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T-Account: Linda’s Transactions

A T-account is an informal term for a financial records’ set that contemplates the International Accounting Standards (IAS) double-entry bookkeeping rule. A T-account is also referred to as the ledger accounts. It describes the bookkeeping entries’ appearances by displaying them on a large letter T drawn on a page. The account title is then written just above the top horizontal line with debits and credits transactions just underneath on the left and right sides separated by letter T’s vertical line, respectively, as displayed in the transactions recorded below.

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Linda’s Ledger Accounts

Capital Account

Dr Cr
31stOct, 2020 ‘Bal c/d’ £ 16200

£ 16200

1stOctober 2020 ‘Bank’ £ 8000
1stOctober 2020 ‘Cash’ £ 5200
1stOctober 2020 ‘Van’ £ 3000
£ 16200
31stOctober 2020 ‘Bal b/d’ £ 16200

According to the IAS framework, capital accounts are mainly affected by the business owner’s investments or injections. According to Duţescu (2019, p. 263), the transactions that involve this account are mostly done at the beginning of trade or before an inventory is completed. However, other injections that come directly from the owner’s accounts are recorded in the ledger account. They can be in terms of material possessions or liquid wealth (cash at a bank or hand). Transactions that decrease the business due to the owner are recorded on the capital account’s debit side.

Conversely, transactions that increase the industry’s capacity because of the owner are recorded on the capital account’s credit side. From the accounting information of Linda’s business, she invested a total of £ 13,000. From this, £ 8,000 was deposited in the bank, and £ 5,200 was given in cash to the business on 1st October, 2020. On the same day, she gave a van worth £ 3,000 to the company. These transactions increase the business’ due to the owner hence recorded on the capital account’s credit side.

Bank Account

Dr Cr
1stOctober 2020 ‘Capital’ £ 8000
5thOctober 2020 ‘Sales’ £ 1500
21stOctober 2020 ‘Rent R’ £ 500
2ndOctober 2020 ‘Laptop’ £ 1000
24thOctober 2020 ‘Car’ £ 2500
26thOctober 2020 ‘Wages’ £ 820
30thOctober 2020 ‘Rent’ £ 1000
31stOct 2020 ‘Drawings’ £ 1600

An active and properly operating business should/must have a bank account where non-cash transactions can be done. According to IAS, transactions that are done directly through the business bank account are recorded in the ledger’s bank account. The transactions are mainly deposits and withdrawals. Any deposit transaction means the business’ bank account has increased in a cash amount. Any withdrawal means that the company’s bank account has been reduced in cash.

Deposits are recorded on the bank account’s debit side, and withdrawals are recorded on the credit side of the business’ bank account. From the information withdrawn from Linda’s business, a deposit was made on 1st by Linda worth £ 8,000. On 2nd, £ 1,000 was withdrawn from the bank to buy the business a laptop. On 5th, the business received a deposit of £ 1,500 from the business’ sales. A deposit of £ 500 was made on 21st from the rent received, and on 24th, £ 2,500 was withdrawn to purchase a car for the business. On 26th, £ 820 was withdrawn to pay for wage expenses, and on 30th £ 1,000 was withdrawn to pay for business rent. Lastly, on 31st, £ 1,600 was stated for Linda’s personal use.

Cash Account

Dr Cr
1stOctober 2020 ‘Capital’ £ 5200
23rdOctober 2020 ‘Sales’ £ 1500
23rdOctober 2020 ‘Sales’ £ 500
£ 7200
31stOctober 2020 ‘Balance b/d’ £ 7120
12thOctober 2020 ‘Repairs’ £ 80
31stOctober 2020 ‘Balance c/d’ £ 7120
£ 7200

To sort out petty and urgent transactions in the business, cash at hand is vital. Not all transactions, therefore, are done in the bank. As recommended by the accounting standards, these critical and little transactions are done using cash at hand. The account is affected when these tractions are done in the cash account, where any transaction that reduces money is recorded on the credit side. Any transaction increasing cash is recorded in the debit account. The information on Linda’s transaction shows an increase in the money on 1st from Linda’s cash that acted as the capital, on 12th there was a decrease in cash used for repairing the Van costing £ 80, on 23rd cash worth £ 1,500 was received from sales and consequently on that same day the business received £ 500.

Van Account

Dr Cr
1stOctober 2020 ‘Capital’ £ 3000
£ 1000
31stOctober 2020 ‘Balance b/d’ £ 3000
31stOctober 2020 ‘Balance c/d’ £ 3000
£ 3000

Laptop Account

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Dr Cr
2ndOctober 2020 ‘Bank’ £ 1000
£ 2350
31stOctober 2020 ‘Balance b/d’ £ 1000
31stOctober 2020 ‘Balance c/d’ £ 1000
£ 1000

Several other accounts are supposed to be made by the business to record the industry’s value of the property. The information about Linda’s business shows how Linda gave the business a Van worth three thousand pounds. The statement by the transaction information issued also indicates that on second, one thousand pounds were used to purchase a laptop as shown in the recordings above. Bringing/buying an asset is recorded on the respective T-accounts’ debit side, whereas an asset’s selling is recorded on the credit side.

Purchases Account

Dr Cr
4thOctober 2020 ‘Toys Ltd’ £ 2450

£ 2350
31stOctober 2020 ‘Balance b/d’ £ 2350

18thOctober 2020 ‘Purchases Return’ £ 100
31stOctober 2020 ‘Balance b/d’ £ 2350
£ 2350

Any increase and decrease in inventory/stock are recorded in the purchases account of the T-accounts. Drawn from Linda’s business information, the business purchased goods on credit from Toy’s Ltd worth two thousand four hundred and fifty on 4th.

Toys Ltd Account

Dr Cr
18thOctober 2020 ‘Purchases Return’ £ 100
31stOctober 2020 ‘Balance c/d’ £ 2350
£ 2350
4thOctober 2020 ‘Purchases’ £ 2450

£ 2350
31stOctober 2020 ‘Balance b/d’ £ 2350

Any credit purchases are recorded in the respective organization’s account with an increase in the number of credits recorded on the account’s credit side. In contrast, those involving a reduction in credits are recorded on the debit side.

Sales Account

Dr Cr
31stOctober 2020 ‘Balance c/d’ £ 3900

£ 3900

5thOct, 2020 ‘Bank’ £ 1500
23rdOct, 2020 ‘Cash’ £ 1500
23rdOct, 2020 ‘Fred’ £ 400
23rdOct, 2020 ‘Cash’ £ 500
£ 3900
31stOctober 2020 ‘Balance c/d’ £ 3900

This is to record transactions that are related to stack bringing in and returns. All the transactions involved in the selling of stocks are recorded on the credit side, while the debit side records transactions involving returns.

Repairs Account

Dr Cr
12thOctober 2020 ‘Cash’ £ 80

£ 80
31stOct 2020 ‘Balance c/d’ £ 80

31stOct 2020 ‘Balance c/d’ £ 80
£ 80

Expenses are as well explained by the IAS, which stipulates that all the expense transactions are recorded on the debit side of the respective expense account.

Purchases Return Account

Dr Cr
18thOctober 2020 ‘Purchases’ £ 100

£ 100
31stOct, 2020 ‘Balance b/d’ £ 100

31stOct, 2020 ‘Balance c/d’ £ 100
£ 100

The transaction is recorded on the account’s debit side in returning the goods outwards, as shown above.

Rent Received Account

Dr Cr
31stOctober 2020 ‘Balance c/d’ £ 500
£ 500
21stOctober 2020 ‘Bank’ £ 500

£ 500
31stOctober 2020 ‘Balance b/d’ £ 500

Any income from any source of the business assets or value is as well recorded in the T-account. The transactions involved are recorded on the credit side of the T-account.

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Free Account

Dr Cr
23rdOctober 2020 ‘Sales’ £ 400

£ 400
31stOct 2020 ‘Balance b/d’ £ 400

31stOct 2020 ‘Balance c/d’ £ 400
£ 400

Transactions involving credit sales are as well recorded in separate accounts of themselves. Any transaction of this kind is recorded on the debit side of the T-account.

Car Account

Dr Cr
24thOctober 2020 ‘Bank’ £ 2500

£ 2500
31stOct 2020 ‘Balance b/d’ £ 2500

31stOct 2020 ‘Balance c/d’ £ 2500
£ 2500

Transactions involving purchases of assets are recorded on the debit side, while those of asset sales are recorded on the credit side of the T-account

Wages Account

Dr Cr
26thOctober 2020 ‘Bank’ £ 820

£ 820
31stOct, 2020 ‘Balance c/d’ £ 820

31stOctober 2020 ‘Balance c/d’ £ 820
£ 820

Rent Paid Account

Dr Cr
30thOctober 2020 ‘Bank’ £ 1000

£ 1000
31stOctober 2020 ‘Balance b/d’ £ 1000

31stOctober 2020 ‘Balance c/d’ £ 1000
£ 1000

Expenses are recorded on the debit side of the T-account

Drawings Account

Dr Cr
30thOctober 2020 ‘Bank’ £ 1600

£ 1600
31st Oct 2020 ‘Balance b/d’ £ 1600

30thOctober 2020 ‘Balance c/d’ £ 1600
£ 1600

Carson, Carson, and Eimermann (2017, p. 183), business owners can make money for personal amenities, thus reducing the corporation’s owing to the owners. This transaction is recorded on the debit side of the drawings account.

Trial Balance as of 31st October 2020

Particulars
Cash
Bank
Capital
Van
Laptop
Purchases
Purchases Return
Sales
Toy Ltd
Rent Received
Fred
Rent Paid
Wages
Car
Repairs
Total
Debit (£)
7120
3080
3000
1000
2450
400
1000
820
2500
80
21450
Credit (£)
14600
100
3900
2350
500
21450

A trial balance is a bookkeeping worksheet on which all ledger balances are combined into equivalent debit and credit account column totals. A trial balance’s primary function is to ensure that the entries in a company’s bookkeeping procedure are mathematically accurate. The duly balanced ledger accounts are combined in a trial balance to detect the validity of the ledger’s information. Linda’s transaction from the trial balance above has been proved valid and very clear.

Income Statement for Period Ended 31st October 2020

Revenue from Operations
Income Rent Received
Total
Less
Purchases
(Return)
(Changes in stock)
Repairs
Wages
Rent Paid
TotalProfit for the Period
(£)
3900
500
4400
2450
(100)
(250)
80
820
1000
4000400

An income statement is a financial statement that indicates the income and expenses of a company. It also shows when a business is profitable or losing money for a given period (Duţescu, 2019, p. 63). The revenue statement, along with the balance sheet and cash flow statement, aids in understanding the company’s financial capacity to withstand the liabilities based on the current assets owned by such corporate organizations.

Statement of Financial Position

Capital
Add profit
Trade Payable (Toy Ltd)
Total
(£)
14600
400
2350
7350
Van
Laptop
Cash
Closing Stock
Bank
Trade receivables
Car
Total
(£)
3000
1000
7120
250
3080
400
2500
7350

A balance sheet, also known as a financial statement, shows a company’s assets, liabilities, and equity at a given point in time. For instance, considering the following scenario of cash, stock, land, factory, and machinery, which are all examples of assets owned by a company, liabilities are the company’s debts to third parties.

Ratios Calculations

Net Profit Margin= Net Income/Sales:

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Net Income 150
Sales 3900
Net profit margin 3.85%

Gross profit Margin= Gross Profit/Sales:

Gross Profit 1550
Sales 3900
Gross profit margin 39.74%

Current Ratio=Current Assets/Current Liabilities:

Current Assets 7400
Current Liabilities 2350
Current Ratio 3.15

Acid Test Ratio= Liquid assets/Current Liabilities:

Liquid Assets 74000
Current Liabilities 2350
Current Ratio 3.15%

Account Receivable Collection Period= Account receivable/credit/credit sales*365:

Account Receivable 400
Credit Sales 3900
Account Receivable Collection Period 37 Days

Account Payable Payment Period= Account Payable/Net Purchase*365:

Account Payable 2350
Net Purchases 2350
Account Payable Payment Period 365 Days

Points to Note

  • Making assumptions that there is no closing stock, a pleasure trip will be regarded as a personal expense.
  • As to the net profit margin, the performances is incredibly pathetic because the standard is 3.15 and the business ratio is 3.8%
  • As to the gross profit margin, it is as well not good because the average is 54%, and Linda’s rate is 39.74%
  • As at current ratio, it is better because the standard is 2.87, and her ratio is 3.25
  • As to the current ratio, it is better because the average is 1.35, and Linda’s ratio is 3.15. As there are no non-liquid assets like inventory, the ratio is the same as the current ratio.
  • As to the account receivable collection period, it is as well better because it is only 37 days as compared to the 50 days standard. The account payable payment period is largely best because the 365 days is incomparable with the 72 days classic, hence no payment of payables intentions for October.

Reference List

Carson, D.A., Carson, D.B. and Eimermann, M. (2018) ‘International winter tourism entrepreneurs in northern Sweden: understanding migration, lifestyle, and business motivations’, Scandinavian Journal of Hospitality and Tourism, 18(2), pp. 183-198.

Duţescu, A. (2019) ‘Accounting Process and Transaction Analysis’, in Duţescu, A, Stănilă, O. and Hoinaru, R. (eds.) Financial Accounting. Cham: Palgrave Macmillan, pp. 63-92.

Duţescu, A. (2019) ‘Closing Procedures, Financial Statements, and Financial Analysis’, in Dumitru, M. and Duţescu, A. (eds.) Financial Accounting. Cham: Palgrave Macmillan, pp. 261-293.

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