2. Disclaimer:
• The views expressed in this presentation are my own
and not necessarily those of the Kentucky Society of
Certified Public Accountants, the American Institute
Certified Public Accountants and the Internal Revenue
Service.
• The information is not a substitute for consultation with
an expert and the creator is not liable for problems
arising from following the advice on the site.
• The laws and regulations are subject to change over
time and recent changes after the date of this
representation may not be reflected on this presentation
3. What is Accounting ?
“the language of business”
•large international corporation
•single person
•home based business
•government agency
•non-profit
vehicle for reporting financial information about a
business entity to many different groups of people
4. Definition of Accounting
Accountancy is the process of communicating financial
information about a business entity to users such as
shareholders and managers. The communication is
generally in the form of financial statements that show in
money terms the economic resources under the control
of management; the art lies in selecting the information
that is relevant to the user and is reliable. The principles
of accountancy are applied to business entities in three
divisions of practical art, named accounting,
bookkeeping and auditing. (Elliot, Barry & Elliot, Jamie:
Financial Accounting and Reporting, Prentice Hall,
London, 2004 p.3)
5. Definition of Accounting (continued)
The American Institute of Certified Public
Accountants (AICPA) defines accountancy as
“the art of recording, classifying, and
summarizing in a significant manner and in
terms of money, transactions and events
which are, in part at least, of financial
character, and interpreting the results thereof.
(Accounting Terminology Bulletin No.1
Review and Resume)
6. There are three types of accounting
• Tax Accounting
• Managerial Accounting
• Financial Accounting
7. Tax Accounting
• Tax Accounting helps determine how
much is owed to the government for taxes
• The government sets the rules for
determining taxes
• Taxes :
– Tax Authorities : Federal - State - Local
– Taxes : Business Corporate (Net Profit,
Property) – Individual (Payroll, Sales,
Property)
8. Managerial accounting
• Designed to help people inside the
business make decisions
• There are no rules
• Report is customized and designed to
meet needs of users inside the business.
9. Financial Accounting
• Designed to help people outside of the
business make decisions (creditors,
investors, suppliers, customers,
governments, labor unions)
• Multi purpose reports (one set of financial
statements meets the need of all users
outside the business)
• Follows the rules of GAAP (Generally
Accepted Accounting Principle)
10. Assets and Equity
• Accounting “accounts for” two things:
– the business assets and
– the equity in those assets
• Definition of assets by International Accounting
Standard Board (IFRS Framework):
“An asset is a resource controlled by the entity as a result of past
events and from which future economic benefits are expected to
flow to the enterprise”
• An asset generally is something that the business owns
and holds the legal title to.
• Example: building, equipment, furniture
11. Assets and Equity (cont.)
• Definition of equity by International Accounting
Standard Board (IFRS Framework) F.49(c):
“equity capital is the owners’ interest on the
assets of the enterprise after deducting all its
liabilities.”
• Equity represents ownership.
12. Liabilities
• Definition of liabilities by International Accounting
Standard Board (IFRS Framework) F. 49(b):
“A liability is a present obligation of the enterprise
arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of
resources embodying economic benefits.”
• Liabilities are debts and obligations of the
business.
• Liabilities represent creditors’ claim on interest
of ownership of business assets.
13. Assets = Liabilities + Owner’s Equity
ASSETS =
• Cash LIABILITIES
• Inventory (creditors’ ownership of interest of
• Building assets)
• Equipment +
• Furniture
• Supplies OWNER’S EQUITY
• Vehicle (investors’ ownership of interest of
assets)
The Accounting Equation
14. Debits and Credits
• Debits and Credits are the two fundamental aspects of
every financial transaction in the double-entry
bookkeeping system in which every debit transaction
must have a corresponding credit transaction(s) and vice
versa.
• In financial accounting or bookkeeping,
“Dr” (Debit) means left side of a ledger account
and
“Cr” (Credit) is the right side of a ledger account
15. The Five Accounting Elements
• To determine whether one must debit or credit a specific
account, we use the modern accounting equation
approach which consists of five accounting elements.
• Five accounting elements:
– Asset
– Liability
– Equity
– Income/Revenue
– Expense
• The Modern Extended Accounting Equation :
Asset + Expense = Liability + Equity + Income/Revenue
16. The Five Accounting Elements
• (Gross) Income/Revenue: is increases in economic
benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than
those relating to contributions from equity participants.
(The International Accounting Standard Board, IFRS
Framework F.70)
• Expense: decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases
in equity, other than those relating to distributions to
equity participants. (The International Accounting
Standard Board, IFRS Framework F.70)
17. The Five Accounting Elements
Increase Decrease
• An increase (+) to an Asset
Expense
Debit
Debit
Credit
Credit
asset or expense Liability Credit Debit
account is a debit (Dr). Equity / Capital
Income / Revenue
Credit
Credit
Debit
Debit
Debit Credit
• An increase (+) to a Asset + -
liability, equity or Expense + -
income/revenue account Liability - +
Equity / Capital - +
is a credit (Cr).
Income / Revenue - +
18. Recording The Transactions
• All accounts must first be classified as one of the five
accounting elements.
• Each transactions will consist of at least one debit to a
specific account and one credit to another specific
account.
• Each transaction must be equal (balance).
• Each transaction recorded in a general ledger or
t-account.
Bank (Asset) Equity
Dr. Cr. Dr. Cr.
19. Recording The Transactions
(1) X made an initial investment of $ 20,000 cash to start the X Law
Office, PLLC and open a business bank account.
Journal Entry
Dr. Cr.
Cash (Bank) $20,000
Equity/Capital X $20,000
Bank (Cash) – (Asset) Equity / Capital X
Dr. Cr. Dr. Cr.
(1) $20,000 (1) $20,000
20. Recording The Transactions
(2)X decided to obtain the loan from Bank Z to finance the entire
purchase of $ 5,000 in office furniture and equipment.
Journal Entry
Dr. Cr.
Office Furniture & Equipment $5,000
Loan from Bank Z $5,000
Office Furniture & Equipment (Asset) Loan Bank Z (Liability)
Dr. Cr. Dr. Cr.
(2) $5,000
(2) $5,000
21. Recording The Transactions
(3) X Law Office, PLLC paid $ 5,000 for security deposit for leasing an
office space
Journal Entry
Dr. Cr.
Security Deposit $5,000
Bank (Cash) $5,000
Bank (Cash) - (Asset) Security Deposit (Asset)
Dr. Cr. Dr. Cr.
(3) $5,000
(1) $20,000
(3) $5,000 $5,000
$15,000
22. X Law Office, PLLC
Assets = Liabilities + Owner’s Equity
Assets: Liabilities:
Bank/Cash $ 15,000 Loan Bank Z $ 5,000
Security Deposit $ 5,000 Equity:
Office Furniture &
Equipment $ 5,000 Equity/Capital X $ 20,000
_______ _______
Total Liabilities
Total Asset $ 25,000 and Equity $ 25,000
23. Cost vs. Benefit
The accounting system considers cost versus benefit.
This means when the business designs the accounting
system, the cost of producing the information will not
want to exceed the benefit of having the information.
Legal and regulatory considerations override the cost
and benefit analysis. The business is obligated to comply
with any legal and regulatory considerations that are
applicable to the business.
24. What are the law office typical
industry characteristics (based on
our law office clients’ experience) ?
• IOLTA Account
• Retainer
• Reimbursement (Business to Business)
– Income Reimbursement
– Expense Reimbursement (mark-up is optional)
• More than a year account receivable / billing
collection (cut off date at the end of fiscal year
and necessary adjustment journal entry).
Notas do Editor
The assets will use up (obsolete) by the business operations and activities now and in the future. The business does not have to own 100% of the asset to hold the legal title of the asset. The equity represent the percentage of ownership interest of asset of business. There will a lien against the legal title that will represent the creditors’ interest in the asset.
For example: Building will not own100% by the business. The business owner pay the down payment. The rest is financed through the creditor (lender, bank, financial institution).
Asset = Liability + Equity is the Accounting Equation. Asset + Expense = Liability + Equity + Income/Revenue is the modern extended accounting equation.