EGM421/CIE 421 - ENGINEERING,

MANAGEMENT AND SOCIETY I

UNIT 4: BASICS OF ACCOUNTING
 Introduction to Accountancy
Definition of Accountancy
• Accountancy is the systematic process of identifying, recording, classifying,
summarising, interpreting, and communicating financial information.
• It plays a crucial role in helping organisation's make informed decisions
about their financial activities.

Purpose of Accountancy
• To provide a clear financial picture of an organization.
• To facilitate effective decision-making.
• To comply with legal and regulatory requirements.
• To communicate financial information to stakeholders.
 Key Components Financial Statements
Balance Sheets
Definition:
• A Balance Sheet is a financial statement that provides a snapshot of a company's financial position at a
specific point in time.
• A balance sheet reports a business’s assets, liabilities and equity at a specific point in time.
Components of a Balance Sheet:
Assets, Liabilities, and Equity.

Accounting Equation:
Assets = Liabilities + Equity.

Purpose of a Balance Sheet:

To show what a company owns (assets), owes (liabilities), and the residual interest of the owners (equity). It
gives a snapshot of the business’s overall worth.

Balance Sheets are important in assessing the financial health of a company.

 Balance Sheet
• A balance sheet is broken into two main sections: assets on one side and liabilities and
equity on the other side.
• The balance sheet formats require the two sides must balance out, meaning they should
be equal to one another.
• It reports the following line items:
1. Current Assets: Assets that will be converted to cash within a year, including accounts
receivable, inventory and prepaid expenses.
2. Long-Term Assets: Assets that won’t be converted to cash within a year, including land,
buildings and equipment.
3. Current Liabilities: Debts owed within a year, including rent, utilities, taxes and payroll.
4. Long-Term Liabilities: Long-term business loans, pension fund liabilities.
5. Shareholders Equity: A business’s net assets, including money generated by the
business and donated capital.
6. Amortisation Expenses: These are also called depreciation expenses, and account for
any long-term assets over the life span of their use (such as cars or expensive
technology)
Balance Sheet
 Key Components Financial Statements
Profit and Loss Accounts or Income Statement
Definition:
• A financial statement that summarises revenues, costs, and expenses incurred during a
specific period.
• lists a business’s revenues, expenses and overall profit or loss for a specific period of
time

Components:
Revenues, Costs, and Expenses, Net Income.

Purpose:
The end goal of the income statement is to show a business’s net income for a specific
reporting period. If the net income is a positive number, the business reports a profit. If
it’s a negative number, the business reports a loss.
 Profit and Loss Accounts
An income statement reports the following line items:
1. Sales: Revenue generated from the sale of goods and services
2. Cost of Goods Sold: Including labour and material costs
3. Gross Profit: The cost of goods sold subtracted from sales
4. General and Administrative Expenses: Includes rent, utilities, salary, etc.
5. Earnings Before Tax: Your business’s pre-tax income (EBIT and EBITDA)
6. Net Income: The total revenue minus total expenses, which gives the profit
or loss
Profit and Loss Accounts
 Key Components Financial Statements
Appropriation Accounts

Definition:
Accounts that show how a company distributes its profits among various
stakeholders.

Components:
Dividends, Retained Earnings, Reserves.

Purpose:
To communicate how profits are allocated and retained for future use.
The Relationship Between Income Statement and Balance Sheet
• In double entry bookkeeping, the income statement and balance sheet are closely
related.
• Double Entry Bookkeeping involves making two separate entries for every business
transaction recorded.
• One of these entries appears on the income statement and the other appears on the
balance sheet.
• Every time a sale or expense is recorded, affecting the income statement, the assets or
liabilities are affected on the balance sheet.
• When a business records a sale, its assets will increase or its liabilities will decrease.
• When a business records an expense, its assets will decrease or its liabilities will
increase.
• In this way, the income statement and balance sheet are closely related.
• Balance sheets will show a more thorough overview of the security and investment
health of a business, however they are both indispensable financial statements.
The Relationship Between Income Statement and Balance Sheet
 Importance to Engineers
A. Financial Decision Making
Budgeting:
• Engineers need to be involved in budgeting processes to ensure that financial resources are allocated efficiently for projects.
Cost Control:
• Understanding cost structures is vital for engineers to control project expenditures and optimize resource utilization.

B. Project Evaluation
Return on Investment (ROI):
• Engineers play a role in assessing the financial viability of projects by considering costs, benefits, and potential returns.

Capital Expenditure Decisions:

• Engineers contribute to decisions regarding long-term investments in assets, impacting the company's financial health.

C. Communication with Stakeholders

Interdisciplinary Collaboration:
• Engineers must communicate financial information effectively to collaborate with professionals from diverse backgrounds.
Investor Relations:
• Engineers need to understand and communicate financial performance to investors, aiding in building investor confidence.
Entrepreneurship
Definition of Entrepreneurship:
Entrepreneurship is the process of identifying, creating, and pursuing
opportunities to create value and to innovate.

Characteristics of Entrepreneurs:
• Risk taking propensity.
• Innovation and creativity.
• Vision and leadership.
• Resilience and adaptability.
Entrepreneurship
Entrepreneurial Process:
1. Identifying Opportunities:
• Recognising market needs and gaps.
• Innovation and technology trends, to fill the gaps identified.
• Market research and feasibility studies.

2. Creating a Business Plan:

• Importance of a business plan.
• Key elements: Executive summary, market analysis, company description, organisation
and management, product or service line, marketing and sales, funding request,
financial projections.

3. Financing and Funding:

• Sources of funding (e.g., angel investors, venture capitalists).
• Financial management for startups.
Entrepreneurship
Entrepreneurial Process:
2. Creating a Business Plan:
• Key elements: Executive summary, market analysis, company description, organisation
and management, product or service line, marketing and sales, funding request,
financial projections.

A business plan is a foundational document for entrepreneurs and is crucial for the
success and sustainability of a new venture. Here are several key reasons why a business
plan is important in entrepreneurship:

A. Roadmap for Success: A business plan serves as a roadmap that outlines the goals,
objectives, and strategies for the business. It provides a clear direction for the
entrepreneur and the team, helping them stay focused on their objectives.
B. Strategic Planning: The process of creating a business plan involves strategic thinking
and planning. Entrepreneurs must analyze the market, identify opportunities and
threats, and develop strategies to capitalize on strengths and mitigate weaknesses.
Entrepreneurship
Entrepreneurial Process:
2. Creating a Business Plan:
C. Resource Allocation: A well-structured business plan helps
entrepreneurs understand the financial requirements of their
business. This includes start-up costs, operating expenses, and
revenue projections. It guides resource allocation, ensuring that
financial resources are used efficiently.
D. Attracting Investors and Funding: Investors and lenders often
require a business plan before committing funds to a new venture.
A comprehensive and well-researched business plan demonstrates
to potential investors that the entrepreneur has thoroughly
considered the business model, market conditions, and financial
projections.
Entrepreneurship
Entrepreneurial Process:
2. Creating a Business Plan:

E. Risk Management: By conducting a thorough analysis of the market and

industry, entrepreneurs can identify potential risks and challenges. This
allows them to develop strategies for risk mitigation and contingency
planning.
F. Communication Tool: A business plan serves as a communication tool for
various stakeholders, including investors, partners, employees, and even
customers. It articulates the vision and mission of the business, helping to
create a shared understanding among all involved parties.
G. Feasibility Assessment: The process of creating a business plan requires
entrepreneurs to assess the feasibility of their business idea. This involves
evaluating market demand, competition, regulatory considerations, and
other factors that can impact the success of the venture.
Entrepreneurship
Entrepreneurial Process:
2. Creating a Business Plan:

H. Operational Guidance: Entrepreneurs can use a business plan as a

reference point for day-to-day operations. It provides guidance on key
aspects such as marketing strategies, sales tactics, and operational
processes.
I. Measuring Progress: The business plan serves as a benchmark for
measuring progress. Entrepreneurs can compare actual results against the
projections outlined in the plan, helping them identify areas of success and
areas that may require adjustments.
J. Adaptability and Flexibility: While a business plan provides a structured
framework, it should also be adaptable. Entrepreneurs can use it as a tool
to reassess and adjust their strategies based on changing market
conditions, customer feedback, and other variables.
Entrepreneurship
Entrepreneurial Process:
3. Financing and Funding:
Sources of funding:
A. Personal Savings: Many entrepreneurs use their personal savings to
fund the initial stages of their businesses. This self-funding approach
demonstrates commitment and confidence in the venture.
B. Family and Friends: Borrowing from family and friends is a common way
for entrepreneurs to raise capital. However, it's important to approach
such arrangements professionally and with clear terms to avoid potential
conflicts.
C. Bootstrapping: Bootstrapping involves building and growing a business
with minimal external capital. Entrepreneurs fund the business through
revenue generation and cost-saving measures, allowing them to
maintain control and ownership.
Entrepreneurship
Entrepreneurial Process:
3. Financing and Funding:
Sources of funding:
D. Angel Investors: Angel investors are affluent individuals who provide
capital in exchange for equity or convertible debt. Beyond funding, many
angel investors also offer mentorship and guidance based on their
industry experience.
E. Venture Capital: Venture capital (VC) firms invest in high-potential start-
ups in exchange for equity. VC funding is often sought by businesses with
significant growth potential and scalability. However, it typically involves
giving up some level
F. Crowdfunding: Crowdfunding platforms allow entrepreneurs to raise
small amounts of money from a large number of people. This method is
especially effective for products or ideas that have broad appeal.
Entrepreneurship
Entrepreneurial Process:
3. Financing and Funding:
Sources of funding:
G. Bank Loans: Traditional bank loans provide a lump sum of capital that
entrepreneurs must repay with interest over a specified period. These loans are
often used for more established businesses with a proven track record.
H. Government Grants and Subsidies: Many governments offer grants and subsidies
to support specific industries or activities. Entrepreneurs can explore government
programs to secure non-repayable funding.
I. Corporate Partnerships: Strategic partnerships with established companies can
provide funding, resources, and access to markets. These partnerships can take
various forms, such as joint ventures or licensing agreements.
J. Incubators and Accelerators: Incubators and accelerators support startups by
providing funding, mentorship, and resources in exchange for equity. These
programs often culminate in a "demo day" where startups pitch their businesses
to potential investors.
Entrepreneurship
4. Managing a Start-up:
• Team building and leadership.
• Operations and logistics.
• Marketing and sales strategies.
Entrepreneurship
Challenges in Entrepreneurship:
• Financial challenges.
• Market competition.
• Regulatory hurdles.
• Scalability issues.

Success Factors:
• Market fit and demand.
• Effective leadership.
• Continuous innovation.
• Adaptability to change.