January 2025

Accounting ratios are crucial for assessing a company’s financial performance and position. They provide insights into profitability, liquidity, efficiency, and solvency. In this example, we will demonstrate how to calculate and interpret key accounting ratios using financial data from a fictional company, ABC Ltd.. 1. Financial Data for ABC Ltd. Below is the summarized financial data for ABC Ltd. for the year ending December 31, 2024: Revenue (Sales): $600,000 Cost of Goods Sold (COGS): $360,000 Gross Profit: $240,000 Operating Expenses: $120,000 Net Profit: $100,000 Total Assets: $500,000 Current Assets: $200,000 Inventory: $50,000 Accounts Receivable: $80,000 Cash and Bank: $70,000 Current Liabilities: $100,000 Total Liabilities: $250,000 Shareholders’ Equity: $250,000 2.… Read more

Accounting ratios are essential tools used to evaluate a business’s financial health and operational performance. They simplify complex financial data into easily interpretable metrics, allowing businesses, investors, and stakeholders to make informed decisions. By using simple accounting ratios, businesses can quickly assess profitability, liquidity, efficiency, and solvency, providing valuable insights into various aspects of financial management. 1. What Are Accounting Ratios? Accounting ratios are mathematical comparisons of financial statement items, often expressed as percentages or proportions.… Read more

Drawings refer to the withdrawal of cash or other assets from a business by its owner for personal use. In sole proprietorships and partnerships, drawings are common as owners take out funds for personal expenses, living costs, or other non-business-related purposes. Unlike salaries, drawings are not considered business expenses and do not affect the profit and loss account. Instead, they reduce the owner’s equity or capital in the business. 1. Understanding Drawings Drawings occur when the owner removes resources from the business for personal use.… Read more

Accruals and prepayments are fundamental accounting adjustments that ensure financial statements reflect the correct income and expenses for a specific period. They are part of the accrual basis of accounting, which recognizes revenues and expenses when they are earned or incurred, rather than when cash is received or paid. Properly recording accruals and prepayments ensures that financial reports provide an accurate picture of a business’s financial health. 1. Understanding Accruals Accruals refer to expenses or revenues that have been incurred or earned but have not yet been paid or received by the end of the accounting period.… Read more

Determining the value of sales during a specific period is essential for understanding a business’s revenue performance and financial health. Sales can be categorized into cash sales and credit sales. While cash sales are straightforward to track through cash or bank records, credit sales require analyzing the debtors (accounts receivable) account to identify how much was sold on credit during the period. Combining these figures gives the total sales for the period.… Read more

A debtors account (also known as an accounts receivable account) is used to track amounts owed to a business by its customers due to credit sales. While cash sales are recorded directly in the cash or bank account, credit sales are recorded in the debtors account. By analyzing the debtors account, businesses can calculate both cash and credit sales, providing valuable insights into their sales performance and cash flow. 1. Understanding the Debtors Account The debtors account records transactions related to sales made on credit.… Read more

Theft of cash from the till is a common challenge faced by many businesses, particularly in retail and hospitality industries. It involves the unauthorized removal of cash from the cash register or till, often by employees or external parties. This type of theft directly impacts a business’s profitability and cash flow, and it requires careful accounting to ensure that financial statements accurately reflect the loss. Additionally, it highlights the importance of implementing robust internal controls to prevent such incidents.… Read more

Preparing a cash book involves recording all cash and bank transactions to track the inflows and outflows of money within a business. The cash book serves as both a journal and a ledger, and it is crucial for managing a company’s liquidity and ensuring accurate financial reporting. Below is a detailed example of how to prepare a double-column cash book, which records both cash and bank transactions. 1. Scenario: Transactions for XYZ Ltd.… Read more

The cash book is a primary accounting record that tracks all cash and bank transactions within a business. It serves as both a journal and a ledger, recording the inflow (receipts) and outflow (payments) of cash. By maintaining a cash book, businesses can monitor their liquidity, manage day-to-day finances, and ensure that all cash movements are accurately recorded for financial reporting. 1. What is a Cash Book? The cash book is a specialized ledger that records all transactions involving cash and bank accounts.… Read more

Stock lost can occur due to various reasons such as theft, damage, errors in inventory management, natural disasters, or accidental loss. Regardless of the cause, businesses need to accurately account for lost stock to ensure that financial records reflect the true value of inventory and the business’s financial position. Proper accounting helps identify the cause of the loss, supports insurance claims (if applicable), and assists in implementing measures to prevent future losses.… Read more