It is the analysis and evaluation of the
factors that will affect the economic
success of engineering projects to the
end that a recommendation can be
made which will insure the best use of
capital.
Source: Engineering Economy 3rd Edition
by Hipolito Sta. Maria
Basic Accounting Concepts
Introduction for
Engineering Students
Accounting
• It is a system for measuring, processing, and
communicating financial information. It is often referred
to as the language of business.
• It is generally a source of much of the financial data
needed in making estimates of future financial conditions.
• It is also a prime source of data for after-the-fact analyses
that might be made regarding how well an investment
project has turned out compared to the results that were
predicted in the engineering economy study.
• The process of identifying, measuring, and reporting
financial information of an entity.
ACCOUNTING
Is a system for measuring, processing, and
communicating financial information. It is
often referred to as the language of
business.
A key product of an accounting information
system, financial statements allow people
to make business decision.
Accounting’s Role in Business
Mission of the Business:
Provide a Product/Service
Functions directly
Relationship of Business with
related to the
mission:
- Production
- Purchasing
- Sales
- Service
- Human Resource (HR)
- Administration
- Accounting/ Financial Services
| Proprietorship | Partnership | Corporation | |
|---|---|---|---|
| 1. Owner(s) | Proprietor - One owner |
Partner - two or more owners |
Stockholders - generally many owners |
| 2. Life of entity | Limited by owner's choice or death | Limited by owner's choice or death | Indefinite |
| 3. Personal liability of owner(s) for business debts | Proprietor is personally liable | Partners are personally liable | Stockholders are NOT personally liable |
The Accounting Equation
Assets = Liabilities + Owner's Equity
Economic Resources = Claims to Economic Resources
Assets = Economic Resources
Liabilities = (outsider claims) financial obligations to outsiders called creditors
Owner's Equity = (insider claims) claims held by the owner/s of the business
Accounting Equation Expounded
- An example of an asset would be your car. Your car has a dollar value attached to it. It adds value to your individual worth.
- An example of a liability would be your car loan. The loan removes value from your individual worth.
- The equity in your car would be any money you paid down toward the purchase.
- If you use your car to operate a pizza delivery service, the income generated from delivering pizzas would be known as revenue.
- Any expense for gas or car repairs would be recorded in an expense account known as “automotive expense”.
A = L + ( I - W + i - d )
A for assets
L for liabilities
I for investments
W for withdrawals
i for income
d for deductions from income or expenses
ASSETS
Classification of Assets
1. Current Assets
Improvements to International Accounting Standards
1(December 2003) classifies assets as current assets when it
is:
a) expected to be realized in, or s intended for sale or
consumption in, entity’s normal operating cycle;
b) held Primarily for the purpose of being traded;
c) expected to be realized within twelve months of the
balance sheet date; or
d) cash or a cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve
expenses months after the balance sheet date.
Classification of Current Assets
• Cash includes coins, currencies, checks, bank deposits and other
cash items readily available for use in the operations of the
business.
• Cash Equivalent are short-term investments that are readily
convertible to known amounts of cash which are subject to an
insignificant risk to changes in value (per SFAS No. 22, revised
2000)
• Marketable securities are stocks and bonds purchased by the
enterprise and are to be held for only a short span of time or
short duration. They are usually purchased when a business has
excess cash.
• Trade and other Receivables includes the amounts collectible from any of the
following accounts:
Accounts Receivable — is the amount collectible from the customer to
whom sales have been made or services have been rendered on account or
credit.
Notes Receivable — is a promissory note issued by the client or the
customer in exchange for services or goods received as evidence of his/her
obligation to pay.
Interest Receivable — amount of interest collectible on promissory notes
received from costumers and clients.
Advances to employees - certain amount of money loaned to employees
payable in cash or through salary deductions.
Accrued Income — income already earned but not yet received.
• Inventories represent the unsold goods at the end of the accounting period.
This is applicable only to a merchandising business.
• Prepaid Expenses include supplies bought for use in the business or services
and benefits to be received by the business in the future paid in advance.
CONTRA-ASSET ACCOUNTS—these are accounts deducted from the related
asset accounts.
• Allowance for Bad Debts are losses due to uncollectible accounts, This is
deducted from the accounts receivable account to get the net reliable value. This
is in line with the financial statements qualitative characteristic of conservatism
wherein no profits would be anticipated but all probable or estimable losses
should be provided.
• Accumulated Depreciation represents the expired cost of property, plant and
equipment as a result of usage and passage of time, This is deducted from the
cost of the related asset account.
2. Non-Current Assets
Classification of Non-Current Assets
• Long-Term investment are assets held by an enterprise for the accretion of
wealth through capital distribution such as interest, royalties, dividends and
rentals for capital appreciation or for other benefits to the investing enterprise such as those
obtained through trading relationships. Investments are classified as long-term when
they are intended to be held for an extended period of time (International Accounting
Standard No. 25).
• Property, Plant, and Equipment are tangible assets that are held by an
enterprise for use in the production or supply of goods or services, or for
administrative purposes and which are expected to be used for more than one
period (International Accounting Standard No. 16).
Examples of Property, Plant, and Equipment
• Land is a piece of Lot or real estate owned by an enterprise on which a building can be
constructed for business purposes.
• Building is an edifice or structure used to accommodate the office, store, or factory of
business enterprise In the conduct of its operations.
• Equipment includes typewriter, air-conditioner, calculator, filing cabinet, computer, electric
fan, trucks, cars used by the business in its office, store, or factory, Specific account titles
may he used such as Office Equipment Store Equipment, Delivery Equipment
Transportation Equipment, Machinery, and Equipment.
• Furniture and Fixtures includes tables, chairs, carpets, curtains, lamp and lighting fixtures
and wall decors. Specific account titles may be used such as Office Furniture and Fixtures
and store Furniture and Fixtures.
• Intangible Assets are identifiable, non-monetary assets without physical substance held for
use in the production or supply of goods or services, or rental to others, or for
administrative purposes, These include goodwill, patents, copyrights, licenses, franchises,
trademarks, brand names, secret processes, subscription lists and non-competition
agreements (International Accounting Standards No. 38).
LIABI LITI ES
Improvements to International Accounting Standards 1 (December 2003)
classifies a liability as a current liability when it is:
a) Expected to be settled in the entity’s normal operating cycle;
b) Held primarily for the purpose of being traded;
c) Due to be settled within twelve months after the balance sheet date; or
the entity does not have an unconditional right to dofer settlement of
the liability for at least twelve months after the balance sheet date.
Classification of Current Liabilities
Trade and other payables - includes payables from any of the following
accounts:
Accounts Payable includes debts arising from purchase of an asset or
acquisition of services on account
Notes Payable includes debts arising from purchase of an asset or acquisition
of services on account evidenced by a promissory note.
Loan Payable is a liability to pay the bank or other financinginstitution arising
I rom funds borrowed by the business from these institutions payable within
twelve months or shorter. (Note: if the loan is payable within twelve months,
then it is classified under non-current liabilities,)
Utilities Payable is an obligation to pay utility companies for services received
from them. Examples of this are telephone services to PLDT, electricity to
Meralco and water services to Maynilad.
Unearned Revenues represent obligations of the business arising from
advance payments received before goods or services provided to the customer.
This will be settled when certain goods or services are delivered and rendered.
Accrued Liabilities include amounts owed to others for expenses already
incurred but not yet paid. Examples of these are salaries payables, utilities
payable, taxes payable, and interest payable.
Classification of Non-Current Liabilities
Non-Current Liabilities are no long term liabilities or obligations which are
payable for a period longer than one year. Examples of Non-current
Liabilities are as follows:
• Mortgage payable is a long-term debt of the business with security or
collateral in the form of real properties, In case the business fail to pay
the obligation, the creditor can foreclose or cause the mortgaged asset
to be sold and the proceeds of the sale to be used to settle the
obligation,
• Bonds Payable is a certificate of indebtedness under the seal of a
corporation, specifying the terms of repayment and the rate of interest
to be charged.
OWNER’S EQUITY
• Capital is an account bearing the name of the owner representing the original
and additional investment of the owner of the business increased by the amount
of net income earned during the year. It is decreased by the cash or other assets
withdrawn by the owner as well as the net loss incurred during the year.
• Drawing represents the withdrawals made by the owner of the business either
in cash nr other assets.
• Income Summary is a temporary account used at the end of the accounting
period to close income and expense accounts. The balance of this account shows
the net income or net loss for the period before it is closed to the capital account.
• Service lncome includes revenues earned or generated by the business in
performing services for a customer or client.
Examples: Laundry Services by a laundry shop
Medical Services by a doctor
Dental services by a dentist
• Salaries or wages Expense includes all payments made to employees or
workers for rendering services to the company. Examples are salaries or
wages, 13th month pay, cost of living allowances and other related benefits
related to them.
• UtilIties Expense is an expense related to the use of electricity, fuel, water,
and telecommunications facilities.
• Supplies Expense covers office supplies used by the business in the conduct
of its daily operations.
• Insurance Expense is the expired portion of premiums paid on insurance
coverage such as premiums paid for health or life insurance, motor vehicles
or other properties.
• Depreciation Expense is the annual portion of the cost of a tangible asset
such as buildings, machineries, and equipment charged as expense for the
year.
• Uncollectible Accounts Expense/Doubtful Accounts Expense/Bad Debts Expense
means the amount of receivables charged as expense for the period
because they are estimated to be doubtful of collection.
• Interest Expense is the amount of money charged to the borrower for the
use of borrowed funds.
TERMS DEFINED
Accounts Payable - money owed to creditors, vendors, etc.
Accounts Receivable - money owed to a business, i.e. credit sales
Accrual Accounting - a method in which income is recorded when it is earned and expenses are recorded when they are incurred
Asset - property with a cash value that is owned by a business or individual
Balance Sheet - summary of a company's financial status, including assets, liabilities, and equity
Bookkeeping - recording financial information
Chart of Accounts - a listing of a company's accounts and their corresponding numbers
Cost Accounting - a type of accounting that focuses on recording, defining, and reporting costs associated with specific operating functions
Credit - an account entry with a negative value for assets, and positive value for liabilities and equity.
Debit - an account entry with a positive value for assets, and negative value for liabilities and equity.
Depreciation - recognizing the decrease in the value of an asset due to age and use
Double-Entry Bookkeeping - system of accounting in which every transaction has a corresponding positive and negative entry (debits and credits)
Equity - money owed to the owner or owners of a company, also known as "owner's equity"
Financial Accounting - accounting focused on reporting an entity's activities to an external party; ie: shareholders
Financial Statement - a record containing the balance sheet and the income statement
Fixed Asset - long-term tangible property; building, land, computers, etc.
General Ledger - a record of all financial transactions within an entity
Income Statement - a summary of income and expenses
Job Costing - system of tracking costs associated with a job or project (labor, equipment, etc) and comparing with forecasted costs
Journal - a record where transactions are recorded, also known as an "account"
Liability - money owed to creditors, vendors, etc
Liquid Asset - cash or other property that can be easily converted to cash
Loan - money borrowed from a lender and usually repaid with interest
Net Income - money remaining after all expenses and taxes have been paid
Non-operating Income - income generated from non-recurring transactions; ie: sale of an old building
Note - a written agreement to repay borrowed money; sometimes used in place of "loan"
Operating Income - income generated from regular business operations
Payroll - a list of employees and their wages
Profit - see "net income"
Profit/Loss Statement - see "income statement"
Revenue - total income before expenses.
Single-Entry Bookkeeping - system of accounting in which transactions are entered into one account
Debits and Credits
Every single transaction recorded in the accounting process falls into one of two categories: it is either a debit or a credit.
A debit is a transaction of value “added” to an account.
A credit is a transaction of value “removed” from an account.
Debit, value is added.
Credit, value is removed.
For example, in your checking account, a deposit is a debit, a check is a credit.
How you apply those transactions, depends upon the type of account you are working with.
Accounts
Accounts are simply established to provide a record of individual business transactions as they apply to a certain area or item.
Your personal checking account is established in order to provide a record of individual personal financial transactions you create when you write a check.
All of the accounts are listed in a general ledger.
Today, the actual ledger book has long since been replaced by accounting software that creates a general ledger on the computer. The concept however has not been altered. The general ledger is the central location for maintaining all your accounts.
Journal entries refer to the posting or entering of the financial transactions to a particular account.
ACCOUNTING FOR BUSINESS TRANSACTIONS
TRANSACTION: is any event that affect the
financial positions of the business entity.
A transaction always has a value received and
value parted with.
— Value- property, cash, service, or a right.
• Transactions affect a business’s assets,
liabilities, and owner’s equity. Therefore every
transaction affects the accounting equation.
Accounting for Business Transaction
Transaction- is any event [liai affect the financial positions of the
business entity.
- a transaction always has a value received and value parted with
Value property, cash, service, or a right.
Is I Mr Lee bought land for the business
Value received- land
Value parted with—cash
Ex2 Mr. Lee paid the salary of helper.
Value received —services
Value parted with- cash
Es3: Mr Lee sold goods on account.
Value received — right to collect from customer
Velue parted with is goods
Transactions affect a business’s assets, liabilities, and owner’s
equity.
Therefore every transaction affects the accounting equation.
Ti: Mr. Lee Invested cash of P100,000 and land worth P300,000
in the business.
Assets = Liabilities Owner’s Equity
T2: Mr Lee borrowed P100,000 from the bank.
Assets = Liabilities Owner’s Equity
T3: Mr. Lee received P20,000 cash for services rendered to
customer
Assets = Liabilities + Owner’s Equity
T4 —Mr. Lee paid P5,00C) the salary of his helper.
Assets = Liabilities ÷ Owner’s Equity
http://www.a-systems.net/accounting-terms.htm
http://content.moneyinstructor.com/1413/basic-accounting.html
http://accountingexplained.com/financial/introduction/chart-of-accounts
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