Financial Accounting & Analysis

Q1. Prepare the journal by recording the following transactions.

Answer

Introduction:

A journal is a detailed account that records all the financial transactions of a business,
to be used for the future reconciling of accounts and the transfer of information to other
official accounting records, such as the general ledger

Application and concept applied:

Company corporations use accounting journals to record service transactions like sales,
cash, accounts payable, etc. If the organization needs to apply them, those journals are
optionally available and may be used. The income magazine consists of info of the
deliver and stores supplied through the entity on credit score terms. A coins magazine
files the coins transactions of the entity. These transactions may encompass coins bills
for fees or acquisition of buying and selling items, or coins invoices for the sale of
products.
Similarly, there are numerous numerous different journals to videotape distinctive
classifications of transactions. The quantity of accounting facts may be enormous and
segregated in distinctive locations if a enterprise makes use of numerous journals to file
numerous transactions. Thus groups select to apply the minimal important range of
journals.
Where the accounting statistics is digitized, these kind of journals and get entry to may
be readily determined in a single place.
Nevertheless, the number one magazine is utilized by all firms. It consists of files of
every enterprise transaction made through the company. The info encompass:
• Date of transaction
• Description.
• The ledger accounts are affected.
• Amounts by which every ledger is affected.
• Details of debits and credits.
It may be defined as a "catch-all" Journal.
Traditionally accounting records have been prepared manually. An accounting
magazine became then honestly essential. It became the document from which the
transactions have been uploaded to the overall ledger. With the automated bookkeeping
today, a trendy magazine is prepared, containing all of the adjusting get entry to and
fantastic monetary transactions.
To put together an accounting magazine, it's miles obligatory to tape beneficial facts
regarding monetary transactions. These info may be acquired from billings, orders,
invoices, and different resources; after reading and assuring the transaction's validity,
the magazine files the statistics in sequential order.
Journal get entry to is regulated through the double get entry to approach of
bookkeeping. To file every transaction, an impact is given in columns: a credit score and
a debit. The documented transactions are known as magazine entrances.
Let us realize it with the assist of an instance:
Intend you buy a desk on your provider and pay coins to the company from whom you
purchased it. The accounting magazine will videotape entries, or a whole lot extra
precisely, we are able to nation it'll have an effect on ledger debts. The coins account
may be lowered, and the ownership account may be increased.
Steps for recording the Journal entries
1. Identification of the monetary transactions affecting the enterprise.
2. Analyzing the transactions and figuring out how they affected the accounting
equation.
3. Using credit and debits to tape the modifications. Generally, the debited debts are
furnished over the debts which might be credited. A magazine access wishes to have a
date and a description, moreover known as the narration of the transaction.
While creating a magazine front, the bookkeeper have to make sure that the accounting
transaction stabilizes, i.e., the quantity of the debit to credit. Since the credit and debits
are the premise of a magazine front, it's miles important. They tell the visitors if the
enterprise is acquiring some thing or advertising it. Thus, a magazine front may be a
-liner. A one-liner magazine will now no longer stability and isn't always used to tape
business enterprise transactions.
In the supplied case, multiple accounting transactions are given. It is needed to put
together the magazine which files those accounting transactions
Closing statement:
In the above statement all the journal entries is a two way entry, and it is double entry
accounting system basis.
Q2. Preparing the profit and loss account is a lengthy but at the same time
interesting task. You need a lot of information to prepare the profit and loss
statement. Discuss any five essential components out of the total eight
components which contributes in preparing the profit and loss statement.
Answer:
Introduction:
Bookkeeping is the process of summarizing, evaluating, and reporting monetary
transactions. Correct bookkeeping plays a crucial duty in taping business efficiency and
tracking the development and survival of the business organization. Better, keeping
proper accounts of the organization's different divisions assists in evaluating the
efficiency of the various departments in the organization. It assists in determining the
actual profit from its functional tasks. It is generally viewed as a key to the success of
small company proprietors. The audit procedure aids in maintaining the books of
accounts of a business—the method of bookkeeping assists in analyzing and translating
the financial results of the business procedures.
Application and concept applied
The profit and loss account of a business reflects the profit or loss that has been
represented over time. It can be for a month, quarter, or fiscal year. The major
constituents of the profit and loss account are as adheres to:
1. Revenue, also known as sales
2. Cost of goods sold or cost of sales
3. Selling, General or Ad TV ministrative expenses.
4. Marketing and Advertising
5. Technology/ Research & Development
6. Interest Expense
7. Taxes
8. Net incomes
There are mainly two categories of accounts that hired accounting professionals need to
prepare while preparing a profit and loss Declaration. It consists of:
Revenue Account and Expense Account
A revenue Account consists of all the money or funding the selling has made from
products.
1. Direct and indirect expenses
An enterprise may sustain several expenses to perform its day-to-day operations.
Expenses are additionally incurred to assist in sales. The expenses incurred in the
company can be split into two classifications: Indirect expenses and direct expenses.
Direct expenses are the expenses directly related to the acquisition or manufacturing of
goods. Direct expenses consist of a factory worker's income, gas expenses of the
manufacturing system, and so on.
Indirect expenses are expenses aside from direct expenses. Indirect expenses may
consist of the expenses related to renting out, printing and stationery, devaluation, and
so on
2. Liability: liability is a thing that is produced when a specific company owes cash to
another individual or company. A type of liability on that particular company is that they
have to settle the amount to a different organization, which will decrease the business's
properties: an example, Bank loans, and charge card financial obligations.
Owners are not the only ones to be held responsible for any financial debts sustained
by the firm. There are mainly two sorts of liabilities: long-term and existing liabilities. The
previous is where the liabilities have emerged for a maximum of one year, and the last
suggests a situation when the liabilities have occurred for greater than one year. The
term 'liability' is likewise used in a company framework known as Minimal liability
collaboration. It refers to a kind of collaboration where all the companions in the
business owe a limited amount of value to the business.
3. Loans: The management operates an organization with no intention to close it down
quickly. Correct management of funds is needed to avoid embezzlement and incorrect
use. To operate its activities without inconvenience, every company needs funds. These
funds can be either contributed by the business proprietors or acquired from outdoor
organizations like a bank. The funds obtained with an intention and promise to return
are known as loans.
4. Revenue: Revenue describes the income made by an organization entity by offering
its products or supplying services. In some cases, revenue and sales are used
reciprocally or synonymously. E.g., when a restaurant uses food for its consumers, it
takes the money from the customers; that cash is primarily the restaurant's revenue.
Revenue is usually a combination of profit and prices. It will lead to profits when you
divide the charges from the revenue.
5. Other incomes: An organization may also make some revenue from activities that are
not the main revenue-generating tasks of business. These incomes include rental
income, interest income, or returns income. Therefore, a company may produce
revenue from either core company procedures or additional or supporting tasks. The
income from main company tasks is called Revenue from Operations, while all other
income is other income.
Conclusion:
Preparing an economic declaration is crucial for any firm or organization. It mirrors the
monetary setting of the firm. It demonstrates how much of the expenses have been
made by the business and, along with it, just how much a company earns revenue in
one single fiscal year. A company has to prepare numerous kinds of financial accounts;
these are ledger loss, profit, and account and trial equilibrium at last. The profit and loss
account suggests all the firm's expenses, losses, incomes, and gains in one financial
year. Expenses are to be revealed on the debit side of the account.

Q3. Following are the particulars available for Z and X, LLP

a. Prepare T Form Balance Sheet out of the details as shared in the table
Answer

Introduction:

A balance sheet is a financial statement that contains details of a company’s assets or

liabilities at a specific point in time. It is one of the three core financial statements
(income statement and cash flow statement being the other two) used for evaluating the
performance of a business.A balance sheet serves as reference documents for
investors and other stakeholders to get an idea of the financial health of an
organization. It enables them to compare current assets and liabilities to determine the
business’s liquidity, or calculate the rate at which the company generates returns.
Comparing two or more balance sheets from different points in time can also show how
a business has grown.With this information, stakeholders can also understand the
company’s prospects. For instance, the balance sheet can be used as proof of
creditworthiness when the company is applying for loans. By seeing whether current
assets are greater than current liabilities, creditors can see whether the company can
fulfill its short-term obligations and how much financial risk it is taking.

Application and concept applied:

There are two ways to prepare a balance sheet:

a. A vertical presentation
b. A horizontal presentation or the T-form

The balance sheet is drawn based on the fundamental accounting equation. It is:

Assets = Liabilities equity

A test balance creates the basis of the prep work of the balance sheet. It reveals that at
a given factor, the assets in a business need to be equal to its obligations/ liabilities and
equity. When it occurs, the balance sheet is claimed to be tallied.
Thus, there are three components of a balance sheet. These are:
1. Assets: This category stands for the sources owned by the entity and used to
produce future revenues.

2. Liabilities: This group represents the entity's responsibilities developing from a

previous occasion and consists of all those financial liabilities the entity owes to
outsiders.
3. Equity: The equity of the business stands for the amount contributed by the owners of
the business and the revenues preserved in the business. Simply put, a business's
equity is the amount entrusted to the business after paying the responsibilities to the
financial institutions.
A balance sheet provides visitors with an account of the resources from which the firm
has acquired funds and the sources it has invested them.
Horizontal Format of Balance Sheet
According to this format, all business liabilities exist on the left-hand side, and all assets
are revealed on the right-hand side of the balance sheet. It is likewise called the
T-shaped Balance sheet
b. Define and calculate the current ratio, Discuss the significance of this ratio.
Introduction:

The ratio between the existing properties of the business and its present responsibilities
is known as the current ratio. Existing properties can be realized within the operating
cycle of business, usually one year. Present obligations are the service's responsibilities
that must be paid or satisfied within one year.

Application and concept applied

A company's monetary declarations are prepared to identify its earnings and financial
position among the industry members. Various accounting tools and techniques are
utilized to examine these statements. One such, most generally made use of the
technique is ratio evaluation. It specifies the relationship between different monetary
elements existing and controlling a service.

A current ratio derives the relationship between a business's current assets and
obligations on its annual report on a given date. It shows the size of the company's
current properties versus its existing liabilities. It is usually described as the working
capital ratio.

It is calculated using the following formula:

Current ratio = Current assets/Current liabilities

Examples of Current assets:

• Marketable securities
• Trade receivables
• Inventories
• Cash-in-hand
• Bank balances

Examples of Current liabilities:

• Provisions
• Outstanding liabilities
• Short-term loans etc.
• Bank overdraft
• Trade payables
 Calculation of current ratio of Z and X LLP

The calculations above show that the current ratio of Z and X LLP is 2.53:1

Importance of current ratio:

The current ratio aids in the measurement of a firm’s ability to pay for its short-term
obligations or the ones that are due within 12 months. It allows analysts and investors to
understand the way in which a business can increase its current assets as much as
possible on the balance sheet for clearing the existing debt and other dues.

A ratio of 2:1 is considered an excellent ratio as it reveals that the company has doubled
its present properties compared to its current obligations. However, any ratio between
1:1 to 2:1 is considered significant. If the ratio is lower than 1:1, it suggests the lower
monetary liquidity of the business. If the ratio is too high, it shows that the firm still has
current properties and is shedding an opportunity to utilize them to produce revenue.

Closing statement:

A Current Ratio is among the different liquidity ratios a company calculates. These
liquidity ratios assist in identifying the company's capability to satisfy its near-term
commitments as they specify an organized relationship between the quantum of the
current/liquid properties and the current/ temporary commitments