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Accounting
Wayne State University Law School
Schenk, Alan

ACCOUNTING FOR LAWYERS (ACCELERATED CLASS) – 2008 SCHENK

Balance Sheet, Double-Entry Bookkeeping, Income Statement, and Closing Process (p. 1-38)

Financial Statements

· Balance Sheets – Assets / Liabilities and Equity (net worth) – Tell little about value / provide historical data.
· Profit and Loss Statements – Revenue / Cost of Goods / Gross Profit / Expenses / Net Income / Cash Flow
· Trial Balance – Usually done by computer where all assets, liabilities, equity acts, income, expenses are equalized – To prepare, we look at ledger accounts (T accounts) – This information comes from journal entries (individual transactions).

Balance Sheet

Assets
(Acts Receivable)
Represents assets and claims to assetsare
+Debit / -Credit
Start w/most liquid (cash)–End w/most fixed/intedeterminate (intangibles)

Liabilities
Outside Creditors
-Debit / +Credit

Equity
Shareholders or Proprietorship
(Owners claim to assets)
-Debit / +Credit

Intangible things are not reflected in balance statements (loyal customers, employee morale/quality/loyalty, goodwill defined as the expectation that the company will earn an above avg rate of return – typically because of intangibles, name recognition)

The asset side includes:
· Current Assets
o Cash
o Accts Receivable
o Inventory
· Capital Assets
o Investments (in other businesses)
o Fixed assets
· Intangibles (e.g. patents)

The liability side includes:
· Current liabilities
o Accts payable
o Creditors
· Mortgages/Bank loans

· Equity
o Preferred stock (if company bankrupt and all liability paid off, who gets remaining $)
o Common shareholders (residual equity)

Income Statement
· All profit/loss accts closed at end of period
· All have separate ledger accounts
· An increase in profit increases equity
· Start with revenue, deduct cost of rev (write off sold inventory) to get gross profit for net inc
Trial Balance, 6-Column Worksheet, Change in Owner’s Equity, and Accrual Accounting (p. 39-74)

Trial Balance – Everything together for preparing the income and balance sheets.

Current Asset – Cash or readily convertible within an operating cycle.

Operating Cycle – Assets start with cash, used for Inventory, then sold for cash/credit. Ends when cash received or when acts recv converted to cash.

Journal entries are posted to ledger accounts.
At end of period, ledger accts are closed out to profit/loss account.
Close ledger sheets with a journal entry.
Every expense account should have a debit balance, so credit p/l.
P/L chart is then closed to the income chart. If they don’t balance, a journal entry must be added (typically debiting proprietorship).

*A note payable is a liability account that is never closed (just transferred over to next period).

Accrual Method – Takes into account earned income and expenses related to that income.

Accounting prin

red Rev 1300

After the good is provided, the liability will be handled. So in the next period, it looks like this

Deferred Rev 1300
Revenue 1300

A purchaser takes a product on Dec. 30 and intends to pay on Jan 5:
Acct Rec 500
Revenue 500

But the problem is on Jan 5, he receives cash:
Cash 500
Acct Rec 500

Expense Examples
On Dec 10, company purchases services and paid for them:
Cash 10000
Legal Exp 10000

To get it to the correct time period, we do this (since posted in current period, nothing shown in P/L)
Legal Exp. 10000
Prepaid Leg. 10000

Once legal work completed, it would be:
Prepaid Leg. 10000
Legal 10000

On Dec 1, a mechanic fixed our phones and sent a bill for $450, but it was not paid until Jan 3:
Acct Payable 450 (liability)
Misc Expense 450

Next period, the clerk records:
Cash 450
Misc Expense 450

You need the following to balance the above:
Acct Payable 450
Misc Expense 450
Merchandise Inventory, Cash Flow Statement & Consolidated Financial Statement (p. 75-100)

Inventory always raises a deferral problem.

If a business is cheating, it can typically be found in the inventory.

SALES
-COST OF GOODS SOLD (subtract returns from Gross Sales)
GROSS PROFIT
-EXPENSES
NET INCOME