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Accounting for Lawyers
Wayne State University Law School
Schenk, Alan

Accounting For Lawyers Fall 2010
Accelerated Course
Introduction to Financial Statements, Bookkeeping and Accrual Accounting
Four Different Financial Statements:
Balance Sheet: presents an enterprise’s assets, liabilities and residual equity
Income Statement: shows how well or badly the enterprise has done
Statement of Change in Owner’s Equity: portrays ups and downs in the ownership interest from all causes during the period
Statement of Cash Flows: analyzes changes in an enterprise’s cash during a particular period
Double-Entry Bookkeeping
Accrual Accounting: set of principles and rules for classifying and measuring economic events in the real world through the process of bookkeeping; goal is to have periodic financial statements
The Balance Sheet:
Assets: what a business owns
Liabilities: what a business owes
Equity: ownership interest or Net Worth
Current Assets: current assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business
Types of Assets:
Office Furniture
Stationary and Supplies
Office Equipment
Assets – future economic benefits which a particular accounting entity owns or controls as a result of a past transaction or event.
–          economic resources when the entity:
1.      Controls the resource
2.      Expects resource to have a future benefit
3.      Obtained resource in a measurable transaction
Accountants generally record assets at historical costs not fair market value.
Need to know where money came from to buy the assets
Balance Sheet: parallel listing of assets and their sources
            Totals of two columns MUST always be EQUAL
                        B/S shows what assets the business owns and where the money came from to
acquire those assets at ONE PARTICULAR POINT IN TIME
Outside Sources: money which the business owes to creditors
Inside Sources: money owners invested in the business
Types of Liabilities:
                        Note Payable
Liabilities: duties or responsibilities to provide economic benefit to some other accounting entity in the future
–          arise from borrowings of cash, purchases of assets on credits, breaches of contracts or commissions of torts, receipt of services, or passage of time
–          Three Defining Characteristics:
·         Debt or obligation must involve an existing duty or responsibility
·         Duty or responsibility must obligate the entity to provide a future benefit
·         Debt or obligation must have arisen from a transaction which has already occurred so that the entity can reasonably measure the obligation
B/S: does not show “positives” or “negatives” such as poor management, labor problems, unsatisfied customers, poor reputation…thus, the B/S can convey a false impression about a business’s financial condition
Equity: refers to the arithmetic difference between an entity’s assets and it’s liabilities
–          increases when the owners invest assets into the business
One person owns a Sole Proprietorship
Residual ownership interest in a sole proprietorship is referred to as proprietorship
Partnership: two or more persons engage in business for profit as co-owners
Residual ownership interest in a partnership is referred to as partner’s equity or capital
One or more persons owning a business could also form a Corporation
Corporation: legal entity separate from its owners
Residual ownership interest in a corporations is divided into shares
Shareholders: enjoy limited liability, ownership interest is called shareholder’s equity
Other Forms:
Limited Partnership
The Fundamental Accounting Equation
Equity = Assets – Liabilities
SO, Assets = Liabilites + Equity
A = L +E is the Fundamental Accounting Equation
 And is the underlying basis for the balance sheet
Total Assets must equal the sum or liabilities and equity
B/S speaks at, or as of, one particular instant in time
B/S records assets at historical costs
B/S only shows assets and liabilities which meet certain accounting requirements.
Classified Balance Sheet:
Assets classified into four types and listed in a particular order
Current assets, long-term investments, fixed assets, and intangible assets
Increase in Asset:
Increase in Source
Decrease in Asset
Decrease in Asset:
Decrease in Source
Increase in Asset
Increase in Source
Increase in Asset
Decrease in Source
Decrease in Source
Increase in Source
Decrease in Asset
Left-Hand Entries:
Increase in Asset
Decrease in Source
Right-Hand Entry:
Increase in Source
Decrease in Asset
Revenues: amounts which the business activities generate
Expenses: costs incurred to produce those revenues
Income Statement: 2nd basic financial statement
–          shows the extent to which business activities have caused an accounting entity’s equity or net worth, to increase or decrease over some period of time
–          also called the statement of operations or statement of earnings
–          covers a period of time between successive balance sheets
–          gives a summary of earnings or losses between balance sheets
–          does NOT provide prospective information
–          shows results of operation for a period in the past
–          only shows extent to which a business’s activities have caused an increase or decrease in equity, or net worth, over a period of time
Revenues and Expenses
Revenue: increases in assets, decreases in liabilities, or both, resulting from delivering goods, rendering
services, or engaging in ongoing major or central operations

en earned and to match expenses with the revenues that they produce
in ACCRUAL accountant “pulls” the future payment into the current period
in DEFERRAL, the accountant “pushes” a payment already received into the future
(cash method: an accounting entity that recognizes revenues when the enterprise actually receives cash in payment for goods or services)
(1)   Economic Entity Assumption:
a.       Can separate the activities of a business from those of its owners and any other business
(2)   Monetary Unit Assumption
a.       Same unit of measurement – $$$
b.      Assume no inflation or deflation
(3)   Periodicity Assumption
a.       Can divide economic activity into artificial time periods
(4)   Going Concern Assumption
a.       Will continue normal operations into the future
Basic Principles
(1)   Historical Cost Principle
a.       Record assets at historical costs or original cost
b.      This measure offers a definite and determinable standard
c.       May not provide the most relevant or helpful information
d.      Using current fmv – offer less precision and require more estimates
(2)   Objectivity or Verifiablity Principle
a.       Accounting principles are sufficiently stable and identifiable
b.      Same results if two or more qualified people examined the same data
c.       Prefer accounting treatments that can be supported by available and reliable evidence
d.      f/s do not provide completely objective information, as long as basis for estimate is disclosed and others can corroborate the supporting data and methodology, accountants consider an estimate objective and verifiable
(3)   Revenue Recognition Principle
a.       Only recognize revenue when:
                                                              i.      An exchange transaction has occurred
                                                            ii.      The accounting entity has completed or virtually completed the earnings process
(4)   Matching Principle (PAGE 55)
a.       Dictates that an entity try to match expenses and the revenue they produce in the same accounting period
b.      Defer revenue? Then defer expenses
(5)   Consistency Principle (PAGE 55)
a.       Entity must give economic events the same accounting treatment from accounting period to period
b.      Restricts an accounting entity from changing an accounting method between accounting periods