Accounting Systems

Dr. Elsaid Hassan Salem The Petroleum Institute Mechanical Engineering Department

Accounting Systems Dr. Elsaid Salem

Purposes of the Accounting System

Process cash receipts and disbursements Prepare financial statements Pay Income and employment tax Provide data for financial management Quick

Accounting Systems Dr. Elsaid Salem

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 companys 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.
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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 Provides data in time for management to analyze the data and make corrections in a timely manner Proactive approach
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Cost Control:

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

Accounting Systems Dr. Elsaid Salem

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

Accounting Systems Dr. Elsaid Salem

Components of an Accounting System

General Ledger:

Companys 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

equipment

For companies that have heavy

Accounting Systems Dr. Elsaid Salem

Accounting System Importance

Allah created 4 things with his hand How Important is accounting?

Alarsh; The Thrown Adam; Human Race; your design should protect all human race The Pen ; Accounting, recording, . Jannat Elkhold; The Forever Paradise

Accounting Systems Dr. Elsaid Salem

Method of Accounting

Cash Accrual; at a particular time Percentage of completion: at specific % of completion Completed contract: at the end

Accounting Systems Dr. Elsaid Salem

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 + Owners Equity Snapshot of a companys assets, liabilities, and owners 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

Owners 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 companys 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) Net Profit From Operations (Gross Profit Overhead) Profit Before Tax (Net Profit Other Income and Expense) Profit After Tax (Profit Before Tax Income Tax)
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Overhead

Other Income and Expense

Income Tax

Income Statement:

Operation (Construction) Costs

1. 2.

Materials Labor
Passes through payroll system and is charged to a job

3.

Subcontract
Always includes labor component

4. 5.

Equipment Other
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Income Statement

Equipment Cost:
1. 2. 3. 4. 5. 6. 7.

Rent and Lease Payments Depreciation Repairs and Maintenance Fuel and Lubrication Taxes, Licenses, and Insurance Equipment Costs Charged to Jobs (Contra) 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

We use historical data to estimate and check the Budgets against actual results and repeat the cycle

Actual Costs

Historical record

Budgets

Estimates & bids

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Accounting Systems Dr. Elsaid Salem

Job Cost Ledger

Most Accounting Systems allow 4 levels of tracking; project (job), phase, cost code and cost type
May not be used

COST CODE

MATERIALS LABOR MATERIALS LABOR MATERIALS LABOR MATERIALS LABOR MATERIALS LABOR MATERIALS LABOR MATERIALS LABOR MATERIALS LABOR

...

PHASE #

COST CODE

...

...

Project or

JOB # PHASE #

COST CODE

...
COST CODE

...

...
COST CODE

...

JOB COST LEDGER

...

PHASE #

COST CODE

...

...

JOB #

COST CODE

...
PHASE # COST CODE
Accounting Systems Dr. Elsaid Salem

...

...

...

...

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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
RENT AND LEASE PAYMENTS DEPRECIATION EQUIP. # REPAIRS AND MAINTENANCE FUEL AND LUBRICATION EQUIPMENT LEDGER TAXES, LICENSES, AND INSURANCE EQUIPMENT COSTS ALLOCATED RENT AND LEASE PAYMENTS DEPRECIATION EQUIP. #
...

REPAIRS MAINTENANCE TIRES

REPAIRS MAINTENANCE TIRES

REPAIRS AND MAINTENANCE FUEL AND LUBRICATION TAXES, LICENSES, AND INSURANCE EQUIPMENT COSTS ALLOCATED
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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

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 110 120 121 130 140 150 160 199 210 220 230 240 250 260 299 310 311 320 330 340 341 342 343 344 350 360 379 380 Cash Accounts Receivable-Trade Accounts Receivable-Retention Inventory Costs and Profits in Excess of Billings Notes Receivable Prepaid Expenses Other Current Assets Building and Land Construction Equipment Trucks and Autos Office Equipment Less Acc. Depreciation Capital Leases Other Assets Accounts Payable-Trade Accounts Payable-Retention Billings in Excess of Costs and Profits Notes Payable Accrued Payroll Accrued Payables Accrued Taxes Accrued Insurance Accrued Vacation Capital Leases Payable Warranty Reserves Other Current Liabilities Long-Term Liabilities 730 740 750 798 799 805 806 810 811 812 819 820 821 822 823 824 825 830 835 840 841 842 843 844 845 846 850 855 860 865 870 875 880 881 885 891 892 893 898 899 Repairs and Maintenance Fuel and Lubrication Taxes, Licenses, and Insurance Equipment Costs Charged to Employees Equipment Costs Charged to Jobs Advertising Promotion Car and Truck Expenses Computer and Office Furniture Repairs and Maintenance Depreciation Employee Wages and Salaries Employee Benefits Employee Retirement Employee Recruiting Employee Training Employee Taxes Insurance Taxes and Licenses Office Supplies Office Purchase Office Rent Office Utilities Postage and Delivery Janitorial and Cleaning Telephone Charitable Contributions Dues and Memberships Publications and Subscriptions Legal and Professional Services Meals and Entertainment Travel Bank Fees Interest Expense Bad Debts Unallocated Labor Unallocated Materials Warranty Expense Miscellaneous Overhead Charged to Jobs

Profit =

410 Capital Stock 420 Retained Earnings 430 Current Period Net Income 500 Revenue 610 620 630 640 650 Materials Labor Subcontract Equipment Other

710 Rent and Lease Payments 720 Depreciation

Accounting

910 Other Income 920 Other Expense Systems Dr. Elsaid Salem 950 Income Tax

Figure 2-1

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BALANCE SHEET
Current Year ASSETS CURRENT ASSETS Cash Accounts Receivable-Trade Accounts Receivable-Retention Inventory Costs and Profits in Excess of Billings Notes Receivable Prepaid Expenses Other Current Assets Total Current Assets FIXED AND OTHER ASSETS Land Buildings Construction Equipment Trucks and Autos Office Equipment Total Fixed Assets Less Acc. Depreciation Net Fixed Assets Other Assets Total Assets LIABILITIES Current Liabilities Accounts Payable-Trade Accounts Payable-Retention Billings in Excess of Costs and Profits Notes Payable Accrued Payables Accrued Taxes Accrued Vacation Capital Lease Payable Warranty Reserves Other Current Liabilities Total Current Liabilities Long-Term Liabilities Total Liabilities OWNERS EQUITY Capital Stock Retained Earnings Current Period Net Income Total Equity Total Liabilities and Equity Accounting 325,458 22,546 5,218 15,514 15,648 10,521 3,564 0 0 25,438 423,907 153,215 577,122 228,585 18,254 11,562 45,250 16,658 8,254 3,002 0 0 35,648 367,213 99,073 466,286 Last Year

200,492 402,854 25,365 0 32,586 12,548 5,621 11,254 690,720

144,254 308,253 21,885 0 15,234 0 4,825 7,225 501,676

72,000 103,862 95,284 51,245 56,896 379,287 224,512 154,775 178,544 1,024,039

72,000 103,862 95,284 31,556 42,546 345,248 182,990 162,258 171,256 835,190

Systems Dr. Elsaid

10,000 436,917 0 446,917 1,024,039 Salem

10,000 358,904 0 368,904 835,190

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FIGURE 2-2

Balance Sheet

Figure 2-3

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Accounting Systems Dr. Elsaid Salem

Figure 2-3

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