Accounting for Lawyers Outline

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
 
Assets
 
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
Library
Cash
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.
 
Sources
 
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
 
Liabilities
 
Types of Liabilities:
                        A/P
                        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
 
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:
LLC
Limited Partnership
LLP
 
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
 
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
SEE PAGES 10-11
 
EFFECTS OF TRANSACTION CHART (Page 14)
 
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
DEBITS
 
Right-Hand Entry:
Increase in Source
Decrease in Asset
CREDITS
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THE INCOME STATEMENT
 
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