Attorney Accounting Terminology

Hi there, Linda Ardesani, Ardesani Accounting. This week I thought I would touch upon terminologies or terms that we as accountants use when we work with the attorneys or we work with our clients, and we sometimes forget that not everybody has the same education when it comes to accounting, and we speak in accounting speak, much like an attorney will speak in their legalese. And there's times I've had to work with attorneys in my own personal life where my estate planning attorney actually had to make a mind map for me so I could understand all the— it was a gigantic document. It was a trust and it had all the different if this, if not that. It was basically your wills and your trust and who dies first, what happens next. So it was helpful for me to see that visual. Well, the same thing with attorneys, I want to touch upon some of the terms that we use as accountants when we work with you so you can understand your financials better and have a little bit of knowledge of when we speak in these terms what we're talking about, because these are terms that we use all the time in our world. And I thought it was helpful to maybe educate you all on some of the terms. And you may already know these, but it's sometimes good to have a helpful refresher. I'm going to share my screen. I'm going to show you what I'm talking about. I'm going to start with a trial balance. It's not a report we typically give to our clients. It's kind of a— if you get a general ledger at the end of the year, general ledger report, it gives you all the details of every transaction that's ever occurred in the file. And trial balance is basically a summary of all of that. I wanted to show you this because it shows the debits and the credits, which we can add on any report if we want to in the filter. I just wanted to show you so you can see, you know, here's your assets, and you can see here, you know, you've got your checking account assets Checking accounts are assets. It's cash, right? Cash in the bank. Anything that you physically own. Sometimes it's your website. You might have spent a ton of money on your website. That's an asset. If it's over $2,500 that you've spent, it's typically an asset. And the rules around that is it's anything you've spent, like spent $5,000 on doing your website, that has to be capitalized over a certain period of time. Your tax professional will know that as what it is. And then they will be able to write down and depreciate that every single year on your books. If you're cash basis, you will see that usually as a year-end adjustment. And you'll see it if you're accrual-based. Sometimes we'll do it monthly depending on— I did that a lot when I worked with real estate. The client wants to see it monthly, the depreciation coming off the books. So we create a recurring entry and do it that way. And we just start to take out. You spent the $5,000 in 2021, but then it gets depreciated off the books at year end. So you only get to take a piece of that. So if the tax professional says that has a 5-year life cycle, then you'll get that 1/5 every year until it's completely— that money you spent is completely expired. You don't get to take it in the year you spent it. But then there's other rules around that stuff. So just if you understand that, that will help give you a little bit of an idea of where we're, where we're talking about when we talk about depreciation and accumulated depreciation. These are terms that a client can get a little hung up on if they're not— and they don't live in our world, they don't speak this language. So debit and a credit. And debit on an asset would increase the asset, a credit on the asset would decrease it. So you want to see things in specific columns that way. So I have a clearing account here. A clearing account should always be zero. So, and that's just used for us when we start to do any transactions that don't fit the norm. A lot of times we'll flow things through a clearing account. Usually that's reconciled to zero, especially at year end. As you get through prepaids, a prepayment of an expense is— if you're working in it with accrual-based books, a prepayment of an expense would be an asset. You would— I'm paying, say for example, insurance. I'm paying the insurance bill upfront the whole year. I get a discount if I pay the entire year at once. In accrual-based books, that would get dispersed through the year. You would divide by usually 8 months. You divide it by 8 and start to take those pieces off until it's zeroed out. when the term is up and then you end up moving it into another, you know, another time frame of the next— in the next billing period or the next time that the policy flips over. So that's an account we would track. We put the whole amount into prepaid, that debit, and we would credit— we would credit it down as we start to take it off and we would debit the expense. So we credit prepaid, debit the expense. So that's how that would show on the books as you start to use that and show that expense. monthly. Again, accrual-based books, totally different than cash-based. And most of the time when we're working with attorneys and law firms, it's cash-based books. So if I spend $10,000 on insurance in the current fiscal year, that $10,000 of insurance is going to be expensed in that current year because that's how cash-based books goes. So just knowing those differences would just help give you a little bit of an idea of what the world we work in. So there's your balance sheet. Obviously, if I want to increase a liability account, I'm going to credit it. Lower it. I'm going to debit it. It's the opposite of the asset account. So it's— assets are what you have, what you physically own, and the liabilities are what you owe. So if you can kind of think of it in that respect, it'd be your loan, it could be a mortgage. Those are examples of a liability account. And assets obviously would be your prepaids, your, your cash in the bank, and things like that. If you have a loan receivable, you loan someone money, then the loan receivable would be an asset on your books. And as we go down here, we can get into the equity accounts. So the equity accounts depends on the type of entity that you have. If you have a partnership, you'll see partnership equity, you'll see partnership contributions, you'll see partnership withdrawals. If it's a sole proprietor, it would just say owner's account. If it's a— if it's an account that's— if you are an S corp, you'd see, you know, capital accounts, you'll see stock accounts. These are what you owe. So when you look at a balance sheet, I like to think of it as this is my report card for all the years I've been in business. It kind of shows you the health of the file. You look at a profit and loss report, which I'll navigate over to that right now, and you're going to see in a profit and loss, you will see— and I'm not sure if it will bring up— there's just this month or last year. You'll see the snippet of time for the year that you're looking at. And this one I'm looking at December— January to December 2020. So my income, obviously I will credit to show the income going up. Debiting income shows it going down, like you get a refund. Uh, your expenses, you debit them to increase them. If you get a refund on insurance, maybe they do an audit and they say, hey, you spent— you paid too much, that refund would come in as a contra expense, or it would be a expense that's credited. And as you go through, you can see examples here of the various kinds of expenses you would see in a law firm. Typical ones you might have— sometimes you'll have like other income, which would sit at the bottom of your profit and loss. That would be more your home— if you have a home office, you see your home office things there. Reward income would be the flip side, that other account, which would be other income that you'll see at the bottom. Your PPP stuff will be sitting down at the bottom because we want, as the accounting person doing the day-to-day accounting, we want that tax professional to see, you know, even your ERC credits. Those things are going to sit at the bottom of your profit and loss or your— when you're showing the financials, because we want them to stick out like a sore thumb. Any fines or penalties, those aren't deductible. Those are going to sit down there as well. So I think that that's probably a little bit of a high level of the things that you're going to see inside your financials and some of the terms. I go into a little bit more detail in the article that's attached to this video, but I wanted to at least give you a little rundown on what we speak in accounting language all the time. We forget sometimes that the client doesn't exactly live in our world when it comes to that. You will see sometimes what we do with our clients, because we live mostly cash basis, which works out well for the client. You're only paying taxes on money you've actually been paid. What's great about that is we'll flip it to a hybrid method. So we'll show the books during the year in the real world where you've got invoicing and things going on, because there are invoices even though you're cash basis. We kind of disregard them at tax time, but there's invoicing. We kind of show it in a hybrid scenario. So we let the clients see kind of the pulse of their company during the year in that accrual base. And then at the end of the year, we produce all the cash basis reporting and And that's usually what you'll see when you work with our firm. So I hope that's helpful. If you have any questions or comments, feel free to reach out. Love to help you. Accounting— we do accounting for law firms. We help bookkeepers and accountants learn legal accounting with our group, the Accountant's Law Lab. Just reach out. Plenty of links in the blog post as well if you need help with any of this. I hope this short video was at least giving you a little guidance into our world. Thanks for watching. Bye now.