BUSINESS ACCOUNTING
Introduction
Business accounting or bookkeeping refers to company’s daily financial activities for its long-term financial goal which involves business accounting, bookkeeping and managerial accounting. Business accounting covers the financial tracking, analysis, budgeting and other tasks which help in high level decision making and working on operational activities such as forecasting. It is mainly approachable for smaller organisation than the large organisation (Al Breiki and Nobanee, 2019). These businesses handle accounting internally or depend upon the accounting firms if the organisation is large and there may be various factors to look into. Business accounting focuses on management, different activities to manage cash flow, inventory. The collection of financial information is utilized by financial advisors to assist small business to make important financial decision. It involves some steps to complete the procedure of company’s taxes, forecasting, budgeting and many more. Company needs to record the transaction like journal entries, daily and monthly receipts or depreciation charged on the fixed assets. A company should maintain its all-journal entries, trial balance, and income statement and balance sheet. There are different types of accounting financial accounting, managerial accounting, cost accounting and many more (Barr and McClellan, 2018). Business accounting is very useful for the organisation (Hopwood, 2019). The main importance is to know the performance of the company over a period, whether a company is earning profits or facing any losses. It helps to project its budget for the future projects. Budget helps to distribute company’s funds to promote the business objective and goal. It also helps to take any decision and to add new policies for the betterment of the company (Rikhardsson and Yigitbasioglu, 2018).
Question 1
Answer 1. (a) AC Ltd
Income Statement
For the Year Ended 31st December 2023 (in £)
R
evenue:
-Net Sales 1,300,000
-Cost of Goods Sold (COGS)
Opening Inventory 110,000
Purchases 800,000
Closing Inventory (120,000) (790,000)
Gross Profit 510,000
Operating Expenses:
-Selling & Distribution Expenses 75,000
- Administration Expenses 160,000
Prepaid Expenses (10,000) 150,000
- Audit Fee 10,000
Accrued 2,000 12,000
- Directors’ Remuneration 37,000
- Depreciation on Machinery
[250,000-90,000*20%) 32,000
Total Operating Expenses 306,000
Operating income (Gross profit – Operating expenses) 204,000
Finance Costs:
- Debenture Interest 13,000
Profit before Tax (Operating income- Finance cost) 191,000
-
Provision for Taxation
40,000
Net Income (profit before tax – provision for tax) 151,000
Answer 1. (b) AC Ltd
Balance Sheet
As at 31st December 2023 (in £)
A
ssets:
Non-current assets:
Land and Building 624,000
Machinery (250,000-90,000*20%) 32,000 [250,000-(32,000+90000)] 128,000
Total non-current assets 752,000
Current Assets:
Inventories 120,000
Receivables 100,000
Cash 4,000
Bank 12,000
Pre-paid administrative expenses 10,000
Total assets 998,000
Equity and liabilities
Equity:
Ordinary Share capital 450,000
Retained profits (81,000-20,000-40,000-45,000) (24,000)
Total equity 426,000
Liabilities:
Non-current liabilities:
7% Debentures 200,000
C
urrent
liabilities:
Payables 70,000
Accrued audit fees 2,000
Proposed final dividend 45,000
Tax provision 40,000
Total current liabilities 157,000
T
otal
equity and liabilities 998,000
Conclusion: This Company’s balance sheet represents the financial position which includes assets, liabilities and shareholding of the AC Ltd of the year 2023. Total assets of a company are £998,000, which includes a total of £752,000 non-current assets which comprises of land and building, and machinery. It shows how the company maintains its equipment to be in a competitive position in the market. It also consists of a total of £246,000 current assets which comprises of inventories, receivables, cash, bank and pre-paid administrative expenses of the organisation which helps the company to meet its short term goals. Company’s financial position is also depends on the liability of the organisation. It has two types of liabilities namely non-current liabilities and current liabilities. Company has total of non-current liabilities of £200,000 which includes 7% debentures of the company. This shows how a company has long term borrowings to manage its capital in the future. It also has total current liabilities of £157,000 which includes payables, accrued audit fees, proposed final dividend and tax provision. The liabilities side also holds equity holdings. It has equity capital of £426,000 out of which it had retained profits of £24,000 which is deducted from the ordinary share capital £450,000. The retained profits are caused by various deductions, including dividend and tax provisions. Equity helps to generate capital and maintain desired profits in the financial statement. This balance sheet depicts a positive performance of the organisation. It has strong asset side related to its liability side and generates profits in the short run as well as in the long run. It also focuses on its long run competitiveness (Hillier et al., 2019).
Answer 1. (c) The accruals or matching concept is a fundamental accounting principle which states and verifies the expenses of the organization are related to the revenue earned by the organization which is incurred or earned in the same period. The expenses and incomes can be taken from the income statement or the profit and loss report. If the expenses are occurred in any month, then it should be recorded in books when the expense is done rather than when the cash is transferred. This concept ensures the (Weygandt et al., 2019).
For e.g. If we order a furniture costing £2100 for your office from a buyer in July get an invoice, but the settlement is done in September month. Here the record of the expenses will be done in July with £2100 only.
This application will not be applied on cash accounting. As in that concept the expenses and revenues are recorded when the cash is paid. In this concept only expenses are recorded in the income statement in the period when they are occurred. It is always shows on the liabilities side of the balance sheet at the end of financial year (Pandey, 2017).
The benefit of matching principle is to provide the proper and accurate records of financial position. It helps to maintain the consistency of income statement and balance sheet of the company. It also helps to determine the actual profits over the accounting period.
The three examples from AC ltd.’s financial statement are:
Prepaid Administration Expenses, in this question AC Ltd has £10,000 as prepaid administration expenses. This expense can be termed as an asset in accounting period. When it is incurred over a period of time, it will be recognized in profit and loss account. It will reflect in company’s financial performance. Another example is Accrued audit fess, in this question AC Ltd has audit fees of £2,000 which is accrued but not paid yet. This expense is generally recognised in the current financial report even though the cash payment has not been made yet and payment will receive after a period of time. Through this accrued expense AC Ltd make sure that all expenditure should be incurred which matches the revenues earned during the period. This accrual concept helps to know the expenses and clear knowledge of profitability. Last example is Tax Provision; in this question AC Ltd has a tax provision of £40,000. The tax expenses are recorded in the current period of financial statement. It shows the tax liability of the company which should be paid with the earned profit of the organization over the financial year. This matching concept ensures that the shown profits are proper and all the stakeholders have clear understanding (Kimmel, et al, 2020).
Question 2
Answer 2. (a) Ratio Analysis of CR plc
Profitability Ratio
(a) Gross profit = sales – cost of sales
Year 2023 - 830.4-646.2 = 184.2
Year 2022 - 746.5-577.8 = 168.7
Gross Profit Margin =
Year 2023 -
=
22.2%
Year 2022 -
(b)
Net Profit Margin = 
×100
Year 2023 -
Year 2022 -
Liquidity Ratio
Current ratio =
Year 2023 - -
Year 2022 -
Quick assets = Current Assets – Inventory
Year 2023 - 417.5-102.7=314.8 Year 2022 - 291.6-87.0= 204.6
Quick ratio =
Year 2023 -
=0.91
Year 2022 -
Efficiency Ratios
(a) Inventory turnover ratio =
Year 2023 -
Year 2022 -
(b) Receivables turnover ratio =
Year 2023 -
Year 2022 -
Answer 2. (b) Analysis of the above ratios-
Ratios |
Year 2023 |
Year2022 |
Gross Profit Margin |
22.2% |
22.6% |
Net Profit Margin |
10% |
11.7% |
Current ratio |
1.20 |
1.24 |
Quick ratio |
0.91 |
0.87 |
Inventory turnover ratio |
6.81 |
6.09 |
Receivables turnover ratio |
18.13 |
16.28 |
If we compare all the three ratios namely profitability, liquidity and efficiency ratio then we can get the performance evaluation of CR plc for 2 years i.e. 2023 in comparison with 2022.
Profitability Ratio Profitability ratio is a financial measure that helps to recognize the company’s power to generate earning through its revenue, financial statement, stakeholders. This can be obtained by gross profit margin, net profit margin, operating margin or return on equity. Gross Profit Margin: It is derived when the percentage of gross profit is divided by the total sales of the company. In the above question gross profit margin is decreased slightly from 22.6% to 22.2%, in the two years. It indicates that when the sales increased, the cost of goods sold grew at a faster rate, affecting overall profitability.Net Profit Margin: The net profit margin of a company is derived by adjusting all the expenses and the taxes levied on the company. It will be derived as the percentage of profit after tax divided by its sales. It is also declined as gross profit margin from 11.7% to 10.0% in the two years. It suggests a reduction in overall efficiency and profitability after accounting for all expenses (Hosaka, 2019).
Liquidity Ratio: Liquidity ratio is a financial measure that helps to determine debtor’s ability to pay short term debt obligations without raising external capital. This ratio can be obtained through current ratio or quick ratio. The Current Ratio: This ratio helps the company to measure the ability to pay its short term debt. The ideal ratio of current ratio is 1.0. In this question the ratio decreases from 1.24 to 1.21, indicating a decrease in the company's short-term debt. It is also determine that CR plc's ability to cover short-term liabilities has slightly weakened (Rashid, 2018).
Efficiency Ratio: Efficiency ratio is another financial measure which helps to analyse how company uses its assets and liabilities within the organization. It helps to know the company’s inventory turnover ratio, repayment of liabilities or usage of equity. Inventory Turnover Ratio: This ratio determines, how many times an organisation sells its stock over a period of time. In the above question this ratio is improved from 6.09 to 6.81, indicating that CR plc is managing its inventory more efficiently. It is a positive sign, as it reflects good inventory management and fast sales. Receivables turnover ratio: This ratio determines that how efficiently company is collecting its debt and credit. It is calculated when the net credit is divided by average accounts receivables. In this question the ratio is increased from 16.28 to 18.13. It shows the effective customers payment of debts ability.
Reference
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