Accounting for Lawyers Outline

2013 Accounting Outline

September 9

Chapter 1: Introduction

v Why we need of accounting?

Ø Business background:

· Change of transportation and communication makes the nature of the human interaction totally differently.

· It also creates problem:

(1) Requirement for recording of business which can be understandable and readable by people who need it; and

(2) For the purpose of issuing debts

v What is the core idea of accounting?

Ø System of recording – recording of transaction (like bean counter)

Ø So that independent party can verify the numbers of the financial data.

Ø Don’t confused with different systems (i.e. financing accounting and tax accounting), even though the language is similar.

v Historic Background

Ø 1914: Started imposing income tax – Congress passed an accounting standard for business recording.

Ø 1920: Economic booming era — Market expanded (giant companies, stock exchange), but there was no law. Government started to set up regulation. i.e. 1934 Securities Act — every public company need to public its financial information.

v GAAP – General Accepted Accounting Principle

Ø Is GAAP a law? Not clear – Congress didn’t pass it. Congress just asks SEC to require all the public companies to comply GAAP. Congress passed and promulgated the GAAP by profession requirement. If an accountant violated GAAP, he can be put into jail.

v Basic concepts

Ø Value: Market value, component value, subject value……all are right, depend on the context.

Ø Four important characters:

· Relevance: in timely fashion

· Reliability: free from error and bias (accurate and can be verified by independent third party)

· Comparability: able to comparable with other entities (compare with others)

· Consistency: same accounting methods and procedure (compare to itself)

Ø Assumptions: (See P11)

· Separate entity

· Going concern

· Time period: monthly, annually…

· Monetary transactions

· Realization: record only when earning process is complete.

· Matching: expense allocated to the period when the revenue occurs.

· Conservative: understating > overstating earning, values and cash flows.

· Cost: understate

· Consistency: apply principles consistently

· Materiality: meaningful information

Ø Asset=Equity + Liability (fundamental accounting equation) — Like a farmer’s scale:

Ø Definition of Asset: (p13) probable future economic benefits obtained or controlled by an entity resulting from past transactions or events.

· Example of assets: house, cash, IP (difficult, only to the extent that the company paid for. i.e. company paid a lot money to buy Coco-cola. It has value of trademark under its asset sheet. But Pepsi is never sold. The company didn’t pay anything for it. The value of the trade mark under asset sheet is little), securities, pre-paid expenses,

· BUT, employees are not assets and Land is ultimate asset

· Example of liability: loan, accounts payable, civil trial (contingent liability – probable some payment), warranty, retainer (client pay before receiving services)

Ø Revenue (intra-period increase) and Expense (intra-period decrease) are measured by period. On contrast, Asset and liability are not measure by period.

Ø Balance sheet: a snapshot of an entity at a specific date

Ø Income statement: motion picture of a specific period

September 16

Chapter 2: Recording Elements and Reporting Financial Results

v Recording Elements

Ø 1st step. Journalizing — first time to write down the financial activities (i.e. transaction). In reality, there are a lot of different journals. With computerization today, when you pay you money. The computer automatically record the transaction, the information also goes into accounting system – cash payment journal.

Ø 2nd step Posting into Ledger organized by accounts types – what category to put the item in; To record changes in each specialized item (i.e. account payable). Company has sub-ledgers to collect all different, i.e. receivables.

Ø 3rd Adjusting – Two kinds of adjustments:

· a. To correct states (i.e. mis-classfied);

· b. Things that occur without benefit of the account (because of matching principle) – i.e. pre-payment.

Ø 4th Closing entries – cancel the temporary account — i.e. income statement is a period report (closing the books). Bring the number back to zero

v Debit and Credit

Left-hand side – Debit

Right-hand side – Credit

Asset Accounts (i.e. cash inventory, equipment…)

If increase, debit it.

If decrease, credit it

Liability Accounts (account payables…)