1.

ANSWER

Accountants use special forms called journals to keep track of their business transactions. A
journal is the first place information is entered into the accounting system. A journal is often
referred to as the book of original entry because it is the place the information originally enters
into the system. A journal keeps a historical account of all recordable transactions with which the
company has engaged. In other words, a journal is similar to a diary for a business. Journaling
the entry is the second step in the accounting cycle. Journal is also called a subsidiary book.
Transactions are entered in a chronological order in the journal. The debit and credit amounts
recorded in the journal are subsequently transferred to the relevant accounts in the ledger at
convenient intervals.
When you enter information into a journal, we say you are journalizing the entry.

ENTERING TRANSACTIONS INTO THE JOURNAL

The journal is prepared in the following manner:

FORMAT OF JOURNAL
Date Particular L.F. Dr. Amount Cr. Amount

1. In the first column, the date of the transaction is entered. At the top, the year is written and
below the year, the month and the date are written.

2. In the second column, the names of the accounts involved are written. The account to be
debited is written first with the word 'Dr.' (which stands for debit). It is written towards the end
of the column. In the next line, a little space is left, then the word 'To' is written, after which the
name of the account to be credited is written. In the next line, 'narration' is written which refers
to the explanation for the entry being made and the necessary details relating thereto. It starts
with the words 'Being'.

3. In the third column, L.F. refers to 'Ledger Folio', which is the page of the ledger containing the
account in which entry is written up or posted.
4. The fourth column refers to the debit amount. In this column, the amounts to be debited are
entered.

5. In the fifth column, the amounts to be credited are entered. The process of entering the
transactions in the journal is called journalizing.

Henceforth, journal for provided transactions would be as follows:

JOURNAL OF VEENA’S BUSINESS

Date Particular L.F. Dr. Amount Cr. Amount
Dec 3 Cash Account Dr. 5000 505000
Bank Account Dr. 500000
To Capital Account
(Being Amount Invested By Veena)
Dec 5 Furniture Account
To Cash Account Dr. 30000
To Bank Account Dr. 30000
(Being furniture purchased 50%
payment made through bank and
rest is payable)

Dec 7 Purchase Account

To Bank Account Dr. 315000
(Being goods purchased through
bank account)

Dec 8 Bank Account. Dr. 500000

To Sales Account
(Being goods sold)
Dec 10 Rent Account Dr. 30000
Electricity Account
Salary Account
To Bank account
(Being the amount paid for
electricity, rent and salary)
2. ANSWER

A profit and loss account, in simplest terms, is a record of all the income and expenses of the
business during a particular period of time. Such a period can be the entire financial year, an
interim period like half financial period, or a quarter. Every business whether it is a sole
proprietorship to a company needs to maintain a profit and loss account to get their correct
financial position at the end of the required period. All the cash and non-cash income and
expenses of the business are recorded in the profit and loss account.

A profit and loss statement is prepared based on certain basic principles of accounting. These
principles include the principle of accrual accounting, matching principle, and revenue
recognition. It shows various stages of profits earned by the business organization like gross
profit or loss, the operating margin, or the net profit or loss incurred by the business.

An income statement consists of different parts that record the company's income and expenses
in different categories. The details are described below.

1. Revenue/ Income

A company's turnover is also known as its top line. The company's income is divided into two
parts. First, revenues from the main business operations are recorded. This includes income
generated in the ordinary course of business. The following categories relate to company
miscellaneous income or miscellaneous income. This includes income from the company's
various investments, such as interest and dividend income.

2. COGS

The next big category on the income statement is cost of goods sold (COGS). This includes the
direct operating costs of your business, such as raw material costs, labor costs, or the business
unit's direct overhead costs associated with manufacturing or purchasing goods. These expenses
are the first expenses that are deducted from the revenue and arrive at the company's gross
margin. It is important for a company to have a higher gross margin because operating and non-
operating expenses that are deducted from the gross margin further reduce the company's profit.
Therefore, it is important to check the COGS to ensure that the company's owners or
stockholders benefit from the bottom line.
3. Operating expenses

Operating costs are the indirect costs of running a business as opposed to the direct costs
associated with the production or manufacturing process. These expenses include personnel
costs, depreciation, sales, marketing and distribution costs, and administrative costs such as
research and development costs. These costs directly affect the company's net profit. A positive
gross profit can also turn into a net loss if the company's operating costs are too high. business
performance

4. Operating profit is the positive balance of gross profit after deducting operating expenses.
Also known as EBIT (earnings before interest and taxes). A positive operating margin guarantees
the company's profitability and solvency to investors and stakeholders.

5. Net income

The net income of a business is the revenue or net income generated by a business after
deducting all operating and non-operating expenses, interest and taxes. This is the profit that can
be distributed to shareholders. Earnings per share is also calculated based on the company's net
income or net income.

The profit and loss account of any business is the reflection of its financial viability. It is a
mandatory statement that is important for every business and has to be prepared with due
diligence without which the survival of a business whether small or big can come in serious
jeopardy.

The importance and benefits of the profit and loss account are mentioned hereunder:

 It helps the business understand its operational efficiency and the various expenses
incurred by the business to keep it afloat.
 The profit and loss account helps the shareholders understand their net earnings per share
while the investors can evaluate the viability of their investment.
 It also helps the business meet the statutory requirements of drafting the financial
statements and getting them audited and approved in the AGM.
 A profit and loss account is the direct evaluation of the profitability of the business and
comparison with its past performance.
 A negative net profit despite a positive gross margin can indicate a high operating cost
and help the management take executive decisions to optimize it.
 It can also form the basis to make future profit and loss statements to estimate projected
profits of the business and make better business decisions.
3 a. ANSWER
The term balance sheet refers to a financial statement that reports a company's assets, liabilities,
and shareholder equity at a specific point in time.

BALANCE SHEET OF Z AND X PVT.LTD

LIABILITIES AMOUNT ASSETS AMOUNT

Retained earnings 860 Accounts receivable 250
Salaries payable 150 Supplies 150
Accounts Payable 540 Equipment 1500
Unearned Revenue 200
Cash 550

Prepaid Insurance 300

Common stock 1000

3 b. ANSWER

Financial Statements are prepared to know the profitability and financial position of the business
in the market. These financial statements are then analysed with the help of different tools and
methods. Ratio Analysis is one of the methods to analyse financial statements. The relationship
between various financial factors of a business is defined through ratio analysis.

Current Ratio is the one that is used to derive a relation between the current assets and current
liabilities of a firm. It is used to determine whether the current assets of a firm would be
sufficient to pay off its current obligations or not. In other words, it is used to depict the
magnitude of current assets against current liabilities of a concern. It is also known as Working
Capital Ratio.
A Current Ratio is one of the two main liquidity ratios. Liquidity ratios are the ones that
determine the organisation’s ability to meet its short-term obligations by defining a systematic
relationship between the amount of current and/or liquid assets and that of the current/ short-term
obligations.

Generally, a current ratio of 2:1 is considered ideal, which means that the current assets must be
twice the amount of current liabilities. It is noteworthy that an organisation may or may not have
this ideal ratio at all points in an accounting period. But it must try its best to maintain the ideal
ratio to ensure liquidity and creditworthiness.

Formula:

Current Ratio = Current Assets / Current Liabilities

Where, Current Assets = Cash in Hand + Cash at Bank + Short-term Investments (Marketable
Securities) + Trade Receivables (Less Provision) + Inventories (Stock of Finished Goods + Stock
of Raw Material + Work in Progress) + Prepaid Expenses

Current Liabilities = Bank Overdraft + Trade Payables + Provision of Taxation + Proposed

Dividends + Unclaimed Dividends + Outstanding Expenses + Loans Payable within a Year.

Therefore, current ratio for given data will be as follow :

Solution:

Current ratio = Current Assets / Current Liabilities

= 3950 /1550

= 2.55

Significance of current ratio:

Current Ratio is computed to know the ability of a firm to pay off the short-term liabilities of
a firm with the help of current assets. It is assumed that all the current assets are likely to be
converted into cash to pay off the short-term liabilities of the firm. In other words, this ratio is
calculated to determine the short-term solvency of a firm. 2:1 is considered an ideal current
ratio. That means the current assets should be double the current liabilities of the firm. But if
the current ratio is very high, it is believed that the funds are lying idle and the firm has poor
control over its inventory or debtors turnover is slow.

There can be three situations arising from the calculation of current ratio:

 If Current Assets > Current Liabilities, then Current Ratio > 1: This implies that the
organisation would still have some assets left even after paying all the short-term debts
and is a desirable situation to be in.
 If Current Assets = Current Liabilities, then Current Ratio = 1: This means that the
current assets are just enough to cover the short-term obligations of the firm.
 If Current Assets < Current Liabilities, then Current Ratio < 1This is not an ideal
situation to be in since it implies that the company does not have enough resources to pay
off short-term debts.