Accounting Systems 2

Accounting Systems

Accounting Systems Dr. Elsaid Salem 1

Dr. Elsaid Hassan Salem

The Petroleum Institute

Mechanical Engineering Department


Process cash receipts and disbursements

Prepare financial statements

Pay Income and employment tax

Provide data for financial management

Quick

Purposes of the Accounting System


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


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


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


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


Accounting System Importance


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



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



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



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



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



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


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


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)


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)


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)


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.


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)


Balance Sheet

Liabilities Long-term Liabilities

Total Liabilities (Total Current Liabilities + Long-term Liabilities)


Balance Sheet

Owner’s Equity (Corporation)

Capital Stock

Retained Earnings

Current Period Net Income Total Equity


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)


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)


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


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


Relationships

Balance Sheet Assets = Liabilities + Equity

Income Statement Revenue = Expenses + Profit

Balance Sheet and Income Statement Change in Equity = Profit


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


Cost Information Cycle

Historical record

Estimates & bids Budgets

Actual Costs


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

Accounting Systems Dr. Elsaid Salem 30 ...

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


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


Equipment Ledger

Provides breakdown of equipment costs on income statement by piece of equipment

May provide additional breakdown


Equipment Ledger


...

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


Accounting System Software


Some Accounting Software

• Cougar Mountain DENALI • Multiview Enterprise net n10 • Intact • Netsuit Financials • Sage • EPICOR • MS Dynamics • GCE • Serenic Navigator • Accufund Accounting Suite


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 = -


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


Figure 2-3

Accounting Systems Dr. Elsaid Salem 40 Figure 2-3

Accounting Systems 2

Documents

Transcript of Accounting Systems 2