Accounting and Finance for Lawyers
Law School: Liberty University School of Law
Course ID: LAW 630
Term: Spring 2020
Instructor: Dean Todd
To make a double-entries in a general journal, the three questions are:
- What has happened?
- Which accounts are affected?
- In which direction are the affected accounts?
E.g., if someone contributes $5,000 in exchange for stock, and $2,000 is used to buy supplies, half on credit:
O/E means owner's equity.
A/R means accounts receivable.
N/R means notes receivable.
Assets are increased by numbers in the left column and decreased by numbers in the right.
Liabilities and equities are decreased by numbers in the left column and increased by numbers in the right.
Revenues are decreased by numbers in the left column and increased by numbers in the right.
Expenses are increased by numbers in the left column and decreased by numbers in the right.
When a period is closed out, this P&L account is closed out by decreasing/increasing the income statement entries to 0 with a new entry on the opposite side and a P&L entry on the first side.
The P&L account will then be closed out and added to equity.
Revenue for services not yet rendered cannot be entered be entered as Revenue when it is paid. Instead, a Deferred Revenue liability account must be increased. When the service is rendered, this account is then decreased and the Revenue account is increased.
"COGS" is an abbreviation of "cost of goods sold."
A purchase decreases Cash and increases Inventory by the purchase price.
A purchase still immediately decreases Cash and increases a Purchases account by the purchase price.
A sale increases Cash and Sales (Revenue) by the sale price.
Then, on a fixed date, the Inventory is reassessed, and the cost of goods sold during the period is calculated by adding the beginning Inventory and the Purchases and subtracting the ending Inventory. (It's the consumed inventory.)
The purchase price for COGS has various ways of determination:
The specific identification method looks at the actual cost of purchasing/producing the exact good sold.
There are three ways of assuming cost flows:
FIFO stands for "first in, first out." The goods purchased the longest ago are assumed to be sold first.
LIFO stands for "last in, first out." The last goods purchased are assumed to be sold first.
The third possible assumption averages the costs.
Depreciation is allocating the upfront cost of an asset over multiple years to better match its cost of the asset against when its benefit is acquired. This is basically consuming the asset through wear and tear.
Delivery, installation, and improvement costs are included in an asset's historical cost amount.
Scrap value is what the asset can be sold for at the end of its useful life.
|Gain on Sale||1000|
SYD depreciation multiplies the cost minus the scrap value by a fraction based on the years.
Example Fractions Over Five Years
- Year 1:
- Year 2:
- Year 3:
- Year 4:
- Year 5:
The double declining method depreciates by taking the percent of the useful life the year is, doubling it, and multiplying it by the opening balance.
- Note that unlike the others, scrap value does not change this depreciation every year. It just cannot depreciate it below such value.
|Year||Historical Cost||Opening Balance||Depreciation Expense (20%)||Accumulated Depreciation||Book Value|
Held-to-maturity debt is reported at cost.
For equity securities of less than 20% ownership, cost or fair value methods are used.
The equity method of account reports investments at cost and then adjusts according to the the investor's proportionate share of the investee's earnings and losses.
An operating lease gives the lessee the right to use some property for a period of time, but he has no ownership in or obligation for the property.
This is not ideal as it makes one's debt ratio bigger.
- The lessee gets ownership at the end of the lease term.
- The lessee has the right to purchase the property for a "bargain price"—one dramatically below any possible sense of the asset's market value.
- The lease covers at least 75% of the property's useful life.
- The lease payments amount to at least 90% of the fair market value of the property.
If a corporation pays out a dividend in stock of at least 20% of the recipients', dividends are recorded according to the par value.
Cash flows show a business's increase or decreases in cash.
Cash flows are divided into three categories based on their origins:
- Operating activities
- The normal ways you get money
- Includes the receipt of interest and dividends
- Investing activities
- Purchases and sales of securities, investments, loans to others, and the purchase and sale of fixed assets
- Financing activities
- Borrowings, issuance of stock, and repayments and dividends related to such
It can either be done by the direct method, where all journal entries are just classified when entered, or it can be done by the indirect method, where all non-cash income is taken away from net income.