RICS-APC COMPETENCIES

SECTION-1

ACCOUNTING
PRINCIPLES
Presented by:
Rana Zafar Iqbal - CCE, MSc QS, MRICS
(On Behalf of QSAP)
Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS BALANCE SHEET

The balance sheet is one of the main financial statements. It is
also known as the statement of financial position.

The balance sheet reports on the assets and liabilities of an

entity at a given point in time. Balance sheet is not a part of
double entry system.

Typical assets listed in balance sheet includes but not limited to

Cash, Accounts receivable, Inventory, Supplies, Prepaid
insurances, Land, Buildings, Equipment, and Intangible assets
such as goodwill.

On the other hand, typical liabilities include payables such as

Accounts payable, Salaries payable, Interest payable, and tax
payable

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS PROFIT AND LOSS ACCOUNT

The profit and loss account is one of the main financial
statements which provide net result of a business.

It provides net income by subtracting expenses from the

revenue.

Net Income = Total Revenues - Total Expenses

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS CASHFLOW
Cash flow is one of the main accounting statements that shows the
amount of cash generated and used by an entity over a given period. No
business can survive until it takes in more cash than it is paying out.
Cash flow statement provides relevant information in assessing
company’s liquidity, quality of earnings and solvency. Managers have to
ensure that they have enough cash available to meet their debts. If they
cannot they may become insolvent and consequently bankrupt upon a
court order.
Cash inflows usually arise from one of three activities - financing,
operations or investing
It shows how cash moved during the period by indicating whether a
particular line item is a cash in-flow or cash out-flow.
It reflects revenue or expense streams that changes a cash account over
a given period. Information for cash flow comes from other financial
statements i.e. profit-loss account and balance sheet.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS THE DIFFERENCE BETWEEN

"A PROFIT & LOSS ACCOUNT" AND "A BALANCE SHEET"

Both the reports are entirely different in their

approach, as the difference on income and
expenditure provides net result of a business which
shows the profit or loss of a company.

Balance sheet on the other hand, shows what a

company owns (assets) and what it owes (liabilities)
at a given point in time.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

"STATEMENT OF COMPREHENSIVE INCOME"

VS
"STATEMENT OF FINANCIAL POSITION?"

A statement of comprehensive income shows the

income, expenditures, profit and loss of the company.

Whereas the statement of financial position shows

what a company owns (assets) and owes (liabilities).

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT ARE THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES GAAP?

Like principles of measurements used by Quantity Surveyors, Accountants are using
‘accounting principles’ in order to have a globally accepted common method of
accounting.
GAAP – Generally Accepted Accounting Principles are the common set of accounting
principles, standards and procedures that companies use to compile their financial
statements.
Fundamental Principles of professional accountants – Integrity, Objectivity (free of
undue influence), Professional competence & due care, Confidentiality, Professional
behaviour
International Financial Reporting Standards, usually called IFRS, are standards issued
by the IFRS Foundation and the International Accounting Standards Board (IASB) to
provide a common global language for business affairs so that company accounts
are understandable and comparable across international boundaries.
A major difference between IFRS and GAAP accounting is the methodology used to
assess the accounting process. GAAP focuses on research and is rule-based, whereas
IFRS looks at the overall patterns and is based on principle.
A principle internally motivates you to do the things that seem good and right. ... A
rule externally compels you, through force, threat or punishment, to do the things
someone else has deemed good or right. People follow or break rules. It seems to me
that rules control others and principles guide them.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

ROLE OF ACCOUNTING STATEMENTS IN

TECHNICAL EVALUATION AND PREQUALIFICATION

Accounting statements are important in

Assessing financial capacity
Current and long term assets
Liabilities of an entity.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT ARE THE KEY FINANCIAL STATEMENTS

THAT ALL COMPANIES MUST PROVIDE?
A consolidated statement is usually needed to be provided
by the companies in order to assess their financial
strength.

The consolidated statement includes:

Auditor’s report
Profit and loss account
Balance sheet
Cash flow
Notes of financial statement
Statements changes in equity

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Section-1 : ACCOUNTING PRINCIPLES (AP)
WHAT DO YOU KNOW ABOUT VAT?
VAT, or Value Added Tax, is a type of indirect tax that is imposed
on the value added to goods and services at each stage of
production, distribution, and final sale. It is typically paid by the
consumer at the point of purchase, and collected by the seller
on behalf of the government. The rate of VAT varies among
countries.
UAE has issued Federal Decree Law No. (8) of 2017 on Value Added
Tax (VAT) ("VAT Law") which was implemented in the UAE effective
from 1 Jan 2018 at a standard rate of 5%. Wherever applicable, VAT
will be collected on taxable supplies of goods and services.

In UAE, As per ministry of finance, VAT is not applicable in free

zone areas, and revealing selected sectors that will be assigned
zero-rated tax, such as education, healthcare, oil and gas,
transportation and real estate.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

A BRIEF ABOUT RATIOS

Ratio simply means one number expressed in terms of another. Ratio
analysis is a tool which is used to analyse of the performance of a
company by using published accounts such as income statement, balance
sheet, cash flow statement. Normally ratio analysis can be classified into
the following groups.
Profitability Ratios: Return on Investment ratio, Return on Asset ratio,
Profit Margin ratio etc.
Liquidity Ratios: Current ratios, quick ratio
Solvency Ratios: Gearing ratio, debt ratio
ROI = Net profit / Average Stakeholders' Equity OR
Net profit/Capital Employed x 100
CR = Current Assets / Current Liabilities
QR = Acid Ratio = Current Assets – Stock (inventory) / Current Liabilities
GR = Long Term Liabilities / Equity Shareholders' Funds OR Debt / Equity
OR Loans / Shareholder’s funds x 100 = %
The main types of ratios are grouped into Profitability, Liquidity, Efficiency
and investment ratios. The respective ratios are ROI, CR, QR & GR

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Section-1 : ACCOUNTING PRINCIPLES (AP)

INSOLVENCY

Solvency is the ability of an entity to pay its debt

in time. On the other hand, insolvency is the
inability of an entity to pay its debt when they fall
due.

Insolvency in not the synonym of bankruptcy, as

bankruptcy is the determination of the court of
law with resulting legal orders to resolve the
insolvency.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS TAXATION?
Taxation is not an accounting but a regulatory requirement
which differs in its application country to country depending on
the taxation laws of the land.

For instance, there was no income tax in UAE until VAT, while
such taxation was applicable in many parts of the world.

Taxation is a levy charged by government on individuals.

Normally tax is divided into two types; direct taxes such as
income tax and indirect taxes such as sales tax, employment
tax etc.

It is the revenue for the government for various expenditure of

the nation.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

REVENUE AND CAPITAL EXPENDITURE?

Revenue expenditure incurred on fixed assets includes costs that are
aimed at 'maintaining' rather than enhancing the earning capacity of
the assets. These are costs that are incurred on a regular basis and the
benefit from these costs is obtained over a relatively short period of
time. The revenue expenditures may include: repair, maintenance, and
renewal expenses.
Capital expenditure includes costs incurred on the acquisition of a fixed
asset and any subsequent expenditure that increases the earning
capacity of an existing fixed asset. The fixed assets may include Land,
building, machinery, vehicles, office, furniture etc.
The cost of acquisition not only includes the cost of purchases but also
any additional costs incurred in bringing the fixed asset into its present
location and condition (e.g. delivery costs).
Capital expenditure, as opposed to revenue expenditure, its benefit is
derived over several accounting periods. Capital Expenditure may
include Purchase, deliver, installation, up-gradation, Replacement costs
and legal charges.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

AUDITING
Auditing is an independent, unbiased, and official
examination of the financial statement of an organization to
ensure if the money is spent correctly.

The different types of audits include financial audit, Tax

audit, Cost audit, Management Audit etc.

It is conducted by competent, independent, and objective

persons known as auditors / accountants, who then issue an
auditor’s report based on results of audit.

An audit seeks to provide only reasonable assurance that the

statements are free from material error.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

CREDIT CONTROL
Credit control is the process of controlling credit
extended to credit customers on daily basis.

It takes in account increase in sales revenue by

extending the credit limit of credible creditors.

Credit card is one of the easily understandable examples.

The process of providing a cap on such open terms to

remain within calculated risk is called credit control.

However, the accounts are regularly monitored to

increase or decrease the credit limit depending on the
financial behaviour of an individual or an entity.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS PROFITABILITY?

Profitability is the ability of an entity to generate /

earn profit.

It is the ability of an entity to earn income over its

expenditure.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

LATE PAYMENT DEBIT ACT

Late Payment of Commercial Debts Regulations 2013
(Regulations) On 16 March 2013 the new Regulations came
into force, introducing new rules relating to payment
periods, and the dates from which statutory interest runs
on commercial debts by amending the Late Payments of
Commercial Debts (Interest) Act 1998 (Act).
Sharia law, Article 409 of penal code, and Article 204, and
Article 714 of the UAE Civil Code restrict interest on
payment. However, the prohibition does not apply on the
matters govern by the commercial code. UAE Federal Law
No. 18/1993 and Article 76, 77 provide the right to demand
interest on late payment with a cap of 12% or as agreed.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS COST ACCOUNTING?

The fundamental theory behind cost accounting is
the identification of resources consumed in the
production of goods or services and corresponding
direct and indirect costs of those resources.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING

Management accounts are for the internal use of

the management team. Not required by law. Not
essentially to be audited. Can be issued at any
time - daily, weekly, monthly.

On the other hand, financial accounts are

prepared for the use of shareholders, general
public, legal requirements, and auditing purposes.
Such accounts are usually issued at a certain
period, quarterly or yearly.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

HOW DO YOU ASSESS THE FINANCIAL STATUS OF

A CLIENT YOU ARE GOING TO CONTRACT WITH?

I will ask the financial statements (at least last 3

yrs.) and do a ratio analysis / prepare a
Performance Evaluation Sheet

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS DOUBLE ENTRY IN ACCOUNTING?

Every Transaction should be records in two or more
places while recording them and most importantly
total credits and debits should be equal.

Every financial transaction must be recorded twice.

It means, if you entre an entry in liabilities (receivable)

as addition, it should be adjusted in liabilities.

Example - if you purchase something for AED 500, your

assets (cash) to be reduced by 500, but your stock will
increase by 500. Normally this is described as 'credits'
and 'debits'

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHAT IS LEDGER?

A ledger is an accounting book that facilitates

the transfer of all journal entries in a
chronological sequence to individual accounts.
The process of recording journal entries into the
ledger is called posting.

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Section-1 : ACCOUNTING PRINCIPLES (AP)

WHY DO CHARTERED SURVEYORS IN YOUR PATHWAY NEED TO

UNDERSTAND AND BE ABLE TO INTERPRET COMPANY ACCOUNTS?
It is always good to be knowledgeable; accounting
knowledge would help in assessing the financial strength of
the contractor participating in the tendering process for a
project. Moreover, understanding accounting would help in
Appraising contractor’s pre qualifications
Managing and taking decisions on your own business
better than anyone else
Assessing where you are and where you are heading for
in your business
For the above and many other reasons a chartered surveyor
need to understand and be able to interpret company
accounts.

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Section-1 : ACCOUNTING PRINCIPLES (AP)
KEY WORDS USED IN ACCOUNTING
Financial Performance - This is judged by matching income received with expenditure
incurred over a period of time. (Usually one year period)
Asset – things that will result in future economic benefit as a result of a past event (example -
plant or machinery) Assets =
Liability – an obligation arising from past event (example- you bought furniture, but you want
to pay for it next year. So until then, you owe an obligation.
Accruals - revenues that have been earned or expenses incurred but are not yet recorded in
the accounts
Bankruptcy – Formal legal procedure towards a legal protection from creditors. (Liabilities are
more than assets.)
Liquidation – when a company gets into serious financial difficulties. Attempt can be made to
escape.
Insolvency – when a company could not pay to its creditors on time (could be recovered)
Credit - an entry recording a sum received (listed on the right-hand side or column of an
account.)
Debit - an entry recording a sum owed, (listed on the left-hand side or column of an account.)
Capital - Capital account records what owner has contributed to the entity in other words,
what business owes the owner?

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