ACCOUNTING PRINCIPLES AND

PROCEDURES
FOR RICS APC

By
DHANUSHKA SAMPATH
PgCert in Const Law & Arb, BSc.(Hons)QS, Adv. Dip in Civil Eng,
MCIArb, ACMA, CGMA
WHAT RICS EXPECT FROM US?

All topics will be

discussed today
 CONTENT OF THE PRESENTATION
• Basic Accounting equation
• Essential Accounting Concepts
• Financial Statements – Timeline
• The Statement Of Financial Position (Balance Sheet)
• The Statement Of Comprehensive Income (Income Statement)
• The Statement Of Cash Flow
• Revenue Expenditure Vs. Capital Expenditure
• Auditing
• Credit Control
• Profitability
• Insolvency
• Legislation
BASIC ACCOUNTING EQUATION
Activity
1) Sunil started a construction consultancy company by investing OMR
5,000 in cash
2) He purchased a building for OMR 3,000 to put up an office for his
company
3) A bank loan of OMR 4,000 was obtained to invest in the company
4) He purchased furniture, computers and office accessories spending
OMR 2,500
5) He withdrew OMR1,000 from the company for his personal use.
6) He received OMR 4,000 from client A as a fee for his consultancy
service.
7) He paid OMR 3,000 in cash for salaries of his employees
8) He paid OMR 1,000 in cash for the bank loan.
9) He billed OMR 4,000 for one of his client B, but money to be
received.
10) Client B paid OMR 3,000 in cash.
 ESSENTIAL ACCOUNTING CONCEPTS
• Accruals concept
- Expenses and revenues are recorded in the period they occur, whether or not cash is involved
• Conservatism concept
- Recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but
to only recognize revenues and assets when they are assured of being received

• Consistency concept
- Once you adopt an accounting principle or method, continue to follow it consistently in
future accounting periods

• Economic entity concept

- entity's activities need to be separated from activities of its owner and those of other economic
entities
• Going concern concept
- An entity will remain in business for the foreseeable future
• Matching concept
- Firms recognize revenues and their related expenses in the same accounting period. Firms
report revenues, that is, along with the expenses that brought them
• Materiality concept
- Trivial matters are to be disregarded, and all important matters are to be disclosed
FINANCIAL STATEMENTS - TIMELINE
 THE STATEMENT OF FINANCIAL POSITION
(Balance Sheet)
▪ Reports the amount of assets, liabilities, and stockholders' (or owner's)
equity at a specific moment (or point in time).

▪ Content of a balance Sheet

▪ Non-current assets (e.g.. Property, plant and equipment)
▪ Current Assets (e.g.. Cash in hand, cash in bank, inventory, trade receivable)
▪ Equity (e.g.. Share capital, Retained earnings)
▪ Non-current liabilities (e.g.. Bank Loans)
▪ Current liabilities (e.g.. Trade payables, wages payables)

▪ The principle accounting equation

Assets = Liabilities + Owner's (Stockholders') Equity

 THE STATEMENT OF COMPREHENSIVE INCOME
(Income statement)
▪ Reports a corporation's revenues and expenses during a period of time

Elements of an income statement:

▪ Revenues - Fees that were earned during the period of time shown in the heading
(e.g.: Contract income of a construction company)

▪ Gains - Net amount related to transactions that are not considered part of the
company's main operations (e.g.: Gains from investing share market by a
construction company)

▪ Expenses - Costs used up by the company in performing its main operations (e.g..
Construction resources cost for a construction company)

▪ Losses - Net amount related to transactions that are not considered part of the
company's main operating activities (e.g.: Losses from investing share market by a
construction company)
 THE STATEMENT OF CASH FLOW

▪ Explains how a company's cash and cash equivalents have changed

during a specified period of time.

▪ Because the income statement is prepared under the accrual basis of

accounting, the revenues reported may not have been collected & the expenses
reported on the income statement might not have been paid.
 THE STATEMENT OF CASH FLOW
▪ Elements of a statement of cash flow

• Cash provided and used in operating activities

 (Loss) / profit before taxation
 Adjustments for depreciation
 Working capital movements

• Cash provided and used in investing activities

 Purchases of property plant and equipment
 Purchases of intangible assets
 Disposal of property plant and equipment

• Cash provided and used in financing activities.

 Short term loans
 Bank borrowings
 Interest expenses

Cash and cash equivalents at beginning of the year

+ Net increase / (decrease) in cash and cash equivalents
= Cash and cash equivalents at the end of the year
 REVENUE EXPENDITURE
VS. CAPITAL EXPENDITURE
• Capital Expenditure are costs associated with one-off expenditure on the
acquisition, construction or enhancement of significant fixed assets including land,
buildings and equipment that will be of use or benefit for more than one financial
year.
• Land or property acquisition
• Consultant fees directly associated with the development.
• Materials, plant and equipment
• Fixtures and fittings
• Revenue Expenditure is an amount that is expensed immediately—thereby
being matched with revenues of the current accounting period
• Wages
• Utilities
• Maintenance and repairs
• Rent.
• Sales.
• General and administrative expenses.
 AUDITING
The process of reviewing and investigating any aspect of a business, whether
financial or nonfinancial.

• Financial Audit - A historically oriented, independent evaluation performed for the

purpose of attesting to the fairness, accuracy, and reliability of financial data
• External Audit - involves the examination of the truth and fairness of the financial
statements of an entity by an external auditor who is independent of the
organization in accordance with a reporting framework such as the IFRS
• Internal Audit - a voluntary appraisal activity undertaken by an organization to
provide assurance over the effectiveness of internal controls, risk management
and governance to facilitate the achievement of organizational objectives

• Operational Audit - A future-oriented, systematic, and independent evaluation of

organizational activities. E.g. operational policies and achievements related to
organizational objectives. Internal controls and efficiencies
 AUDITING
• Follow-up Audit - Conducted approximately six months after an internal or
external audit report has been issued to evaluate corrective action that has
been taken on the audit issues reported in the original report

• Forensic Auditing -
Involves the use of auditing and investigative skills to
situations that may involve legal implications such as fraud investigations

• Tax Auditing - Conducted to assess the accuracy of the tax returns filed by a
company and are therefore used to determine the amount of any over or under
assessment of tax liability towards the tax authorities.

• Investigative Audit - This is an audit that takes place as a result of a report of

unusual or suspicious activity on the part of an individual or a department

• Compliance Audits - companies are required to conduct specific audit

engagements other than the statutory audit to comply with the requirements of
particular laws and regulations
 CREDIT CONTROL
• The process of controlling the credit extended to credit customers
• Aimed at reducing the risk of late payment and bad debt
• Late payment of business debts is one of the biggest problems faced by
construction companies
• A major hindrance to cash flow and a drain on profitability
• Key to successful cash flow is good planning
• Should know exactly when payments are due in and out of your bank account

Credit control mechanisms :

 Have a system for chasing debts and be firm but fair.
 Set the terms at the start of the contract.
 Checking creditability of potential large customers / client
 Maintain the information flow with the customer, the more you know the
better you can control credit risk
 Watch for the danger signs – be wary of changes in customers normal
pattern of activity
 PROFITABILITY
• Profitability is a situation in which an entity is generating a profit

• Arises when the aggregate amount of revenue is greater than the aggregate
amount of expenses in a reporting period

• Accounting profitability may not be matched with the cash flows generated by
the organisation

• Profitability can be achieved in the short term through the sale of assets that
garner immediate gains, but not sustainable

• Profitability is generally measured with the net profit ratio and the earnings per
share ratio.

• Profitability of a future project can be assessed through various project appraisal

techniques like NPV, Payback period, IRR etc.
 INSOLVENCY
• A situation in which a firm or individual has a Negative Net Worth.
• Accounting insolvency occurs when total liabilities exceed total assets on a
firm's or individual's balance sheet.
• Accounting insolvency does not automatically equate to bankruptcy because the
individual or organization may still be able to make monthly payments.
• This is what differentiates accounting insolvency from standard insolvency,
which involves the inability to service debts.
• Creditors may force corporations with accounting insolvency to restructure
payments or declare bankruptcy, depending on the specific situation.
 LEGISLATION
• Capital Market Law (Royal Decree 80/1998): Article 282 of the Executive Regulation of the

Capital Market Law states that every issuer (listed companies) shall prepare financial statements in
accordance with IFRS Standards. The Code of Corporate governance also requires companies to prepare

financial statements in accordance with IFRS Standards.

• The Law of Organising the Accountancy and Auditing Profession (Royal Decree 77/1986): Article

30 states that accountants are bound to apply the International Accounting Standards approved by the
Committee on the Unified International Accounting Standards on preparing balance sheets and the final

accounts, until a decision is issued by the Minister of Commerce and Industry stating the accounting standards

that shall be applied on preparing the balance sheets and the final accounts etc.

• Article 79 of the Income Tax Law and Article 61 of Executive Regulations of the Income Tax Law

(Royal Decree 47/1981): These laws make it mandatory to treat finance leases as per International
Accounting Standards.

(Source: http://www.ifrs.org/Use-around-the-world/Documents/Jurisdiction-profiles/Oman-IFRS-Profile.pdf)
THANK YOU