2. • The purpose of accounting is to record and analyze
any financial transactions that have an influence on
the utility of capital
• Accounts of expenses, income, assets, liabilities, and
similar item are maintained
• These records can be of considerable value to the
engineer, since they indicate where errors were made
in past estimates and give information that can be
used in future evaluations
• Design engineer should be acquainted with
accounting procedures
• Knowledge of the basic principles as applied in
economic evaluations is an invaluable aid to the
engineer
3. OUTLINE OF ACCOUNTING PROCEDURE
• Standard accounting procedure, starts with the
recording of the original business transactions &
proceedings and ends with preparation of
balance sheets and income statements
• As the day-by-day business transactions occur,
they are recorded in the journal
• A single journal may be used for all entries in
small businesses, but large concerns ordinarily
use several types of journals, such as cash, sales,
purchase, and general journals
4. • The next step is to assemble the journal entries under
appropriate account headings in the ledger
• The process of transferring the daily journal entries to
the ledger is called posting
• Statements showing the financial condition of the
business concern are prepared periodically from the
ledger accounts
• These statements are presented in the form of
balance sheets and income statements
• The balance sheet shows the financial condition of
the business at a particular time, while the income
statement is a record of the financial gain or loss of
the organization over a given period of time
5.
6. BASIC RELATIONSHIPS IN ACCOUNTING
• An asset may be defined as anything of value, such as cash,
land, equipment, raw materials, finished products, or any
type of property
• At any given instant, a business concern has a certain
monetary value because of its assets
• At the same instant, many different persons may have a just
claim, or equity, to ownership of the concern’s assets
• Certainly, any creditors would have a just claim to partial
ownership, and the owners of the business would have
some claim to ownership
• Under these conditions, a fundamental relationship in
accounting can be written as
Assets = Equities
7. • Equities can be divided into two general
classes as follows
• Proprietorship- the claims of the concern or
person who owns the asset; and
• Liabilities - the claims of anyone other than
the owner
• The term proprietorship is often referred to
as net worth or simply as ownership or
capital
Assets = Liabilities + Proprietorship
8. • Five students have gone together and
purchased a secondhand automobile worth
$1000
• Because they did not have the necessary
$1000 they borrowed $400 from one of their
parents
• Therefore, as far as the students are
concerned, the value of their asset is $1000,
their proprietorship is $600, and their liability
is $400
10. • A balance sheet for an industrial concern shows
the financial condition at any given date
• The amount of detail included varies depending
on the purpose
• Consolidated balance sheets based on the last
day of the fiscal year are included in the annual
report of a corporation
• These reports are intended for distribution to
stockholders, and the balance sheets present
the pertinent information without listing each
individual asset and equity in detail
11. • Assets are commonly divided into the classifications
of current, fixed, and miscellaneous
• Current assets, in principle, represent capital which
can readily be converted into cash
• Examples would be accounts receivable, inventories,
cash, and marketable securities
• These are liquid assets
• On the other hand, fixed assets, such as land,
buildings, and equipment, cannot be converted into
immediate cash
• Deferred charges, other investments, notes and
accounts due after 1 year, and similar items are
ordinarily listed as miscellaneous assets under
separate headings
12. • Modern balance sheets often use the general term
liabilities in place of equities
• Current liabilities are grouped together and include all
liabilities such as accounts payable, debts, and tax
accruals due within 12 months of the balance sheet date
• The net working capital of a company can be obtained
directly from the balance sheet as the difference between
current assets and current liabilities
• Other liabilities, such as long-term debts, deferred credits,
and reserves are listed under separate headings
• Proprietorship, stockholders’ equity, or capital stock and
surplus complete the record on the equity (or liability)
side of the balance sheet.
13. • Consolidated balance sheets are ordinarily
presented with assets listed on the left and
liabilities, including proprietorship, listed on the
right
• The total value of the assets must equal the
total value of the equities
• The value of property items, such as land,
buildings, and equipment, is usually reported as
the value of the asset at the time of purchase
• Depreciation reserves are also indicated, and
the difference between the original property
cost and the depreciation reserve represents the
book value of the property
14. • Thus, in depreciation accounting, separate
records showing accumulation in the
depreciation reserve must be maintained
• In the customary account, reserve for
depreciation is not actually a separate fund but
is merely a bookkeeping method for recording
the decline in property value
• The ratio of total current assets to total current
liabilities is called the current ratio
• The ratio of immediately available cash to total
current liabilities is known as the cash ratio
15. Net Worth
• Balance sheets break out assets (such as cash,
inventory, and receivables) and liabilities (such
as debt and accounts payable)
• Subtracting the latter from the former gives you
net worth, which is also referred to in this
context as shareholders' equity or book value
• Here's an example: As of the end of 2012, IBM's
assets totaled $119 billion, and its liabilities
totaled $100 billion. Thus, its net worth, or
shareholders' equity, was $19 billion
16. THE INCOME STATEMENT
• A balance sheet applies only at one specific time, and
any additional transactions cause it to become
obsolete
• Most of the changes that occur in the balance sheet
are due to revenue received from the sale of goods or
services and costs incurred in the production and sale
of the goods or services
• Income-sheet accounts of all income and expense
items, such as sales, purchases, depreciation, wages,
salaries, taxes, and insurance, are maintained, and
these accounts are summarized periodically in income
statements
17. • A consolidated income statement is based on
a given time period
• It indicates surplus capital and shows the
relationship among total income, costs, and
profits over the time interval
• The transactions presented in income-sheet
accounts and income statements, therefore,
are of particular interest to the engineer,
since they represent the facts which were
originally predicted through cost and profit
analyses
18. Q. The following information applies to E Company on a given date:
Long-term debts 1,600
Debts due within 1 year 1,000
Accounts payable 2,300
Machinery and equipment (at cost) 10,000
Cash in bank 3,100
Prepaid rent 300
Government bonds 3,000
Social security taxes payable 240
Reserve for depreciation 600
Reserve for expansion 1,200
Inventory 1,600
Accounts receivable 1,700
Determine the current ratio, cash ratio, and working capital for
Company E at the given date.
19. • Total current assets = Cash + Inventory +
Accounts Received + Prepaid Rent
= $3100 + $1600 + $1700 + $300
= $ 6700
• Total current liabilities = Accounts payable +
Debts due in 1 Year + Social security taxes
payable = $2300 + $1000 + $240 = $ 3540
• Net working capital = TCA – TCL = $3160
• Cash ratio = Cash/TCL=$3100/$3540 = 0.89
• Current ratio = TCA/TCL=$6700/$3540 = 1.89
20. Q. During the month of October, the following information
was obtained in an antifreeze retailing concern:
Salaries $3,000
Delivery expenses $700
Rent $400
Sales $15,100
Antifreeze available for sale during October (at cost)
$20,200
Antifreeze inventory on Oct. 31 (at cost) $11,600
Other expenses $1,200
Earned surplus before income taxes as of Sept. $800
Prepare an income statement for the month of October
giving as much detail as possible.
21. ANTIFREEZE RETAILING CONCERN CONSOLIDATED INCOME
STATEMENT FOR THE MONTH OF OCTOBER
Income
Net Sales $15100
Total Gross Income $15100
Deductions
Cost of Goods Sold $20200 - $11600 = $8600
Salaries $3000
Delivery Expenses $700
Rent $400
Other deductions $1300
Total deductions $13900
Total income before taxes $1200
Earned surplus before taxes as of Sept 30 $800
Provision for taxes (@35%) $700
Net Income $1300
Earned Surplus at the end of the month $1300
22. Q. Prepare a balance sheet applicable at the date when the X
Corporation had the following assets and equities
Cash $20,000
Accounts payable:
B Company $2,000
C Corporation $8,000
Accounts receivable $6,000
Inventories $15,000
Mortgage payable $5,000
Common stock sold $50,000
Machinery and equipment(at present value) $18,000
Furniture and fixtures (at present value) $5000
Government bonds $3,000
Surplus $2,000
23. Assets Liabilities
Current Assets Current Liabilities
Cash $20000 Accounts Payable $2000
Accounts Recievable $6000 $8000
Inventories $15000 Mortgage Payable $5000
Total Current Assets $41000 Total Current Liabilities $15000
Government Bonds $3000 Common Stocks sold $50000
Machinery & Equipments $18000
(at present value)
Surplus $2000
Furniture & Fixtures $5000
(at present value)
Total Assets $67000 Total Liabilities $67000
24. Current Ratio = (TCA)/(TCL)
= $41000/$15000 = 2.73
Cash Ratio = (Cash)/(TCL)
= $20000/$15000 = 1.34
Net working capital = TCA – TCL
= $41000 - $15000
= $26000
25. Debits and Credits
• When recording business transactions, a debit entry
represents an addition to an account, while a credit
entry represents a deduction from an account
• In more precise terms, a debit entry is one which
increases the assets or decreases the equities, and a
credit entry is one which decreases the assets or
increases the equities
• Since accounting records must always show a balance
between assets and equities, any single transaction
must affect both assets and equities
• Each debit entry, therefore, requires an equal and
offsetting credit entry
26. • For example, if a company purchased a piece of
equipment by a cash payment, the assets of the
company would be increased by the value of the
equipment
• This represents an addition to the account, and would
therefore, be listed as a debit. However, the company
had to pay out cash to obtain the equipment. This
payment must be recorded as a credit entry, since it
represents a deduction from the account
• At least one debit entry and one credit entry must be
made for each business transaction in order to maintain
the correct balance between assets and equities
• This is known as double-entry book keeping
30. • A typical example of a journal page is shown
• The date is indicated in the first two columns
• An analysis of the account affected by the particular
transaction is listed in the third column, with debits
listed first and credits listed below and offset to the
right. A brief description of the item is included if
necessary.
• The amounts of the individual debit and credit entries
are indicated in the last two columns, with debits
always shown on the left.
• When the journal entry is posted in the ledger, the
number of the ledger account or the page number is
entered in the fourth column of the journal page. This
column is usually designated by “F” for “Folio.”
31. Accumulation, Inventory, and
Cost-of-Sales Accounts
• Cost-accounting methods require posting of all costs in so-
called accumulation accounts
• At the end of a given period, such as one month, the
accumulated costs are transferred to inventory accounts,
which give a summary of all expenditures during the
particular time interval
• The amounts of all materials produced or consumed are
also shown in the inventory accounts
• The information in the inventory account is combined
with data on the amount of product sales and transferred
to the cost-of-sales account
• The cost-of-sales accounts give the information necessary
for determining the profit or loss for each product sold
during the given time interval
32. Materials Costs
• The variation in costs due to price fluctuations can
cause considerable difficulty in making the transfer
from accumulation accounts to inventory and cost-
of-sales accounts
• Accumulation account: Chemical A for use in
producing product X
Date Received Cost Balance on hand Delivered
Aug 2 5000 kg $0.036/kg 5000 kg
Aug 16 10000 kg $0.039/kg 15000 kg
Aug 22 9000 kg 6000 kg
33. • In transferring the cost of chemical A to the
inventory and cost-of-sales accounts, there is a
question as to what price applies for chemical A.
There are three basic methods for handling problems
of this type
• The current-average method. The average price of all
the inventory on hand at the time of delivery or use
is employed in this method. The current-average
price for chemical A would be $0.0380 per kg
• The first-in-first-out (or fifo) method. This method
assumes the oldest material is always used first. The
price for the 6000 kg of chemical A would be $0.0360
per kg for the first 5000 kg and $0.0390 for the
remaining 1000 kg
34. • The last-in first-out (or lifo) method. With
this method, the most recent prices are
always used. The price for the 6000 kg of
chemical A would be transferred as $0.0390
per kg
• Any of these methods can be used. The
current-average method presents the best
picture of the true cost during the given time
interval, but it may be misleading if used for
predicting future costs
35. • Q. On Aug. 1, a concern had 10,000 kg of raw
material on hand which was purchased at a cost
of $0.030 per kg. In order to build up the
reserve, 8000 kg of additional raw material was
purchased on Aug. 15 at a cost of $0.028 per kg,
and 2 days later 6000 kg was purchased from
another supplier at $0.031 per kg. If none of the
raw material was used until after the last
purchase determine the total cost of 12,000 kg
of the raw material on an inventory or cost-of-
sales account for the month of August by (a) the
current-average method, (b) the “fifo” method,
and (c) the “lifo” method.
