Financial Accounting & Analysis

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

3-Dec Mrs. Veena started business by introducing cash Rs 5000 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 company are taped using the double-entry accounting system. A
Journal is a book of original access where the accounting transactions are taped chronologically.
A journal additionally complies with a double-entry accounting system; for each debit, there is a
credit. It forms the basis of the various accounting ledgers prepared as accounting entrances are
published in the ledgers from the journal. It has a document of all the business transactions
during the accounting period.

Concept and application:

Company businesses use accounting journals to record service transactions like sales, cash,
accounts payable, etc. If the firm wishes to use them, these journals are optional and can be used.
The sales journal includes details of the supply and shops offered by the entity on credit terms. A
cash journal documents the cash transactions of the entity. These transactions might include cash
payments for expenditures or acquisition of trading items, or cash invoices for the sale of
products.

Similarly, there are several various other journals to videotape different classifications of
transactions. The volume of accounting records will be significant and segregated in different
places if a business uses various journals to record various transactions. Thus businesses choose
to use the minimum necessary number of journals.

Where the accounting data is digitized, all these journals and access can be conveniently found in
one place.

Nevertheless, the primary journal is used by all firms. It contains documents of each business
transaction made by the company. The details include:

 Date of transaction
 Description.
 The ledger accounts are affected.
 Amounts by which each ledger is affected.
 Details of debits and credits.

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

Traditionally accounting records were ready manually. An accounting journal was then really
essential. It was the document from which the transactions were uploaded to the general ledger.
With the computerized bookkeeping today, a general journal is prepared, containing all the
adjusting access and notable financial transactions.

To prepare an accounting journal, it is mandatory to tape useful information concerning financial

transactions. These details can be obtained from billings, orders, invoices, and other resources;
after analyzing and assuring the transaction's validity, the journal documents the data in
sequential order.

Journal access is regulated by the double access method of bookkeeping. To record each
transaction, an effect is given in two columns: a credit and a debit. The documented transactions
are referred to as journal entrances.
Let us comprehend it with the help of an instance:

Intend you purchase a table for your service and pay cash to the provider from whom you bought
it. The accounting journal will videotape two entries, or much more precisely, we can state it will
affect ledger accounts. The cash account will be lowered, and the possession account will be
increased.

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 credits and debits to tape the modifications. Generally, the debited accounts are
provided over the accounts that are credited. A journal entry needs to have a date and a
description, additionally called the narration of the transaction.

While making a journal entrance, the bookkeeper must ensure that the accounting transaction
stabilizes, i.e., the amount of the debit to credits. Since the credits and debits are the basis of a
journal entrance, it is necessary. They inform the viewers if the business is obtaining something
or marketing it. Thus, a journal entrance will be a two-liner. A one-liner journal will not balance
and is not used to tape organization transactions.

In the offered case, a couple of accounting transactions are given. It is required to prepare the
journal which documents these accounting transactions.

The required entries to be passed in 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:

In the above journal, each accounting transaction is a two-liner. A debit amounts to credit as it is
prepared following the double-entry 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)

SOLUTION:

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.
Concept and Application:

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 to 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.
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 an organization prepares. It reveals the setting of
assets and liabilities on a given day. This date typically notes the end of the fiscal year of the
business. A balance sheet shows assets owned or rented by the company and the sources from
which they are funded. These funding resources may be borrowed capital, the equity added by
the organization participants, or a combination of both.

Concept and application: 

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 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.

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 balance sheet is a part of the company's economic statements to its shareholders.

b. Define and calculate the current ratio, discuss the significance of this ratio. (5 Marks)

SOLUTION:

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.

Concept and application:

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
 
Current assets will include: 
 Cash-in-hand
 Bank balances 
 Marketable securities 
 Trade receivables 
 Inventories etc. 

Current liabilities will include: 

 Bank overdraft 
 Trade 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 helps in determining the liquidity setting of the business. It shows the ability of
the business to pay its present charges or repayments using its current properties.

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.

Conclusion:

A Present 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.