Winter semester 2018-19

Business Accounting for Engineers

Slot: C2+TC2
Code: HUM1006 Class No:1621

Learning Objectives
To understand the basic knowledge on business accounting
To develop problem solving skills and critical thinking skills in accounting
system.

Student Learning Outcomes (SLO)

Having clear understanding of subject, lifelong learning, problem solving
ability, solving social issues, critical thinking and innovative skill
Business Accounting for Engineers – An overview
Module - 1 Deals with introduction to accounting
Module – 2 Deals with final accounts
Module – 3 Deals with ratio analysis
Module – 4 Deals with fund flow statement
Module – 5 Deals with cash flow statement
Module – 6 Deals with budgetary control
Module – 7 Deals with capital budgeting
Business Accounting for Engineers
Module – 1 – Introduction to accounting
Learning Objectives
After studying this module, you will be able to:
1. Understand the meaning and scope
2. Accounting concept and convention of
accounting
3. Able to know objectives of accounting
4. Journal, Ledger and Trial balance
5. Looking back, Review problems, assignment
and Test of your understanding
Do you use accounting? Yes,
we all use accounting information is one form or another. For example:
When you think about buying a car (afford, lease or buy)

Is accounting important to you? Yes,

Accounting is important in your personal life as well as your career, even
though you many not become an accountant. For example: assume that
you are the owner/manager of Woodland Hotels and are considering
opening another hotel in a neighboring town.

Primary objective of financial accounting will help you to make good

personal and business decisions.
Nature of business
List some examples of companies with which you have
recently done business.
Your examples might be large companies such as:
Coca-Cola
Dell Computer
Amazon.com
Local companies
Grocery Stores
What do all these examples have in common that identify
them as businesses?
Business
“An organization in which basic resources (inputs) such as
materials and labour, are assembled and processed to provide
goods or services (outputs) to customers”.
Types of Business
Three types operated for profit
Manufacturing businesses
Change basic inputs into products that are sole to individual
Manufacturing business Product
General motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and televisions
Merchandising business
Sell products to customers. Rather than making the products,
they purchase them from other businesses
Merchandising business Product
Wal-Mart General merchandise
Toys “R” Us Toys
Lands’ End Apparel
Amazon.com Internet books, music, video

Service business
Services rather than products to customers
Service business Service
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Types of business organization
1. Proprietorship
2. Partnership
3. Corporation
Business on stage
What are the characteristics of entrepreneurs who successfully
start and manage a new business?
Technical knowledge and basic management skills
Successful Entrepreneurs
Terms Entrepreneur Company
Vision Jeffrey Yang Yahoo
Perseverance Henry Ford Ford motor
Self confident George Eastman Kodak
High energy level Steven Jobs Apple computer
Motivated Bill Gates Microsoft
Spirit of adventure Sam Walton Wal-Mart
The role of accounting in business
What is the role of accounting in business?
Accounting provides information for managers to use in
operating the business.

Accounting provides information to other stakeholders to use

in assessing the economic performance and condition of the
business.

Professions of accounting
1. Private accounting
Employed by a business firm or not for profit organization
Frequently called management accounting
Employed by manufacturer: Cost accountants
In business: Controller
Certified Management Accountant (affiliate to IMA)
Certified Internal Auditor CIA (Institute of internal auditors)
2. Public accounting
An accountant may practice as an individual or a member of a
public accounting firm
Public accounts who have met a state’s education, experience
and examination requirements may become Certified Public
Accountants (CPAs)

Career Paths of corporate executives

1. Finance – Accounting - 31%
2. Merchandising – Marketing – 27%
3. Engineering – Technical – 22%
CONCEPT
Modern accounting has often been called ‘the language of
business’
DEFINITION
According to the AICPA, “Accounting is the art of recording,
classifying and summarizing in a significant manner and in
terms of money transactions and events which are of a
financial character and interpreting the results thereof”.
STEPS IN ACCOUNTING
1. Recording 2. Classification 3. Summarizing 4
Significant manner 5. In terms of money 6. Transactions
and events of financial character 7. Interpreting the results.
BOOK-KEEPING:
It is concerned with the recording of business transactions in a
systematic manner.
OBJECTIVES OF ACCOUNTING
1. Maintenance of Accounting records 2. Ascertainment of
profit or loss 3. Depiction of financial position 4. Providing
information
ADVANTAGE OF ACCOUNTING
1. Systematic records 2. Preparation of financial statements
3. Assessment of progress 4. Aid to decision making 5.
Statutory requirements 6. Information to interested groups 7.
Evidence in courts 8. Taxation problems 9. Merger of firms
LIMITATIONS OF ACCOUNTING
1. Only money transactions can be recorded
2. Business transactions are recorded at cost price in the books
3. Financial statement will not reveal the true position
4. Accounting treatments are influenced by the personal
judgment
GROUPS INTERESTED (STAKEHOLDERS) IN
ACCOUNTING INFORMATION
I. INTERNAL USERS OF ACCOUNTING INFORMATION
1. Owners
2. Management
3. Employees
II. EXTERNAL USERS OF ACCOUNTING
INFORMATION
1. Creditors and financiers
2. Potential investors
3. Consumers
4. Tax authorities
5. Government
6. Research scholars
BRANCHES (CLASSIFICATION) OF ACCOUNTING:
1. Financial accounting
2. Cost accounting
3. Management accounting

SYSTEMS IN ACCOUNTING
1. Cash system (only cash receipts and payments are recorded)
2. Credit or mercantile system (only credit transactions)
3. Mixed system (both cash and credit system)
ACCOUNTING CONCEPTS AND CONVENTIONS
MEANING OF ACCOUNTING CONCEPTS: The
assumptions or postulates or ideas
THE LIST OF BASIC ACCOUNTING CONCEPTS
1. THE ENTITY CONCEPT: The association of persons is
considered distinct and separate from the owners, managers
and employees of the enterprise.
2. GOING CONCRN CONCEPT: Assumes that a business
entity has continuity of life. It will continue for an indefinite
period of time. It has no need to close down.
3. MONEY MEASUREMENT CONCEPT: All transaction
are measured, expressed and recorded in terms of money.
4. DUAL ASPECT CONCEPT: Business has two aspects –
receiving of benefit and giving of benefit. Both the aspects of
each transaction must be recorded.
5. ACCOUNTING PERIOD CONCEPT: A business unit may
continue for an indefinite period. There should be a correct
interval for preparing the counting information.
6. COST CONCEPT: Assets are recorded at the price paid to
acquire them
7. MATCHING CONCEPT: Match the revenues earned
during an accounting period with the cost associated with the
period to ascertain the profit earned.
MEANING OF ACCOUNTING CONVENTIONS: The
established traditions, customs, methods and practices which
usually as guidelines for preparation and presentation of
accounting.
THE LIST OF BASIC ACCOUNTING CONVENTIONS
1. CONVENTION OF FULL DISCLOSURE: All
accounting statements should be prepared honestly.
2. CONVENTION OF CONSISTENCY: The rules, practices and
concepts used in accounting should be continuously observed

3. CONVENTION OF MATERIALITY: Materiality means ‘relative

importance’. All important items and facts should be
disclosed in accounting statements.
4. CONVENTION OF CONSERVATISM: Conservatism is a
policy of caution or ‘playing safe’.
METHODS OF ACCOUNTING
1. SINGLE ENTRY SYSTEM: Only the personal accounts of the
debtors and creditors and cash book of the trader are
maintained. Impersonal accounts such as sales account,
purchase accounts etc, as well as the assets accounts are
ignored.
2. DOUBLE ENTRY SYSTEM: Every transaction has two
aspects. One is benefit receiving aspects or incoming aspect
and the other one is benefit giving aspects or outgoing
aspect. The benefit receiving aspect is said to be a “debit”
and the benefit giving aspect is said to be a “credit”.
MEANING OF DEBIT AND CREDIT: The word Debit is derived
from the Latin word Debitum which means “Due for that”. In
short, the benefit receiving aspect of a transaction is known
as debit.
The world Credit is derived from the Latin word Creder which means
“Due to that”. The benefit giving aspect of a transaction is known as
credit.
ADVANTAGE OF DOUBLE ENTRY SYSTEM
1. Complete record 2. Ascertainment of profit or loss 3. Knowledge of
financial position 4. A check on the accuracy of accounts 5. No scope
for fraud 6. Tax authorities 7. Amount due from customers 8. Amount
due to suppliers 9. Comparative study.
TYPES OF ACCOUNTS
1. PERSONAL ACCOUNTS: Accounts of persons with whom the business
has dealings are known as personal accounts, e.g., Name of an
individual, firms accounts, limited companies and representative
personal accounts.
2. REAL ACCOUNTS: Accounts in which the business records the real
things owned by it . i.e., assets of the business are known as real
accounts, e.g., Buildings, furniture and cash.
3. NOMINAL ACCOUNTS: It relates to the items which exist in
name only. Expenses, incomes etc., are there in business
activities. Accounts which record expenses, losses, incomes
and gains of the business are known as nominal accounts,
e.g., Insurance.
ACCOUNTING RULES:
PERSONAL ACCOUNTS
Debit the receiver
Credit the giver
2. REAL ACCOUNTS
Debit what comes in
Credit what goes out
3. NOMINAL ACCOUNTS
Debit all expenses and losses
Credit all incomes and gains
ACCOUNTING TERMINOLOGY
1. CAPITAL: Capital represents owners’ claim against the
assets of the business. It also known as owners equity or net
worth.
2. LIABILITIES: It represents temporary interest of outside
creditors in the assets of a business.
3. ASSETS: Assets are future economic benefits, the rights,
which are owned or controlled by an organization or
individual.
4. EXPENSE: It is any amount spent in order to produce and
sell the goods and services which bring in the revenue.
5. DEBTORS: A person who receives a benefit without giving
money or money’s worth immediately but, liable to pay in
future is a debtor.
6. CREDITORS: A person who gives a benefit without receiving
money or money’s worth immediately but, liable to claim in
future is a creditor.

7. FIXED ASSETS: Assets acquired for income generation, but

not for resale are called fixed assets.

8. CURRENT ASSETS: Those assets which are converted into

cash in normal course of business in less than one year.

9. PURCHASES: Buying of goods with the intention of resale is

called purchases.

10. SALES: Selling of goods in the normal course of business.

11. STOCK: Goods lying unsold on a particular date. The stock
of goods at the end of the accounting period is called “closing
stock”, and the stock of goods at the beginning of an
accounting period is called “opening stock”.

12. CURRENT LIABILITIES: Those liabilities which are payable

within one year in the normal course of a business.

13. LONG TERM LIABILITIES: Liabilities repayable beyond a

period of one year are treated as long term liabilities.
 JOURNAL
Concept: The French word “Jour” means ‘day’. Journal,
therefore means a daily record of business transactions.
Journal is a book of primary entry or original entry.

Note: 1. LF Ledger Folio – which means the page number in

Ledger into which the journal entry is posted.
2. Narration: Which explains the details of transaction for
which the entry is written.

Problems
LEDGER
MEANING: ‘Ledger’ is the second important state in the
accounting cycle or process. In this stage of accounting
cycle, all recorded business transactions or entries are
grouped on a predetermined basis. Such grouping takes the
form of ‘accounts’ in a separate book known as ledger
• A summary statement of all the transactions relating to a
person, asset, expense or income which have taken place
during a given period of time and shows their net effect.
• Problems
TRIAL BALANCE
“It is a statement in which debit and credit balances of all the
accounts in the ledger are shown to test the arithmetical
accuracy of the books of accounts”.
Objectives of Trial Balance
1. Trial balance helps to establish arithmetical accuracy of the
books.
2. Financial statements are prepared on the basis of agreed
trial balance.
3. Trial balance serves as a summary of what is contained in
the ledger.
4. Important conclusions can be derived.
5. Books of accounts are tested and it is only after this test the
final accounts are prepared.

Problems
Review Problems
1. Journal entries
2. Ledger and trial balance
3. Test of your understanding
4. Application/Tutorial