Financial Classifications and Debits/Credits

A basic understanding of financial classifications and double entry bookkeeping is required whether a manual or computerized system is used.

The following is a very basic outline:

REVENUES                          Increase in Economic Resources

EXPENSES                           Decrease in Economic Resources

NET INCOME (LOSS)          Excess (Deficiency) of Revenue over Expenses

Tip

   

Revenues – Expenses = Net Income(Loss)

   

ASSETS                                Economic Resources

LIABILITIES                        Debts/Obligations

EQUITY                                Excess of Assets over Liabilities

Tip

   

Assets – Liabilities = Equity

   

Transactions are any event with connection to the law practice that involves the transfer of something of value between two or more entities or accounts. 

Your job is to record every transaction – trust and general – in connection with the law practice.

Double entry bookkeeping is a system whereby each financial transaction is recorded twice – once as a debit and once as a credit.  Debit entries must equal credit entries for each transaction and at any point in time, the books must balance.  This means the debit entries must equal the credit entries.

The left side of any account is the debit side.  The right side of any account is the credit side.  In bookkeeping, addition or subtraction is indicated by the side of the account on which an amount is shown. 

Tip

   

All Asset and Expense Accounts are increased on the left or debit side and decreased on the right or credit side;

All Liability, Revenue and Capital Accounts are increased on the right or credit side and decreased on the left or debit side.

All transactions can be summarized in a Chart of General Ledger Accounts grouped by categories – Please refer to Appendix A- Guides, Checklists and Forms for a Sample Chart of General Ledger Accounts.

   

The basic rules of double entry bookkeeping can be summarized as follows:

 

Increase

Decrease

Assets

Debit

Credit

Liabilities

Credit

Debit

Revenue

Credit

Debit

Expense

Debit

Credit

Retained Earnings

Credit

Debit

Net Income/Equity

Credit

Debit

 

Tip

   

The terms “debits and credits” may be confusing to those who do not have an accounting background. For the purposes of handling a trust account, the terms “deposit” and “withdrawal” will be used.

A “deposit” increases the balance in the trust account.

A “withdrawal” decreases the balance in the trust account.