Recording Business Transactions BA30592

Assignment Solution
PART A
a) Write double entry record the transactions in T-accounts

Answer
Journal
Sr N. A/C (Particulars) Dr Cr
Bank £ 8,000
Cash £ 5,200
01/10
Van £ 3,000
Capital £ 16,200
Laptop £ 1,000
02/10
Bank £ 1,000
Purchases £ 2,450
04/10
Toys Ltd £ 2,450
Bank £ 1,500
05/10
Sales £ 1,500
Repair & Maintenance Expense £ 80
12/10
Cash £ 80
Toys Ltd. £ 100
18/10
Purchases Return £ 100
Bank £ 500
21/10
Rent Income £ 500
Cash £ 1,500
23/10 Fred A/C £ 400
Sales £ 1,900
Cash £ 500
23/10
Sales £ 500
Car £ 2,500
24/10
Bank £ 2,500
Wages & Salaries £ 820
26/10
Bank £ 820
Rent Expense £ 1,000
30/10
Bank £ 1,000
Drawings £ 1,600
31/10
Bank £ 1,600
Recording Business Transactions BA30592

b) T-Accounts & Balance the accounts and bring down an opening balance
Bank A/C
01-10 Capital £ 8,000 02-10 Laptop £ 1,000
05-10 Sales £ 1,500 24-10 Car £ 2,500
21-10 Rent Income £ 500 26-10 Wages & Salaries £ 820
      30-10 Rent Expense £ 1,000
      31-10 Drawings £ 1,600
      31-10 Bal C/F £ 3,080
    £ 10,000     £ 10,000
01-11 Bal B/F £ 3,080      

Cash A/C
01-10 Capital £ 5,200 12-10 Repair & Maintenance £ 80
23-10 Sales £ 1,500      
23-10 Sales £ 500      
           
      31-10 Bal C/F £ 7,120
    £ 7,200     £ 7,200
           
01-11 Bal B/F £ 7,120      
           
           
Van A/C
01-10 Capital £ 3,000      
           
    £ 3,000 31-10 Bal C/F £ 3,000
01-11 Bal B/F £ 3,000      

Laptop A/C
02-10 Bank £ 1,000      
      31-10 Bal C/F £ 1,000
01-11 Bal B/F £ 1,000      
           
           
Purchases A/C
04-10 Toys Ltd £ 2,450      
           
    £ 2,450 31-10 Bal C/F £ 2,450
01-11 Bal B/F £ 2,450      
Toys Ltd A/C
Recording Business Transactions BA30592

18-10 Supplies £ 100 04-10 Supplies £ 2,450

           
31-10 Bal C/F £ 2,350      
    £ 2,450     £ 2,450
      01-11 Bal B/F £ 2,350
           
Repair & Maintenance A/C
12-10 Cash £ 80      
           
    £ 80 31-10 Bal C/F £ 80
           
01-11 Bal B/F £ 80      

Rent Income A/C

      21-10 Bank £ 500
           
31-10 Bal C/F £ 500     £ 500
           
      01-11 Bal B/F £ 500
           
           
           
Account Recievable A/C
23-10 Sales £ 400      
           
    £ 400 31-10 Bal C/F £ 400
01-Nov Bal B/F £ 400      
           
           
Car A/C
24-10 Bank £ 2,500      
           
    £ 2,500 31-10 Bal C/F £ 2,500
01-Nov Bal B/F £ 2,500      

Sale A/C
      05-10 Bank £ 1,500
      23-10 Cash £ 1,500
Recording Business Transactions BA30592

      23-10 Fred £ 400

      23-10 Cash £ 500
31-10 Bal C/F £ 3,900     £ 3,900
      01-Nov Bal B/F £ 3,900
           
Capital A/C
      01-10 Bank £ 8,000
      01-10 Cash £ 5,200
      01-10 Van £ 3,000
           
31-10 Bal C/F £ 16,200     £ 16,200
      01-11 Bal B/F £ 16,200
           
           
Wages & Salaries A/C
26-10 Bank £ 820      
           
    £ 820 31-10 Bal C/F £ 820
           
01-11 Bal B/F £ 820      

Rent Expense A/C

30-10 Bank £ 1,000      
           
    £ 1,000 31-10 Bal C/F £ 1,000
01-11 Bal B/F £ 1,000      
           
Drawings A/C
31-10 Bank £ 1,600      
           
    £ 1,600 31-10 Bal C/F £ 1,600
           
01-11 Bal B/F £ 1,600      

Purchases Return A/C

      18-10 Toys Ltd £ 100
           
31-10 Bal C/F £ 100     £ 100
Recording Business Transactions BA30592

           
      01-11 Bal B/F £ 100

c) Extract a Trial balance as at 31st October 2020

Trial Balance
at the end of 31st Oct 2020
Particulars/ A/C Dr Cr
Bank £ 3,080  
Cash £ 7,120  
Van £ 3,000  
Laptop £ 1,000  
Purchases £ 2,450  
Toys Ltd   £ 2,350
Repair & Maintenance £ 80  
Rent Income   £ 500
Account Receivable £ 400  
Car £ 2,500  
Sales   £ 3,900
Capital   £ 16,200
Wages & Salaries £ 820  
Rent Expense £ 1,000  
Drawings £ 1,600  
Purchases Return   £ 100
     
Total £ 23,050 £ 23,050

d) Prepare an Income Statement for the period ended 31st October 2020. The closing
inventory is £ 250.00.

Income Statement
At the end of 31st Oct 2020
Particulars Amount
Recording Business Transactions BA30592

Sales £ 3,900
Less: Purchases £ 2,200
Add: Statement
Purchases Return
of Financial£ Position 100
Gross Profit £ 2020 1,800
At the end of 31st Oct
Less: Expenses
Particulars   Amount
Repair
Assets: & Maintenance £   80
Non Wages & Salaries
Current Assets £  820
Van Rent Expense £ £ 1,000
3,000
 
Laptop   £ 1,000
Car Operating Profit -£ 100
£ 2,500
 
Current Assets    
BankAdd:   £ 3,080
CashRent Received £ 500
£ 7,120
 
Account Receivable   £ 400
Net Profit
Inventory £ £ 400250
   
Total Assets £ 17,350
   
Liability & Capital  
Accounts Payable £ 2,350
Capital £ 16,200
Add: Net Income £ 400
Less: Drawings £ 1,600
   
Total Liability & Capital £ 17,350

e) Prepare a Statement of Financial Position as at 31st October 2020

Recording Business Transactions BA30592

f) Write a brief letter to Linda explaining what drawings are concerning small business
and answering her query concerning her holiday.

Answer

A drawing is an accounting record maintained for the money tracking that was
withdrawn from the business by its owner or Linda. A journal entry of the drawing
Recording Business Transactions BA30592

account consist on a debit to the drawing account and credit to the bank with £1,600/-.
Drawings are never expenses for a business. Linda withdraw the £1600/- for a long week
holiday that concerning about the stress and strain of the business. It has accumulated
funds that the Linda put into the business plus their share the profit and loss. In this case,
Linda should first carefully evaluate the business from having enough capital to continue
the operating activities.

If the Linda are doing nothing inappropriate and she is not violating the laws of
business than she would eventually be taking draws well in excess of the money the she
put into the business. The Linda was drawing the money from the business for a long
week holiday so that is not appropriate and she is not violating the business laws. She can
withdraw the money from the business and she is not restricted in any agreement.

PART B
i) According to the information available in Income and Financial position
statements in Part A, calculate the following ratios for Linda’s business.
Recording Business Transactions BA30592

Solution

 Net Profit Margin

Ratios Formulas
Net Profit Margin 10.26% Net Profit / Sales

 Gross Profit Margin

Ratios Formulas
Gross Profit Margin 46.15% Gross Profit / Sales

 Current Ratio

Ratios Formulas
Current Ratio 4.62x Current Assets / Current Liabilities

 Acid Test Ratio

Ratios Formulas
Acid Test Ratio 4.51x (Current Assets - Inventories) / Current Liabilities

 Account Receivable Collection Period

Ratios Formulas
Account Receivable Collection Period 37.44 (Accounts Receivable / Net Sales) * 365

 Accounts Payable Payment Period

Ratios Formulas
Recording Business Transactions BA30592

365/(Accounts Payable/((Accounts Payable O/B +

Account Payable Payment Period 178.6 Accounts Payable C/B))/2)

ii) Assuming Linda’s competitors ratio averages are as stated above: Analyse her
performance with reference to each of the ratios calculated in comparison to those
of her competitor.

Answer

 Net Profit Margin

The net profit margin ratio compare with net income with sales. If a company
generates the earnings higher as compare to the competitors then we can say that the
company can protect themselves during hard time. This ratio gives us the sense of
company financial stability. In this Linda’s case, the net profit margin of Linda’s
company is less than the competitors so; we can say that the Linda’s business is less
stable than the competitor’s average. In other words, we can say that the Linda’s
company has more generated the admin and operating expense as compare to
competitors.

 Gross Profit Margin

The gross profit margin ratio tells us about how much a profit of a company on its
cost of sales. Also, it indicates the management efficiency in the labor and supplies
process. The Linda’s business has less gross profit margin as compare to competitors
average ratio. So, we can analyse that the business of Linda have less money as
compare to competitor left over to spend the other business operation activities or
expenses. But it is an important that the gross profit margin vary from business to
business.

 Current Ratio
The current ratio is a liquidity ratio that measures the business ability to pay the short
term debts or liability within one year. If current ratio is less as compare to others so
we can say that it has higher risk to default. Similarly, if a company has higher current
ratio than it indicates the management may not be using the assets efficiently and
lower risk to default. In Linda’s business the current ratio is higher as compare to
competitors average than we can say that the Linda’s management is not utilize the
assets efficiently but it has less risk to default in short term.
Recording Business Transactions BA30592

 Acid Test Ratio

The acid test ratio measures the liquidity of a business through its ability to pay off its
current liabilities with current assets or quick assets. Also, the higher acid test ratio
means that the company has more ability to pay the long term debt. The Linda’s
business has higher ratio as compare to competitors average. So, we can say that the it
has more favourable for Linda’s business because it showing that there are more
current assets that the current liabilities except inventory. It also shows that the
Linda’s business could pay off it current liabilities without selling the non-current
assets and it has more liquidate as compare to competitor. More assets will be easily
convertible in to cash when the company is needed to be.

 Accounts Receivable Collection Period

The accounts receivable collection period compare the outstanding receivable of a
business to its sales. This ratio is used to compare or evaluate the long term customers
can pay to the seller. The Linda’s business has 37.4 days collection period. It is not a
bad figure but it considering the collection of its receivable is short and reasonable as
compare to its competitors. This period of time gives the time to pay off its
obligations.

 Accounts Payable Payment Period

The accounts payable payment period shows that the relationship between the
payments and credit purchases for them. It measures the average number of days by
taken the entity to pay its suppliers. The Linda’s business has higher days payment
period as compare to its competitors. It shows that the Linda’s business can retain the
available funds for a long duration of time. Also, it has an opportunity to utilize those
funds in a better way to maximize the benefits.