Accounting Principles and Procedures

Mandatory Competency at Level 1

Ramesh Palikila MRICS

QS , Davis Langdon

Indian Quantity Surveyors Association www.iqsa.info

IQSA-APC-Matrix
Agenda

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The balance sheet

The balance sheet reports the amount of assets, liabilities, and
stockholders' (or owner's) equity at a specific moment (or point in time).
The balance sheet usually reports assets by classifications such as
– Current assets
– Investments,
– Property, plant and equipment, and other assets.
– Liabilities :Current liabilities and long-term liabilities.

Typical assets listed on the balance sheet :

– Cash, accounts receivable, inventory, supplies, prepaid insurance, land, buildings,
equipment, and intangible assets such as goodwill.

Typical liabilities include :

– Accounts payable, wages payable, interest payable, income taxes payable, and bonds
payable.
Stockholders' equity: Assets - Liabilities.
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Other points

Profit & Loss Account

P & L account is a financial statement which the net results of the
business for a particular period. It includes income and expenses of that
period.

Taxation

Taxation is a levy charged by government on individuals. Normally tax is
divided into two types, Direct Taxes such as income tax and indirect tax
such as sales tax, employment tax etc. It is the revenue for the
government for various expenditure of the nation.

Revenue Expenditure

Revenue Expenditure is the amount spend for daily or routine business
activity such as salary, insurance, rent, advertisement. These expenditure
is to matched with the revenue to arrive at the profit or loss for the period.

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The accounting equation

Assets = Liabilities + Owner's (Stockholders') Equity.

The accounting equation should remain in balance at all times because of

double-entry accounting or bookkeeping.

(Double-entry means that every transaction will affect at least two accounts
in the general ledger.)

Assets = Liabilities + Owner's Equity + Revenues – Expenses – Draws

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The cash flow statement

The cash flow statement (or statement of cash flows) is one of the main
financial statements. The cash flow statement explains how a company's
cash and cash equivalents have changed during a specified period of
time.

The cash flow statement is organized into three sections:

1. Cash provided and used in operating activities,

2. Cash provided and used in investing activities,

3. Cash provided and used in financing activities.

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Debits and credits

Debits and credits are part of double entry accounting and bookkeeping.
Recording a transaction under double entry requires that at least one
account will have an amount entered as a debit-which means entered on
the left side of an account. It also requires that at least one account will
have an amount entered as a credit-which means entered on the right
side of an account.

Each transaction must have the total of the debits equal to the total of the
credits.

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Financial accounting

Financial accounting is focused on four general-purpose, external

financial statements:

The balance sheet—which reports a corporation's assets, liabilities,
and stockholders' equity as of a point in time (e.g., as of midnight of
December 31, 2006).

The income statement—which reports a corporation's revenues and
expenses for a period of time, such as a year, quarter, month, 52 weeks,
etc.

The statement of cash flows (or cash flow statement)—which provides
information on the change in a corporation's cash and cash equivalents
during the same period of time as the income statement.

statement of stockholders' equity

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Capital Expenditure

Capital expenditure is an outlay of cash either acquire long term assets

such as Plant, Machinary, Furniture. Vehicles, Land etc or improve an
existing the aforesaid assets.

Auditing

Auditing refers to an official examination of an organization’s accounts to
ensure that money is spend correctly. The different types of audit includes
Financial audit, Tax audit, Cost audit, Management Audit etc.

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Ratio Analysis

Ratio simply means one number expressed in terms of another. Ratio analysis is a tool which is used to
analysis of the performance of a company by using published accounts such as income statement,
balance sheet, cash flow statement. Normally ratio analysis can be classified into the following groups.

Profitability Ratio: It is a ratio which measures the profitability of an organization. It indicate how well a firm
is performing in terms of it’s ability to generate revenue.

Eg: Net Profit Ratio= Net profit/ Sales

Coverage Ratio: A measure the corporations ability to cover an expense.

Eg: Fixed Interest Cover = Income Before Interest & Tax/ Interest Charges

Turnover Ratio: It is activity or efficiency ratio. It indicates the efficiency with which the capital employed is
rotated in the business. It measures an asset’s activity or efficiency in generating or turn over cash.

Eg: Assets Turn Over = Net Sales/ Net Assets

Financial Ratio: It indicates about the financial position of the company. It is further divided into Liquidity
Ratio and Stability Ratio.

Liquidity ratio (measures short term solvency of the firm)

Current Ratio= Current Assets/ Current Liabilities

Stability Ratio (Measures long term solvency of the firm)

Fixed Assets Ratio = Fixed Assets/ Long term Funds

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Credit Control , Profitability ,Insolvency

Credit control is the process of controlling the credit extended to credit

customers in the daily business. It takes into account increase in sales
revenue by extending sales customers on credit basis who is having
reliable credibility and minimizing bad debt loses (Uncollected credit sales
amount).

Profitability: Profitability is the ability of a firm to generate/ earn profit. The

ability to earn income over it’s expenditure.

Insolvency: Solvency is the ability of the firm to pay it’s debt in time.
Insolvency is the inability to pay the debt.

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