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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.
Linda’s Ledger Accounts
Capital Account
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
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 From the information withdrawn from Linda’s business, a deposit was made on 1st by Linda worth £ 8,000. On 2nd, £ 1,000 was withdrawn from the bank to buy the business a laptop.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
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
Laptop Account
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
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
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
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
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
The transaction is recorded on the account’s debit side in returning the goods outwards, as shown above.
Rent Received Account
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.
Free Account
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
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
Rent Paid Account
Expenses are recorded on the debit side of the T-account
Drawings Account
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
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
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
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:
Gross profit Margin= Gross Profit/Sales:
Current Ratio=Current Assets/Current Liabilities:
Acid Test Ratio= Liquid assets/Current Liabilities:
Account Receivable Collection Period= Account receivable/credit/credit sales*365:
Account Payable Payment Period= Account Payable/Net Purchase*365:
Points to Note
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Making assumptions that there is no closing stock, a pleasure trip will be regarded as a personal expense.
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As to the net profit margin, the performances is incredibly pathetic because the standard is 3.15 and the business ratio is 3.8%
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As to the gross profit margin, it is as well not good because the average is 54%, and Linda’s rate is 39.74%
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As at current ratio, it is better because the standard is 2.87, and her ratio is 3.25
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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.
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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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