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Accounting for Lawyers
Wayne State University Law School
Schenk, Alan

Fall 2014 – Concise 2 week class – Schenk

Textbook – Accounting for Lawyers, Concise 4th edition

Common Exam Construction :

· Couple journal entries, figure out if they are right or wrong, if they are wrong, figure out how to correct them to make sure they are not misleading.

· Time Value of Money

· Revenue Recognition and Contingency

Financial statements are historic: They don’t tell us about the future, they tell us about what already happened.

Financial statements are statements of management.

· Management is responsible to put out these statements

· Designed to aid management

o Management wants to know that there are holes on the shelves, that they can’t sell certain products, etc.

o Management also wants to know who they owe money to and who owes them money.

· Also aids lenders – Lenders will want to see financial statements before they lend money

o They will generally request an auditor to review financial statements to see if the auditor gives a clean opinion (an unbiased opinion of the financials)

§ Clean opinion – statements fairly represent the financials of the company and are prepared in accordance with generally accepted accounting principles.

· Other people that it aids – Shareholders, SEC, etc.

Established companies use the normal, standard financial statements. Companies who are trying to make their numbers look better, they will report other metrics, such as EBIDA:

· EBI(t)DA = Earnings before Interest, taxes, depreciation and amortization.

Balance sheet tells us a snapshot of what the company has as of a certain date

· Measures Assets vs. (Liabilities and Equity)

· Financial condition

Income Statement tells us what the company has over a given period

· Results of operation

Two parts of Annual Reports that are important to look at when investing:

· Management discussion and analysis

o Discusses what they are planning on doing in the future

· Risks

o Discusses forward looking risks that may jeopardize the financials

Internal Control

· Separated the financial parts of the company.

· We want more than one person to approve a expenditure over a certain amount

· We want the person who receives the check to be different from the person who was recording the money who is also different from the person depositing the money.

o EX: This was the problem with Enron

International Standards v. U.S. Generally Accepted Accounting Standards

· Originally these differed pretty greatly, but there has been a push to move to the international standard.

· Since 2001, there has been a push to convergence between International and US

· We have Statement of Accounting Standards, or Accounting Codification

o This is the primary authority of what generally accepted accounting principles

· Under International standard, assets can be revalued and, thus, accurately reflects a company’s holdings.

Problems with financial statements:

· There is a lot that is not reported on financial statements, such as having really good management, loyal employees, loyal customers, etc.

· Goodwill: Ability to earn an above average return on investment

o Consumers and Investors know what they are going to get

o Almost like name or brand recognition

o This is not on a balance sheet, unless it is purchased

§ This would be in a situation where a business is purchased for more than its tangible assets

· There is lots of value that is not represented on a financial statement or on a balance sheet.

Journal Entries:

· Three Questions

1. What’s coming in and what’s going out, what’s the transaction?

2. What accounts are affected?

3. In what direction are the accounts affected?

· (Left Side of Balance Sheet)

o Assets

§ Cash, Equipment, Inventory, Accounts Receivable, Furniture, Building, Land, Intangible Assets (Patents, Copyrights, Trademarks)

§ Current Assets: Cash, Accounts Receivable, Inventory

§ Investments

§ Fixed Assets: Equipment, Land, Building

§ Intangible Assets: Goodwill, Patents, Affiliation Contracts

· (Right Side of Balance Sheet) – These are Source of Funds

o Liability

§ Account Payable, Note payable, Mortgage payable,

§ Current Liability: Accounts Payable, Wages, Mortgage monthly payments, etc.

§ Long Term Liability: 20 year notes, Mortgage

o Equity

§ Sole Proprietorship, Partnerships, Joint Ventures, Ltd Partnership, LLC, PC, LPC, Corp, S Corp

· Left side of balance sheet are debits, right side of balance sheet are credits

o Increase in an asset (More on the left side) = Debit

o Reduce an asset = Credit

o Increase in Liability (More on the right side) = Credit

o Decrease in Liability = Debit

o Increase in proprietorship (equity) = Credit

o Putting money into the business = increase in proprietorship, increase in cash à Credit to proprietorship and debit to cash

· Each Journal Entry is posted to a T-Account

Trial Balance Sheet:

· Assets from Trial Balance goes to Balance sheet in Debit

· Liabilities from Trial balance go to balance sheet in credit

· Revenue from trial balance goes to Income statement in credit

· Expenses from trial balance goes to income statement in debit

Connection between income statement and balance sheet:

· Net profit from income statement increases equity, credit

· Net loss from income statement decreases equity, debit

Difference between income statement and balance sheet:

· Income statement accounts are always closed out at the end of the period, balance sheet never has accounts closed.

o i.e. Income statement starts fresh at the beginning of the per

unt.

Deferral & Accrual Accounting

· System that makes sure that the revenue that is generated in this period is recorded in this period and nothing else.

o We want to adjust the disparity between cash in/cash out and income in/expenses out

· We want to understand, when is revenue reportable and when are expenses incurred and reportable?

· Revenue is earned when a transaction occurs and the earning process is complete or substantially complete.

· Expenses are incurred when you have an obligation to pay.

o When the bill is issued

· If the accounting period is from Jan 1 to Dec 31, and on Dec 15, business receives cash from a customer for goods that are going to be delivered in Jan:

o If we were on the cash method, debit cash and credit revenue, but that revenue doesn’t belong in this period.

o If we are on accrual accounting method, we would credit customer advances and debit cash.

Deferral:

· Shift forward a revenue or expense that has already been recorded in the current period but doesn’t belong there.

· Adjusting a journal entry that is made in a current period but belongs in the next period

· Already have a journal entry that was recorded in error because the revenue or expense belongs in a different period.

· Essentially, this is a correction

o If we defer an expense, we are creating an asset

o If we defer income (rev), we are creating a liability

· The adjustment that changes the deferral to the income or expense column is not a transaction, it is just an adjustment entry.

Accruals:

· Adjusting entry that records something that has not been record.

· No actual cash in or cash out, but we record it in order to get the revenue or expense in the correct period.

· Obligation has occurred, but we haven’t paid yet.

o Revenue: Account Receivable

§ Setting up an asset that has not been earned yet, so that we can properly record the revenue in the correct period.

o Expense: If we get a bill but haven’t paid it yet, set up an Accrued Account Payable.

§ Depreciation Expense Account – If we know the life of something, say X, (original payment – salvage value)/Useful Life)

ú Useful Life = X – time used

ú Salvage value = how much it will be worth at the end. when X is expired

§ We also will set up accounts such as Accumulated Depreciation value to add the depreciation of assets all together.