Accounting

M U H A M M A D Z E E S H A N A K RA M
“Accounting is the language of the
practical business life. It must be
an accurate language, one that
does not permit misunderstanding,
and one that should be used
without bias and without emotion”

- LUCA PACIOLI
Accounting?
Accounting is the language of business that communicates corporate results to
the world.

Control Investors
Employees
Customers
Suppliers
Creditors
Operatio
ns
Communities

Plan Evaluate Accounting

Why Accounting?

• What does a company own?

• How much does a company owe others?
• How well did a company’s operations perform?
• How does the company get the cash to fund
itself?
Accounting Concepts

Cash Vs
Accrual Going Consisten
The Entity
Accounti Concern cy
ng

Allocation
Objectivi Conservatis Materialit
&
ty m y
Matching
The Entity
Accounting reports communicate the activities of a specific
entity.

• Alshaya Group prepared

Conglomera reports for each of its
Starbucks coffee shops
te • Landmark Group
prepared reports for Corporate
each of its store
• Panda prepared report Report
for its District Izdihar
Single branch
• KFC prepared report for
its branch in Nakheel
Mall
Cash Basis Vs Accrual Accounting
Cash basis Accounting: transactions are recorded only when cash
changes
Examples:hands
• If a store pays two years’ rent in 2000, all the rent cost would be recorded
as a cost in 2000, not over a period of two years
• When a small machine shop purchases a power tool, its cost would be
recorded when it was purchased, not over the useful life of the tool

Accrual Accounting: recognizes the financial effect of an activity when the

activity takes place without regard to the movement of cash when a product or
service is delivered to a customer with the expectation that money will be paid
Examples:
in the future
• Almajdoi rental costs are recorded each month with the benefits of
occupancy
• The cost of rivet guns at Boeing’s aircraft factory is recorded over
the useful life of the tools as workers use them on the factory floor
 Allocations & Matching
MatchingAllocation

IBM sold a large computer on credit to Ford Motor Company on December 31, 2000,
accrual accounting would record the sale in 2000 when the binding contract was
signed, not when Ford actually laid out the cash in 2001. The sale could be
recorded at that point, because it was then that Ford became legally bound to take
delivery of the computer. Ford, on the other hand, would recognize or accrue and
allocate the cost of using the computer over its useful life.
Almarai sells fresh produce on December 31, 2000, but doesn’t pay the supplier’s
bill until 2001, accrual accounting will nevertheless record the costs related to those
sales in 2000. Almarai’s sales in 2000 caused the expense, and therefore, the sales
should have the related costs allocated against them in the same year. Sales made
in one period are matched with their related selling costs or cost of goods sold
(COGS) in the same accounting period
Without established policies for allocation and matching,
accountants could easily manipulate financial reports by choosing
when to record sales or expenses in order to cover up or delay bad
results
Objectivity
Accounting records transactions only if they are:
• Completed
• Quantifiable (monetary value)
• Reasonable
• Verifiable

If IBM purchases a patent on a new chip from an inventor for $1,000,000, it would
be recorded on the books as $1,000,000. The patent has quantifiable market value.
However, if an IBM scientist developed a new chip architecture in the lab, the
accountants could not record the innovation until it was sold
Conservatism
When companies incur losses that are probable and that can reasonably be
estimated, accountants record them, even if the losses have not actually been
realized
When gains are expected, accountants postpone recording them until they actually
are realized
Accounting conservatism governs the preparation of financial statements and
records only:
• Measurable Assets
• Verifiable Assets
• Debts
• Sales
• Costs
Conservatism dictates that the loss be
recognized today
Going Concern
The values assigned to items in the accounting records assume that the business is a
going concern
Accountants presume:
• Company will continue to operate in the foreseeable
future
• Company is using its machinery productively
Consistency
Accounting rules demand that an entity use the same accounting rules year
after year

FIFO
LIFO

$50 $500
1950 2020
Materiality
Financial statements give a materially accurate picture so that a reasonable
person can make informed decisions based on the report
 The Financial Statements
Financial statements are the final product of the accounting
function
Cash Debt Stocks
The Balance
Sheet
The balance sheet
presents the assets
owned by a company,
the liabilities owed to
others, and the
Receivable
s Assets Inventory
= Taxes
Liabiliti
es
Payabl
e + Equity
accumulated
investment of its Earning
Capital
owners s
The Income Equipme
Wages
nt
Statement
The Income
statement shows the
“flow” of activity and Income = Revenue –
transactions over a
specific “period” of Expenses
time Statement of Cash
The Operations
Flows
The cash flow statement
Cash = Current Liabilities + Noncurrent Liabilities + Activities
is a management tool to
help avoid liquidity Owners’ Equity - Accounts Receivable – Inventory- Investing
problems
Noncurrent Assets Activities
Ratio Analysis
Liquidity Current Ratio = Current Assets / Current
Ratios Liabilities
Financial Leverage = (Total Liabilities + Owners’ Equity) /
Capitalization Owners’ Equity
Ratios Long-term Debt to Capital = Long-term Debt / (Liabilities +
Owners’ Equity)

Activity Assets Turnover per Period = Sales / Total Assets

Ratios
Return on Sales (ROS) = Net Income / Sales
Profitability
Ratios Return on Equity (ROE) = Net Income / Owners’
Equity
Managerial Accounting
Managerial Accounting:
• Uses accounting data to manage and analyze operations
• Focuses on operations
• Uses standards, budgets, and variances to run the business and explain
operational results
• Budget a company’s activities for a period of time,
• and
Price Explain why the
Volume actual results “varied” from the projections
Variances
• Price variance tells the manager how much of the difference between budgeted
sales revenue and actual sales revenues is due to changes in sales price changes
Sales Price Variance = (Actual Sales Price – Standard Sales Price) × (Actual Quantity Sold)
• Volume variance isolates the dollar effect of a different unit volume from what
was budgeted assuming no price changes
Sales Volume Variance = (Standard Sales Price) × (Actual Quantity Sold – Standard
Quantity
Purchase Sold)
Price and Efficiency Variances
Purchase Price Variance = (Standard Price – Actual Price) × (Actual Quantity Purchased or Used)
Material or Labor Efficiency Variance = (Standard Use Quantity – Actual Usage Quantity) × (Standard Cost of
Material or Labor)
COST ACCOUNTING Vs ACTIVITY-
BASED COSTING

Cost accounting Acivity-Based accounting

Determining the cost Allocating overhead
of producing goods expenses based on
and services and actual usage, not on
closely associated arbitrary measure
with managerial
accounting
OPEX Vs CAPEX
OPEX, which stands for "operating expenses," CAPEX, which stands for "capital
refers to expenses incurred to maintain the day-to- expenditures," refers to expenses incurred to
day operations of a company acquire tangible assets that will be used over
An expense should be classified as OPEX when it an extended period
meets the following criteria: An item of expenditure should be classified as
1. It is not an asset expected to be used for more CAPEX when it meets these three points:
than one year 1. It's an asset expected to be used for more
2. It will not generate economic benefits for the than one year
company during its useful life 2. It will generate economic benefits for the
3. It does not have a significant cost company during its useful life
• Salaries and benefits 3. It •has a significant
Land purchasecost
• Rent • Buildings
• Utilities • Equipment acquisition
• Supplies • Software acquisition
• Maintenance • Research and development
• Advertising
• Marketing

OPEX provides short-term benefits, whereas CAPEX

provides long-term benefits
Account Receivables Vs Payables

Accounts Payable (also referred to as AP) is an Accounts Receivable (also known as AR)
account on your company’s general ledger that refers to outstanding invoices that are owed to
represents an obligation to pay off a debt to your company by customers. It represents a
creditors or suppliers. In short, it’s the money line of credit that has been extended from the
owed by your business to third parties. client to the customer.