Financial Accounting & Analysis

SOLUTION for Question-1:

Introduction:

The accounting transactions in any company are recorded using the double-entry accounting
system. A Journal is an official record providing all the financial transactions in a chronological
order. In addition, the journal corresponds to the double-entry bookkeeping system; for every
debit there is a credit. It forms the basis of the various ledgers prepared as the accounting entries
are posted in the journal ledgers. It has a proof of all the business transactions during the
accounting period.

Concept and application:

Businesses of a Company use accounting journals to record service transactions like sales, cash,
accounts payable, etc. If the company wishes to use them, these journals are optional and can be
used. The sales journal contains details of the supplies and trades offered by the entity on credit
terms. The cash journal documents the cash transactions of the accounting unit. These
transactions may include cash payments for expenses or acquisition of trading items, or cash
invoices for product sales.

Similarly, there are several other journals to record 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 different transactions. Thus, any firm chooses to use only the
required necessary number of journals.

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

However, the primary journal is used by all businesses. It records data of each business
transaction made by the company. The details include:

1. Date of transaction
2. Description.
3. The ledger accounts are affected.
4. Amounts by which each ledger is affected.
5. Details of debits and credits.
It can be described as a "catch-all" Journal.

Earlier, accounting records were prepared manually. An accounting journal was really needed
back then. It was the document from which the transactions were recorded in the general ledger.
In today's computerized accounting, a general journal is prepared, that contains all adjusting
entries and significant financial transactions

To prepare an accounting journal, it is mandatory to record useful information related to

financial transactions. These details can be obtained from invoices, purchase orders, and other
sources; after analyzing and validating the transaction, the journal documents the data in
sequential order.

Access to the journal is regulated by the method of double access to accounting. To record each
transaction, the effect is shown in two columns: credit and debit. Documented transactions are
referred to as journal entries.
Let's understand this with an example:
You intend to purchase a table for your service and paid cash to the provider you purchased it
from. The accounting journal will record two entries, or more precisely, we can state that it will
affect ledger accounts. The cash account will be decreased, and the possession account will be
increased.

The steps to record journal entries are -

1. Identification of financial transactions affecting the business.

2. Analyzing the transactions and identifying how they affect the accounting equation.

3. Using credits and debits to record the modifications. Usually, debited accounts are provided
over the accounts that are credited. A journal entry must have a date and a description, which is
also called as the narration of the transaction.

When making a journal entry, the accountant must ensure that the accounting transaction
stabilizes, i.e. the amount to debit credits. Since credits and debits are the basis of the journal
entry, this is necessary. They inform viewers whether the company is acquiring or selling
something.. Thus, a journal entrance is a two-liner. A one-liner journal will not balance and is
not used to record organization transactions.

In the offered case, several accounting operations are listed. A journal must be prepared to
document these accounting transactions.
The required entries to be noted in the Journal are:
Date Particulars Dr. Amount Amount
03.12 Cash a/c Dr. 5000
Bank a/c Dr. 500000
To capital a/c 505000
(Being capital introduced in the business)
05.12 Furniture a/c Dr. 60000
To bank a/c 30000
To sundry payable 30000
(Being furniture purchased for ₹60000; ₹30000 is
paid through bank account and the creditors created
for the balance amount)
07.12 Stock-in-trade a/c Dr. 315000
To bank a/c 315000
(Being goods bought and payment made through
business’s bank account)
08.12 Bank a/c Dr. 500000
To Sales Account 500000
(Being goods sold)
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, & salary expense paid
through bank account)

Conclusion:
In the above journal, each accounting transaction is two-liner. The debit amounts to credit as it is
prepared by using the double-entry accounting system.

SOLUTION for Question-2:

Introduction:

Accounting is a process of summarizing, evaluating, and reporting the financial transactions.

Proper Accounting plays a key role in monitoring business efficiency and monitoring the
development and survival of a business organization. Better yet, keeping proper accounts of
various divisions of an organization helps in evaluating the effectiveness of various departments
in the organization. It helps in determining the actual profit from his functional tasks. This is
generally considered the key to success for small business owners. The auditing procedure helps
in keeping the books of the business - the accounting method helps in analyzing and translating
the financial results of business procedures.

Concept and Application:

The income statement of a business reflects the profit or loss that has been represented over time.
It can be a month, quarter or fiscal year. The main components of the profit and loss statement
are:

1) Revenues, also known as sales

2) Cost of goods sold or cost of sales
3) Sales, general or administrative expenses of Ad TV.
4) Marketing and advertising
5) Technology/Research and Development
6) Interest expense
7) Taxes
8) Net income

There are mainly two categories of accounts that accounting professionals hire to prepare when
preparing a profit and loss statement. Consists of:

Income and expenditure account

The revenue account consists of all the money or funds that the sale earned from the products.

1) Direct and indirect expenses

A business may incur several expenses to carry out its day-to-day operations. In addition, costs
are incurred to assist in sales. Costs incurred in a company can be divided into two
classifications: Indirect costs and direct costs.

Direct costs are costs directly related to the acquisition or production of goods. Direct expenses
consist of the income of the factory worker, gas expenses of the production system, and so on.
Indirect costs are costs other than direct costs. Indirect costs can be expenses related to rent,
printing and stationery, depreciation, etc.

2) Liability: A liability is something that arises when a particular company owes cash to another
person or company. The type of liability of this particular company is that it has to pay an
amount to another organization, which will reduce the assets of the business: for example, bank
loans and payment card financial obligations.

The owners are not the only ones responsible for any financial debts of the business. There are
mainly two types of liabilities: current liabilities and current liabilities. The previous one is a
situation where the obligations arose for a maximum period of one year and the last one indicates
a situation where the obligations last for more than one year. The term "responsibility" is also
used within a society known as minimal liability cooperation. It refers to a type of partnership
where all partners in a business owe a limited amount of value to the business.

3) Loans: Management runs the organization with no intention of shutting it down quickly.
Proper management of funds is required to prevent embezzlement and misuse. In order for every
company to operate its activities without inconvenience, it needs financial resources. These funds
can either be provided by the business owners or obtained from outside organizations such as a
bank. Funds obtained with the intention and promise of repayment are known as loans.

4) Revenue: Revenue describes the income an organization earns by offering its products or
providing services. In some cases, revenue and sales are used interchangeably or synonymously.
For example, when a restaurant uses food for its consumers, it takes money from customers; that
cash is primarily the restaurant's income. Revenues are usually a combination of profit and
prices. This will lead to profits when you split the fees from the revenue.

5) Other incomes: An organization may also have some income from activities that are not the
main income-generating tasks of the business. This income includes rental income, interest
income or revenue income. Therefore, a company can generate income either from the main
business practices or from additional or support tasks. Income from the company's main tasks is
called operating income, while all other income is other income.

Conclusion:
The preparation of an economic declaration is essential for any company or organization. It
reflects the currency settings of the company. It shows how much of the cost the business has
incurred along with how much revenue the company earns in one fiscal year. A company must
prepare a number of types of financial accounts; these are accounting losses, profit and
accounting and trial balance. A profit and loss statement shows all the costs, losses, income and
profits of a business in one financial year. Expenses should be shown on the debit side of the
account.
SOLUTION for Question-3(a):

Introduction:

A balance sheet is a financial statement that is prepared by an organisation. It reveals the asset
and liability settings for the given day. This date usually marks the end of the business's fiscal
year. The balance sheet shows the assets owned or leased by the business and the sources from
which they are financed. These sources of financing may be borrowed capital, equity capital
contributed by the organization's participants, or a combination of both.

Concept and application:

There are two methods to prepare a balance sheet:

1) Vertical presentation

2) Horizontal presentation or the T-form

Balance sheet is made based on the fundamental accounting equation. That is:

Assets = Liabilities+ equity

The test balance fprms the basis of the preparation of the balance sheet. It shows that for a given
factor, the assets in the business must equal its liabilities/liabilities and equity. When this
happens, the balance sheet is claimed to be tallied.

The balance sheet therefore consists of three components. These are:

1) Assets: This category represents the resources owned by the entity and used to generate future
revenues.

2) Liabilities: This group represents the liabilities of the accounting entity that develop from a
previous opportunity and consists of all financial obligations that the accounting entity owes to
outsiders.

3) Equity: The equity of a business represents the amount contributed by the owners of the
business and the earnings retained in the business. Simply put, business equity is the amount
owed to the business after paying liabilities to financial institutions.
The balance sheet provides visitors with an overview of the sources from which the company
obtained funds and the sources that invested them.

Horizontal balance sheet format

Under this format, all trade liabilities exist on the left side and all assets are listed on the right
side of the balance sheet. Also called a T-shaped balance sheet.

Figures
LIABILITIES for ASSETS Figures for

Current
Year Current Year

(Rs. ‘000) (Rs. ‘000)

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 the part of the firm's economic statements to its shareholders.

SOLUTION for Question-3(b):

Introduction:

The ratio between a business's current assets and its current liabilities is known as the current
ratio. Existing properties can be realized within the operating cycle of the business, usually one
year. Current liabilities are service obligations that must be paid or fulfilled within one year.

Concept and application:

A company's financial statements are prepared to identify its earnings and financial position
among industry members. Various accounting tools and techniques are used to examine these
statements. One of the most commonly used such techniques is ratio evaluation. It specifies the
relationship between the various monetary elements existing and controlling the service.

The current ratio derives the relationship between a company's current assets and liabilities in its
annual report as of a given date. It shows the size of the company's current assets compared to its
current liabilities. It is usually described as an indicator of working capital.

It is calculated by the following formula:

Current ratio = Current assets/Current liabilities

Current assets will include:

 a. Cash-in-hand
b. Bank balances
c. Marketable securities
d. Trade receivables
e. Inventories etc.

Current liabilities will include:

a. Bank overdraft
b. Trade payables
c. Provisions
d. Outstanding liabilities
e. Short-term loans etc.

Calculating current ratio of Z and X LLP

Particulars Calculations Amount (₹)

Current assets (a) 1250

Accounts receivable 250
Supplies 150
Cash 550
Prepaid insurance 300

Current liabilities (b) 890

Salaries payable 150
Unearned revenue 200
Accounts payable 540
Current ratio (a/b) 1.404:1

Calculation above shows that the current ratio of Z and X LLP is= 1.404:1
Significance of current ratio:

The current ratio helps in determining the liquidity settings of the business. It shows the ability
of the business to pay its current charges or installments using its current properties.

A ratio of 2:1 is considered an excellent ratio as it reveals that the company has doubled its
current properties compared to its current liabilities. However, any ratio between 1:1 and 2:1 is
considered significant. If the ratio is lower than 1:1, it indicates lower cash liquidity of the
business. If the ratio is too high, it shows that the firm still has current properties and is forgoing
opportunities to use them to generate income.

Conclusion:

The current ratio is among the various liquidity indicators that the company calculates. These
liquidity ratios help in identifying a company's ability to meet its short-term obligations because
they specify an organized relationship between the amount of current/liquid properties and
current/temporary liabilities.