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Accounting for Lawyers
Wayne State University Law School
Schenk, Alan

Accounting for Lawyers

Prof. Schenk

Spring/Summer 2016

Lecture 8/16/16

Income Statement

No required form like the balance sheet
Profit & Loss account is essentially an income statement
Increase in income is a credit, decrease is a debit

Sales of $1,000 – some products returned of $180, that is a debit b/c it’s a reduction of income.

Increase in expense is a debit, reduces income & equity – decrease in expense is a credit

Cash $10,000

Gain on investment $10,000 – just like income, increase in gain is a credit
Loss on investment is a debit – reduces equity

Balance sheet accounts continue – never closed out, carry over to the next period

Income statements will be closed out at the end of the period

Closing entries

Look at all of the accounts and close them all out to profit & loss
Create a new account at the end of the period called “Profit & Loss”

Gives all the information to produce an income statement

Assets, liabilities, & equity – just get a balance at the end of the period
Expenses and income – close it to the profit and loss account

Income gets credited to profit and loss
Expenses gets debited to profit and loss

Credit or debit the profit and loss to get a 0 balance and transfer/post it to the equity/proprietorship/partnership account

Supplies can be treated as an asset in the inventory account (large amount), or as an expense if they get used up within the year

Matter of judgment, no rule about when a supply is an asset or expense

Depends on how large the supply account is (3 years of supplies at a time = inventory)

Whether a notes payable is a current liability or long-term liability depends on when it matures

If it’s within the year then it’s a current liability
Sometimes its payable in installments – so it can be split among current liabilities & long term liabilities


Partners take a “draw” a few times a year

Credit cash and debit the partner in the journal entry
If there are lots of draws during the year each partner would have a drawing account

Then would later close the drawing account with a credit, and then the debit would post to the partner’s account
Easier to keep track of what the partners are drawing if they each have a separate drawing account

Separate ledger accounts for each partner can become difficult if there are many partners, but still have to do it

Some entities are taxable as partnerships, even if they aren’t partnerships under state law

LLC – limited liability company

Still have to have separate ledger accounts for each member of the LLC


Do not have separate accounts for corporations & their shareholders
Corporations are treated separate from the owners

Board of directors has to declare a dividend in order to distribute money to shareholders

Money is taxed, then the dividend of that is given to the shareholders and then is taxed again
Dividends have to be equal based on the amount of shares each person holds

Shareholders don’t have a right to draw money from the corporation

Have a right to the assets – if there is liquidation

Corps issue stock

Takes many different forms

Junior stock – after liquidation these shareholders get paid off after everyone else gets paid off

Common Stock (equity)

Par value or no par value – not as significant today

A lot of states don’t have this anymore
Par value – permanent equity of the corporation

Creditor protection rules prevent corps from paying out dividends on common stock if it will jeopardize the creditors
If stock is issued for $10/share (par value has to go in the common stock account) if no par it’s up to the board of directors to determine how much is to be put into the common stock account

Amount in common stock could be $.05 even though the stock is $10/share

The $9.95 that is left gets put into paid-in capital or surplus (equity)

If there is a profit, it goes into the earned surplus or retained earnings

If there is a loss, it’s a reduction in retained earnings (equity)

Too much common stock dilutes the earnings per share

Corps may not want to issue more common stock in order to earn more capital because of this
Market bases the value of a company on its earnings per share

Preferred Stock

Might be issued in order to gain more capital
Can have an expected dividend rate, still up to the board of directors to issue dividends
There can be different classes of preferred stock


Needs to be treated as separate from the owner
Can have a drawing account like a partnership that gets closed at the end of the year.
Just because personally liable for the company still needs to be kept separate

Trial Balance & 6-Column Worksheet

pped, even though payment was received in the prior period

Journal entry will defer the revenue – “push” the income into the next period

Adjusting entry – debit to sales income for $10,000 on 12/31/15, credit to “deferred sales income” or “payable account” (liability account)

Puts the sales income into the next period, where it belongs
When the goods are shipped on 1/5/16 – the liability is satisfied

Debit the deferred liability account and credit sales income

Expenses – reported in the period in which the expense is incurred, when the liability is created

When the bill is received by the company, employs labor – worked & haven’t been paid yet, phone bill
DTE Bill for $275 received on 12/15/15 – hasn’t been paid

Paid 1/4/16 – cash
$275 needs to be recorded as an expense in the 2015 period

Expense needs to be accrued
Adjusting entry – debit utility expense $275, credit account payable (liability)

When the expense has been incurred and has not yet been recorded it needs to be accrued into the current period

When paid on 1/4/16 – journal entry is credit cash and debit account payable

When actually paid there is not charge to an expense account, because that was done in the adjusting entry

Prepay for 3 year insurance policy $2700 ($900/year) on 10/14/2015 – insurance is considered an asset (have right to insurance for the next 2 years)

Debit insurance expense 2700 and credit cash 2700

Only $900 has beenearned in the current 2015 period
Have to defer part of the expense

Credit insurance expense 1800, debit prepaid insurance – deferral of expense that doesn’t belong in the current period, into the next period

Defer an expense because not going to be used up in the current period, but in the future