Financial Accounting & Analysis

Ans 1.

Introduction:

A journal is a document you keep of your day-to-day activities or thoughts. It could be a

periodical that deals with the same subject or business. A journal is one example of an account
book. It helps you keep the track of your thoughts and occasions. The transactions are kept in
your journal, a type of book that's a subset your accounts. A journal's main book of account is the
ledger. It organizes transactions that are entered into the journal. Journal entries must contain no
more than two lines. Additionally the total value recorded in each debit and credit column must
be equal. These are the structural requirements of a journal entry. Journal entries are generally
printed and placed in a file of accounting records. They also have supporting documents. These
records may be accessible for external auditors in their annual review. Each journal entry
contains the date and the amount that is to be debited or credit and a brief description of the
transaction as well as details regarding the accounts. The journal entries may also include a list
of affected subsidiaries, tax information, and other information.

Concept and application:

To assure the accuracy and fullness of financial reports that are based on this data, it's crucial to
properly and accurately complete the journal entries. The recurring journal entries can be
automatized and templated using today's accounting software, reducing the possibility of
mistakes. Double-entry accounting allows journals to be created in chronological order. They can
also include both debit and credit columns. The column totals must match regardless of whether
credit or debit are linked to several accounts. General accounts, sales, cash receipts and
disbursements, purchase returns from purchases, cash receipts and disbursements.
All accounting data is digitally digitized, and all journals and their access information can be
located in one place.

Nevertheless, the primary journal is utilized by all businesses. It contains all documents related
to every transaction. The information includes:

 Date of transaction
 Description.
 The accounts in the ledger are affected.
 Amounts by which each ledger is affected.
 Information about credit and debit cards.

It is described as a "catch all" journal.

Accounting records were typically prepared by hand. The importance of a journal accounting
was evident at the time. It was the primary document that the transactions were transferred to the
general ledger. Today, with the use of computerized bookkeeping an overall journal is created,
with all the changes to access and the most notable financial transactions.

To create an accounting journal, keep track of financial transactions. After verifying the
legitimacy of the transaction, the journal will record the data in a sequence series.

Journal access is governed by double-entry accounting. Every transaction is recorded. debit and
credit is registered. Journal entries serve as documentation of transactions. Let's take a look at an
example to understand the concept.

You will need to purchase a table and pay in cash to the service provider. The accounting journal
will make two entries. We could also say that this will impact ledger accounts. Cash accounts are
going to be reduced, while the possession account will rise.

How to document Journal entries

1. The identification of financial transactions that affect the business.

2. Analyse the transactions and identify their impact on the equation of accounting.
3. By using debits and credits, you can tape the modifications. Typically, the accounts that are
debited are transferred to the accounts which are credited. Journal entries should have a date and
a description, also known as the narration of the transaction.

The bookkeeper has to ensure that the journal entry is stable, i.e. the balance of the debit and
credit prior to making the journal entry. This is crucial because the journal entry is dependent on
the credit and debit. They inform the viewers if the company is purchasing something or
marketing it. The journal entry should therefore be two lines. A one-liner journal will not be
balanced and cannot be intended to record transactions for an organization.

The following accounting transactions were performed in the situation. These accounting
transactions need to be documented in a book.

A journal entry is an entry which is directly recorded in the main journal. Journal entries must
adhere to a prescribed format to identify which accounts and the amounts that were affected by
each transaction. Journal entries must contain at minimum one credit or debit.

Date Particulars L.F Dr. Cr.

3rd Dec Cash A/c Dr. 5000 55000

Bank A/c Dr. 50000
To Capital A/c
(Being business commenced)
5th Dec Furniture A/c Dr. 60000 30000
To Bank A/c 30000
To Account Payable A/c
(Being furniture purchased partially by cheque and on
credit)
7th Dec Purchases A/c Dr. 315000 315000
To Bank A/c
(Being goods purchased through bank)
8th Dec Bank A/c Dr. 500000 500000
To Sales A/c
 (Being goods sold)

10th Dec Rent A/c Dr. 10000 10000

Electricity A/c Dr. 10000
Salary to employees A/c Dr. 10000
To Bank A/c
(Being expenses paid through bank)

Conclusion:

This was the summary of the journal entries. It is essential to keep track of this as it fulfills the
objective of correctly and completely documenting every business transaction, no matter if it's
physically or electronically. Journal entries are among the most important books of entry. They
help you organize your company's records and assure accuracy in all accounting processes.
Although there are numerous bookkeeping software that are available, they allow you to manage
your accounts easily. Understanding the debit entry system will make it easier to pick the
appropriate accounting software.

Ans 2.

Introduction:

A Profit and Loss Statement (or P&L) is a financial statement that reveals the revenues,
expenditures and expenses for a particular time period. It's often either a quarter or a fiscal year.
These statements demonstrate whether a business can increase profits, cut costs or both. P&L
statements are often presented in accordance with the cash or accrual method. Corporate and
investor managers make use of P&L statements to assess the financial health of an organization.
Profit and loss (P&L) or financial statement provides an overview of revenue, expenditures, and
expenditures over a certain period. It could be a quarter or fiscal year, or even a whole year.
These statements show if businesses can make money by raising sales, cutting expenses, or both.
P&L statements are usually presented in accordance with the accrual or cash method. P&L
statements are utilized by corporate and investment managers to assess a firm's financial
position. The total expenses are subtracted to determine the loss or profit. P&L costs and sales.
Gross margin, sales, administrative expense net profit and net sales. The P&L report shows the
revenue as well as costs, so it shows how money enters (and departs) the company.

Concept and application:

A financial report, commonly referred to as the profit and loss (P&L) statement gives an
overview of revenues as well as expenditures and expenses made for a particular time frame.

Every publicly traded business produces a P&L report every quarter, and an annual in addition to
the cash flow statement and balance sheet. By combining the P&L as well as the balance sheet
and cash flow statements, a thorough review of a company's financial performance is available.
Statements can be prepared using either the accrual or cash method. Comparing P&L statements
from various accounting periods is crucial because any changes made over time have more
significance than the raw data.

The principal categories that can be found on the P&L include:

1. Revenue (sales/turnover): Revenue is the term used to describe the earnings earned from an
organization selling its products or providing services. Sometimes, the terms sales and revenue
are used in the same way. For instance when a restaurant offers food to customers and then takes
the revenue from them. It is the restaurant's primary source of income. Revenue is typically a
combination of profit and cost. This will result in profit when you separate the charges from the
income.

2. Cost of goods sold (COGS): The total cost of goods sold is the sum of all expenses the
company incurs to facilitate the sale of goods. Based on the company's nature, and could include
packaging, raw materials, labour and items purchased for resale. The inventory at the end of the
course is subtracted from its starting value. Any new inventory is added to this total.

COGS = Beginning Inventory + Purchases – Ending Inventory.

3. Gross profit (revenue minus COGS): Gross Profit is the profit which a business makes after
deducting the total cost incurred in producing and selling its products or services. The income
statement of a company will include gross profits from taking the cost of selling goods (COGS)
from revenues (sales). The income statement of any business will contain these numbers. They
are known as gross profit or sales profit. Gross profit measures the efficiency with which an
organization uses its workforce and resources to produce items and services. Gross profit is not
inclusive of the cost of goods sold. Net profit includes all company costs. Gross margin
demonstrates the percentage of a company's profits can be devoted to operational expenses.

4. Expenses: It is the sum of money that companies spend in order to generate income.
Expenditures can be described as money and expenses that an organization incurs in order to
make a profit. When combined, account expenditures result in profitability. Although they have a
lot in common with regards to the language of both, cost and expense are distinct in
bookkeeping. Cost is the price of buying an asset. Costs are the cost of consuming and using
these assets. While the cost of buying an automobile for a business might be considered a
expense however, maintenance costs and fuel costs could also be considered expenses. However,
these are not always expense. All expenses are included into the company's accounts for
financials. Businesses are able to subtract costs from total sales in order to calculate their profit.

5. Net income: Net income is all income earned by an individual or company after expenses
allowances tax, other expenses. The sales are subtracted from the costs of products sold, sales
general and administrative costs, operating expenses, depreciation, interest, taxes, and other costs
for the calculation of net income (NI) which is also referred to as net income. Investors can
utilize this figure to determine how much a company's revenue exceeds its expenses. This is a
measurement of the company's profit and is usually displayed on the income statement.

Net Income = Total Revenues - Total Expenses.

Conclusion:

The Profit and Loss Report can help you understand your company's net income. It assists the
company's management team, and particularly the board of directors, in making decision. The
stakeholder groups of business consider it extremely useful since it shows Sales Revenue, All
Business Costs, and Profits or Loss of a Company for a given period of Time. It gives a picture
of the amount of money producing or losing, and permits the creation of precise estimates for the
future for your company. A financial statement is an essential part of any business or
organization. It is an indication of the monetary policy the company has in place. It indicates
how much expenditures were incurred, and also how much money the firm earns in a fiscal year.
Furthermore, it shows how much of the business's expenses are paid for by revenues. An
organization should keep various financial accounts. The most important ones are the ledgers
profit, loss, and the trial equilibrium at each end. The Profit and Loss account provides an
overview of company's spending and incomes, losses, and profits over a specific period of time.
The debit portion of an account is the place where one should disclose one's expenses.

Ans 3a.

Introduction

The idea behind "balance sheet" is to refer to assets that equal liabilities and shareholder’s
equity. One of the three basic financial statements the balance sheet is essential to the financial
and accounting models. The balance sheet reveals all the assets in the company, as well as how
those assets are financed--either through equity or debt. The balance sheet is often referred to as
a statement of financial position, or statement of net worth. The most complete picture of the
financial condition of a business can be found 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 balance sheet, which is an accounting report, lists the assets, liabilities and equity of
shareholders of an organisation. One of the most essential financial statements used to judge the
financial condition of a business is the balance sheet. It provides an overview of a business's
financial status (what it has and what it owes) in the year of its publication date.

There are, therefore, three parts to a balance sheet. They are:

1. Assets: This is the term that refers to the assets owned by the entity. They are used to produce
future revenue.

2. Liabilities: This class covers the entity's obligations that have developed out of a previous
event. It comprises all financial obligations the entity has to outsiders.

3. Equity: The equity of the company is the amount contributed by the owners of the company
and the profits preserved in the business. Simply put equity is the amount of money that is
transferred to the business following the settlement of the obligations of the financial institution.

A balance sheet is a financial report that lists the company's assets and liabilities. The most
important of the three financial statements that are used to evaluate an organization's financial
health is its balance sheet. The balance sheet provides an overview of all assets and liabilities as
of the publication date. The balance sheet amount to the total liabilities and equity of
shareholders. Analysts who are fundamental use balance sheets to determine financial ratios.

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 essential because they aid in assessing the
risk. This financial statement covers all liabilities and assets for a corporation. It can help a
business decide if it's taking on too much debt or if its liquidity is not enough to meet the
immediate requirements. A business's balance sheet is employed to attract talent as well as to
ensure capital.

Ans 3b.

Introduction:

Accounting ratios allow you to examine between two or more financial data points and analyze
financial statements. Business stakeholders, like creditors, shareholders and investors, utilize the
ratios effectively to determine power, profit, and financial standing. Accounting ratios are a way
to measure an organisation's efficiency and profitability using financial reporting. They are often
included in financial ratios. They help to demonstrate the relationships between accounting
items. The ratio informs analysts and investors how companies can make use of their assets to
decrease its current debts.
Concept and application:

A high contemporary ratio is close to or slightly higher than the industry average. A lower-than-
average current ratio may promote discomfort or default. The current ratio of a company could
be higher than peers this could mean that the company's management isn't utilizing its resources
efficiently. The ratio does not take into account other liquidity measures. It is a comprehensive
measure of current liabilities, assets and capital.

Current ratio = Current Assets/ Current Liabilities

To determine a company's ratio, it's used to calculate the current assets and liabilities. A
company's balance sheet comprises cash, accounts receivable, inventory, and other assets that are
in use (OCAs). Current obligations include the payment of taxes, payroll as well as short-term
and long-term borrowing. If the ratio is lower than 1 then the company has more liabilities than
cash or short-term assets. While there could be a myriad of factors that could negatively affect a
company's current ratio however, it's still possible to cause alarm should the ratio fall below
1.00. A company with a high current ratio can deliver on its promises because it has greater ratio
of short-term assets 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 between Z and the letter X in LLP stands at 2.53 to 1.

Significance of current ratio:

The current ratio can be used to determine the liquidity situation of a company. It indicates how
likely the business is to pay its current expenses or repay its creditors using its current assets.

A ratio of 2:1 is considered an acceptable ratio as it indicates that the company's actual assets
have doubled in comparison to its obligations. But, any ratio that is from 1:1 to 2:1 is considered
significant. If the ratio is lower than 1:1, it indicates that there is less liquidity in the financials of
the company. If the ratio is excessively high, it indicates that the firm still has the properties it
has and is losing an opportunity to utilize them to produce revenue.

Conclusion:

The Current Ratio (which is an indicator of a business's ability to pay its creditors' short term
liabilities, is extremely important. So, we can conclude that the company having current ratio as
1.404 means they are able to fulfill their short-term responsibilities. As the ratio improves it
increases the capacity of the company. A company's ideal current ratio is around 1.2 to 2. This
means that it has more than twice the amount of assets and liabilities as it does current liabilities.