BASIC ACCOUNTING /ACCOUNTS

1. Introduction.

Successful ship owning is 95% careful accounting. Many prosperous ship-

owners have a background in finance and banking.

An enterprise that spend more than it earns will not survive. The exception is if it
is subsidized from public funds as a social service.

Whether intended as a profitable business or as a nonprofit making undertaking,

it is necessary to produce records of income and expenditure, commonly known
as a set of books.

2. Terminologies used in accounting.

a) Accounting

This is the systematic and comprehensive recording of financial

transaction pertaining to the business. It is therefore a complete package
of all the planning and managing of the company financial affairs.
Bookkeeping is a part of accounting.

b) Capital

This is the total value of all the company’s fixed assets, investment and
cash. It is therefore the money required to start a commercial enterprise.
Capital will be required from time to time to maintain its momentum or to
increase the range of its activities.

Purpose of capital in an enterprise.

 To purchase machineries or equipment’s or anything that will

become a fixed asset such as ships.

 To run the company e.g. paying wages, salaries and rent. This is
known as working capital.

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 How to raise capital

 Through incorporating partnership in the business by allowing other

people to become part – owners of the company.

 Through borrowing the money from a bank or other financial

institutions. This is referred to as loan capital.

c) Management accounting

This is process of preparing management reports and accounts that

provide accurate and timely financial and statistical information required
by managers to make day-to-day and short-term decisions.

d) Interest

This is the percentage of the capital sum that the borrower pays the lender
for the use of the money borrowed. Borrowing and lending are essential
elements of commercial life.

A company may find that it has more cash than it need for its immediate
purpose. It will deposit this with the bank so that it earns interest instead of
lying idle. This is called lending.

Alternatively, the company may have a temporary shortage of ready cash.

This will require a short term loan from the bank known as an overdraft. a
well-managed company can usually negotiate a substantial overdraft
facility. This is called borrowing.

e) Credit

This is whereby goods and services in the commercial world are provided
without immediate payment. The recipient of the goods is given credit. A
vital function of bookkeeping is keeping track of the credit in the company.

When the goods and services are supplied, an account is presented in the
form of an invoice. Invoice will give details of the goods and services
provided and the cost. The invoice is likely to state when payment should
be made or the length of time permitted between supply and payment may
be mutually agreed by the two parties.

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 Those who have supplied the goods and services on credit basis and are
awaiting settlement of their invoices are called Creditors.

When the accounts are paid, the outgoing money is referred to as

expenditure.

Those who owe money against outstanding invoices are debtors. When
they have settle their accounts the money is referred to as income or
revenue.

f) Cost

This is the cash amount or cash equivalent given up for an asset thus it is
the commercial value of the asset.

Capital assets such as ships needs to work to earn revenue and generate
profit. To do so requires expenditure on a wide range of items, which will
have to be forecast as accurately as possible for budgeting purpose.

Categories of cost

i. Fixed cost.

These are expenses that must be incurred whether production is

done or not. In shipping they are cost that will be incurred even if
the ship stand idle. This process is called amortization e.g.

 Loan repayments ,
 Interest on the loan
 Depreciation.

Another cost that continues regardless of what is happening is

depreciation, because an asset grows older so its value
decreases. This is subject to any revaluation.

ii. Variable cost

These are cost that varies with the production. They vary
depending with the cost of production and output. They are
subdivided into two as follows

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 Running cost.

These are cost that occurs whenever a ship is operational such as

 Crew wages
 Maintainace cost
 Insurance cost

Voyage cost.

These are cost that apply uniquely to a specific voyage such as

 Bunkers cost
 Port cost
 Stevedoring cost
 Agency Fee / cost.

g) Budget;

This is an estimate of costs, revenues, and resources over a specified

period, reflecting a reading of future financial conditions and goals.

h) Profit ;

This is a financial benefit that is realized when the amount of revenue

gained from a business activity exceeds the expenses, cost and taxes
needed to sustain the business.

i) Revenue

This is the amount of money that the company actually receives during a
specific period of time including discounts and reductions.

j) Balance sheet ;

This is a financial statement that summarizes a company's assets,

liabilities and shareholders' equity at a specific point in time.

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The following are items contained in the balance sheet;

i. Assets

Fixed Assets

 Ships
 Building’s
 Land
 Equipment’s like containers
 Interest in leased assets
 Tangible assets like Good wills and Trade marks

ii. Current assets

 Stocks
 Debtors
 Investments
 Cash at bank
 Cash in hand
 Inventories e.g. Raw – materials
 Account receivable – Money expected from credit sales

iii. Capital and reserves

 Share premium
 Revaluation reserves
 Stockholders funds
 Loans
 Creditors
 Share capitals
 Provisions for liabilities and charges

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k) Profit and Loss Account.

This is the financial statement that summarizes the revenues, cost and
expenses during a specific period of time E.g. 1 year. It therefore shows
the position of the company if it made a loss or profit within the financial
period.

The following are the key items in the profit and loss account;

 Turnovers
 Net operating profit
 Share of pre – tax profit
 Operating profit
 Interest payable less interest received
 Employees profit share
 Profit on ordinary activities before taxation
 Taxation on profit on ordinary activities
 Dividends

l) Bookkeeping

This is the practice of collecting, analyzing and recording all the company
financial information’s such as profit and loss account and balance sheet.

Uses of bookkeeping;

 Fund borrowing ;

The company can seek and obtain funds from financial institutions
like banks using the company audited books of accounts and
financial statements like the balance sheet and profit and loss
account.

 To know the business financial status ;

Company financial records and books of accounts like profit and

loss account and balance sheet are used in calculating whether the
companies have inquired profit or loss over given financial year.

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  Budgeting ;

Through financial records, the company can do its budgeting based

on the company financial records.

 Attracting stakeholders and retaining their confidence in the

company ;

Through proper company financial records like profit and loss

account and balance sheet that are audited and show that the
company is generating profit or financial stable, the shareholders
may be attracted and their confidence in investing in the company
boosted.

 Easy cash flow monitoring and management;

If the company books of account are in order and up to date, the

company will have ability to save money through having monitoring
and controlling the cash inflows and cash outflows.

 Performance evaluation;

The company uses financial books of accounts like the profit and
loss account records to evaluate the business performance and to
determine the percentage growth of the business.

m) Cash Flow

This is the movement of cash in and cash out of the company in the form
of payment to suppliers and collection from the customers.

Types of cash flow in business

i. Positive cash flow

This is a type of cash flow which is realized by the company

when the company cash inflow during a specific period is higher
than the cash outflow. Meaning the company income is higher
than the company expenditures.

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 Importance of positive cash flow

 Easy planning.
 Easy budgeting.
 Used for seeking funds from the financial institutions.
 Attracts and retains investor’s confidence to invest in the
company.
 It is assign of the company financial stability.
 Easy monitoring and managing of the company assets.
 Easy performance evaluation.

ii. Negative cash flow

This is when the company cash outflow is higher than the cash
inflow meaning the company expenditure is higher than the
company income.

Courses of negative cash flow

 Selling the goods and offering services on credit terms.

 Giving debtors long credit period.
 Company poor follow up of the debtors.
 Company investing on projects with long pay back
periods.
 Company overspending on the vouchers and petty cash.
 Poor company financial planning.
 Poor planning of the company projects.
 Poor debtors records keeping.
 Bad debts in the company.

How port agent can avoid negative cash flow

 Through selling goods or offering services on cash basis.

 Through offering shorter term credit period to debtors.
 Through investing on projects with faster payback period.
 Through proper follow up of debtors to pay their debts.
 Through proper debtors records keeping and follow up.
 Through proper budgeting.

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  Through proper monitoring and controlling of cash flows.
 Through proper financial planning.

3. Business Entities / Types of Companies

Business entities are types or forms of the business that are operated by the
business operators’. They includes

a) Sole trader / Sole proprietor

This is a form of business operation formed and operated by one person (the
owner) in which the owner owns all the assets of the business .it is therefore
a one man business type. It is also called sole trader. The business owner will
raise all the money necessary to operate the business.

Advantages of sole proprietorship.

 Easy formation and dissolution.

 It attracts low startup cost.
 It has low operational overheads e.g. low wages
 There is no corporate income taxes since it is not corporate entity
 Easy to raise capital.
 Owners make independent decisions.
 Owners have complete control over the business.
 Owners have personal contact with employees and customers.
 Easy to eliminate bad debts.
 Business information’s are kept very private and confidence.
 Owners enjoy all the profit alone.
 There is flexibility since owners are able to respond quickly to business
needs.
 The owners have total business control.

Limitations of sole proprietorship.

 The owner bears all the losses alone.

 The owner have unlimited / continuous liability for business debt.
 The success of the business depends on the hard work of the
entrepreneur.

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  Business operations can be affected by the death of the owner.
 Inadequate capital for business owners.
 Owners are subjected to long working hours leading to low
productivity.
 Sometimes the owners may make poor decisions due to lack of
consultation.

b) Partnership / Firm

This is a type of business entity which is formed by two or more people or

partners with an aim of making and sharing of the proceeds / profits
generated from the business.

Advantages of partnership business entities;

 Synergy. There is clear potential for the enhancement of values

resulting from the two or more individuals combining their strength.
 There is stronger potential of access to greater amount of capitals.
 There are no corporate income taxes.
 There is capacity for more capital to be raised by different partners.
 Work can be divided among the partners.
 There is better and healthy consultation among the partners.
 They are relatively easy and simple to form than co operations.
 They are subjected to fewer regulations than co operations.
 It is easy to expand the business.
 It allows moral support and brain storming among the partners.
 There is specialization among the partners.
 There is no restriction on size

Limitations of the partnership business entity;

 Unlimited liabilities since general partners are individually responsible

for the obligation of the business hence creating personal risk.
 A partnership may end upon the withdrawal or death of either partner.
 There is a real possibility of disputes or conflict between the partners
which could lead to dissolving the partnership.
 If one partner makes a mistake, all partners suffer from the
consequences.
 Some partners may work harder than others, yet the profit are shared
.this may discourage a hard working partners.

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  If a business relies heavily on one partner and the partner leaves or
dies, the firm can easily collapsed.
 There is time consuming in decision making.

c) Limited company

This is a business entity formed by shareholders rather than partners and the
liability of the partners is limited to their shareholdings. If the company fails, all
the shareholders lose is what they paid for their shares.

In case of any loss, those whom the company owed money will bear the rest
of loss as the shareholders bear the loss of what they pay for their shares.
This may seem unfair to the suppliers that provided goods on credit but it is a
risk they must run when doing business with a limited company.

Limited companies must have at least one director, who may or not be a
major shareholder Director must abide by certain rules of conduct

A Limited company may be owned by a small group of shareholders, in this

case it is referred to as Private Company and its name has to include
specific words or initials after its name. In the UK, the word Limited or the
abbreviation LTD is used.

Companies owned by a large number of shareholders are known as Public

companies and a different name or set of initials has to be used in their
names. In UK, the initial PLC standing for Public Limited Company is used.

Advantages of Limited companies

 They are available to anyone who wishes to buy shares

 They are traded in stock exchange market at whatever market price
 Large companies may buy or form subsidiaries companies
 They are easy to form
 They can raise more capital through sale of share to the public.
 Shareholders has limited liability.
 The death of the shareholder does not affect its operations.
 They are managed by the professionals.
 There is more control on the management.
 It is a legal entity.
 There shareholders liability is limited to the amount contributed.

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  There is no restriction on the transfer of the shares.
 They can easily expand due to large capital base.
 The company is a legal entity which can sue and be sued.

Limitations of Limited companies

 Shareholders can only transfer their shares with the consent of

other shareholders.
 The company is not allowed to appeal to the public for extra capital.
 The accounts of the company must be filled annually with the
registrar of companies.
 Lack of secrecy.
 Not allowed to subscribe its shares to the public.
 The procedures of forming companies are long and complicated.
 Raising capital can be expensive due to the cost involved.
 As the company grows it may be difficult to manage.
 Once established, it has to comply with many regulations.
 The accounts of the public companies must be published so there
is no secrecy or privacy about its affairs.
 The owners exercise little control over the business.

d) Conglomerates

These are large companies with several branch offices or factories. They are
also made up of numerous subsidiary companies. The subsidiaries may be in
a line of business related to that of the parent or in an entirely different trade.
One reason for forming a conglomerate is Integration.

Example

To avoid having to buy inland transport services from outside, a ship owner
may own a trucking company. It may also possess a chain of agency offices
so that it uses its experience to gain income from others

Some conglomerates have very varied operations comprising of a shipping

company, an engineering division and a timber division. The subsidiaries may
trade with each other, but the main reason for the mix, which is known as
Diversification is to spread the risk. One year shipping may be booming
whereas the building trade is poor, reducing the profitability of the timber
division. In another year, engineering is doing well, but the shipping market is

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 rather weak. Because it does not depend on a single market sector, the
conglomerates is able to maintain its overall profitability.

Reasons why Corporations form conglomerates

 The desire to become involved in a business that is different from the

company's main focus.
 A desire to diversify so that, for example losses in one business may
be offset by gains in another.
 An intention to transition the company toward a new area of business.
 Attractive revenues, either historical or projected, from the prospective
subsidiary.
 A need to protect company's established business from risks
associated with the subsidiary.

Advantages of conglomerates.

 It creates an internal capital market.

 It ensures great earning.
 It leads to business diversification.

Limitation of conglomerates;

 They are very expensive to manage.

 They are very complex.
 They sometimes lack focus due to multiple projects.

e) Multinational companies

These are Conglomerates that set up branches and subsidiaries both in the
country where the parent is registered and abroad so it can trade throughout
the world yet retain the trade and profits within its own organization. Example
is Major oil companies and mining companies.

Examples of multinational companies;

 Coca cola – Beverage Company.

 Total limited – Oil Company.
 Toyota – Motor Vehicle Assembly Company.

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  Samsung Limited – Electronic Company.
 Maersk limited – Shipping company
 DHL Logistics – Logistics.
 Plan international – Charitable organization.

Advantages of Multinational companies;

 They boost development in the areas they operate.

 They bring technology in the areas they are operated.
 They help in improving transport link in their areas.
 They provide source of employment to the locals.
 They promote international trade.

Limitations of multinational companies;

 They are subjected to tax in their areas of operations.

 They lack privacy to information since locals have access to such
information.
 They impose stiff competition to the local companies.
 They are biased since in some cases some jobs are reserved to
foreigners.
 They require more regulations to open and operate them.

4. Exchange rates

Each country or region has its own currency and each currency has a value that
can be measured against the currency of another country. These relative values
fluctuates every day.

Shipping is an international business, so rates of exchange have an important

role to play. For example, a company may pay the crew wages in pounds
sterling, whereas capital repayment is in Japanese yen, bunkers and port cost in
a wide variety of currencies, and freight is earned in US dollars. Should any of
the currencies become much stronger or weaker, the company profitability could
be seriously affected.

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5. Company accounts

Companies should be publishing their accounts. A set of published accounts may

also contain such things as a cash flow statements and list of explanatory notes.
These will includes a description of the depreciation principles applied, the way in
which assets have been valued and various other items.

6. Vertical and Horizontal Integrations.

a) Vertical integration ;

This is an arrangement in which the supply chain of a company is owned

by the company.

Usually each member of the supply chain produces a different product or

market specific service and the products combine to satisfy a common
need. The company therefore owns its upstream suppliers and it’s down
streams buyers.

Types of company vertical integration.

i. Forward vertical integration;

This is the strategy where a firm / company gains ownership or increased

control over its previous customers (distributors or retailers).

Example;

A shipping line setting up clearing and forwarding company , container

deport or cargo freight station at the port of discharge to control the
demand of its clients who would want to import or export using such
clearing and forwarding firms , cargo freight stations.

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ii. Backward vertical integration.

This is a strategy where a firm / a company gains ownership or increased

control over its previous suppliers.

Example;

The shipping company acquiring bankers’ supplier and ship spares

company for its ships supply needs.

Advantages of the vertical integration strategy:

 Lower costs due to eliminated market transaction costs

 Improved quality of supplies
 Critical resources can be acquired through Improved coordination
in supply chain
 Greater market share for the company.
 Secured distribution channels
 Facilitates investment in specialized assets (site, physical-assets
and human-assets)
 New competencies.

Disadvantages of vertical integration strategy.

 Higher costs if the company is incapable of managing new activities

efficiently;
 The ownership of supply and distribution channels may lead to
lower quality products
 Reduced efficiency because of the lack of competition
 Increased bureaucracy and higher investments leads to reduced
flexibility;
 Higher potential for legal repercussion due to size (An organization
may become a monopoly)
 New competencies may clash with old ones and lead to competitive
disadvantage.

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7. Horizontal integration ;

Horizontal integration is the acquisition of additional business activities that are at

the same level of the value chain in similar or different industries. This can be
achieved by internal or external expansion

Advantage of company horizontal integration;

 It allows the companies at the same level to share the resources.

 It create favorable economies of scale,
 It creates economies of scope,
 It leads to increased market power
 It leads to reduction in the costs associated with international trade by
operating in foreign markets.

Limitation of horizontal integration.

 It can lead to market monopoly.

 It creates lack of competition
 It leading to poor quality services.
 It crates lack of trust among the operators.

8. Disbursement accounting.

a) Terminologies

i. Disbursement ;

This is the act of paying out or disbursing money, such as money paid
out to run a business, cash expenditures, dividend payments, and/or
the amounts that a ship agent might have to pay out on principal behalf
in connection with a port visit transaction.

ii. Pro Forma Disbursement Account (Proforma) ;

This is an estimate of the port charges and husbanding charges

related to a ship call. A pro forma disbursement account will often be
sent by the agent to the owner or charterer after an agent is appointed.
The Proforma will estimate the funds required to accomplish the port
call.

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 iii. Disbursement invoice ;

This is an itemized invoice showing all cost and charges incurred

during the ships port call supported by the supplier’s individual invoices
showing how the monies disbursed or advanced by the principal to the
agent were spend.

b) Responsibility of paying pro – forma disbursements ;

The responsibility of paying disbursement account would normally fall on two

parties as below

 The ship owner if the vessel is trading on the voyage charter.

 The despondent owner if the vessel is trading on time charter.

c) Items on the pro – forma disbursement invoice.

 The Port / dock charges.

 The canal dues.
 The river dues.
 The towage charges.
 The government levies.
 The agency fee.
 Ship repairs and maintainace cost
 Stores and provision cost
 Crews and master cost

d) Importance of the pro – forma disbursements account.

 To protect the agent from the possibility of default in payment by the

principal.
 It approves the principal financial statement.
 It eases the burden of cash flow for the agents due to late payment.
 It protects the agents from the bad debt.
 It is best for dealing with the principal not very well known by the agent.

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e) COST DIVISION DURING THE SHIPS PORT CALL IN TIME CHARTER
PARTY AGREEMENT.

An agent may often find that they are expected to incur disbursement for
other parties other than their immediate principal .This is especially likely
when the appointment is from a time charter and it is important that the
source of reimbursement is clear.

i. Time charterer cost.

 Cargo handling cost.

 Bunkers cost.
 Pilotage cost.
 Towage cost.
 Agency fee.
 Dock or jetty dues.
 River and canals dues.

ii. Ship-owners cost.

 Cash to the ship master.

 Crew cost (Salaries and Wages)
 Crew medication cost.
 Ship stores and provision cost.
 Repair and maintenance cost.
 Protection and indemnity cost.
 Hull and machinery cost.
 Ship mail cost.

iii. Shippers cost.

 Government levies on import and export cost.

 Custom dues on cargo cost.
 Charges on CIF consignments.
 cargo loading and discharging cost
 Cargo inspection cost.
 Inland transport cost.

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f) The final disbursement account.

 The ship agents should record all the purchases of both services and
supplies to ensure that all the charges are in line the principal understands
and their acceptance.

 The port agent should try to ensure that where possible all the invoices
are signed by the ship master since some principals expects all the
invoices to have the master approval. If this is not possible a port agent
should make sure that a proper agreement is reached before undertaking
the agency.

 All the suppliers should be instructed to submit their invoices quickly and
in line with the agreed prices. The invoices should be addressed to the
ship master and owners care of agents .This is because only this way are
the legality recognizing the agent status which relieves the agent of the
financial liability for the services or purchases which they request upon on
the behalf of the principal.

 The agent should be able to dispatch their disbursement account with all
statements of all charges incurred for the port call and supported by the
invoices for verification within 30 days.

g) How port agents recover from delinquent or difficult principals.

 Through joining debt collectors who are members of CISBA and TIM.

 Consider subscribing to the Lloyd’s List Intelligence website, which

provides a wealth of information in relation to the world’s shipping fleet,
their owners, insurers, vessel movements, in addition to other useful
information.

 Establish which P&I Club the ship is entered with. Is it insured with a Club
from the International Group? In the event of a problem, you will want the
assurance that the vessel is insured by a quality insurer.

 Proceed with caution if the vessel is coming into port with mechanical
problems. This could lead to undue delays in port (particularly if the owner
is in financial difficulty) and liabilities to accrue for a ship agent, in terms of
port dues and other related expenses.
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  Through liquidation of the principal company to cover the debts.

 Through legal arresting and detaining the ship with possible auctioning of
the ship.

h) Port agents from difficult or delinquent principals.

i. Obtain advance funds

If you’re principal is unwilling to provide advance funds, or only remits part of

your pro forma disbursements, contact the club to see if anything is known about
the company. If the clubs is already pursuing outstanding debts from the same
principal, it is essential that the funds should be secured before the ship sails.

ii. Find out for whom you are acting ;

If your instructions are from a company who describe themselves "as agent only"
Ask them for whom they are acting as agents. Just because the party instructing
you is a substantial ship owning or Management Company does not mean that
the party they represent is equally substantial. You may find that the party to
whom you are offering your service is not one to whom you would knowingly
extend credit. On occasions we find that the "agent" is himself a creditor of the
party he represents and is, therefore highly unlikely to discharge the debt to the
port agent.

Similarly, you must regularly notify the suppliers of goods and services to ships
under your agency that you are acting "as agent only" and let them know the
identity of your principals; otherwise you could find yourself being pursued
through the courts by those suppliers.

iii. Find out who is going to pay ;

If there are several parties involved with a ship under your port agency, you must
immediately establish who is going to any for each service. The club frequently
sees claims where the port agent has ordered goods and services e.g., port or
stevedore costs without first establishing who is going to any. If there is any
dispute between the owner and charterer over who is liable to pay under the
terms of the charter party, both parties could refuse to appeal the agent might
then be forced to settle the charges himself.
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 When a port agent sends his request for pro forma disbursements to his
principal, be should include the following sentences as precaution: "Unless we
are specifically devised by you that another party will be responsible for any
services rendered to the ship before they are ordered, we will order such
services on your behalf and for your account".

vi. Do not leave it too long before seeking the Club's assistance;

Contact the Club within a reasonably short period after the debt has been incurred. The
older a debt, the harder it is collect, especially if the ship has been sold and the debtor
is bankrupt. In some countries the time limit for collecting a debt is as little as two years,
so you may find that you have no legal redress against the debtor company.

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