CONSTRUCTION

ACCOUNTING
& COST CONTROL

Dr.K.ANANTHANARAYANAN
Professor
Department of Civil Engineering
IIT Madras Chennai-600036
CONTENTS
 Fundamentals: Management accounting Nature and scope, Financial
Accounting principles, Basic cost concepts
 Financial Analysis: Financial statements analysis and interpretation,
Accounting ratios, funds flow statement, cash flow statement
 Planning and Control: Budgetary control, standard costing, variance analysis,
Managerial costing and profit planning, decision involving alternative choices, capital
budgeting, Management reporting
 Funds Management: Business finance, Working capital Management, Cost of
Capital, leverages, Dividends rights and bonus, lease financing, investment portfolio
management, sources of finance, international financial management
 Miscellaneous: Inventory valuation, Depreciation policy, Accounting concept of
income, Human resource accounting, Business risk and insurance coverage, Tax
implication and financial planning

Ref: Management Accounting and Financial Control

by Dr.S.N. Maheshwari , Sultan Chand & sons
 Board of Directors

Chairman /Managing Directors

Sales Manager Personnel Manager Finance Manager Production Manager

Treasurer Controller

Funds Cost &

Planning &
Management Inventory
Credit Budgeting
Management
Pension Accounting &
Management Profit Analysis
Payroll
Auditing

Tax Administration Special Reports &

studies
CONSTRUCTION ACCOUNTING

Definition:
It is the process of collecting, recording,
classifying and summarizing financial data for
the needs of Management, shareholders,
creditors, bankers and Government.

Accounting

Financial Cost Management

Accounting Accounting Accounting
 FUNCTIONS OF ACCOUNTING

Historical accounting Managerial function

recording, classifying, Planning the future activities and
summarising, analysing, and controlling the operations of the business
interpreting the past transactions

CLASSIFICATION OF ACCOUNTING
Management Accounting
Financial Accounting Accounting designed for use in the
Accounting designed to serve parties
operational needs of the business
external to operating responsibility of the firm
– e.g.. Information relating to
– e.g.. creditors, investors, employees…
the costs, funds , profits …
FINANCIAL ACCOUNTING

It is helpful to a firm’s management to ascertain

the results of its operations and status of
business
Two fundamental statements :
* Income and expenditure statement
* Balance sheet
FINANCIAL ACCOUNTING
Definition:
Accounting is an art of
recording, classifying and summarizing
in terms of money transactions and events of
a financial character
and interpreting the result thereof.
FINANCIAL ACCOUNTING
FUNCTIONS
Recording – basic function of accounting. Recording is done in
the book “Journal”

Classifying – systematic analysis of data with a view to group

transaction

Summarizing – presenting the classified data in a manner

which is understandable to both internal as well as external end users. –
Trial balance, income statement, balance sheet

Interpreting – final function of accounting

FINANCIAL ACCOUNTING
LIMITATIONS
 Provides only limited information

 Provides only a post-mortem record of

business transactions
 Considers only quantifiable information

 Fails to provide informational needs of

different levels of management
MANAGEMENT ACCOUNTING
Definition:
“Management Accounting provides
necessary information to the management for
discharging its functions. – planning,
organising, directing and controlling …. day
to-day operations of an undertaking”
FUNCTIONS OF
MANAGEMENT ACCOUNTING
 Provides data – management planning
 Modifies data- purchase figures for different months- product
wise , supplier wise
 Analyses and interprets data – ratios calculated and
likely trends are projected
 Serves as a means of communication- to top
management, downwards and out wards through
organisation
 Facilities control- budgetary control
 Uses also qualitative information
Scope of Management
Accounting

Financial Accounting
Cost accounting
Budgeting and forecasting
Inventory control
Statistical analysis
Internal audit
Tax Accounting
Functions of Management
Accounting
Presentation of data
Aid to planning and forecasting
Decision making
Communication of Management policies
Effective control
Financial Statements
Objectives:
1. To provide the economic activities of the enterprise to several
group of people
2. To provide useful information to the creditors
3.To provide information to the investors

# For Management
# For Financiers
# For Creditors
# For Investors
Financial statement analysis
# External analysis # Internal analysis
Tools: ratio analysis, cash flow analysis, fund flow analysis
comparative financial statements….
FINANCIAL MANAGEMENT

Accounting Information System

 Needed to measure financial performance.
 Accounting- record of historical transactions.
 To be useful- needs to be compared with budgets
and analysis of performance.
 Timely action most important.
 Manager needs to know how to manage the
accounting function, not how to perform the
accounting function.
Accounting Methods

Two methods - Cash

- Accrual
Cash System
Records transactions at the time that they
impact cash.
- Revenue recorded when cash is
received from the clients.
- Expenses recorded when cash is paid
out.
- Means of keeping track of cash.
- Not an accurate method of measuring a
firm’s financial performance
Accrual Accounting
Records income or revenue when it is earned.
- Expenses when they are incurred.
- Revenue may be shown for services performed before
payment is received.
- Expenses shown when they are received not when cash is
paid for payment.
-Provides a method of determining profit or loss by matching
revenue and expenses.
- Also billed and not-yet-billed revenues are recorded and
shown on firm’s balance sheet.
- Now cash expenses such as depreciation, write-offs for bad
debts etc. are also considered in accrued accounting
General and Firm Accounting
System
Include all activities concerned with keeping records, preparing financial statements
and submitting tax returns.
Procedures not much different among companies.
Standardized- payroll records, receipts, disbursements, tax preparation etc.
Major components - General ledger and chart of accounts.
Chart of Accounts
- Listing of all accounting classifications used by the firm.
- Accounts are numbered in the sequence that groups them and identifies assets,
liabilities, revenue, expenses and net worth .
Ledgers
Compile recorded transactions to keep a running total of each account in the
chart
of accounts
General Ledger
- Master listing that prepares the financial statements for the firm.
- Measure profit or loss, assets, liabilities, owner’s equity, working capital.
Project Accounting System

Enables the firm to identify revenue and expenses by project.

Important information to control projects.
When the project has been estimated and awarded, a project
budget is established based on the amount of the contract
award.
Original estimate is the starting point
Subsequent revisions or adjustments to reflect work scope
changes and actual
Progress
For various activities the project manager establishes the budgeted
hours/day and Rs.
The accounting system should report the actual time and expenses
and any variances have to be determined.
ART OF RECORDING

Two statements
1. Trading & Profit and loss account

2. Balance sheet
Groups interested
 Owner
 Management
 Potential Investors
 Creditors
 Employees
 Government
 Researchers-students
Accounting Principles
Main features:
Usefulness
Objectivity
Feasibility
Concepts:
Duality- Going concern
Accounting period-Historic Cost
Money measurement- Revenue
Recognition- matching
Accrual- objectivity
Dual aspect concept
Purchase of goods from several suppliers
Sales to several customers on cash and credits
Payments to suppliers and collection from
customers,
Payment of salaries to salesmen,
Payment of taxes, rents
Two aspects involved- receipts of goods and
payment of cash
Example
Mr.Nithin, the proprietor of the business, starts
his business with a cash Rs20,000 and
building of Rs 50,000 this fact is recorded in
two places: assets account and capital
account
Capital = Assets
Nithin building + cash
70000 50000 + 20000
Accounting
* The business increases by borrowing Rs 20000
Capital+ Liability = Assets
Nithin +Loan building + cash
70000+20000 50000 + 40000
*Pays for furniture Rs 5000 and purchase land on credit for Rs 8000
Capital+ Liability = Assets
Nithin +Loan +creditor building + cash+ furniture+ land
70000+20000 +8000 50000 + 35000+ 5000+8000
If he pays expenses say Rs2000
Capital+ Liability = Assets
Nithin +Loan +creditor building + cash+ furniture+ land
68000+20000 +8000 50000 + 33000+ 5000+8000
 Capital
+ Assets
Liabilities
Building
Land
Proprietor's capital
Machinery
+
Furniture
Loan, Bank overdraft,
Stock in trade
Creditors, bills payable
Debtor
Outstanding expenses
Bills receivable
Bank cash

Assets = Liabilities + Shareholders' Equity

Problem
A limited company purchases a machinery for
Rs1,60,000. Its estimated life is 5 years at the
end of which it will have a scrap value of
Rs12,440. The asset has to be depreciated at
40% on diminishing balance method. If the
profits before depreciation are Rs1,00,000
per annum show what will be the amount of
profits after depreciation under
1. Straight line method
2.Diminishing balance method
Year Straightline method Diminishing Balance method

Depreciation Profit after Depreciatio Profit after

dep. n dep.
I Yr 29510 70490 64000 36000
II Yr 29510 70490 38400 61600
III Yr 29510 70490 23040 76990
IV Yr 29510 70490 13820 86180
V Yr. 29520 70480 8300 91700
Total profit ------- 352440 ------- 352440
Total depre. 147560 ------ 147560 -------
Add Scrap 12440 ------- 12440 -------
value
Cost of asset 1,60,000 1,60,000
Comments
1. Total depreciation, total profits is the same by both
the methods over 5years
2. In the straight line method dep. and profit after dep.
Are constant for each year
3. In the diminishing method dep. Charge is heavy in
the earlier years resulting in reduction in the profits.
4. Uniform profit is assumed. In practice productivity of
the assets diminishes, the profit also diminishes as
the age of the asset increases. – This method is
preferred as it helps early recovery of the investment
Financial Statements
 A financial statement is an organized
collection of data according to logical and
consistent accounting procedures.
Financial Statements
Nature of Financial Statements
 Accounting conventions
 Personal Judgments
 Ignore substance
 Over generalization
 Recorded facts

Limitations of Financial statements:

 Interim reports
 Conventions
 Influence of personal judgment
 Disclose only monetary facts
Analysis and interpretation of
financial statements
Financial statements are indicators of:
Profitability
Financial soundness
Types of Financial analysis:
# On the basis of material used
external analysis – outside the organization- investor, credit agency, Govt.
agency …
internal analysis – within the org. - executives and employees
# on the basis of modus operandi
Horizontal analysis – statements for number of years
vertical analysis – Ratio analysis
Tools of Financial analysis
# Comparative Financial statements – income statements-
balance sheets
# Trend percentage
# Funds flow analysis
# Ratio analysis
Accounting ratios - Classification

Classification of ratios

Traditional Classification Functional Classification

1.Profit and loss 1.Profitability ratios

account ratio –
gross profit ratio… 2.Turnover ratios
2. Balance sheet ratio –
current ratio 3. Financial ratios
3. Composite ratio-
fixed assets turnover ratio
Basic ratios
 Gross profit ratio
 Net profit ratio
 Operating ratio
 Return on share-holders fund
 Earnings per equity share
 Dividend yield
 Price earning ratio
 Fixed interest cover
 Fixed dividend cover
 Inventory turnover
 Account receivable turnover
 Current ratio
 Quick ratio
 Debt – equity ratio
Categories of ratios
Liquidity or working capital ratios
i) current ratio
ii) Liquidity ratio
iii) Networking capital/net sales
iv) net working capital/ bank credit
Asset utilization
i) Net sales/Total capital employed
ii) Net sales/ Fixed assets
iii) Net sales/ current assets
Profitability Ratios
i) Operating ratio
ii) net profit ratio
iii) Gross profit ratio
iv) ROI ( return on investment)
v) EPS (Earning per share)
Financial stability ratio
i) Net worth/ total outside liabilities
ii) Net worth/ Debt
iii) net worth/ fixed assets
iv) net worth/ net sales..
Basic statements
Basic statements are:
Income statement
Balance sheet
Retained earnings
Changes in financial statements
Income statement
Income statements help investors and creditors
To determine
the past financial performance,
predict future performance,
assess the future cash flows.
Income statement
 Income statement, also called profit and
loss statement (P&L) and Statement of
Operations, is a company's financial
statement that indicates how the revenue is
transformed into the net income.
 The purpose of the income statement is to
show managers and investors whether the
company made or lost money during the
period being reported.
 Multi-Step Format Single-Step Format
Net Sales Net Sales
Cost of Sales Materials and Production
Gross Income Marketing and AdministrativeSelling,
General and Administrative Research and Development
Expenses (SG&A) Expenses (R&D)
Operating Income Other Income & Expenses
Other Income & Expenses Pretax Income
Pretax Income Taxes
Taxes Net Income
Net Income (after tax) --
INCOME STATEMENT

For the year ended DECEMBER 31 2009

Rs Rs
Revenues
GROSS PROFIT (including rental income) 496,397
Expenses:
ADVERTISING 6,300
BANK & CREDIT CARD FEES 144
BOOKKEEPING 3,350
EMPLOYEES 88,000
ENTERTAINMENT 5,550
INSURANCE 750
LEGAL & PROFESSIONAL SERVICES 1,575
LICENSES 632
PRINTING, POSTAGE & STATIONERY 320
RENT 13,000
RENTAL MORTGAGES AND FEES 74,400
UTILITIES 491

TOTAL EXPENSES (194,512)

NET INCOME 301,885

Sample Income Statement
 Now let's take a look at a sample income statement for company XYZ for FY ending 2010
and 2011 (expenses are in parentheses):

Income Statement For Company XYZ FY 2009 and 2010

(Figures rupees) 2009 2010
Net Sales 1,500,000 2,000,000
Cost of Sales (350,000) (375,000)
Gross Income 1,150,000 1,625,000
Operating Expenses (235,000) (260,000)
Operating Income 915,000 1,365,000
Other Income (Expense) 40,000 60,000
Extraordinary Gain (Loss) - (15,000)

Interest Expense (50,000) (50,000 )

Net Profit Before Taxes (Pretax Income) 905,000 1,360,000

Taxes (300,000) (475,000)

Net Income 605,000 885,000

1.Managed to increase sales by about 33%, while reducing its cost of sales from 23% to
19% of sales.
2.Gross income in 2010 increased significantly, which is a huge plus for the company's
profitability
Balance sheet
 ABCD Limited
BALANCE SHEET
(Rupees in millions)

Assets Liabilities & Equity

Current Assets   Current Liabilities  

  Cash 237   Accounts Payable 512
  Accounts Receivable 213   Notes Payable 964
  Inventory 665 Total Current Liabilities 1476
Total Current Assets 1115  
  Long-Term Liabilities  
  Long-Term Debt 460
Fixed Assets
Owners‘ Equity  
  Net Plant & Equipment   301
     Common Stock & Paid-In -47
  Surplus -473
TOTAL ASSETS  Retained Earnings -520
1416 Total Equity  

TOTAL LIABILITIES & 1416

EQUITY
Short-Term Solvency

0.76

0.3

0.16

-0.25
Long-Term Solvency
1.37

-3.72

-2.72

-7.64
Nature of Financial Statements
 Recorded facts
 Accounting

 Personal judgments

 Ignore substance

LIMITATIONS:
 Interim reports

 Accounting concepts and conventions

 Influence of personal judgments

 Disclose only monetary facts