Financial Accounting & Analysis

Ans 1.

Introduction:

Journals can be described as a diary that you keep track of your day-to-day things, thoughts, or
an annual that deals with a particular topic or business. A journal could be described as a diary
which lets you record your thoughts. Transactions are kept in journals, which is a second book of
accounts. A ledger is the main book of accounts that is used to record the transactions that are
recorded in journals. A journal entry must have two lines. The total value in the debit column
must equal the credit column's. These are the fundamental guidelines for journal articles. Journal
entries are often written in paper and are kept in a book of accounting records. They also contain
supporting documents. External auditors' year-end review of financial statements and systems
could have access to this information. Every journal entry contains the date, amount that is to be
credited and debited as well as a brief description of the transaction and the accounts affected.
You may also find tax information and a list of the affected subsidiaries.

Concept and application:

To ensure the accuracy and completeness of financial reports based on the information provided,
it is important to correctly and completely enter journal data. The accounting software of today
allows for automated and templated daily journal entries which minimizes the possibility of
making errors. The double-entry accounting system allows journals to be made in chronological
order, and includes both credit and debit columns. Even if credits and debits are tied to different
accounts, totals for the columns should match. General cash receipts, cash receipts,
disbursements. Sales, cash purchases and returns, as well as cash receipts & disbursements.

All accounting data can be digitally digitized, and all journals and their access information can
be found in one location.
However, all companies use the main journal. It holds all documentation related to the
transaction. The information includes:

 Date of transaction

 Description.

 The ledger accounts affected were erased.

 The amount by which every ledger is affected.

 Details about credit and debit cards.

It can be described as it is a "catch-all" Journal.

Accounting records were traditionally prepared by hand. The accounting journal was crucial
back then. This was the document which uploaded transactions to the general ledger. With the
computerized bookkeeping today the general journal is made, which contains all the adjusting
access and notable financial transactions.

Make a note of financial transactions to make the accounting journal. The journal is created after
confirming that the transactions are authentic.

Journal access is controlled by double-entry Accounting. Credit and debit are recorded in the
same transaction. Journal entries serve to document transactions that have been recorded. We can
understand this by using an instance:

Consider purchasing a table to make use of for your service. After that, you can pay cash to the
company that you are using. The accounting journal will record two entries. Or, specifically, we
could declare that it will affect ledger accounts. The cash account is going to be lower, while the
account for possession will increase.

Steps to record the Journal entries

1. The identification of financial transactions that impact business.

2. The analysis of the transactions, and the identification of their impact on the accounting
equation.

3. It is possible to make changes credit or debit. The accounts that have been debited are usually
first, then the ones that have been paid. Journal entries should include the date and the details. It
is also referred to as the narration.

In the process of making a journal entry the bookkeeper has to ensure that the accounting
transaction is stable, i.e., the amount of debits to the credit. It is crucial to make sure that the
entry in the journal includes the debit and credit. They notify the readers if the business is getting
something or promoting it. Therefore, a journal entry is an two-liner. A journal entry that is just
one line will not be able to balance and cannot be used to record transactions within an
organization.

In the scenario presented two accounting transactions are given. These accounting transactions
must be recorded in a journal.

An entry directly in the main journal can be referred to as journal entries. To identify the
accounts that are affected and the amount of money impacted by each transaction the journal
entry follows an established format. Each journal entry should contain a minimum of one debit
and one credit.

Date Particulars Dr./Cr. Amount Amount

03.12 Cash a/c Dr. 5000

Bank a/c Dr. 500000

To capital a/c Cr. 505000

(Being capital introduced in the business)

05.12 Furniture a/c Dr. 60000

To bank a/c Cr. 30000

 To sundry payable Cr. 30000

(Being furniture purchased for ₹60000, ₹30000 paid

through bank and the creditors created for the
balance amount)

07.12 Stock-in-trade a/c Dr. 315000

To bank a/c Cr. 315000

(Being goods bought and payment made through

bank account)

08.12 Bank a/c Dr. 500000

To stock-in-trade Cr. 315000

To profit on sale of goods Cr. 185000

(Being goods sold for cash and profit realized)

10.12 Rent a/c Dr. 10000

Salary a/c Dr. 10000

Electricity expense a/c Dr. 10000

To bank a/c 30000

(Being rent, electricity and salary expenses paid

through bank account)
Conclusion:

Therefore, this is basically, journal entries. Making them a part of your daily routine is vital since
they serve as a means of accurately and fully documenting any business transaction, whether it's
online or offline. Journal entries are the most important books of entry. They organize your
company's records and guarantee accuracy throughout all accounting processes. Although there
are numerous bookkeeping software available today, they will help you manage your accounts
easily. It will be simpler to pick the appropriate accounting software for your company when
you're familiar with the debit entry technique.

Ans 2.

Introduction:

A profit and loss (or P&L) statement is a financial report that provides an overview of the
revenue as well as expenses for a period of time, usually a quarter or fiscal year. These
statements show if a company can make an income by increasing revenues or reducing costs.
P&L statements are frequently displayed with the accrual or cash method. Investors and
corporate managers use P&L statements for assessing the financial health of a company. Profit
and loss statements (or P&L) is a financial statement that provides an overview of revenue as
well as expenses and income for a specific period of time typically a quarter or fiscal year. The
statements reveal if a company can make a profit by increasing sales or cutting expenses. P&L
statements are usually presented with the cash or accrual method. Management and corporate
investors utilize P&L statements to gauge the financial health of the company. The total expense
is subtracted to determine the loss or profit. P&L expenses and sales. Gross margin, sales,
administration expense, net profit and net sales. The P&L statement displays revenues as well as
costs, so it will show how money moves into (and leaves) the company.
Concept and application:

A profit and loss statement (or P&L) is a financial statement that provides an overview on the
revenue as well as expenditures and expenses for a particular time.

Publicly traded companies will also release the P&L report quarterly or annually and a balance
sheet and cash flow statements. When combined with the balance sheet, the P&L statement and
balance sheet provide an exhaustive analysis of the company's financial performance. Statements
can be prepared using either the cash or accrual method. It is crucial to compare P&L statements
of different periods of time because any changes in time are more significant than the raw data.

The primary categories in P&L are

1. Revenue (sales/turnover): Revenue is the amount of money an organization earns from

selling its products or offering services. In certain cases, the terms sales and revenue are used in
conjunction or. If a restaurant is selling food, it takes money from customers. That cash is
primarily revenues from restaurants. Revenue is typically a mix of profit and price. Divide the
revenue by the costs to calculate profits.

2. Cost of goods sold (COGS): The sum of money your company has spent on expenses directly
related to the sale of goods is referred to as the cost of goods. Depending on the nature of your
company it may also include raw materials, packaging as well as direct labour required in
creating or selling the product, and items purchased for resale. The end-of-study inventory is
subtracted from the beginning value. The new inventory is added to this total.

COGS = Beginning Inventory + Purchases – Ending Inventory.

3. Gross profit (revenue minus COGS): Gross profit is the amount the company has after
deducting all costs incurred while producing and selling its products or services. The gross profit
reported in the income statement of a business is calculated by subtracting the cost of goods
(COGS), from the revenues (sales). These numbers are included in the income statement of a
business. These numbers are also known as gross revenue or sales profit. Gross profit is the
indicator of how efficiently a company employs its workforce and resources to create goods or
services. Gross profit is not inclusive of the cost of selling goods. Net profit covers all company
costs. Gross margin is the measure of the amount of profits can be devoted to operational costs.

4. Expenses: In accounting, expenditures refer to the money that a company spends to earn
revenue. The term "expenses" refers to the expenditures and money that an organization must
incur to earn profit. Accounting expenditures are a blend that could lead to profit. Despite being
similar in terms the terms expense and cost, they are two distinct terms in bookkeeping. Cost is
the cost to buy any asset. These assets can be used and used as expenses. While the acquisition of
a car by a business can be a good example of a cost. However, payments for petrol and
maintenance are considered expenses, however, there are a variety of costs that are not expenses.
In a company's financial statements it is possible to see all expenses. Companies can subtract
expenses from sales totals to determine their profits.

5. Net income: The sum that an individual or business earns after deducting all costs allowances,
taxes, and allowances. Sales are subtracted from costs of products sold, selling, general and
administrative expenditures operating expenses, depreciation, taxes, interest, and other expenses
to arrive at net income (NI) Also known as net earnings. This figure can be used by investors to
determine how much profit a company generates above its expenses. This number can be used to
determine the efficiency of a company. It is found on the income statement.

Net Income = Total Revenues - Total Expenses.

Conclusion:

We can see that profit and loss reports are helpful in helping determine the company's net
income and assist the management team and the board of directors in making important
decisions. The Profit and Loss Report is useful to business owners as it provides information on
business costs, sales revenue, and profit or loss over a time. It provides an overview of the
company's financial position and allows you to create estimates for the future. The formulation
of a financial declaration is a vital task for any business or organization. It's a statement of the
company's current monetary policy. It shows how much of the company's expenditures have
been paid for as well as how much the company earns within a single fiscal period. It also
provides the amount of revenue was used to cover costs for the company. The company must
keep several financial accounts. Most important is the ledger accounts for profit, loss, and trial
equilibrium at each close. The profit and loss account provides an overview of the business's
expenses, incomes, and profits for an accounting period. The debit part of a bank account is
where you should report your expenses.

Ans 3a.

Introduction

The idea of "balance sheet" is to refer to assets that equal equity and liabilities. The balance sheet
is among the three crucial financial statements. It is crucial for accounting and financial
modelling. The balance sheet shows what assets the company has along with the financing
methods that are used to finance these assets. It is also known as a financial statement
circumstances or a declaration of net worth. The most complete snapshot of a company's
financial situation is presented in the balance sheet, commonly called the Statement of Financial
Position.

The fundamental formula Assets = Liabilities + Equity serves as the foundation for the balance
sheet.

Concept and application:

The assets, liabilities and shareholder equity are reported in a balance sheet that is a financial
statement. One of the three main financial statements used to judge the performance of a
business is the balance sheet. It offers a picture of the financial position of a company (what it
owns and what it owes) as of the publishing date.

In other words, there are three elements of the balance sheet. These three components are:

1. Assets: This is the term that refers the assets owned by the entity. They are used to produce
future revenues.
2. Liabilities: This section represents the entity's responsibilities developing from a prior event.
It comprises all financial liabilities that the entity owes to third parties.

3. Equity: The equity of the business refers to the amount which is contributed by the owners of
the business, as well as the earnings kept in the business. Simply stated, equity refers to the sum
of money that is transferred to the company after the fulfillment of the obligations of the
financial institution.

The assets, liabilities as well as shareholder equity are listed on a balance sheet as a financial
statement. The balance sheet is one of the three primary financial statements that are used to
assess a business. It provides an overview of the assets as well as obligations of a business at the
time of its publication. The assets in the balance sheets are the sum of all the liabilities and the
equity of the shareholders. Financial ratios are computed using balance sheets by fundamental
analysts.

Liabilities Amount(Rs Assets Amount(Rs

in ‘000) in ‘000)

Shareholder's equity: Fixed Assets:

Retained earnings 860 Equipment 1500

Common stock 1000

Current Assets:

Current Liability: Accounts receivable 250

Accounts payable 540 Cash 550

Unearned revenue 200 Prepaid insurance 300

Salaries payable 150 supplies 150

Total Liabilities 2750 Total Assets 2750

Conclusion:

Therefore, we can conclude that, balance sheets are crucial because they aid in assessing the risk.
The financial statement consists of the totality of liabilities and assets of a business. It allows a
business to quickly determine whether it has been able to pay off too many debts or if its
liquidity is inadequate and if it has sufficient cash to meet current needs. Balance sheets can be
used to find and keep talent, as well as obtain capital and a loan to the company.

Ans 3b.

Introduction:

Accounting ratios are used to analyze financial statements by comparison of two or more
financial data factors. Business stakeholders, like creditors, shareholders, and investors, use it to
assess power, profit and financial standing. Accounting ratios assess an organization's
productivity and profitability based on financial reports. Financial ratios contain the following.
They serve to illustrate the relationships between accounting items. It informs analysts and
investors what a business can do to use its present assets to its fullest possible to pay down its
current obligations and other payables.

Concept and application:

A high ratio of current is comparable to, or even slightly above, the industry norm. A lower-than-
average current ratio may promote discomfort or default. Management may not be efficiently
employing resources if the current ratio of a business is higher than that of its peers. In contrast
to other measures of liquidity it covers all current assets as well as liabilities. The working
capital ratio is another name for the current ratio.

Current ratio = Current Assets/ Current Liabilities

The company's assets, liabilities and equity are used to calculate the ratio. The balance sheet of
an organization includes accounts receivable and cash inventory, inventory, as well as other
assets that are in use (OCAs). Payroll as well as taxes, short-term loan as well as long-term debts
are current obligations. If the ratio is lower than 1, the company has more debts than short-term
assets or cash. A current ratio less than 1.00 can be scary, even though there are a myriad of
aspects that could impact an organization's strength. If the ratio of a business is high, it is able to
meet its promises because it has a larger ratio of short-term asset value to short-term liabilities.

Calculation of current ratio of Z and X LLP

Particulars Calculations Amount (₹)

Current assets (a) 2250

Accounts receivable 250

Supplies 150

Cash 550

Prepaid insurance 300

Common stock 1000

Current liabilities (b) 890

Salaries payable 150

Unearned revenue 200

Accounts payable 540

Current ratio (a/b) 2.53:1

As you can see, the present ratio of Z and the X in LLP is 2.53 to 1.
Meaning of current ratio:

The ratio of current is utilized to assess the liquidity of the business. This shows how likely the
business is to pay its current expenses or pay its creditors using its current assets.

A ratio of 2:1 is thought to be an excellent ratio because it indicates that the business has doubled
its present properties when compared to the current obligations. A ratio of 1:1-2 is considered to
be significant. If the ratio is lower than 1:1, it indicates the lower monetary liquidity of the
company. If the ratio is excessively high, it means that the business has existing properties, but is
losing the opportunity for revenue generation.

Conclusion:

The Current Ratio (which is an important indicator of a company's capability to meet its
creditors' short term obligations, is a crucial indicator. Thus, we can say that the company having
an current ratio of 1.404 implies that they have the capacity to meet their short-term obligations.
The capacity of the company increases as the ratio grows. The ideal ratio for a company is
between 1.2 to 2, which implies that it has more assets and liabilities as it does current liabilities.