EXECUTIVE BACHELOR IN INDUSTRIAL ENGINEERING TECHNOLOGY

MODULE: 13 - INDUSTRIAL COST CONTROL

EXECUTIVE BACHELOR IN OPERATIONS MANAGEMENT

MODULE: 13 – FINANCE & MANAGING COSTS

EXECUTIVE BACHELOR IN LOGISTICS AND SUPPLY CHAIN MANAGEMENT

MODULE: 13 – FINANCIAL DECISION MAKING AND CONTROL
1
 Accounting..

is an information system that...

measures business activities,

processes information, and...

communicates financial information.

2
 Accounting

- a process of identifying, recording,

summarizing, and reporting
economic information to decision
makers in the form of financial
statements.

3
 Accounting as an Aid to
Decision Making
• Accounting helps in decision making by showing
where and when money has been spent, by
evaluating performance, and by showing the
implications of choosing one plan instead of
another.
• Fundamental relationships in the decision-making
process:
Accountant’s
Financial
Event analysis and Users
statements
recording

4
 Accounting — An Information Process
Identification
of Users

User
Information
Needs

Economic Data Accounting

and Activities System

User
Reports
Decisions

5
 The Flow of Accounting
Information
1. Business transactions
occur

2. Businesses prepare reports to

Show the results of their operations

3. People make decisions.

6
 The Flow of Accounting
Information
• Accounting systems are designed to meet the
needs of the decision makers who use the financial
information.
• Every business maintains some type of accounting
system.
– These accounting systems may be very
complex or very simple, but the real value of
any accounting system lies in the information
that the system provides.
7
 Users of Accounting Information

Government
Individuals regulatory
agencies

Taxing
Businesses
authorities

Investors and Nonprofit

creditors organizations
8
 Users of Accounting Information

• investors
Financial Accounting • creditors
EXTERNAL USERS • regulators
• customers
• competitors
Financial Accounting
INTERNAL USERS • owners
• managers
• employees
9
Some Definitions to remember:
• Inventory - goods held by a firm for resale to
customers
• Account payable - a liability that results from the
purchase of goods or services on account
• Compound entry - a transaction that affects more
than two accounts
• Creditor - one to whom money is owed
• Debtor - one who owes money

10
 Assets
• What is an asset?
• It is something a company owns which
has future economic value.
– land
– building
– equipment
– goodwill
11
 Liability
• What is a liability?
• It is something a company owes.
– money
– service
– product

12
 Revenues
• What are revenues?
• They are amounts received or to be
received from customers for sales of
products or services.
– sales
– performance of services
– rent
– interest
13
 Expenses

• What are Expenses?

• They are amounts that have been paid or
will be paid later for costs that have been
incurred to earn revenue.
– salaries and wages
– utilities
– supplies used
– advertising
14
 Owner’s Equity
• What is owner’s equity?
• It is what’s left of the assets after liabilities
have been deducted.
– the same as net assets
– the owner’s claim on the entity’s assets

15
The Accounting Equation

16
 The Accounting Equation

Assets = Liabilities + Owner’s Equity

Economic Claims to
Resources Economic
Resources
17
 The Accounting Equation

Resources = Sources

Liabilities
Assets
Owner’s
Equity

Resources
Resources used supplied by
in the business creditors and
owners

18
 The Basic Accounting Equation

• Accounting data is represented by the

following relationship among the
assets, liabilities and owners’ equity of
a business:
Assets = Liabilities + Owners’ Equity
• The equation must be in balance after
every recorded transaction in the
system.
19
 Business Transactions

a. Sachin deposits RS 25,000 in a bank account

for ABC Ltd.

ASSETS LIABILITIES

Cash
25,000
= OWNER’S EQUITY

Sachin, Capital
25,000

20
 Business Transactions

c. ABC Ltd buys goods for RS1,350, agreeing to

pay the supplier in the near future.

ASSETS LIABILITIES
Accounts Payable
1,350
Purchases
1,350 = OWNER’S EQUITY

21
 Business Transactions

e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;

utilities, Rs 450; and miscellaneous, Rs 275.

ASSETS LIABILITIES

Cash =
(3,650) OWNER’S EQUITY

Expenses
(3,650)

22
 Business Transactions

f. ABC Ltd pays Rs 950 to creditors on account.

ASSETS LIABILITIES
Accounts Payable
(950)
Cash =
(950) OWNER’S EQUITY

23
 Role of Accounting

Good managers plan for the future.

They develop a budget.

A budget is a formal plan

stated in monetary terms.

24
 Role of Accounting
Accounting helps banks decide
to whom they will lend money.

Accounting provides information

that helps investors pick stocks.

25
 Role of Accounting

Consulting Assurance
services
including Tax
auditing accounting

26
 Accounting as an Aid to
Decision Making
• Accounting information is useful to anyone who makes
decisions that have economic results.
• Owners want to know which employees are productive.

• investors want to know if a company is a good investment.

• Legislators want to know how a proposed law will affect

budgets.

• Managers want to know if a new product will be profitable.

• Creditors want to know if they should extend credit, how much

to extend, and for how long.
27
Generally Accepted
Accounting Principles

28
 Generally Accepted
Accounting Principles
• What is the primary objective of financial
Accounting and Reporting?

To provide information useful

for making investment and
lending decisions

29
 Generally Accepted Accounting
Principles and Basic Concepts
• If every accountant used his or her own rules for
recording transactions, the financial statements
would be useless in making comparisons.

• Therefore, accountants have agreed to apply a

common set of measurement principles (a
common language) to record information for
financial statements. Otherwise, decision makers
could not use or compare financial statements.

30
 Accounting:
Principles and Concepts

Accountants follow professional guidelines.

The rules that govern accounting are called GAAP

(generally accepted accounting principles).

31
The Accounting Equation
Assets are the economic resources
of a business that are expected to
produce a benefit in the future.
Liabilities are “outsider claims,”
or economic obligations
payable to outsiders.
Owners’ equity represents the
“insider claims” of a business.
32
The Double Entry System

33
 Double-Entry Accounting
“ Double-entry accounting is based on a
simple concept: each party in a business
transaction will receive something and give
something in return. In bookkeeping terms,
what is received is a debit and what is given
is a credit. The T account is a representation
of a scale or balance.”

Scale or Balance T account

Left Side Right Side

Receive Give
Luca Pacioli DEBIT CREDIT
Developer of
Receive Give
Double-Entry
DEBIT CREDIT
Accounting 34
 The
TheDouble-Entry
Double EntrySystem
System

Each transaction is recorded with at least:

One debit One credit

Total debits must equal total credits.

35
 TheDouble-Entry
The Double EntrySystem
System
• Each transaction must still be analyzed to
determine which accounts are involved,
whether the accounts increase or decrease,
and how much the balance will change.

36
 TheDouble-Entry
The Double Entry system
System
• Some businesses enter into thousands of
transactions daily or even hourly.
– Accountants must carefully keep track of and
record these transactions in a systematic
manner.

• Accountants use a double-entry accounting

system in which at least two accounts are
always affected by each transaction.
37
 Classification of Accounts
• There are some asset accounts?
– Cash
– Notes Receivable
– Accounts Receivable
– Prepaid Expenses
– Land
– Building
– Equipment
38
 Classification of Accounts
• There are some liability accounts?
– Notes Payable
– Accounts Payable
– Accrued Liabilities (for expenses incurred
but not paid)
– Long-term Liabilities (bonds)

39
 Classification of Accounts
• There are some owner’s equity accounts?
– Capital or owner’s interest in the business
– Withdrawals
– Revenues
– Expenses

40
 Classification of Accounts
• Real Account = Debit –What comes in
Credit- what goes out
• Personal Account = Debit –Receiver
Credit - Giver
• Nominal Account =Debit –Expenses/Losses
Credit- Incomes/Gains

41
 The
TheDouble-Entry
Double Entry system
System
The system records the two-sided
effect of transactions
Transaction Two-sided effect

Bought furniture for cash Decrease in one asset

Increase in another asset

Took a loan in cash Increase in an asset

Increase in a liability

42
 The Double Entry System

Note that the accounting equation equality is

maintained after recording
each transaction.

43
 XYZ Ltd.
A Sole Proprietorship

“ On November 1, 2002, A started a sole

proprietorship called XYZ Ltd. The following
double-entry transactions show how amounts
received (debits) always equal amounts given
(credits).”

44
 Business Transactions
Entry B. Land Owner (seller)

XYZ Ltd. buys land

for Rs 20,000. Land Cash

receive XYZ Ltd(buyer) give

give
Debit Credit
Credit

Journal
Date Description Debit Credit
11/5 Land 20,000
Cash 20,000

45
 Business Transactions
Entry C. Supplier (seller)

XYZ Ltd. buys

goods for Rs1,350, Supplies A promise
agreeing to pay in to pay later
the near future.

receive XYZ Ltd. give

give
Debit (buyer) Credit
Credit

Journal
Date Description Debit Credit
11/10 purchases 1,350
Accounts Payable 1,350

46
 Business Transactions
Entry D. Customer (buyer)

XYZ Ltd. earns

fees of Rs7,500, Cash Services
receiving cash.

receive XYZ Ltd. give

give
Debit (seller) Credit
Credit

Journal
Date Description Debit Credit
11/18 Cash 7,500
Fees Earned 7,500

47
 Business Transactions
Entry E. Various suppliers

XYZ Ltd. paid:

Services,
wages, Rs 2,125; Cash
benefits
rent, Rs 800;
commissions, Rs
450; and misc Rs
275. receive XYZ Ltd. give
give
Debit (buyer) Credit
Credit

Journal
Date Description Debit Credit
11/18 Wages Expense 2,125
Rent Expense 800
Commission 450
Misc. Expense 275
Cash 3,650
48
 Business Transactions
Entry F. Supplier (payee)

XYZ Ltd. pays

Reduction in
Rs950 to creditors Cash
obligation
on account.

receive XYZ Ltd. give

give
Debit (payor) Credit
Credit

Journal
Date Description Debit Credit
11/30 Accounts Payable 950
Cash 950

49
 Business Transactions
Entry H. Amit (payee)

Amit withdraws Rs
Reduction in
2,000 in cash. Cash
obligation

receive XYZ Ltd. give

give
Debit (payor) Credit
Credit

Journal
Date Description Debit Credit
11/30 Amit, Drawing 2,000
Cash 2,000

50
The Accounting Cycle

51
 The Accounting Cycle: Steps

1. Analyze the transaction

2. Journalize the transaction
3. Post the transaction to accounts in ledger
4. Prepare the trial balance
5. Prepare financial statements

52
 The Recording Process
• The sequence of steps in recording
transactions:
Transactions Documentation Journal

Financial Trial Ledger

Statements Balance

53
 The Recording Process
• The process starts with source documents,
which are the supporting original records of
any transaction.
– Examples are sales slips or invoices, check
stubs, purchase orders, receiving reports, and
cash receipt slips.

54
 The Recording Process
• In the second step, an analysis of the
transaction is placed in the book of original
entry, which is a chronological record of
how the transactions affect the balances of
applicable accounts.
– The most common example is the
general journal - a diary of all events
(transactions) in an entity’s life.
55
 The Recording Process
• In the third step, transactions are entered
into the ledger.
– Remember that a transaction is not entered in
just one place; it must be entered in each
account that it affects.
– Depending on the nature of the organization,
analysis of the transactions could occur
continuously or periodically.

56
 The Recording Process
• The fourth step includes the preparation of
the trial balance, which is a simple listing of
all accounts from the ledger with their
balances.
– Aids in verifying accuracy and
in preparing the financial statements
– Prepared periodically as necessary

57
 The Recording Process
• In the final step, the financial statements are
prepared.
– Financial statements may be prepared after each
quarter of the year.
December 2002
– the companies may prepare
financial statements at
various other intervals to
meet the needs of their users.

58
 Journal, Ledger, Trial Balance

1. Transactions are analyzed

and recorded in journal.
Documents
Journal

2. Transactions are posted

from journal to ledger.
Journal Ledger

3. Trial balance is prepared.

Trial Balance

59
 Manual Accounting Cycle

1. Transactions are analyzed

and recorded in journal.
Documents Journal

2. Transactions are posted

from journal to ledger.
Journal Ledger

3. Trial balance is prepared,

4. Financial statements are IS SOE BS

prepared and distributed.
Financial Statements
60
 Computerized Accounting Cycle

1. Transactions are analyzed

and entered in the computer.
Documents
Computer

2. Preliminary reports are

analyzed, adjustments are
prepared and entered in the
Computer
computer. Reports Computer

3. Financial statements are IS SOE BS SCF

printed and distributed.
Financial Statements
4. Reports are analyzed and
interpreted for decision- ?
making purposes.
61
JOURNAL

62
Journal entry
•Journal entry - an analysis of the effects
of a transaction on the accounts, usually
accompanied by an explanation of the
transaction
–This analysis identifies the accounts to be
debited and credited.

63
Record transactions
in the journal.

64
 Journalizing
• Journalizing –
It is the process of entering
transactions into the journal

65
 Recording Transactions
• On April 2, Garge invested Rs 30,000 in Gay
GillenTravel.
• What is the journal entry?
Date Particulars Debit Credit
April Rs
2 Cash Account Dr 30,000
To Garge Capital 30,000
(Received initial investment from owner)

66
 Types of journal entries:

• Types of journal entries:

– Simple entry - an entry for a transaction that
affects only two accounts
– Compound entry - an entry for a transaction
that affects more than two accounts

• Remember: whether the entry is simple or

compound, the debits (left side) and credits
(right side) must always equal.

67
Ledger

68
 Ledger Accounts
• Ledger - a group of related accounts kept
current in a systematic manner

Ledger

– Think of a ledger as a book with

one page for each account.

69
 Ledger

Ledger

Cash

Accts. Receivable Customer Accounts

A B C D

Supplies

Accts. Payable Creditor Accounts

A B C D

70
 Ledger Accounts
• A simplified version of a ledger account is called
the T-account.
– They allow us to capture the essence of the accounting
process without having to worry about too many
details.
– The account is divided into two sides for recording
increases and decreases in the accounts.
Account Title

Left Side Right Side

71
 Debits and Credits
• Debit (dr.) - an entry or balance on the left
side of an account
• Credit (cr.) - an entry or balance on the right
side of an account

• Remember:
– Debit is always the left side!
– Credit is always the right side!
72
Post from the journal
to the ledger.

73
 Posting
• What is posting?
• It is the transfer of information from the
journal to the appropriate accounts in the
ledger.

74
 POSTING TO THE LEDGER
• POSTING REFERS TO TRANSFERRING
THE INFORMATION IN A JOURNAL ENTRY
TO THE APPROPRIATE LEDGER
ACCOUNT
• ENTER DATE
• ENTER AMOUNT IN PROPER DEBIT OR
CREDIT COLUMN
• ENTER JOURNAL SOURCE INFO

75
 The Account
Account Title
Debit Credit

LEFT SIDE

76
The Account
Account Title
Debit Credit

RIGHT SIDE

77
 Ledger Accounts
• Balance - difference between total left-side
amounts and total right-side amounts at any
particular time
– Assets have left-side balances.
• Increased by entries to the left side
• Decreased by entries to the right side
– Liabilities and Owners’ Equity have right-side
balances.
• Decreased by entries to the left side
• Increased by entries to the right side
78
 Recording and Posting an Entry
Journal Page 1
L.F.
Date Description Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400

1. Analyze and record the transaction as shown.

2. Post the debit side of the transaction.
3. Post the credit side of the transaction.

79
 Recording and Posting an Entry
Journal Page 1

Date Description L.f. Debit Credit

12/1 Prepaid Insurance 15 2,400
Cash 11 2,400
1
4 3 2
Ledger Page No.15
Prepaid insurance Account
Dr. Cr.
Date Particulars Fol. Amt. Date Particulars Fol. Amt.

12/1 To Cash 1 2400

80
TRIAL BALANCE

81
 TRIAL BALANCE
What is a Trial balance?
• It is an internal document.
• It is a listing of all the accounts with their
related balances.
• It provide a check on accuracy by showing
whether total debits equal total credits.

82
 TRIAL BALANCE
• A listing of all accounts with balances at the
end of the accounting period after all
transactions have journalized and posted
• Purpose
– to determine that debits = credits
– to identify accounts to be adjusted

83
 TRIAL BALANCE
• A listing of all accounts with balances at the
end of the accounting period after all
transactions have journalized and posted
• To determine that debits = credits

84
 Preparing the Trial Balance
• The purposes of the trial balance:
– To help check on accuracy of posting by
proving whether the total debits equal the
total credits
– To establish a convenient summary of
balances in all accounts for the
preparation of formal
financial statements
85
 Preparing the Trial Balance
• The trial balance is usually prepared with
the balance sheet accounts first, followed by
the income statement accounts.
• An example of a trial balance:
Account (Rs)
Number Account Title Debit Credit
100 Cash 3,50,000 3,50,000
130 Merchandise inventory 150,000 150,000
202 Note payable 100,000 100,000
300 Paid-in capital 400,000 400,000
500,000 500,000
================== ===================

86
 Special Journals

SELLING

Rendering of services or selling of product on account

recorded Sales Book
in
Receipt of cash from any source
recorded Cash Book
in
BUYING

Purchase of items on account

recorded Purchases Book
in
Payment of cash for any purpose
recorded Cash Book
in 87
 The Sales Journal

Sales Journal Page 35

Invoice
Date No. Particulars Details Amount

3/2 615 MyMusicClub.com 2,200

3/6 616 RapZone.com 1,750
3/18 617 Web Cantina 2,650
3/27 618 MyMusicClub.com 3,000
Totals 9,600

All sales on credit are recorded in this journal. Each

sales invoice is listed in numerical order. This
journal is often referred to as an invoice register.

88
 The Purchases Journal

Purchases Journal Page 11

Date Particulars Details Amount

3/3 Howard Supplies 600

3/7 Donnelly Supplies 420
3/19 Donnelly Supplies 1,450
3/27 Howard Supplies 960

Totals 3,430

All purchases on account are recorded in this journal.

89
 The Financial Statements
The financial statements are a picture
of the company in financial terms.

Each financial statement relates to a specific

date or covers a particular period.

90
 Income Statement

The income statement,

reports the company’s revenues,
expenses, and net income
or net loss for the period.

91
 Introduction to the
Income Statement

The income statement is a financial

tool that provides information about
a company’s past performance.

92
 The Income Statement

Revenues
Expenses
– = Net income
(or Net loss)

93
 Income Statement Format

Sales revenues Selling and

Operating
– Cost of goods sold – administrative =
income
Gross profit expenses

Add: Other revenues and gains

Less: Other expenses and losses
94
 Income Statement
Revenue - the proceeds that come from sales to customers
Cost of Goods Sold - an expense that reflects the cost of the product
or good that generates revenue. .
Gross Margin - also called gross profit, this is revenue minus
COGS
Operating Expenses - any expense that doesn't fit under COGS
such as administration and marketing expenses.
Net Income before Interest and Tax - net income before taking interest
and income tax expenses into account.
Interest Expense - the payments made on the company's
outstanding debt.
Income Tax Expense - the amount payable to government.
Net Income - the final profit after deducting all expenses from
revenue. 95
The Income Statement can be divided
into:
• Trading Account
• Profit and Loss Account

96
 The Accounting Terms
Revenues

Revenues are inflows or other

enhancements of assets to an entity.

They result from delivering or

producing goods, rendering services,
or other activities that constitute the
entity’s major or central operations.
97
 The Accounting Terms
Expenses

Expenses are outflows or

other using up of assets.

They result from delivering or

producing goods, rendering services,
or other activities that constitute the
entity’s major or central operations.
98
 The Accounting Terms
– Gross profit (gross margin) - excess of sales
revenue over the cost of inventory that was sold
– Operating expenses - a group of recurring
expenses that pertain to a firm’s routine
operations
– Operating income (operating profit) - gross
profit less all operating expenses
– Other revenues and expenses - items not
directly related to the main operations of a firm

99
 The Accounting Terms

• Net income - the remainder after all

expenses (including income taxes) have
been deducted from revenue
– Often seen as the “bottom line”

• Net loss - the excess of expenses over

revenues

100
 The Income Statement
DANIELS COMPANY
Income Statement
for the Year Ended June 30, 2002

Sales Rs98,600
Expenses:
Wages expense Rs45,800
Rent expense 12,000
Carriage 6,500
Depreciation expense 5,000
Total expenses 69,300
Net Income Rs29,300
==============

101
 Introduction to the
Balance Sheet
The balance sheet is the financial
tool that focuses on the present
condition of a business.

102
 The Balance Sheet
• The Balance sheet shows the financial
position of a company at a particular point
in time.
– The balance sheet is also referred to as the
statement of financial position or the statement
of financial condition.
• The left side lists assets – the right side lists
liabilities and owners’ equity
103
The Accounting Elements
Assets

Probable future economic benefits

obtained or controlled by a
particular entity as a result
of past transactions events.

104
 The Accounting Elements
Liabilities

Probable future sacrifices of economic

benefits arising from present obligations
of a particular entity to transfer assets
or provide services to other entities
in the future as a result of past
transactions or events.

105
The Accounting Elements
Equity

The residual interest in the assets

of an entity that remains after
deducting its liabilities.

Investment Earned
by owners equity
106
 Formats of Balance Sheets
• Balance sheet formats:
– Report format - a classified balance sheet with
assets at the top and liabilities and equity below
– Account format - a classified balance sheet with
assets at the left and liabilities and equity at the
right

• Regardless of format, balance sheets always

contain the same basic information.
107
 Balance Sheet Transactions

• The balance sheet is affected by every

transaction that an entity encounters.

• Each transaction has counterbalancing

entries that keep total assets equal to
total liabilities and owners’ equity.

108
 BALANCE SHEET
• RESOURCES • HOW RESOURCES
AVAILABLE FOR ARE FINANCED
USE BY THE FIRM • LIABILITIES - DEBT
(ENTITY) OWED TO OTHERS
• ASSETS - • OWNERS’ EQUITY
PROBABLE - INVESTMENT BY
OWNERS
FUTURE
– DIRECT
ECONOMIC – INDIRECT
BENEFITS
109
 The Balance Sheet
• Elements of the balance sheet:
– Assets - resources of the firm that are expected to
increase or cause future cash flows (everything the firm
owns)
– Liabilities - obligations of the firm to outsiders or
claims against its assets by outsiders (debts of the firm)
– Owners’ Equity - the residual interest in, or remaining
claims against, the firm’s assets after deducting
liabilities (rights of the owners)

110
Classifying Assets and Liabilities

Current assets

Long-term assets

Current liabilities

Long-term liabilities
111
 XYZ Ltd.
Trial Balance
November 30, 2002
Cash 5,900
Purchases 550
Land 20,000
Accounts Payable 400
Amit, Capital 25,000
Amit, Drawing 2,000
Fees Earned 7,500
Wages Expense 2,125
Rent Expense 800
Commission 450
Supplies Expense 800
Miscellaneous Expense 275
32,900 32,900

112
 XYZ Ltd.
Trial Balance
November 30, 2002
Cash 5,900
Purchases 550
Balance Land 20,000
Sheet Accounts Payable 400
Amit, Capital 25,000
Amit, Drawing 2,000
Fees Earned 7,500
Wages Expense 2,125
Rent Expense 800
Commission 450
Supplies Expense 800
Miscellaneous Expense 275
32,900 32,900

113
 XYZ Ltd.
Trial Balance
November 30, 2002
Cash 5,900
Purchases 550
Land 20,000
Accounts Payable 400
Amit, Capital 25,000
Amit, Drawing 2,000
Fees Earned 7,500
Wages Expense 2,125
Income Rent Expense 800
Statement Commission 450
Supplies Expense 800
Miscellaneous Expense 275
32,900 32,900

114
 XYZ Ltd.

Balance Sheet Income Statement

1. Assets 4. Revenue
11 Cash 41 Sales
12 Accounts Receivable 5. Expenses
14 purchases 51 Wages Expense
15 Prepaid Insurance 52 Rent Expense
17 Land 54 Commission
18 Office Equipment 55 Supplies Expense
59 Miscellaneous
2. Liabilities Expense
21 Accounts Payable
23 Unearned Rent
3. Owner’s Equity
31 Amit, Capital
32 Amit, Drawing

115
 Summary
Original evidence Accounting Financial
records records Statements

Source Journals
documents
Profit and Loss
Statement
Ledger

Balance Sheet
Trial
Balance

Statement of
Closing cash flows
Entries
116