05/07/2020

CE316
PROJECT AND INFRASTURCTURE
ASSET MANAGEMENT
-
ENGINEERING ECONOMICS

TOPICS TO BE COVERED

1. Engineering Economics and financial accounting

2. Financial Statement Analysis
3. Capital Investment Decisions
4. Marketing, Costing & Budgeting
5. Tax & Engineering Business

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COURSE EVALUATION

This course will be evaluated by:

• a three-hour final examination with a weighting of
seventy-five per cent (75%) of the total overall final
mark whilst the assignments will contribute twenty-
five (25%) of the total overall final mark.
• One assignment from the course components covered
from this section

ENGINEERING ECONOMICS
Introduction
• Engineers and Architects are extremely well trained in all the
technical aspects of their professions.
• most decisions they make involve the commitment of financial resources
in the hundreds, thousands or millions of dollars
• EE is a component of project and infrastructure asset management
• covers fundamentals of economics and basic accounting.
• understanding how economy works critical for success of engineers
• rising in the ranks means more exposure in handling money resources
• ned to plan and justify how to spend money
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• skills for personal and social life

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ENGINEERING ECONOMICS

Financial accounting focuses on areas such as:

• profit and loss account,
• the balance sheet,
• historical cost and
• financial statement analysis

RECORDING TRANSACTIONS
1. The Bookkeeping Model

What is bookkeeping (accounting)?

• Bookkeeping is the recording, on a day-today basis, of the
financial transactions and information pertaining to a
business.
• usually performed by a bookkeeper.
• It is concerned with ensuring that records of those
individual financial transactions are accurate, up-to-date and
comprehensive.
• Accuracy is therefore vital to the process.
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RECORDING TRANSACTIONS
• In principle transactions have to be recorded daily into
the books or the accounting system

• For each transaction, there must be a document that

describes the business transaction, in the terms of a simple
sales e.g. an invoice

RECORDING TRANSACTIONS
What is an Invoice?
• a document sent to a buyer that specifies
the cost of products or services that have
been provided by a seller.
• indicates what must be paid by the buyer
according to the payment terms of the
seller.
• Payment terms usually specify the period
of time that a buyer has to send payment
to the seller for the goods and/or services
that they have purchased. 8

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BOOKKEEPING

Main reasons for book-keeping:

• to keep records of income (money coming in) and
expenditure (money spent) so that the profit or loss during
a period of time can be easily worked out
• to keep records of assets (property and stock owned) and
liabilities (bills or money still owing to others) so that the
financial situation of the project or business can be worked
out

BOOKKEEPING

Common financial transactions and tasks that are

involved in bookkeeping include:
• Billing for goods sold or services provided to clients.
• Recording receipts from customers.
• Verifying and recording invoices from suppliers.
• Paying suppliers.
• Processing employees’ pay and the related governmental
reports.
• Monitoring individual accounts receivable.
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BOOKKEEPING

• Recording depreciation and other adjusting entries.

• Providing financial reports.

Today bookkeeping is done with the use of computer

software.
Bookkeeping requires knowledge of debits and credits and
a basic understanding of financial accounting, which
includes the balance sheet and income statement.
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BOOKKEEPING

Functions of a Bookkeeper
• A bookkeeper/an accounting clerk/accounting technician,
is a person who records the day-to-day financial transactions
of an organization
• is usually responsible for writing the "daybooks". The
daybooks consist of purchases, sales, receipts and
payments

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BOOKKEEPING

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BOOKKEEPING

Functions of a Bookkeeper
• is responsible for ensuring all transactions are recorded in
the correct day book
• The bookkeeper brings the books to the trial balance stage.
• An accountant prepares the income statement and
balance sheet using the trial balance and ledgers prepared
by the bookkeeper

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BOOKKEEPING SYSTEMS

TYPES OF BOOKKEEPING SYSTEMS

There are two types of bookkeeping systems used in recording
business transactions:
1. single-entry bookkeeping system and
2. double-entry bookkeeping system

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Single-Entry Bookkeeping System

1. Single-Entry Bookkeeping System

• described as a loose and defective way of recording
transactions, simple, practical and informal way of
recording.
• Usually, it only maintains a record of cash disbursement,
cash receipts, sales and purchases.

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Single-Entry Bookkeeping System

Disadvantages of Single Entry System.

• Since every debit does not have a corresponding credit, a
Trial Balance cannot be extracted to test the arithmetical
accuracy of the entries.
• It is too easy to perpetrate the errors and frauds and too
difficult to detect them.

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Double-Entry Bookkeeping System

2. Double-entry Bookkeeping System

• In a double-entry system, two entries are made for each
transaction – one entry as a debit in one account and the
other entry as a credit in another account
• which means that for every transaction there is something
received (debit) and given up (credit), as such, recorded
transaction affects two or more accounts.

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Double-Entry Bookkeeping System

• The two entries keep the accounting equation in balance so

that:
Assets = Liabilities + Owners’ Equity
• Equities are the claims against the assets and indicate the
source of assets.
• The source may be owners themselves or outsiders,
• e.g. owners invest funds in the Organization and Creditors
lend money in the Organization.
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Double-Entry Bookkeeping System

Double entry bookkeeping requires that for every

transaction, there is an entry to the left side of one (or
more) account and a corresponding entry to the right side
of another account(s).
• Expenses are always debits
• Revenues are always credits
• Debit the Cash account when cash is received
• Credit the Cash account when cash is paid out
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Double-Entry Bookkeeping System

• Benefit of double-entry bookkeeping system is it has a

process to ensure accurate and complete recording of
business transactions.
• a reliable source of financial information and fair valuation of the
condition or performance of a business.
• Advantages of Double Entry System:-
• It is possible to keep a full record of dual aspect of each
transaction.
• Transactions are recorded in a scientific and systematic manner and
thus the books of accounts provide the most reliable information
for controlling the Organization efficiently and effectively.
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BOOKKEEPING SYSTEMS

Double Entry Accounting versas Single Entry Accounting

• Single-entry bookkeeping is a system that tracks basic
income and expenditures as these transactions occur.
• Double-entry bookkeeping goes a step further and
demonstrates the effect of each transaction on the
company's overall finances, showing where the funds have
come from as well as how the resulting purchase or sale has
affected your bottom line.

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BOOKKEEPING SYSTEMS

Accountability
• A double-entry bookkeeping system introduces an elevated
degree of accountability into your business records.
• By knowing how your business resources have been spent
and how each expenditure affects the equity of
stakeholders, your company can demonstrate that it has
used funds responsibly and can identify red flags that may
indicate fraud.
• This enhanced level of accountability is especially important
when seeking capital funding or appealing to investors.
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BOOKKEEPING SYSTEMS

Example of Single-entry Bookkeeping

Date Description Amount

Jan 2 Beginning Balance 1,000
Jan 4 Purchased workshop consumables (150)
Jan 7 Performed repair service 275
Jan 9 Performed repair service 125
Jan 17 Paid water bill (50)
Jan 30 Ending balance 1,200
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BOOKKEEPING SYSTEMS

• Because the above system uses a single column, only the

difference between revenues and expenses is totaled; not the
individual values of each
• Knowing the individual total amounts of revenues and
expenses is important to a business, e.g. when formulating a
budget
• In the preceding example, individual revenue and expense
amounts determined by sorting through transactions &
tabulating the totals using separate column for revenues and
expenses. 25

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BOOKKEEPING SYSTEMS

Separating Revenues and Expenses

Date Description Revenues Expenses
Jan 4 Purchased workshop consumables 150
Jan 7 Performed repair service 275
Jan 9 Performed repair service 125
Jan 17 Paid water bill 50
January Totals 400 200
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BOOKKEEPING SYSTEMS

• While the example above uses two columns, it is still

considered to be single entry system since only one line is
used to record each transaction in the cash account
• The single entry system often is expanded to provide more
useful information.

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BOOKKEEPING SYSTEMS
Double Entry Bookkeeping Example
Date Accounts Debit Credit
Jan 7 Cash 275
Revenue 275
• Note that two accounts (revenue and cash) are affected by the
transaction.
• If the customer did not pay cash but instead was extended credit,
then “accounts receivable” would be used instead of “cash”
• The double entries take the form of debits and credits
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BOOK KEEPING TERMS

Abbreviations used in bookkeeping

• a/c – account
• B/S – Balance Sheet
• c/d – carried down
• b/d – brought down
• b/f – brought forward
• Dr – Debit record
• Cr – Credit record
• G/L – General Ledger: (or N/L – Nominal Ledger)
• P&L – Profit & Loss
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• TB – Trial Balance

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BOOK KEEPING TERMS

Understanding Bookkeeping Terms
• Account - Record of money
• Assets - Property, stock or cash owned
• Expenditure - Money spent
• Gross Profit - Total gain made from the business
• Income - Money coming in
• Ledger - Book in which money records are kept
• Liabilities - Amounts owed by the business
• Net Profit - Real gain made, after expenses are deducted
• Purchases - Items bought
• Transaction - Business or activity carried out
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DEBITS AND CREDITS

• Definition: The term credit comes from the Latin creditum
meaning "that which is entrusted or loaned".
• In accounting, credit is the negative side of a balance
sheet account and the positive side of a result item. Crediting an
account implies that you keep a negative amount in the account.
• Definition: Debit is a formal bookkeeping and accounting
term that comes from the Latin word debere, which means
"to owe".
• A debit is an expense, or money paid out from an account, that
results in the increase of an asset or a decrease in a liability or
owners equity. Debit is the positive side of a balance sheet account,
and the negative side of a result item. 31

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DEBITS AND CREDITS

• Every transaction involves a debit entry in one account and

a credit entry in another account.

• This means that every transaction must be recorded in two

accounts; one account will be debited because it receives
value and the other account will be credited because it has
given value
• The rule to remember is "debit the receiver and credit the
giver".
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DEBITS AND CREDITS

• Debits are on the left and increase a debit account and reduce
a credit account.
• Credits are on the right and increase a credit account and
decrease a debit account.
• Which side are you on?
• Double-entry bookkeeping is governed by the accounting eqn.
• If revenue equals expenses, the following basic equation must
be true:
Assets = liabilities + equity 33

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DEBITS AND CREDITS

Examples of debits and credits

Purchase of a Computer
• Debit Computer account (Fixed asset account) is
increased
• Credit Creditors account (Liability account) is increased
Paying supplier for the Computer
• Debit Creditors account (Liability account) is reduced.
• Credit Bank account (Asset account) is reduced.
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DEBITS AND CREDITS

Simple Examples:
1. A refrigerator bought for cash for $300.
Entry = DEBIT Purchases $300 (purchase)
CREDIT Bank $300 (increase in liabilities)
2. The refrigerator sold for cash for $350
Entry = CREDIT Sales $350 (revenues)
DEBIT Bank $350 (increase in assets)
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EXAMPLE 1

Transaction 1: Purchasing an item with cash

• Suppose you purchase a new desk that costs $1,500 for your
office. This transaction actually has two parts: You spend an
asset — cash — to buy another asset — furniture.
• So, you must adjust two accounts in your company’s books:
the Cash account and the Furniture account. Here’s what
the transaction looks like in a bookkeeping entry:

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EXAMPLE 1

Purchasing a New Office Desk

Account Debit Credit
Furniture $1,500
Cash $1,500
In this transaction, you record the accounts impacted by the
transaction. The debit increases the value of the Furniture
account, and the credit decreases the value of the Cash
account.

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EXAMPLE 1

• For this transaction, both accounts impacted are asset accounts,

so, looking at how the balance sheet is affected, you can see that
the only changes are to the asset side of the balance sheet
equation:
Assets = Liabilities + Equity
• Furniture increase = No change to this side of the equation
• Cash decrease
• In this case, the books stay in balance because the exact dollar
amount that increases the value of your Furniture account
decreases the value of your Cash account.
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EXAMPLE 2

Transaction 2: Purchasing items on credit

• Here is an example that shows how to record the purchase
of inventory. Suppose that you purchase an Atlas Copco
Compressor for $5,000 on credit.
• The new compressor adds value to your Inventory Asset
account and also adds to your Accounts Payable account.
(Remember, the Accounts Payable account is a Liability
account where you track bills that need to be paid at some
point in the future.) Here is how the bookkeeping
transaction for your compressor purchase looks:
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EXAMPLE 2

Purchasing a Compressor for Sale to Customers

Account Debit Credit
Inventory $5,000
Accounts Payable $5,000
• Here’s how this transaction affects the balance sheet equation:
• Assets = Liabilities + Equity
• You can see from the two example transactions how double-entry
bookkeeping helps to keep your books in balance — as long as you
make sure each entry into the books is balanced.
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EXERCISE

You are the bookkeeper for Bitumen Hardware. A customer

has just shopped in your store on 07/09/2013 and purchased
the following items:
• 3 shovels for a total of $30.00
• 2 wheelbarrows for a total of $100.00
• This makes the total sale $130.00. The value added tax is
15% for a total of $19.50 in sales tax. The sales total is
$149.50. The customer plans to buy these items for cash.
You are required to do the bookkeeping entry 41

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EXERCISE ANSWER

• First, you would enter a debit to cash to your checking

account.
• Next, you would enter a credit to the Sales and Sales Tax
Collected accounts.
• The entries on the debit side and credit side should always
balance.
• The entry into your sales journal would use three figures --
the subtotal of sales, total sales, and sales tax. Here is how
the entry would look:
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EXERCISE ANSWER

Sales Journal Entry - Cash Receipts for

07/09/2013
Debit Credit
Cash $149.50
Sales $130.00
Sales Tax Collected $19.50

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ACCOUNTING BOOKS
Books generally used are
• Cash Book,
• Journal,
• General Ledger,
• Trial Balance,
• Income & Expenditure A/c and
• Balance Sheet: -

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CASH BOOK

• All cash transactions are entered in the cash book

straightway and ledger accounts are prepared on the
basis of such records.
• Has debit and credit sides. All receipts are entered
on the debit side and all payments are entered
on the credit side.
• It is maintained under the Double entry principle.
• All cash receipts and cash payments are entered
chronologically in the cash book 45

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JOURNAL

• A journal is a record that keeps accounting

transactions in chronological order i.e. as they
occur.
• All accounting transactions are recorded through
journal entries that show account names, amounts,
and whether those accounts are recorded in debit or
credit side of accounts.
• A journal entry is called "balanced" 46

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GENERAL LEDGER

• The complete set of accounts for a business entry is

called a general ledger.
• It is the “reference book” of the accounting system and
is used to classify and summarize transactions and to
prepare data for financial statements.
• It is also a valuable source of information for
managerial purposes, giving for example the amount of
sales for the period or the cash balance at the end of the
period.
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TRIAL BALANCE

Purpose of a Trial Balance

• Trial Balance acts as the first step in the preparation of
financial statements.
• It is a working paper that accountants use as a basis while
preparing financial statements.
• Trial balance ensures that for every debit entry recorded, a
corresponding credit entry has been recorded in the books
in accordance with the double entry concept of accounting.
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TRIAL BALANCE

• If the totals of the trial balance do not agree, the differences

may be investigated and resolved before financial statements
are prepared.
• Trial balance ensures that the account balances are accurately
extracted from accounting ledgers.
• Trail balance assists in the identification and rectification of
errors.

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TRIAL BALANCE

Following is an example of what a simple Trial Balance looks like:

ABC LTD Trial Balance as at 31 December 2011
Account Title Debit Credit
$ $
Share Capital 15,000
Furniture & Fixture 5,000
Building 10,000
Creditor 5,000
Debtors 3,000
Cash 2,000
Sales 10,000
Cost of sales 8,000
General and Administration Expense 2,000
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Total 30,000 30,000

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PROFIT AND LOSS STATEMENT

Profit & Loss A/C or Income & Expenditure A/C

• An Income & Expenditure Account, shows the revenues
from operations, expenses of operating the concern and the
resulting net profit or loss of a organization over a specific
period of time.
• In short, Income & Expenditure Accounts is an account
compiled at the end of an accounting period to Net results
of operations
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PROFIT AND LOSS STATEMENT

Total revenue $1,000,000 100%
Less Cost of Goods Sold $426,200 42.6%
Gross Profit $573,800 57.4%

Less Expenses
Accounting and legal fees $11,700
Advertising $15,000
Depreciation $38,000
Electricity $2,700
Insurance $15,200
Interest and bank charges $27,300
Postage $1,500
Printing and stationary $8,700
…..ctd 52

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PROFIT AND LOSS STATEMENT

…ctd
Professional memberships $1,800
Rent for premises $74,300
Repairs and maintenance $21,100
Training $6,900
Vehicle operating costs $20,000
Wages and salaries $223,500
Workers compensation $6,500
All other expenses $14,100
Less Total Expenses $488,30048.8%
Equals Net Profit (BOS) $85,500 8.6%
BOS = Before Owner’s Salary 53

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BALANCE SHEET

• A balance sheet is a snapshot of a business’ financial

condition at a specific moment in time, usually at the close
of an accounting period.
• A balance sheet comprises assets, liabilities and owners’ or
stockholders’ equity; that is, a statement of what a business
owns (assets) and owes (liabilities) and the value of the
owner's equity (or net worth of the business) at a specific
point in time.
• The balance sheet is the financial statement used to report
on the financial position of the business to the owner and
other stakeholders such as banks and investors. 55

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BALANCE SHEET

• AKA statement of financial position because it shows a

summary of the business’s financial position at a particular
point in time.
• Provides a good picture of financial health of a business
• a tool used to evaluate a business's liquidity.
• It helps a small business owner identify trends and quickly grasp the
financial strength and capabilities of their business.
• The difference between the assets and liabilities is known as
owner’s equity. The balance sheet is so named because the
equity must equal assets minus liabilities.
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ENGINEERING ECONOMICS

• The financial position of the Organization can be readily

ascertained by preparing a Balance Sheet.
• Frauds are prevented, because alteration in accounts
becomes difficult and discovery of irregularities is facilitated.

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BALANCE SHEET
Example of a Balance Sheet
ASSETS
Current Assets
Cash $20,000
Accounts receivable $15,000
Inventory $150,000
Total Current Assets $185,000
Non-Current Assets
Plant and equipment $50,000
Business premises $650,000
Vehicles $70,000
Total Non-Current Assets $770,000
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BALANCE SHEET
TOTAL ASSETS $ 955,000
Current Liabilities
Accounts payable $25,000
Bank overdraft $10,000
Credit card debt $5,000
Tax liability $30,000
Total Current Liabilities $70,000
Non-Current Liabilities
Long term business loan 1 $450,000
Long term business loan 2 $50,000
Total Non-Current Liabilities $500,000
TOTAL LIABILITIES $570,000
NET ASSETS $385,000
OWNERS EQUITY $385,000

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ENGINEERING ECONOMICS
TUTORIAL QUESTIONS
1. What are the advantages of using double entry
bookkeeping over single entry accounting?
2. What is the importance of the following documents in an
organisation:
a. balance sheet and
b. income statement?
3. Are balance sheets compulsory?
4. What are the components of a balance sheet?

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