accounting systems 2
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Accounting Systems
Accounting Systems Dr. Elsaid Salem 1
Dr. Elsaid Hassan Salem
The Petroleum Institute
Mechanical Engineering Department
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Process cash receipts and disbursements
Prepare financial statements
Pay Income and employment tax
Provide data for financial management
Quick
Purposes of the Accounting System
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Accounting systems serve five purposes: Detailed
• Processes the cash receipts (collecting payments) and disbursements (paying bills) for the company
• Collects and reports the data needed to prepare company’s financial statements
• Collects and reports the data needed to prepare income taxes, employment taxes, and other documents required by the government.
• Collects and provides the data needed to manage the finances of the company (company as a whole, project, heavy equipment, …….
• Provide this data quickly enough for management to analyze the data and make corrections in a timely manner.
Cost Reporting Versus Cost Control
Cost Reporting: Provides data after the opportunity has passed for
management to respond to and correct the problems
Shows where the company has been Reactive approach
Cost Control: Provides data in time for management to analyze
the data and make corrections in a timely manner Proactive approach
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Cost Reporting Versus Cost Control Cost Control:
Strong job cost and equipment tracking Costs must be current & up to date
Uses “management by exception” Management by Exception: a policy by which management devotes its time to investigating only those situations in which actual results differ significantly from planned results. Else, higher management is to mainly target & address “strategic” plans & decisions!
Follows established procedures
Data must be readily available
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Cost Reporting Versus Cost Control
Cost Control: Must have a strong job cost and equipment tracking
system. Should provide reports that allow management to quickly
identify problem areas and address the problems accounting procedures need to be established to ensure
that things do not fall through the cracks
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Components of an Accounting System General Ledger: Company’s overall system. Chart of accounts (see Figure 2-1) Balance sheet and income statement
Job Cost Ledger: Costs by project, for specific jobs
Equipment Ledger: Costs by piece of equipment or vehicle For companies that have heavy
equipment
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Accounting System Importance
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How Important is accounting?
Allah created 4 things with his hand •Alarsh; The Thrown •Adam; Human Race; your design should
protect all human race •The Pen ; Accounting, recording, …. • Jannat Elkhold; The Forever Paradise
Method of Accounting
Cash
Accrual; at a particular time
Percentage of completion: at specific % of completion
Completed contract: at the end
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Method of Accounting
1.Cash, Revenue = received payment – paid bills 2.Accrual, Revenue = right to receive - obligated
to pay 3.Percentage of completion, Revenue =
(recognized retention + revenues from the bill)- Bill received
4.Completed contract, Recognizes revenues and expenses at the completion of the project
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Method of Accounting
1-Cash
Revenue is recognized when payment is received.
Revenue = received payment – paid bills
Expenses are recognized when bills are paid
Easiest to use, used by small companies
Little use for financial management because data is not up to date
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Method of Accounting
2-Accrual
Revenue is recognized when the company has the right to receive payment Revenue = right to receive - obligated to pay Retention is not a revenue until the job is
complete
Expenses are recognized when the company is obligated to pay bills
May pay income taxes on imaginary profits
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Method of Accounting
3-Percentage of Completion Used by most companies
Revenue is recognized throughout the project Revenue = (recognized retention + revenues from the
bill)- Bill received Retention is recognized throughout the project
Expenses are recognized throughout the project
Estimated profits are equally distributed throughout the project Based upon expected revenues and expenses
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Method of Accounting
4-Completed Contract
Revenue is recognized at completion of the project
Expenses are recognized at completion of the project
Revenues and expenses are known
Useless for financial management
May create large swings in income
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Balance Sheet
Assets = Liabilities + Owner’s Equity
“Snapshot” of a company’s assets, liabilities, and owner’s equity
Assets are what is owned by the company and have a monetary value
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Balance Sheet
Assets Current Assets Cash
Accounts Receivable-Trade (invoice- met requirements)
Accounts Receivable-Retention (did not meet requ.)
Inventory
Costs and Profits in Excess of Billings (Underbillings)
Notes Receivable
Due from Operation (construction) Loans
Prepaid Expenses
Other Current Assets Total Current Assets (sum of above)
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Balance Sheet
Assets Fixed and Other Assets Land
Buildings
Equipment (Construction Equipment) If it exist
Trucks and Autos
Office Equipment Total Fixed Assets (sum of above)
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Balance Sheet
Assets Fixed and Other Assets
Less Accumulated Depreciation (Contra Account) Net Fixed Assets
(Total Fixed assets – Les Accumulated Depreciation)
Capital Leases
Other Assets Total Assets (Total Current Assets + Net Fixed Assets +
Other Assets)
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Balance Sheet
Liabilities
Obligations for a company to transfer assets or render services at some future time for which the company is already committed to such as loans and warrantees Current liabilities (short term); within a year
use current assets to pay Long-term liabilities.
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Balance Sheet
Liabilities Current Liabilities
Accounts Payable-Trade
Accounts Payable-Retention
Billings in Excess of Costs and Profits (overbillings)
Notes Payable
Accrued Payables (including taxes and vacation)
Capital Lease Payable
Warranty Reserves
Other Current Liabilities Total Current Liabilities (sum of above)
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Balance Sheet
Liabilities Long-term Liabilities
Total Liabilities (Total Current Liabilities + Long-term Liabilities)
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Balance Sheet
Owner’s Equity (Corporation)
Capital Stock
Retained Earnings
Current Period Net Income Total Equity
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Income Statement
Spans a period of time between 2 balance sheets
Prepared for each month and fiscal year
Shows company’s revenues, expenses, and resulting profit
Represents the transactions that occur between two balance sheets (Relationship)
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Income Statement Revenue (net sales): recognized income, Operation (Construction) Costs (cost of sales); direct
and indirect Equipment Costs
Gross Profit (Revenue – Const. Costs – Equip. Costs)
Overhead Net Profit From Operations (Gross Profit – Overhead)
Other Income and Expense Profit Before Tax (Net Profit – Other Income and Expense)
Income Tax Profit After Tax (Profit Before Tax – Income Tax)
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Income Statement:
Operation (Construction) Costs
1. Materials
2. Labor Passes through payroll system and is charged to a job
3. Subcontract Always includes labor component
4. Equipment
5. Other
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Income Statement
Equipment Cost: 1. Rent and Lease Payments
2. Depreciation
3. Repairs and Maintenance
4. Fuel and Lubrication
5. Taxes, Licenses, and Insurance
6. Equipment Costs Charged to Jobs (Contra)
7. Equipment Costs Charged to Employees (Contra) Total Equipment Costs
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Relationships
Balance Sheet Assets = Liabilities + Equity
Income Statement Revenue = Expenses + Profit
Balance Sheet and Income Statement Change in Equity = Profit
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The Job Cost Ledger
Provides breakdown of operation costs on income statement
May provide a breakdown of revenues on the income statement
Costs are broken down by: Job (construction) Phase (optional; may not be used) Cost code Cost type
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Cost Information Cycle
Historical record
Estimates & bids Budgets
Actual Costs
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We use historical data to estimate and check the Budgets against actual results and repeat the cycle
Job Cost Ledger Most Accounting Systems allow 4 levels of tracking; project (job), phase, cost code and cost type
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JOB #
...
PHASE #
PHASE #
...
COST CODE ...
MATERIALSLABOR
COST CODE LABOR...MATERIALS
COST CODE
COST CODE
...
LABOR
MATERIALSLABOR...
...
MATERIALS
COST CODE
COST CODE
COST CODE
COST CODE
JOB #
PHASE #... ...PHASE #
...LABOR
LABOR
MATERIALS
MATERIALS
LABOR
MATERIALSLABOR
......
......
MATERIALSJOB COSTLEDGER
May not be used
Project or
Job Cost Code Structure
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Relationships
Income Statement and Job Cost Ledger Revenue = Revenues Operation (construction) Costs = Operation Costs
Excludes Committed Costs not Recognized Materials = Materials Labor = Labor Subcontract = Subcontract Equipment = Equipment Other = Other
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Equipment Ledger
Provides breakdown of equipment costs on income statement by piece of equipment
May provide additional breakdown
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Equipment Ledger
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...
EQUIP. #
RENT AND LEASE PAYMENTS
EQUIPMENTLEDGER
DEPRECIATIONREPAIRS AND MAINTENANCEFUEL AND LUBRICATIONTAXES, LICENSES, AND
TIRES
REPAIRSMAINTENANCE
FUEL AND LUBRICATIONREPAIRS AND MAINTENANCE
RENT AND LEASE PAYMENTSDEPRECIATION
MAINTENANCETIRES
REPAIRS
EQUIP. #
INSURANCEEQUIPMENT COSTS ALLOCATED
EQUIPMENT COSTS ALLOCATED
TAXES, LICENSES, AND INSURANCE
Relationships
Income statement and Equipment Ledger Charge Costs = Cost Allocated Costs = Costs
Rent and Lease Payments = Rent and Lease Payments Depreciation = Depreciation Repairs and Maintenance = Repairs and Maintenance Fuel and Lubrication = Fuel and Lubrication Taxes, Licenses, and Insurance =
Taxes, Licenses, and Insurance
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Accounting System Software
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Some Accounting Software
• Cougar Mountain DENALI • Multiview Enterprise net n10 • Intact • Netsuit Financials • Sage • EPICOR • MS Dynamics • GCE • Serenic Navigator • Accufund Accounting Suite
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CHART OF ACCOUNTS
110 Cash 730 Repairs and Maintenance 120 Accounts Receivable-Trade 740 Fuel and Lubrication 121 Accounts Receivable-Retention 750 Taxes, Licenses, and Insurance 130 Inventory 798 Equipment Costs Charged to Employees 140 Costs and Profits in Excess of Billings 799 Equipment Costs Charged to Jobs 150 Notes Receivable 160 Prepaid Expenses 805 Advertising 199 Other Current Assets 806 Promotion
810 Car and Truck Expenses 210 Building and Land 811 Computer and Office Furniture 220 Construction Equipment 812 Repairs and Maintenance 230 Trucks and Autos 819 Depreciation 240 Office Equipment 820 Employee Wages and Salaries 250 Less Acc. Depreciation 821 Employee Benefits 260 Capital Leases 822 Employee Retirement 299 Other Assets 823 Employee Recruiting
824 Employee Training 310 Accounts Payable-Trade 825 Employee Taxes 311 Accounts Payable-Retention 830 Insurance 320 Billings in Excess of Costs and Profits 835 Taxes and Licenses 330 Notes Payable 840 Office Supplies 340 Accrued Payroll 841 Office Purchase 341 Accrued Payables 842 Office Rent 342 Accrued Taxes 843 Office Utilities 343 Accrued Insurance 844 Postage and Delivery 344 Accrued Vacation 845 Janitorial and Cleaning 350 Capital Leases Payable 846 Telephone 360 Warranty Reserves 850 Charitable Contributions 379 Other Current Liabilities 855 Dues and Memberships 380 Long-Term Liabilities 860 Publications and Subscriptions
865 Legal and Professional Services 410 Capital Stock 870 Meals and Entertainment 420 Retained Earnings 875 Travel 430 Current Period Net Income 880 Bank Fees
881 Interest Expense 500 Revenue 885 Bad Debts
891 Unallocated Labor 610 Materials 892 Unallocated Materials 620 Labor 893 Warranty Expense 630 Subcontract 898 Miscellaneous 640 Equipment 899 Overhead Charged to Jobs 650 Other
910 Other Income 710 Rent and Lease Payments 920 Other Expense 720 Depreciation 950 Income Tax
Figure 2-1
Profit = -
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BALANCE SHEET Current Last
Year Year ASSETS
CURRENT ASSETS Cash 200,492 144,254 Accounts Receivable-Trade 402,854 308,253 Accounts Receivable-Retention 25,365 21,885 Inventory 0 0 Costs and Profits in Excess of Billings 32,586 15,234 Notes Receivable 12,548 0 Prepaid Expenses 5,621 4,825 Other Current Assets 11,254 7,225 Total Current Assets 690,720 501,676
FIXED AND OTHER ASSETS
Land 72,000 72,000 Buildings 103,862 103,862 Construction Equipment 95,284 95,284 Trucks and Autos 51,245 31,556 Office Equipment 56,896 42,546 Total Fixed Assets 379,287 345,248 Less Acc. Depreciation 224,512 182,990
Net Fixed Assets 154,775 162,258 Other Assets 178,544 171,256
Total Assets 1,024,039 835,190
LIABILITIES Current Liabilities
Accounts Payable-Trade 325,458 228,585 Accounts Payable-Retention 22,546 18,254 Billings in Excess of Costs and Profits 5,218 11,562 Notes Payable 15,514 45,250 Accrued Payables 15,648 16,658 Accrued Taxes 10,521 8,254 Accrued Vacation 3,564 3,002 Capital Lease Payable 0 0 Warranty Reserves 0 0 Other Current Liabilities 25,438 35,648 Total Current Liabilities 423,907 367,213
Long-Term Liabilities 153,215 99,073 Total Liabilities 577,122 466,286
OWNER’S EQUITY Capital Stock 10,000 10,000 Retained Earnings 436,917 358,904 Current Period Net Income 0 0
Total Equity 446,917 368,904 Total Liabilities and Equity 1,024,039 835,190
FIGURE 2-2 Balance Sheet
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Figure 2-3
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