Course Code: EGQS4250

Course: Accounting Principles for Engineers

Chapter 1

Basics of Accounting in
Construction Projects
Learning Outcomes
Describe the basics of accounting and how its
relevance to construction projects.
CHAPTER 1- OUTLINE
• Meaning and scope of accounting and the accounting cycle.
• Various Branches of Accounting
• Basic Accounting Terms
• Role of Accounting and Finance in Decision Making
 Brainstorming Session
• What Construction Projects all About?
• What are the Various Transactions in Construction Projects ?
• How to Deal with these Transactions in the Construction
Projects ?
• Create a scenario to complete a Project and calculate profit.
 What is Accounting?
Its an information system that measures business activities, processes that
information into reports, and communicates these findings to decision-
makers also known as stakeholders. It is considered to be the language of
business. Accounts are the records in which financial data is recorded.
 Scope of Accounting
Accounting is the language of business. It is language
of business in a way that financial transactions occur
in every business organization.

Not only in business, accounting has wide use in

Government organization, Non-Government
organization and even in personal life of an individual.
 Basis of Accounting
 Accrual Basis: Accounting method in which revenue is recorded when
a sale is made and expense is recorded when it is incurred, regardless of
when cash is exchanged.

 Cash Basis: Accounting method in which revenue is recorded when

payment is received and expense is recorded when cash is paid.
Accounting cycle:
• Accounting cycle is a step-by-step process of recording, classification
and summarization of economic transactions of a business. It generates
useful financial information in the form of financial
statements including income statement, statement of financial position,
cash flow statement and statement of changes in equity.

• The time period principle requires that a business should prepare its
financial statements on periodic basis. Therefore accounting cycle is
followed once during each accounting period. Accounting Cycle
starts from the recording of individual transactions and ends on the
preparation of financial statements and closing entries.
 Different Nature / Types of Business
Service Trading / Manufacturing
Merchandizing

Consultants,
Material
Architects Construction Manufactures
(providing a Material products &
service) Stores sells to
(buys & customers
resells)
 A business can be organised in various forms:

Sole Proprietorship Government

Quasi-
Partnerships governmental
bodies

Companies Voluntary
Organisations
 Forms of Business Organization
Sole Proprietorship: A business owned by one person
Partnership: A business is owned by two or more persons
associated as partners is a partnership
Corporation : A corporation is business legally incorporated
under commercial law that separate and distinct from its owner.
As per Oman commercial law corporations are allowed to enter
into contracts, to loan and borrow, to sue and be sued, to hire
employees, to pay taxes.
 Why do the Users Want Accounting
Information?
 The owners/shareholders use them to see if they are getting a satisfactory return on their investment, and to assess the financial health of
their company/business.

 The directors/managers use them for making both internal and external comparisons in their attempts to evaluate the performance. They
may compare the financial analysis of their company with the industry figures in order to ascertain the company’s strengths and weaknesses.
Management is also concerned with ensuring that the money invested in the company/organization is generating an adequate return and that
the company/organization is able to pay its debts and remain solvent.

 The creditors (lenders) / suppliers want to know if they are likely to get paid and look particularly at liquidity, which is the ability of the
company / organization to pay its debts as they become due.

 The prospective investors use them to assess whether or not to invest their money in the company/organization.

 The government and regulatory agencies such as Registrar of companies, Custom departments, Tax departments etc. require information
for the payment of various taxes such as Value Added Tax (VAT), Income Tax (IT), Customs and Excise duties for protecting the interests of
investors, creditors(lenders), and also to satisfy the legal obligations imposed by the Oman commercial company law and Capital Market
Authority from time-to-time.
 Users of Accounting Information/data
• A stakeholder is a party that
has an interest in a company
and can either affect or be
affected by the business.

• Primary stakeholders in a
typical corporation are its
investors, employees,
customers, and suppliers
 Branches of Accounting
Financial Accounting
Cost Accounting
Management Accounting
4. Relationship between Cost Accounting, Financial
Accounting and Management Accounting
Nature Cost Accounting Financial Accounting Management Accounting
Objective To ascertain cost and guide management To prepare financial statements To provide useful information to
in planning, controlling etc., management in decision making

Mandatory In most of cases Voluntarily prepared by As per companies Act, it is prepared Voluntarily prepared by the
the management. But some cases need compulsorily Management
to prepare for legal requirements
Accounting Period It may be prepared daily, weekly, Prepared annually It may be prepared daily, weekly,
monthly etc., monthly etc.,
Reporting Reported to the management Reported to the shareholder, lenders, Reported to the management
govt., etc.,

Presentation of There are not any set formats for A set format is used for presenting There are not any set formats for
information presenting cost information in most of financial information. presenting cost information.
the cases, except when legal
requirement.
Evaluation It evaluates the operational efficiency in It evaluates the financial efficiency in It evaluates the management efficiency
terms of production and cost terms of profitability and market value in terms of right managerial decisions
 Basic - Accounting Terms
Business Transactions:- are economic activities/events that can be
measured in terms of money and affect the business operation and financial
position of a company.

1. Cash Transactions: Transactions are settled by immediate cash payment

and receiving.

2. Credit Transactions: Transactions settled in any future date.

 Accounting Terms
 Account: A summarized statement of transactions relating to a particular person, item expense or
income, asset and liability. A company will have separate accounts for such items as cash, salaries
expense, accounts payable, and so on. There are five main types of Accounts namely: Assets,
Liability, Equity, Expenses and Revenues
 Chart of Accounts: It is a list of names for all accounts (and its code) that is used by an
organization to record business transactions.
 Debit and Credit: These are the jargons used in accounting to show the effect of any transaction.
The words debit and credit are derived from Latin words meanings ‘due for that’ and ‘due to that’.
Both the terms are symbol of accounting used to make the rules of accounting clear and operative.
 Voucher: Documentary evidence of transaction is called voucher. When we purchased goods on
cash we received a cash memo from seller. This cash memo is a voucher.
 Invoice or bill: A bill or a statement issued by the seller to the buyer giving details of goods sold.
 Assets
• Assets: are resources owned and acquired by the business to be used for
future economic benefit. In more simple term, assets are company
properties which are used to generate income. It is because of the assets
that economic benefit will flow into the business.

There are two types of Assets:

 Current assets
 Non- current assets (long term assets).
 Current Assets
Assets that can easily be converted to cash and cash equivalents and can be used within a business
operating cycle (within one year).
 Cash & Bank balance: includes cash on hand or bank balance available for business uses
 Accounts Receivable: It is the amount to be collected from customer who receives the product or
services with a promise to pay after some time. It is generated in a business by credit sales. A/R is
also known as Debtors.
 Prepaid expenses: These are the amount paid in advance for future cost of items or services.
Examples prepaid rent, prepaid insurance.
 Inventory: It is the amount of goods available for sale at a given point of time. It is also known as
stock. It includes raw materials, finished goods and work-in-progress. Once inventory is sold or
used they are converted to an expense.
 Non-current Assets
Assets that are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes are considered to be non-current
assets.
 They are the assets that cannot be easily converted to cash and cash
equivalents.
 They can be used by the company over a period of more than one year for
future benefit.
 They are not meant for sale while used in business to increase the earning
capacity.
Example: Machinery, equipment, buildings, land, furniture, motor vehicle, etc.
 Liability
Liability: Amount owed by the business to outsiders or whatever is payable by

a company is known as liability. ‘Liabilities’ denotes the claim of outside parties

such as creditors, suppliers, banks, government etc. These are the obligations

which will result in outflow of economic benefits from the business.

There are two types of Liabilities:
• Current Liability is a liability that is due within less than one year.
• Non current Liability is a liability that is due after more than one year.
 Current Liability
Refers to short-term debts or financial obligations that are due within twelve months or within one
accounting period.

 Accounts Payable (A/P): is an amount owed (i.e. to be paid) to suppliers for goods purchased or
services performed on credit.

 Outstanding Expenses: Expenses unpaid at the end of given period or specified period or
accounting period such as outstanding salary (Salary Payable).

 Unearned Revenues: Are money paid to a business in advance, before it actually provides goods or
services to the customers.

 Bank Overdrafts: Banks allowed company to continue withdraw the money even the account has
no funds. It is another form of borrowing.
 Non Current Liabilities
Referred to as the long term debts or financial obligations
that are also known as long term liabilities. These obligations
are not due within twelve months or accounting period as
opposed to current liabilities.

Examples: Long-term loans taken from banks and financial

institutions, Long-term lease etc.
 Equity and related items
Equity: Amount remaining after deducting total liabilities from the total assets (Total assets - Total
liabilities). Equity also denotes the amount which is due to the owners of the business. Equity consist of
the following components:

Capital: Capital refers to the investment made by the owner of business in the form of cash or money's
worth (goods, machinery etc.). In case of sole proprietorship and partnership it is termed as capital.
While in the case of a corporation it is termed as Share capital.

Drawings: The cash or other assets withdrawn from the business by the owner for the personal use.
This transaction usually occurred in case of sole proprietorship and partnership. Such amount is
deducted from the amount of capital

Net Income: Profit earned or loss incurred by a firm, determined by subtracting expenses from
revenues. If the revenues are more than expenses it results in profit and if expenses are more than
revenues it results in loss. Net profit is added to capital while net loss is deducted from capital.
 Equity and related items
Retained Earnings: The net income amount earned by the company but not
distributed to its owners in the form of dividends and reinvested in the
company. Such amount is added to the Equity
Reserves: The amount of profits which are kept aside for specific, legal or
general purposes are called as reserves. Such amount is added to the Equity.
Dividend: are the distribution of cash or other assets to shareholders. It
reduce retained earnings. However, dividends are not expenses.
Formula of equity for a sole proprietorship (single person ownership)
Equity = Capital + Net profit + Retained earnings + Reserves – Drawings
 Revenues Expenses
Revenues or sales Revenues are amounts • It is the cost incurred in the process of
earned by the business on the process of selling generating income. In other words, expenses
goods or performing services. represent the costs businesses incurs to generate
revenues or sales.
In short it is the amount customer pays (cash) or
agree to pay later (account receivable) in return • Few examples of expenses are salary and
to the goods or services provided. wages, rent expense, insurance expense,
commission and discount, internet and office
supplies expenses, gas, water and electricity
Thus sale is the major revenue of the business. expenses, transportation expenses, depreciation
Other items of revenue are rent received, expenses, advertising expenses, interest
interest received, dividend received etc. expenses, etc.
 Purchases: The total amount of goods obtained by a business both for cash and credit is
called purchases. A trading business purchases finished goods for resale whereas a
manufacturing business purchase raw materials and produce finished goods for sale.

 Purchases Returns: If goods purchased are found defective or unsatisfactory, they are
returned to the persons/business from whom they were purchased (suppliers). Such returns
are called purchases returns or returns outwards.

 Sales: Goods sold by a business for cash or on credit are called sales. When goods are sold
and payment is received on the spot or immediately, the sales are said to be cash sales. But
when the payment of the transaction is postponed to a future date, the sale is said to be
credit sales.

 Sales Returns: If a person to whom goods have been sold finds that they are defective or
unsatisfactory and return them, are called sales returns or returns inwards.
 Financial Statements
 Financial statements are the reports that provide the detail of the entity’s financial information
including assets, liabilities, equities, incomes and expenses, shareholders’ contribution, cash flow, and
other related information during the period of time.

 Financial statements are used by different stakeholders including entity’s management, shareholders,
investors, staff, majors customers, majors suppliers, government authority, stock exchanges, and other
related stakeholders.

 In general, there are five types of financial statements that are prepared by an entity either monthly,
quarterly, annually or the period required by management.

 Those five types of financial statements includes income statement, statement of financial position
(Balance sheet), statement of change in equity, statement of cash flow, and the Notes (disclosure)
to financial statements.
 Role of Accounting and Finance in Decision Making
Finance is referred as the art and science of managing funds or
money.
 Finance is the lifeblood of business concern, because it is
interlinked with all activities performed by the business
concern.
 “The Science on study of the management of funds’ which
including, “Circulation of Money, Granting of Credit, Making of
Investments, and the Provision of Banking Facilities”
 Finances is obtaining funds and their effective usage in business
environment.
 Effective procurement and efficient use of finance leads to
proper utilization of the finance by the business concern.
References
• This chapter has been prepared by using following books:
https://ebookcentral.proquest.com/lib/momp/detail.action?docID=437704&query=Accounting
• Ramagopal, C.. Accounting for Managers, New Age International Ltd, 2009. ProQuest EBook Central,
https://ebookcentral.proquest.com/lib/hctom/detail.action?docID=437704.
• Larson KD, Wild JJ, Chiappetta B (2002), ”Fundamental of Accounting Principles” sixteenth edition, McGraw-
Hill Irwin Publisher
• Weygandt JJ, Kimmel PD, Kieso DE (2015), “Financial Accounting” IFRS edition, WILEY Publisher

• Sangster A, Wood F, (2015), “Business Accounting” Thirteen Edition, Pearson Publisher

• Hogget J., Edwards L., Medlin J., Chalmers K., Hellman A., Beattie C., Maxfield J., (2015) “ Financial
Accounting”, 9th Edition, Wiley Publisher
• Needles Jr BE, Powers M (2001), “ Financial Accounting” Seventh Edition, Houghton Muffin Company

• Jerry J. Weygandt, Donald E. Kieso, and Paul D. Kimmel, “Accounting Principles”, 8th Edition, Wiley
International Edition.
• Walter Harrison, Charles Horngren, Bill Thomas, Themin Suwardy, “Financial Accounting”, Pearson Global
Edition.
 CONTACT INFORMATION:

Name of the Staff : Dr. Gaurav Aggarwal

Office:: BS045
Email: [email protected]

VERSION HISTORY

Version No Date Approved Changes incorporated

01 Sem-II 2022/2023

32