Financial Accounting & Analysis

1. Prepare the journal by recording the following transactions (10 Marks)

3-Dec Mrs. Veena started business by introducing cash Rs5000 and Rs

500000 as transfer from her saving bank account in the business
5-Dec She Purchased furniture worth Rs 60000, 50% payment made
through the bank account of the business and the rest amount is
payable
7-Dec She purchased goods for sale, costing her Rs 315000 and made the
payment through the business bank account
8-Dec She sold off the entire goods at Rs 500000

10-Dec She paid rent, electricity, salary to employees Rs10000 of each type
of expense through the bank account

SOLUTION:

Introduction:
The accounting transactions in a business are recorded using the double-access accounting
device. A journal is an e-book of original entries wherein the accounting transactions are
recorded chronologically. A journal also follows a double-entry accounting machine; for every
debit, there is a credit score. It forms the basis of the various accounting ledgers organized as
accounting entries are posted within the ledgers from the journal. It consists of a record of all the
business transactions during the accounting length.

Concept and application:

Business enterprises use special accounting journals to document business transactions like
income, cash, accounts payable, and many others. These journals are optional and may be used if
the company needs to apply them—the sales journal details the inventory and shops offered by
the entity on credit terms. A cash journal records the coin transactions of the entity. Those
transactions may also consist of cash payments for the expenses or buy of the buying and selling
items or cash receipts for the sale of products.

Similarly, there are numerous different journals to report special categories of transactions. If an
enterprise uses unique journals to report one-of-a-kind transactions, the extent of accounting
facts might be massive and segregated in unique places. For this reason, groups prefer to use the
minimum required range of journals.
Also, wherein the accounting information is digitized, all these journals and entries may be
effortlessly found in one place.

However, the general journal is utilized by all companies. It includes records of each business
transaction made through the company. The information contained encompasses:

• Date of transaction

• Description

• The ledger bills affected

• Quantities by which each ledger is affected

• Info of debits and credit

It could be described as a "catch-all" journal.

Traditionally accounting facts were prepared manually. An accounting journal becomes then
very important. It changed into the file from which the transactions had been posted inside the
preferred ledger. With automated bookkeeping, a general journal is ready, containing all the
adjusting entries and unique financial transactions.

To put together an accounting journal, it is mandatory to document correct information

approximately financial transactions. That information may be acquired from invoices, purchase
orders, receipts, and other sources. After studying and assuring the transaction's validity, the
journal documents the data in chronological order.

The recorded transactions are known as journal entries. The journal entries are governed via the
double entry method of bookkeeping. To file each transaction, an effect is given in columns: a
debit and a credit score.

Let us recognize it with the assistance of an example:

Think you buy a table in your business and pay cash to the provider from whom you bought it.
The accounting journal will record two entries, or more precisely, we can say it will affect ledger
accounts. The cash account may be reduced, and the asset account may be improved.

Steps for recording the journal entries

1. Identification of the financial transactions affecting the business.

2. Analyzing the transactions and identifying how they affected the accounting equation.
3. Using debits and credits to record the changes. Usually, the debited accounts are indexed
above the accounts which can be credited. A journal entry must have a date, and a description,
also known as the narration of the transaction.

While making journal access, the bookkeeper ought to make sure that the accounting transaction
is balanced, i.e., the debits are the same as credits. It's miles essential because the debits and
credits are the ideas of a journal entry. They tell the reader if the enterprise is obtaining
something or selling it. Thus, a journal entry may be a two-liner. A one-liner journal will now
not balance and is not used to record business transactions.

Within the given case, few accounting transactions are given. It is required to prepare the
magazine which facts these accounting transactions.

The desired entries to be passed inside the journal are:

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:

Within the above journal, each accounting transaction is -linear. A debit is identical to a credit
because it is ready following the double access accounting system.

2. 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. (10 Marks)

Introduction:
Accounting is the system of summarizing, reading, and reporting economic transactions. Proper
accounting plays an important position in recording business performance and tracking the
growth and survival of the business organization. Further, maintaining proper debts of the
organization's diverse departments helps evaluate the performance of the different departments
inside the organization. It facilitates ascertaining the actual profit from its operational sports. It's
usually regarded as a key to the achievement of small business owners. The accounting
technique helps hold the books of bills of a business. The accounting approach allows for
analyzing and interpreting the financial results of business operations.

Concept and application:

A company's profit and loss account displays the profit or loss portrayed over time. It may be for
a month, quarter, or financial year. The main constituents of the earnings and loss account are as
follows:

1. Revenue, additionally known as sales

2. Cost of goods sold or value of income

3. Selling, trendy or advert TV ministrative charges.

4. Marketing and advertising

5. Technology/ research & development

6. Interest expense

7. Taxes
8. Net incomes

There are primary classes of bills that chartered accountants ought to prepare while preparing a
profit and loss assertion. It consists of:

Revenue Account and Expenditure Account.

Sales Account includes all the cash or capital that has been earned through the selling of goods.

1. Direct and indirect expenses 

A business company may incur several expenses to perform its daily operations. Prices also are
incurred to facilitate sales. The fees incurred in business can be divided into direct and indirect
charges.

Direct charges are the prices once associated with the sports of buying or manufacturing goods.
Direct costs include prices related to a factory employee's wages, fuel costs of the manufacturing
unit, etc.

Oblique expenses are fees aside from direct prices. Oblique costs may include the expenses
associated with renting, printing and stationery, depreciation, etc.

2. Liability: Liability is an item created when a character or business owes cash to any other
individual or organization. It is a liability on that individual or company that they have to repay
the quantity to any other company, which will lessen the business's property—for example, bank
loans and credit card debts.

There are usually two sorts of liabilities: current and long-term liabilities. The previous is where
the liabilities have arisen for a maximum of one year, and the latter was a situation where the
liabilities have arisen for a couple of years. The term 'liability' is also used in a business shape
referred to as a constrained legal responsibility partnership. It refers to a type of partnership
wherein all the partners inside the business owe a restrained quantity of value to the business. So
owners are not the most effective ones to be held answerable for any debts incurred by the
company.

3. Loans: The management operates a business with no purpose of shutting it down rapidly.
However, every organization desires a budget to operate its sports without any problem. Those
budgets may be contributed by using the proprietors of the business or acquired from door
organizations like a bank. The finances received with an aim and promised to return, known as
loans. Proper management of funds is essential to avoid embezzlement and incorrect utilization.
4. Revenue: Revenue refers to the income earned using an enterprise entity by selling its
goods or supplying services. On occasion, sales and income are used interchangeably or
synonymously. E.g. while a restaurant gives meals to its customers, it takes the cash from the
clients; that money is primarily the restaurant's revenue. Revenue is generally a combination of
profit and fees. When you separate the expenses from the sales will lead to earnings.

5. Other incomes: A business might also earn a little revenue from activities that aren't the
main revenue-generating sports of the business. Those earnings include apartment profits,
interest income, or dividend profits. Accordingly, a business may generate sales from either core
business operations or supplementary or supporting sports. The earnings from main business
activities are referred to as revenue from Operations, while all other income is other income.

Conclusion:

Instruction of financial assertion could be essential for any employer or organization. It displays
the monetary function of the corporation. It indicates how much of the expenses were made
using the enterprise and how a good deal is a revenue earned via an employer in one single
economic 12 months. There are a wide variety of financial debts that an organization has to
prepare for, and these are ledger accounts, profit and loss accounts, and trial balances remaining.
The earnings and loss account shows all the costs, losses, earnings, and profits using the
corporation in a single economic yr. Charges are to be shown on the debit aspect of the account.

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

Particulars (Rs in ‘000)

retained earnings 860
accounts receivable 250
supplies 150
salaries payable 150
equipment 1500
unearned revenue 200
accounts payable 540
cash 550
prepaid insurance 300
common stock 1000
a. Prepare T Form Balance Sheet out of the details as shared in the table (5 Marks)

SOLUTION:

Introduction:

A balance sheet is a financial statement that is prepared by a business. It indicates the position of
property and liabilities on a given date. This date commonly marks the give-up of the financial
year of the business. A balance sheet indicates assets owned or leased using the business and the
sources from which they're financed. These capital resources may be borrowed capital, and the
equity contributed by the business members or a combination.

Concept and application:

There are two methods to prepare a balance sheet:

a. A vertical presentation

b. A horizontal presentation or the T-shape

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

Assets = Liabilities+ equity 

Trial stability forms the idea of the instruction of the stability sheet. It suggests that at a given
point, the property in the business has to be equal to its obligations/ liabilities and equity. When
it occurs, the balance sheet is stated to be tallied.

Thus, there are three components of a balance sheet. Those are:

1. Assets: This category represents the assets owned by using the entity to generate future
revenues.

2. Liabilities: This category represents the entity's obligations arising from a past event and
consists of all the one's economic liabilities the entity owes to outsiders.

3. Equity: The equity of the business represents the quantity contributed by the owners of
the business and the earnings retained in the business. In other words, the business's equity is the
amount left with the enterprise after paying the obligations to the lenders.

A balance sheet presents, to its readers, an account of the sources from which the organization
has received funds and the sources where it has invested them.
The horizontal format of the Balance Sheet

As per this format, all business liabilities are presented on the left-hand side, and all assets are
shown on the proper-hand side of the balance sheet. It is also called the T-formed balance sheet.

Figures
LIABILITIES for ASSETS Figures for
Current
Year Current Year
(Rs.) (Rs.)

CAPITAL FIXED ASSETS

Common stock 1000 Land and building
Retained earnings 860 Equipment 1500

LONG-TERM CURRENT ASSETS

LIABILITIES
Loans 0 Cash-in-hand 550
Cash at bank
CURRENT LIABILITIES Account receivables 250
Account payables 540 Prepaid insurance 300
Outstanding salaries 150 Supplies 150
Unearned revenue 200
INVESTMENTS
PROVISIONS Fixed deposit 0
Provision for taxation 0
Provision for bad debts 0

TOTAL 2750 TOTAL 2750

Conclusion:

A stability sheet is a part of the monetary statements supplied by using the organization to its
shareholders.
b. Define and calculate the current ratio, discuss the significance of this ratio. (5 Marks)

Introduction:

Current assets may be realized in the operating cycle of the business, usually 365 days. Further,
current liabilities are the business's duties that must be paid or paid within 365 days. The ratio
between the current assets of the business and its current liabilities is known as the present-day
ratio.

Concept and application:

A company's financial statements are prepared to determine its profitability and financial role
amongst the industry contributors. Different accounting tools and techniques are used to
investigate these statements. One such maximum usually used technique is ratio evaluation. It
defines the relationship among numerous monetary factors existing and governing a business.

A current ratio derives the connection between the business's current property and present-day
liabilities as current on its balance sheet on a given date. It depicts the importance of the
company's current assets in opposition to its current liabilities. Its miles often called the
operating capital ratio.

Its miles were calculated using the following method:

Current ratio = Current assets/Current liabilities 

The Current property will include:

• Cash-in-hand

• Bank balances

• Marketable securities

• Exchange receivables

• Inventories etc.

Current liabilities will encompass:

• Bank overdraft

• Change payables

• Provisions
• Outstanding liabilities

• Short-term loans etc.

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

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

The current ratio allows for figuring out the liquidity position of the business. It depicts the
capability of the business to pay its current dues or payments using its present-day assets.

A ratio of 2:1 is considered a super ratio as it shows that the corporation has double its current
assets compared to its current liabilities. However, any ratio between 1:1 to 2:1 is considered
exact. If the ratio decreases to 1:1, it shows the lower financial liquidity of the business. If the
ratio is exorbitantly high, the company has idle present-day assets and is losing a chance to use
them to generate sales.

Conclusion:

A current Ratio is one of the particular liquidity ratios a company calculates. These liquidity
ratios assist decide the corporation's ability to fulfill its near-term obligations as they outline a
scientific relationship between the quantum of the current/liquid assets and the current/ short-
term obligations.