Financial Accounting & Analysis

December 2022 Examination

Ans 1.

Introduction:

The double-entry accounting system is used by businesses to record accounting transactions.

Accounting transactions are recorded in a book called an "initial access diary" in reverse
chronological order. Journals use the double-entry accounting principle by recording a credit for
each debit. As accounting entries are published in the ledgers of the journal, further accounting
ledgers are constructed on top of them. There is a thorough listing of every transaction that
happened during the accounting period.

The idea and approach

Accounting journals are used by commercial organisations to track service transactions like
sales, cash, accounts payable, etc. The business may take advantage of these optional journals.
All of the company's products and services that were delivered in accordance with the credit
terms are accurately listed in the sales diary. To keep track of all of its cash transactions, the
organisation keeps a cash journal. In these exchanges, money can be used to pay expenses, buy
and sell goods, or buy and trade goods.
Numerous other journals can be used to record various types of transactions. If a business
employs numerous journals to record different transactions, the volume of accounting records
will be substantial and dispersed over numerous locations. Companies seek to use as few
journals as possible as a result of this.
All of these publications, along with information on where to purchase them, can be obtained in
one location as a result of the digitization of accounting data.
However, every firm makes use of the main journal. It provides a summary of each business
transaction the company has ever entered into.
Following are the details:
• Details about debits and credits, such as the date, the type of transaction, the sums affecting
each ledger, and the ledger accounts that were impacted
It might be thought of as a "catch-all" journal.
Traditionally, accounting records were written by hand. We realised right away that we needed
an accounting journal. This form was used to post transactions to the general ledger. Access is
controlled, and detailed records of all key financial transactions are preserved using modern
computerised bookkeeping.
It is crucial to include all relevant information regarding financial activities when creating an
accounting journal. These details may be found in papers such as bills, orders, invoices, and
other documents. The authenticity of the transaction is investigated, and the diary entries are
recorded in the chronological order in which they occurred.
Using the double-access bookkeeping method, access to journals is controlled. An impact with
two columns—a credit and a debit—is provided for each transaction. Journal entries were used
to document transactions.
Let's look at this example to better understand it:
Think about giving the individual who sold you the table cash as a token of appreciation for their
help.
Two entries will be made in the accounting journal, or to put it another way, two ledger accounts
will be affected. When possessions are added, the account's cash balance will decrease.

How to Write a Journal: A Guide

1. Recognizing business-related financial transactions
2. examining the transactions to see if they have an impact on the accounting formula
3. Subtract the difference in the debit and credit columns. Typically, positive credit accounts
outperform negative ones. The date of the transaction and a synopsis, or "narrative," of what
happened must both be included in a journal entry.
The bookkeeper must confirm that the accounting transaction, or the ratio of debits to credits, has
stabilised before publishing a journal entry. Credits and debits are required because they form the
foundation of a journal entry. Every purchase or transaction the company makes is disclosed to
the public. A journal entry will therefore consist of two lines. One-line journals cannot be used to
record organisational transactions because they are out of balance.
Several accounting transactions are mentioned in the example situation. Record these accounting
transactions in a journal.
To pass, the journal must contain the following entries:

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:

The aforementioned journal contains two entries for each accounting activity. A debit equals a
credit since it is made using the double-entry accounting procedure.

Answer 2:
Introduction
Analyzing, logging, and reporting financial transactions are all part of accounting. Accurate
bookkeeping is essential for assessing business performance and monitoring the growth and
survival of the corporate organization. Furthermore, when accurate records are kept for each
business division, it is easier to assess how well each division is performing. It assists in
determining how much money is actually generated by its operational responsibilities. It is
frequently regarded as being essential to small business owners' success. While auditing assists
in keeping an organization's books of accounts current, bookkeeping assists in translating and
analysing the financial implications of business operations.
Practice and Principles
The profit and loss statement shows how well the company did financially for the whole fiscal
year, each quarter, and each month.
The profit and loss account's principal elements are as follows:
1. Sales, which is also known as revenue
2. The price of products sold or the cost of sales
3. The costs associated with routine, necessary, or promotional TV advertising
4. Marketing and promotion
5. Technology, development, and research
The interest rate is six percent.
7. Taxes
8. Net income
When making profit and loss statements, accountants often have to think about two different
kinds of accounts.
It includes:
tally up revenues and costs.
All of the money, or revenue, made from the sale of goods, including direct and indirect costs, is
collected in a revenue account.
1. An organisation may incur additional costs during routine business operations in addition to
the costs incurred to enhance sales. Direct and indirect costs make up the majority of a business's
expenses.
Expenses that are directly connected to the production or acquisition of commodities are referred
to as "direct costs." The cost of the gas used during production, the pay paid to factory workers,
and other charges are examples of direct expenses.
There are indirect costs in addition to direct expenditures. Paying other bills, losing money,
renting a home, and purchasing materials like paper are examples of indirect costs.
2. Accountability: If a business owes money to another person or business, it is responsible.
Debt owed to other companies is one kind of debt for that specific firm, and this debt depreciates
the company's assets. Examples include credit card debt and bank loans.
Long-term obligations and short-term commitments are the two types of liabilities, and it's likely
that not all of the debts the business accrues are entirely the owners' fault. In contrast to the first
case, where the responsibilities were only in existence for up to a year, the second situation's
obligations had been in force for more than a year. Additionally, the word "responsibility"
appears in the wording of the organisational structure known as a "minimum liability
partnership." It serves as an illustration of the kind of cooperation where each employee offers
ideas that will benefit the company.
3. Loans: At this time, the management does not have any plans to shut down the business that it
owns. Careful money management is necessary to prevent theft and incorrect use. Any company
that wishes to remain in operation must have cash. These funds could originate from the
business's founders or from different sources, like a bank. Loans are financial quantities that are
taken out with the goal of repaying them.
4. Money earned by a business entity through the sale of goods or the rendering of services is
referred to as "revenue." Sales and revenue are occasionally used interchangeably or as
synonyms. For instance, the majority of a restaurant's income comes from the payment that
customers make when they are served meals. Profit and pricing are typically combined to create
revenue. Profit is what's left over after expenses are subtracted from revenue.
5. Additional sources of income In addition to the resources required to run the business, a
corporation may also generate revenue from other sources. Several sources, including rental
income, interest income, and return income, contribute to these advantages. As a result, a
business may profit from both its main businesses and its side projects. Revenue from operations
refers to the income generated by the primary business operations, while other income refers to
all other income.
Any business or organisation must disclose its financial goals. It clarifies the organization's
financial status. It shows the total revenue an organisation earned over the course of a certain
fiscal year as well as the percentage of expenses that were paid by the company. Several
financial accounts, including ledger loss, profit, and trial equilibrium, must be set up by a
business. The costs, losses, gains, and profits of the company are detailed in the profit and loss
account for a certain fiscal year. Expenses must be entered on the account's debit side.

Answer 3 (a).
Introduction.
A balance sheet is one type of financial statement created by corporations. It displays the asset-
to-liability ratio on a specific day. The company's fiscal year normally ends on this day. The
assets of the company, including those it owns or rents, are listed on the balance sheet together
with the funding sources for those assets. Loans or stock contributions from club members may
provide this funding.

The idea and approach

One of two methods—a T-form, a horizontal presentation, or a vertical presentation—can be
used to create a balance sheet.
The basic accounting equation serves as the basis for constructing the balance sheet. Liabilities
and equity are added to calculate assets.
The balance sheet is constructed using a test balance. It provides an example of how a
corporation's assets, liabilities, and equity must eventually equalize. The balance sheet is
regarded as having been totaled when this happens.
As a result, a balance sheet is divided into three sections. Which are:
1. Assets are things that the business currently has and will probably employ in the future to
generate revenue.
2. Liabilities: All debts and other obligations that an entity owes to other parties as a result of
earlier events go under this category.
Equity. "Equity" refers to both the capital expenditures made by the company's shareholders and
the retained profits. Equity, to put it simply, is the amount of money that investors are willing to
spend in a company once its debts have been paid. Equity can be defined as the amount of
money that lenders are willing to invest in a company after obligations have been paid. Simply
described, a company's "equity" is the sum of money that banks trust it with after it has paid off
its debts.
A company's balance sheet can be viewed by visitors to learn how much money it has raised and
where it has been invested.
A horizontal balance sheet's design
All of the company's liabilities are listed on the left side of the balance sheet, while all of its
assets are listed on the right. It features a T shape and is also known as a "balance sheet."

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

CAPITAL FIXED ASSETS

Partner's capital contribution
(b/f) 2000 Land and building
Retained earnings 860 Equipment 1500

CURRENT ASSETS
LONG-TERM
LIABILITIES Cash-in-hand 550
 Loans Cash at bank
Account receivables 250
CURRENT LIABILITIES Prepaid insurance 300
Account payables 540 Stock-in -trade 1000
Outstanding salaries 150 Supplies 150
Unearned revenue 200
INVESTMENTS
PROVISIONS Fixed deposit
Provision for taxation
Provision for bad debts

TOTAL 3750 TOTAL 3750

Conclusion:

One of the financial records that the company gives to its shareholders is a balance sheet.

Solution 3b:
Introduction
The current ratio is the proportion of a company's current liabilities to its current assets. Existing
properties can be sold throughout the regular one-year business cycle. The term "current
commitments" refers to the service tasks that must be finished in the upcoming year.

The concept and method

Financial statements are made by corporations to disclose their earnings and financial condition
to other market participants. The study of these statements makes use of numerous accounting
instruments and methods. One of the most frequently used evaluations is the ratio. It
demonstrates the connections between all of the numerous financial factors that affect a service.
The relationship between a company's current assets and liabilities as of a particular date is
described by a current ratio. The size of the business's current assets and liabilities vary. It is also
referred to as the "working capital ratio" informally.
To calculate it, use the formula below:
The current ratio is calculated by dividing current liabilities by current assets.
current assets: Cash on hand, funds in the bank, marketable securities, trade receivables, items,
etc. are examples of current assets.
Current liabilities are things like bank overdrafts, trade payables, provisions, unpaid bills, and
short-term loans.

Current ratio calculations for 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 has an effect on the company's liquidity. It proves that the business has enough
cash on hand to cover all of its costs and pay off all of its debts.
A 2:1 ratio is thought to be remarkable because it demonstrates that the company's current assets
have grown by twice as much as its current liabilities. However, it is thought that any ratio
between 1:1 and 2:1 is important. A ratio of less than 1:1 indicates that the company has less
financial liquidity. If the ratio is too high, the company won't be able to profit from its current
assets.

Conclusion
The present ratio is one of several liquidity metrics that a company may establish. The
relationship between a company's current and liquid assets and its short-term loans can be
determined with the aid of these liquidity indicators. This helps assess if the company can meet
its present obligations.