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An Introduction to Financial
Statements and Double Entry
Accounting
ENGG 401 Notes – Chapter 2
Lecture 3 and Lecture 4
ENGG 401 1
The Business Cycle
Action / Transaction
Analysis Bookkeeping
Financials Accounting
ENGG 401 2
An Instructional Roadmap for
ENGG 401
• We will focus on the business cycle.
• We will start to build a foundation by very briefly
discussing bookkeeping, and accounting.
• With this foundation we will start to build the various
Financial Statements that most engineers will
confront.
• With a firm understanding of Financial Statements
we will shift the focus of the course to using Financial
Statements for analysis, considering the various
analytical tools used to aid in decision-making.
ENGG 401 3
1
4
What are Financial Statements? - 1
• Financial statements are fundamental
business tools to help managers:
– Keep track
– Borrow money
– Measure success
– Manage resources
– Stay in business
• Financial statements apply to all sizes of
business, from a single proprietor corner
store to a multinational company.
ENGG 401 4
What are Financial Statements? - 2
• Types of Financial Statements Include:
– Income Statement
– How much money did we make?
– Statement of Retained Earnings
– How much money did we keep?
– Balance Sheet
– How much money do we have right now?
– Statement of Cash Flow
– What did we do with our money?
• We will develop an understanding of each of these
tools during this course.
ENGG 401 5
Why are Financial Statements
Important to Engineers?- 1
• Most engineering jobs are focused on action.
• Financial Statements are critical part of the cycle of
data collection and analysis that helps managers make
appropriate decisions.
• Engineers must be able to speak the language of the
financial decision-makers to successfully execute
their projects.
• Many engineers will become financial decision-makers.
ENGG 401 6
2
Why are Financial Statements
Important to Engineers? - 2
• An engineer need not become an accountant to
understand financial statements or do intelligent
financial analysis!
• An engineer can not be a good manager if they can not
do analysis of financial statements!
• You can’t manage what you don’t understand!
ENGG 401 7
What is Bookkeeping? - 1
• In most businesses:
– Many transactions occur every business day.
– Money transactions are carefully recorded.
– Each transaction creates a record or “paper trail”.
• Bookkeeping captures the raw data and puts it into
the first level of categorization: a journal.
• Journals are:
– Like a database
– Chronological and by subject area
– The “books of original entry”
– They are “double entry”, with offsetting credits and debits.
ENGG 401 8
What is Bookkeeping? - 2
• There are different types of Journals:
– Cash receipts (sales for cash)
– Sales (sales for accounts payable)
– Cash disbursements (cash purchases)
– Purchases (purchases on account)
– Monthly (regular payments every month)
– Payroll
– General (everything else)
ENGG 401 9
3
What is Bookkeeping? - 3
• Basic Elements of Financial Position:
– Assets
• Properties that are owned and have money value
– Liabilities
• Amounts owed to outsiders
– Equity
• The interest of the owner in the enterprise (also known
as capital)
• The Accounting Equation:
Assets = Liabilities + Equity
ENGG 401 10
What is Bookkeeping? - 4
• The Account
– A record of the increases, decreases
and balances in an individual asset,
liability, equity (incl. income or Account Name
expense).
Debits Credits
• Simplest form is known as the “T”
account because it looks like a “T”
– The left side of the account is the
debit side.
– The right side of an account is the
credit side.
– Decreases are entered on one side of
the account increases on the other.
ENGG 401 11
What is Bookkeeping? - 4
• By definition:
Account Name
Debit Credit
An increase in an asset A decrease in an asset
account account
A decrease in a liability An increase in a liability
account account
ENGG 401 12
4
What is Bookkeeping? - 5
• Assets and liabilities are a matter of perspective.
• For a bank account:
– Your bank account is the bank’s liability. They owe you
money! Therefore an increase is a credit in a liability
account. A debit is a decrease in a liability account.
– However … from your point of view the bank account is an
asset. Therefore an increase would be a debit in your asset
account. A decrease would be a credit in your asset account.
ENGG 401 13
What is Double Entry? An Example - 1
Description Debit Credit
($K) ($K)
• Invest $100k into a
business at startup: Cash $100
Shareholder Equity $100
– the cash (asset) in the
business goes up by
$100k (debit)
– the shareholders’
equity (capital) goes
up by $100k (credit).
ENGG 401 14
What is Double Entry? An Example - 2
• Borrow $40k and use Description Debit Credit
an additional $25k of ($K) ($K)
cash to buy a packaging Cash $100
machine: Shareholder Equity $100
Fixed Assets $65
– Fixed assets increase
by $65k (a debit) Loan $40
Cash $25
• Two offsetting credits:
– Bank loan (liability) of
$40k
– Reduction of cash of
$25k
ENGG 401 15
5
What is Double Entry? An Example - 3
• Sales of $10K for Description Debit Credit
goods payable within ($K) ($K)
30 days: Cash $100
Shareholder Equity $100
– Accounts Receivable
(asset) increases by Fixed Assets $65
$10K (debit) Loan $40
– Sales (capital) Cash $25
increases by $10K Accounts Receivable $10
(credit)
Sales $10
ENGG 401 16
What is Double Entry? An Example - 4
• Receive payment of Description Debit Credit
$10K for sale of goods ($K) ($K)
30 days ago: Cash $100
Shareholder Equity $100
– Accounts Receivable
(asset) decreases by Fixed Assets $65
$10K (credit) Loan $40
– Cash (asset) increases Cash $25
by $10K (debit) Accounts Receivable $10
Sales $10
Accounts Receivable $10
Cash $10
BALANCE TOTALS $185 $185
ENGG 401 17
Double Entry – An Exercise - 1
• Take the following accounts: cash, payables, raw
materials inventory, work in progress, finished goods
inventory, receivables, and SG&A (sales, general and
administrative).
• What are the double entries for:
– Receiving material.
– Paying for it, 40 days later.
– Moving raw materials to the shop floor.
– Pay shop floor labor.
– Paying a salesperson.
ENGG 401 18
6
Double Entry – An Exercise - 2
• Categorize each account as liability, asset or equity.
Cash Asset
Payables Liability
Raw materials inventory Asset
Work in progress Asset
Finished goods inventory Asset
Receivables Asset
SG&A (sales, general and Equity (Expense is a
administrative) negative equity account)
ENGG 401 19
Double Entry – An Exercise - 3
• Receiving material
Cash Asset
Payables + Liability Credit
Raw materials inventory + Asset Debit
Work in progress Asset
Finished goods inventory Asset
Receivables Asset
SG&A (sales, general and Equity (Expense is a
administrative) negative equity account)
ENGG 401 20
Double Entry – An Exercise - 4
• Paying for it, 40 days later
Cash - Asset Credit
Payables - Liability Debit
Raw materials inventory Asset
Work in progress Asset
Finished goods inventory Asset
Receivables Asset
SG&A (sales, general and Equity (Expense is a
administrative) negative equity account)
ENGG 401 21
7
Double Entry – An Exercise - 5
• Moving raw materials to the shop floor
Cash Asset
Payables Liability
Raw materials inventory - Asset Credit
Work in progress + Asset Debit
Finished goods inventory Asset
Receivables Asset
SG&A (sales, general and Equity (Expense is a
administrative) negative equity account)
ENGG 401 22
Double Entry – An Exercise - 6
• Pay shop floor labor
Cash - Asset Credit
Payables Liability
Raw materials inventory Asset
Work in progress Asset
Finished goods inventory Asset
Receivables Asset
SG&A (sales, general and + Equity (Expense is a
administrative) negative equity account)
Debit
ENGG 401 23
Double Entry – An Exercise - 7
• Paying a salesperson
Cash - Asset Credit
Payables Liability
Raw materials inventory Asset
Work in progress Asset
Finished goods inventory Asset
Receivables Asset
SG&A (sales, general and + Equity (Expense is a
administrative) negative equity account)
Debit
ENGG 401 24
8
Bookkeeping: A Summary - 1
• Ledgers are posted to accounts (the book of final
entry).
• There are five types of accounts, with subsets:
• Assets
• Liabilities
• Equity
• Revenues
• Expenses
ENGG 401 25
Bookkeeping: A Summary - 2
• Debits are separated from credits, each being put
into the appropriate account.
• The sum of all accounts should “balance”, since every
credit had an offsetting debit.
– Done periodically, usually monthly.
ENGG 401 26
From Bookkeeping to Accounting - 1
• Accounting takes the accounts and consistently
displays the results in a standard format:
• Income Statement and Retained Earnings (sometimes
these are treated as two statements)
• Balance Sheet
• Statement of Cash Flow (formerly the Statement of
Changes in Financial Position)
• “Consolidated” accounts encompass the results from
all companies in a corporate group.
ENGG 401 27
9
From Bookkeeping to Accounting - 2
• “Materiality” governs adjustments and corrections
– Small errors can be tolerated
– Definition of materiality varies from company to company
• These are the statements are the focus of the next
few lectures in this course.
• We will learn to use these reports as fundamental
tools in our financial analysis tool box.
ENGG 401 28
10
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