ACCOUNTING PRINCIPLES AND PROCEDURES FOR RICS APC By DHANUSHKA SAMPATH PgCert in Const Law & Arb, BSc.(Hons)QS, Adv. Dip in Civil Eng, MCIArb, ACMA, CGMA
WHAT RICS EXPECT FROM US? All topics will be discussed today
CONTENT OF THE PRESENTATION • Basic Accounting equation • Essential Accounting Concepts • Financial Statements – Timeline • The Statement Of Financial Position (Balance Sheet) • The Statement Of Comprehensive Income (Income Statement) • The Statement Of Cash Flow • Revenue Expenditure Vs. Capital Expenditure • Auditing • Credit Control • Profitability • Insolvency • Legislation
BASIC ACCOUNTING EQUATION
Activity 1) Sunil started a construction consultancy company by investing OMR 5,000 in cash 2) He purchased a building for OMR 3,000 to put up an office for his company 3) A bank loan of OMR 4,000 was obtained to invest in the company 4) He purchased furniture, computers and office accessories spending OMR 2,500 5) He withdrew OMR1,000 from the company for his personal use. 6) He received OMR 4,000 from client A as a fee for his consultancy service. 7) He paid OMR 3,000 in cash for salaries of his employees 8) He paid OMR 1,000 in cash for the bank loan. 9) He billed OMR 4,000 for one of his client B, but money to be received. 10) Client B paid OMR 3,000 in cash.
ESSENTIAL ACCOUNTING CONCEPTS • Accruals concept - Expenses and revenues are recorded in the period they occur, whether or not cash is involved • Conservatism concept - Recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received • Consistency concept - Once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods • Economic entity concept - entity's activities need to be separated from activities of its owner and those of other economic entities • Going concern concept - An entity will remain in business for the foreseeable future • Matching concept - Firms recognize revenues and their related expenses in the same accounting period. Firms report revenues, that is, along with the expenses that brought them • Materiality concept - Trivial matters are to be disregarded, and all important matters are to be disclosed
FINANCIAL STATEMENTS - TIMELINE
THE STATEMENT OF FINANCIAL POSITION (Balance Sheet) ▪ Reports the amount of assets, liabilities, and stockholders' (or owner's) equity at a specific moment (or point in time). ▪ Content of a balance Sheet ▪ Non-current assets ( e.g.. Property, plant and equipment) ▪ Current Assets (e.g.. Cash in hand, cash in bank, inventory, trade receivable) ▪ Equity (e.g.. Share capital, Retained earnings) ▪ Non-current liabilities (e.g.. Bank Loans) ▪ Current liabilities (e.g.. Trade payables, wages payables) ▪ The principle accounting equation Assets = Liabilities + Owner's (Stockholders') Equity
THE STATEMENT OF COMPREHENSIVE INCOME (Income statement) ▪ Reports a corporation's revenues and expenses during a period of time Elements of an income statement: ▪ Revenues - Fees that were earned during the period of time shown in the heading (e.g.: Contract income of a construction company) ▪ Gains - Net amount related to transactions that are not considered part of the company's main operations (e.g.: Gains from investing share market by a construction company) ▪ Expenses - Costs used up by the company in performing its main operations (e.g.. Construction resources cost for a construction company) ▪ Losses - Net amount related to transactions that are not considered part of the company's main operating activities (e.g.: Losses from investing share market by a construction company)
THE STATEMENT OF CASH FLOW ▪ Explains how a company's cash and cash equivalents have changed during a specified period of time. ▪ Because the income statement is prepared under the accrual basis of accounting , the revenues reported may not have been collected & the expenses reported on the income statement might not have been paid.
THE STATEMENT OF CASH FLOW ▪ Elements of a statement of cash flow • Cash provided and used in operating activities (Loss) / profit before taxation Adjustments for depreciation Working capital movements • Cash provided and used in investing activities Purchases of property plant and equipment Purchases of intangible assets Disposal of property plant and equipment • Cash provided and used in financing activities . Short term loans Bank borrowings Interest expenses Cash and cash equivalents at beginning of the year + Net increase / (decrease) in cash and cash equivalents = Cash and cash equivalents at the end of the year
REVENUE EXPENDITURE VS. CAPITAL EXPENDITURE • Capital Expenditure are costs associated with one-off expenditure on the acquisition, construction or enhancement of significant fixed assets including land, buildings and equipment that will be of use or benefit for more than one financial year. • Land or property acquisition • Consultant fees directly associated with the development. • Materials, plant and equipment • Fixtures and fittings • Revenue Expenditure is an amount that is expensed immediately — thereby being matched with revenues of the current accounting period • Wages • Utilities • Maintenance and repairs • Rent. • Sales. • General and administrative expenses.
AUDITING The process of reviewing and investigating any aspect of a business, whether financial or nonfinancial. • Financial Audit - A historically oriented, independent evaluation performed for the purpose of attesting to the fairness, accuracy, and reliability of financial data • External Audit - involves the examination of the truth and fairness of the financial statements of an entity by an external auditor who is independent of the organization in accordance with a reporting framework such as the IFRS • Internal Audit - a voluntary appraisal activity undertaken by an organization to provide assurance over the effectiveness of internal controls, risk management and governance to facilitate the achievement of organizational objectives • Operational Audit - A future-oriented, systematic, and independent evaluation of organizational activities. E.g. operational policies and achievements related to organizational objectives. Internal controls and efficiencies
AUDITING • Follow-up Audit - Conducted approximately six months after an internal or external audit report has been issued to evaluate corrective action that has been taken on the audit issues reported in the original report • Forensic Auditing - Involves the use of auditing and investigative skills to situations that may involve legal implications such as fraud investigations • Tax Auditing - Conducted to assess the accuracy of the tax returns filed by a company and are therefore used to determine the amount of any over or under assessment of tax liability towards the tax authorities. • Investigative Audit - This is an audit that takes place as a result of a report of unusual or suspicious activity on the part of an individual or a department • Compliance Audits - companies are required to conduct specific audit engagements other than the statutory audit to comply with the requirements of particular laws and regulations
CREDIT CONTROL • The process of controlling the credit extended to credit customers • Aimed at reducing the risk of late payment and bad debt • Late payment of business debts is one of the biggest problems faced by construction companies • A major hindrance to cash flow and a drain on profitability • Key to successful cash flow is good planning • Should know exactly when payments are due in and out of your bank account Credit control mechanisms : Have a system for chasing debts and be firm but fair. Set the terms at the start of the contract. Checking creditability of potential large customers / client Maintain the information flow with the customer, the more you know the better you can control credit risk Watch for the danger signs – be wary of changes in customers normal pattern of activity
PROFITABILITY • Profitability is a situation in which an entity is generating a profit • Arises when the aggregate amount of revenue is greater than the aggregate amount of expenses in a reporting period • Accounting profitability may not be matched with the cash flows generated by the organisation • Profitability can be achieved in the short term through the sale of assets that garner immediate gains, but not sustainable • Profitability is generally measured with the net profit ratio and the earnings per share ratio. • Profitability of a future project can be assessed through various project appraisal techniques like NPV, Payback period, IRR etc.
INSOLVENCY • A situation in which a firm or individual has a Negative Net Worth . • Accounting insolvency occurs when total liabilities exceed total assets on a firm's or individual's balance sheet . • Accounting insolvency does not automatically equate to bankruptcy because the individual or organization may still be able to make monthly payments. • This is what differentiates accounting insolvency from standard insolvency, which involves the inability to service debts. • Creditors may force corporations with accounting insolvency to restructure payments or declare bankruptcy, depending on the specific situation.
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