ACCOUNTING FOR LAWYERS OUTLINE – 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 principles guiding the recording of transactions (p. 52)
Assumption: Business and Owners are Separate Entities
Only record transactions related to business.
Money added to business account debits cash and credits proprietorship.
Personal money used for buying an annuity is not included in business transactions.
Assumption: Stable Currency
Omit inflation (No 1960 dollars vs. 2008 dollars )
Use only historical purchase prices
Assumption: Draw artificial lines
Financial statements REQUIRE journal entries.
Start with the assumption that any change in accounts must go through a journal entry.
Assumption: a business will continue on indefinitely.
Equipment should not be written off, since it will be used again.
Cost of equipment written off as an asset and depreciation is attributed to the years in service.
Equipment cost is amortized over an extended period.
Accruals / Deferrals (p. 54-73)
There are principles of accounting that help us make the journal entry.
Historical Cost
Anytime making journal entry – whether debit/credit – only have 5 choices.
· a debit is either an inc in asset, a reduction of liability, a reduction of equity, an expense, a reduction of income.
· a credit is either an reduction in asset, an increase in liability, an increase in equity, a reduction of an expense, or an increase in income.
When making journal entry – 3 questions to ask:
· Do you understand the transaction?
· What accts are involved (is it an asset acct, a liability acct, an equity acct, expense acct; maybe the debit & credit go to 2 dif kinds of accts)
· Is it an increase/decrease? In what direction are these accounts going?”
**Remember c/g/s is only the cost of goods sold (no rent, no utilities).
Consolidated Statement – Combines assets/liabilities of parent and child if it is one operation.
Generally Accepted Auditing Standards, Accountant’s Liability, SOx Legislation (p. 149-204)
Sarbanes-Oxley (p. 149)
Congress was concerned about the auditor in charge of the audit being too friendly with management – Prevents financial interest in audit. Rules about who must approve audit firm; every certain number of years, auditor must be changed; every certain number of years, audit firm must be changed.
· Audit stds are established by SOx.
· The body determining what auditors should do is PCAOB. If they don’t measure up, PCAOB has the authority to ban their signing of audit reports.
o The PCAOB has the right to sue or be sued. They can be run like a business and collect fees from the people being overseen. Any auditors of public companies must register with the board.
o There are provisions on quality control, auditing. The board can audit registered audit firms.
