock 4.5 7
current liabilities 5.5 10.7
Acid test ratio 0.82 0.65
Interpretation: The ideal ratio is 1:1 and from the table it can be observed that D plc has 0.65
acid ratio and C plc have 0.82. C plc is in better position to pay its short term liabilities and
possess more liquidity than D plc.

Debtors collection period : This refers to the period which a company takes for collecting its
due from its debtors (Easton and Sommers, 2018). It is calculated by :
Debtors collection period = Debtors/credit sales*365
Particulars
C
plc D plc
Debtors 4.5 0.7
sales 43.9 96.3
Debtors collection
period
37.4
1 2.65
Interpretation: It can be seen from the above table that C plc takes 37.41 days for collecting
its dues while D plc takes only 2.65. This means that D plc is more efficient in collecting its
dues and has maintained the policy which might allow several types of discounts for prompt
payments.
Creditor payment period: This refers to the period which a firms takes for paying its
creditors. It is calculated by :
= Creditors/ COGS*365
Particular C plc
D
plc
Creditors 5.1 10.7
Cost of sales 33.6 84.7
Creditors payment
period 55.40
46.1
1
Interpretation: It can be seen that C plc takes 55.40 days for paying its creditors while D plc
takes only 46.11 days to pay its creditors. D plc is more quicker in paying its liabilities than C
plc.
Stock Turnover ratio : Being an efficiency ratio, it measures how a company manages its
inventory in respect of its cost of goods sold. It is calculated by :
= COGS/inventory
Particulars C plc
D
plc
COGS 33.6 84.7
Stock 3.8 4.1

Stock
turnover 8.84 20.66
Interpretation: It can be observed that C plc is less efficient than D plc in managing its stock.
Higher inventory show that company has good sales and inventory is cleared more quickly.
Gearing ratio: This ratio measures the proportion of borrowed fund in relation to its equity
(Gearing ratio, 2017). Formula:
= Long term liabilities/ capital employed*100
Particulars
C
plc
D
plc
Long term
liabilities 3.2 2.1
Capital
employed 5.9
13.
1
Gearing ratio
54
%
16
%
Interpretation: The capital gearing ratio of C plc is 54 % while D plc is 16 %. It can be said
that C plc have higher financial risk since its ratio is greater than 50%.
D plc is the departmental store and C plc is the chemical manufacturer because as
stock turnover ratio of the grocery and other consumer good is higher than the chemical
industry. The reason for high inventory turnover is that departmental store items needs to
offset their low profitable margins with high amount of sales. It can also be verified from the
sales of D plc which is higher than C plc.
CONCLUSION
From the above project, it can be summarised that financial accounting is all about
recording and presenting the financial information in such a form that reflects the financial
health of a company. It was concluded that ratio analysis of financial data helps in assessing
the soundness of company in paying back its liabilities and its shows how efficiently
company undertake its operations.

REFERENCES
Books and Journals
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Dutta, S. and Patatoukas, P.N., 2016. Identifying conditional conservatism in financial
accounting data: theory and evidence. The Accounting Review. 92(4). pp.191-216.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Online
Gearing ratio.2017. [Online]. Available through
<https://www.accountingtools.com/articles/2017/5/5/gearing-ratio>