Virtual Training 6 Accounting.book - LexisNexis [PDF]

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PCLaw® Accounting PCLaw 12 New Certification Training Virtual Training - Lesson 6

Business of Law Software Solutions Practice Management

Copyright © 2012 LexisNexis, a division of Reed Elsevier Inc. All rights reserved.

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Notes

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Copyright © 2012 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. Updated 9/07/2012

Table of Contents Introduction to Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 G/L Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 G/L Account Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G/L Accounts in a Tree Format . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G/L Accounts in a List Format . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adding/Changing G/L Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 4 6 7

PCLaw Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Generally Accepted Accounting Principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Accounting Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Accounting using the Cash Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Tracking Client Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Creating Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Receiving Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Changing/Writing Down Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Tracking Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Accounting Using the Modified Cash Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Tracking Client Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Creating Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Receiving Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Changing/Writing Down Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Tracking Accounts Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Accounting using the Accrual Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Tracking Client Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Creating Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Receiving Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Changing/Writing Down Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Tracking Accounts Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Posting to Control Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Using Control Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Determining when a G/L Account is a Control Account . . . . . . . . . . . . . . . . . . . . . . 32 Control Accounts in PCLaw . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Reserved Accounts in PCLaw. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

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Using the Client Disb Clearing Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocating to the Client Disb Clearing Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Guidelines for Using the Client Disb Clearing Account . . . . . . . . . . . . . . . . . . . . . . . Changing the Client Disbursement Clearing Account . . . . . . . . . . . . . . . . . . . . . . . . Expense Recovery Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contra Expense Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Using Only Expense Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Using Expense Recovery Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35 35 35 36 37 37 37 38

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Producing Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Common Tab of G/L Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Other Tab of G/L Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determining the Report Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working with the General Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Viewing Non-Detailed General Ledgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Viewing Detailed General Ledgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reading General Ledgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selecting General Ledger Templates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working with Trial Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reading Trial Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selecting Trial Balance Templates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working with Income Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reading Income Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selecting Income Statement Templates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working with Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reading Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Understanding the Equity Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selecting Balance Sheet Templates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Calculating G/L Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working with Departments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tracking G/L Revenue by Department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assigning Departments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realizing Revenue When Billing or Receiving Payments . . . . . . . . . . . . . . . . . . . . Producing Reports by Department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working With Parent and Sub Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parent Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assigning Sub Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Viewing a Chart of General Ledger Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Producing G/L Statements for Parent/Sub Accounts . . . . . . . . . . . . . . . . . . . . . . . . Producing Consolidated Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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PCLaw Accounting

39 40 41 42 43 43 47 48 50 50 50 52 52 52 54 54 55 55 58 58 60 61 62 63 63 63 63 64 64 65 66

Reconciling PCLaw . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Reconciling the Trust Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciling the General Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciling Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciling Client Disb Recov (1210) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciling Client Disb Recov (1210) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciling Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciling Value Added Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Introduction to Accounting Notes

PCLaw follows Generally Accepted Accounting Principles (GAAP) in its General Ledger module. When the Use G/L Accounting option is enabled in PCLaw, double-sided accounting entries are used to record transactions. Source journals are used to store both transactions and familiar financial statements, such as the General Ledger, Trial Balance, Income Statement, and Balance Sheet, which are used to report and summarize transactions. Using GAAP means that most accounts and journals can be reconciled. Various techniques and troubleshooting routines are associated with G/L reconciliation to accomplish this task. This lesson covers all the above, from the basic process of creating a general ledger account, to the complicated procedure of balancing a firm’s set of books, to understanding why a transaction acts the way it does. Some of the topics have been introduced in previous virtual training sessions, with less focus and detail as described in this session.

Objectives: Upon completion of this lesson you will be able to:

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Manage general ledger accounts.

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Produce and analyze financial statements.

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Reconcile discrepancies between journals, client ledgers, and the general ledger.

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Recognize how PCLaw handles different transactions, such as revenue and expenses.

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Introduction to Accounting

G/L Accounts Notes General Ledger (G/L) accounts are used by firms that use PCLaw to produce income statements and balance sheets. You can access General Ledger accounts by typing the G/L account nickname. For example, to access the Petty Cash account, type in 1098, which is the account nickname initially assigned to Petty Cash.

G/L Account Types Each G/L account is assigned an account type which determines whether the account is to appear on the Income Statement or the Balance Sheet. The account type also determines where it is included on the particular statement. Account Type

Account Nickname Range

Statement

Description

Current Asset

Balance Sheet

Dr

1000-1499

Resources owned by the firm including bank accounts, petty cash accounts, and accounts receivable.

Fixed Asset

Balance Sheet

Dr

1500-1999

Resources owned by the firm including furniture and computer equipment.

Current Liability

Balance Sheet

Cr

2000-2499

Obligations that the firm has to other parties such as taxes, loans, and accounts payable.

Long Term Liability

Balance Sheet

Cr

2500-2999

Long Term liabilities are debts that are normally repaid over a period of more than one year.

Equity

Balance Sheet

Cr

3000-3499

Resources invested in the firm by the owners. This corresponds to the difference between assets and liability.

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Notes

Notes Account Type

Account Nickname Range

Statement

Description

Retained

Balance Sheet

Dr/ Cr

3500-3999

Equity accumulated/paid by the firm during the fiscal year. Although these accounts appear on the Balance Sheet, their balances are zeroed out at year end, and applied to Equity. Dividend accounts in corporations and Drawing accounts in partnerships are Debit balance accounts.

Income

Income Statement

Cr

4000-4999

Income earned or received for services including fees, interest, and rental income.

Expense

Income Statement

Dr

5000-9999

Operating costs incurred by the firm such as salaries, rent, insurance, telephone charges, and office expenses.

G/L Accounts in a Tree Format Options > Lists > G/L Accounts The user is given the option to use either the List or Tree format for the pop up help windows. Check Tree View Style on the Other tab of Workstation Settings to use the following window for pop up help. The Pop Up Help - G/L Accounts displays the General Ledger Chart of Accounts. G/L Accounts are used by PCLaw to prepare financial statements. The firm can edit the PCLaw list to match their current chart of accounts or use a PCLaw set for simplified entry. Firms should always consult with their accountant. Each G/L Account has an alphanumeric Nickname and an Account Name. The list of G/L Accounts can be sorted by any criteria when a user clicks on a column heading. The Search For tool searches by the selected column, as displayed in the adjacent box on the toolbar. G/L accounts can be searched by account name, in addition to all other parameters.

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G/L Accounts

Notes

G/L Accounts Window

What You Should Know: Delete Item • Control accounts cannot be deleted. • A general ledger account cannot be removed, if it has a balance or activity in the current year. Demote Item • When using Parent and Sub Accounts, click to make the highlighted account a sub account of another general ledger account. Promote Item • When using Parent and Sub Accounts, click to make the highlighted sub account no longer subservient to its parent account.

Behind the Scenes Each G/L account represents a separate record in the G/L Account data file. Deleting a G/L account, does not physically remove this record from the data file. Only the status of the record is changed.

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Notes

G/L Accounts in a List Format G/L Accounts in the list format are available for PCLaw versions 8 and lower and is also an option for PCLaw version 10. This format is available for Pop Up Help only, and is not available when viewing the G/L accounts window on the Options > Lists pull-down menu. Uncheck Tree View Style on the Other tab of Workstation Settings to use the below window for pop up help.

Pop Up Help - G/L Accounts Window in List Format

The G/L Accounts window in List format has similar functionality to its counterpart in Tree format, although some capabilities are not available. Add and Change buttons replace the Add Items and Change Items icons. Accounts cannot be moved up or down on the list, and the relationship between parent and sub accounts cannot be displayed.

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G/L Accounts

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Adding/Changing G/L Accounts Use the Add G/L Account and Change G/L Account windows to create and modify general ledger accounts, respectively.

New G/L Account Window

What You Should Know: Payroll Account • This option is for firms using ADP Payroll. • It enables you to check to assign this account as a payroll account. Type • Select this option from the drop-down menu to designate accounts as either: • Current Asset • Fixed Asset • Short Liability • Long Liability • Equity • Retained • Income • Expense • •

For control accounts, this option is not available for modification. Account types are discussed in more detail in Behind the Scenes.

Lawyer • If this option is an Equity, Retained, or Income account not assigned to the firm, select the lawyer or partner for whom this account belongs. PCLaw 12

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Notes Sub Account Of • To make this account a sub account, select the nickname to assign an account as its parent. This option is only necessary if using Parent and Sub Accounts.

Behind the Scenes: Control accounts are individually flagged for their specific activity. As a result, changing a control account’s name or nickname does not affect the functionality of the control account. If changing the accounting method for the firm, it is not sufficient to change the control account nickname, specifically for Client Disb Exp (5010) or Client Disb Recov (1210). The recommended method is creating a new account, changing the reserved account status for the original and new account, and transferring the balance. This must be done with the assistance of PCLaw Technical Support. For non-control accounts, changing the account type within a fiscal year can affect the integrity of the financial statements for that year. Particularly, if the change involves transforming an income statement account to a balance sheet account or vise versa. The correct procedure is to create a new account, and then transfer the balance as a G/L Adjustment (General Journal) entry.

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G/L Accounts

PCLaw Accounting Notes In PCLaw, the firm may opt to use General Ledger (G/L) accounting. As we have already seen, making this choice opens a wide range of PCLaw options. Not only can the firm post to the General Ledger, but it also has the ability to track income, assets, and liabilities, as well as create Income Statements and Balance Sheets. Additionally, an array of other financial tools are available, such as budgeting and month end reports. However, along with the benefits of G/L accounting, there are many other choices the firm needs to make. First, you must choose which accounting method to use; Cash, Modified Cash, or Accrual. You must also decide what G/L accounts to use when posting different transactions, such as revenues and costs. Finally, you must select what procedures to use to reconcile your accounts. This topic serves as a general introduction to accounting, and explains how the principles of accounting apply to PCLaw.

Generally Accepted Accounting Principles The PCLaw General Ledger adheres to Generally Accepted Accounting Principles (GAAP). In the United States, Canada, and most other nations whose laws are based on the common law system, GAAP are accounting rules used to prepare, present, and report financial statements for both publicly-traded and privatelyheld companies. In the United States, the U.S. government does not directly set accounting standards in the belief that the private sector has better knowledge and resources. US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) requires that it is followed in financial reporting by publicly-traded companies. The US GAAP provisions differ somewhat from accounting standards in other countries, though efforts are underway to reconcile the differences. Future changes would make reports created under international standards for companies listed on U.S. markets acceptable to the SEC without adhering to the US GAAP. This manual, and the accounting terms herein, are written following US GAAP guidelines. At year end, net profit/loss (P/L) changes to Retained Earnings or Income for Allocation appear on a Balance Sheet.

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Notes GAAP Basic Accounting Debit (Dr)

Credit (Dr)

Assets

Increase

Decrease

Liabilities

Decrease

Increase

Equity

Decrease

Increase

Income

Decrease

Increase

Expenses

Increase

Decrease

Expense Recovery (Contra)

Decrease

Increase

GAAP Accounting

In the GAAP Basic Accounting example above, note that the “T” cell formation represents each and every transaction in PCLaw, with debits and credits provided for each transaction. Debits always equal credits for each transaction, therefore the right column of the credits always equals the left column of debits.

Accounting Methods At installation, the technician is prompted to select one of three accounting methods, Cash, Modified Cash, or Accrual, to use in the PCLaw set of books being installed. If at anytime in the future, the firm wishes to change the accounting method, it must be done with the assistance of PCLaw Technical Support. The sample transactions in the following topics are shown with both Auto Allocate Payments to G/L Accounts and Auto Allocate Retainers at Billing options enabled. If either option is disabled, it becomes the user’s responsibility to allocate tax, disbursements, and fees to the appropriate accounts. Accrual accounting methods do not separate hard and soft costs. For Cash and Modified Cash methods, the firm in PCLaw has the option whether to separate hard and soft costs. All scenarios are demonstrated in the following illustrations.

Accounting using the Cash Method Cash accounting differs from either the Accrual or Modified Cash systems in several key areas. Cash systems can separate hard and soft costs and choose whether to track or not track soft costs if they are separated.

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PCLaw Accounting

Notes These options, Separate Hard and Soft Costs, and Track Soft Costs in G/L, are both located on the Other Tab of System Settings. Sales tax is not included in the sample transactions, illustrated in this topic, although reference to sales tax will be made when the situation warrants.

Tracking Client Costs Expense recoveries, costs imported through the Cost Recovery module, and adjustments to disbursements at the time of billing are considered soft costs. When the Separate Hard and Soft Client Costs option is disabled, these transactions are tracked through Client Disb Expense (5010). When the Separate Hard and Soft Client Costs option and Track Soft Costs option in the G/L are enabled, these transactions are tracked through Client Soft Costs (5011). When the Separate Hard and Soft Client Costs option is enabled, but the Track Soft Costs in G/L option is disabled, these transactions do not appear in the G/L until a payment is made against them. General checks and new payables allocated to a matter are considered hard costs and are not affected by these options. Hard costs are tracked using Client Disb Expense (5010).

What You Should Know: Posting Expense Recoveries Separate Hard and Soft Costs option is disabled When costs are not separated, soft costs post to Client Disb Expense (5010). The following example illustrates the results when posting an expense recovery of $100. Client Disb Expense (5010) Client Costs Journal

100

Expense account (user defined) 100

Posting Expense Recoveries Separate Hard and Soft Costs option is enabled Track Soft Costs in G/L option is enabled When when soft costs are separated and tracked, soft costs post to Client Soft Costs (5011).

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Notes The following example illustrates the results when posting an expense recovery of $100. Client Soft Costs (5011) Client Costs Journal

Expense account (user defined)

100

100

Posting Expense Recoveries Separate Hard and Soft Costs option is enabled Track Soft Costs in G/L option is disabled When hard and soft costs are separated, but soft costs are not tracked, an expense recovery posts the transaction to the Client Costs Journal; however, the General Ledger is not affected. Posting General Checks General checks allocate costs to matters as they occur. Checks with matter allocations consist of 2 transactions, a general check, and an expense recovery. Since these are hard costs, the Separate Hard and Soft Client Costs option does not affect this transaction. The following example illustrates the results when posting an general check of $100 with a matter allocation of $70. General Bank (10##) General Bank Journal Client Costs Journal

Client Disb Clearing (5210) 100

Client Disb Recov (1210)

70 70

70

Expense Account (user defined) General Bank Journal

30

When a matter is entered in the allocation section of the General Check window, PCLaw automatically defaults to Client Disb Clearing (5210). Since the account is debited and credited during the two transactions, the account balance does not change.

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PCLaw Accounting

Notes

Creating Bills Accounts receivable is not used in Cash systems. When invoices are produced, hard costs remain in Client Disb Expense (5010). If tracked, soft costs remain in Client Soft Costs (5011). If not tracked, soft costs remain off of the general ledger. Fees are not posted to the lawyers’ fee accounts. If there are general retainers, the retainer amount is transferred from Client Disb Expense (5010), and applied to the billed fees and disbursements. Trust to general transfers have the same effect as general retainers on the general side of the transaction.

What You Should Know: Creating Bills with No General Retainers The General Ledger is not affected. An accounts receivable balance is not created in the General Ledger. The transaction is posted to the Billing Fees Journal. Applying General Retainers Separate Hard and Soft Client Costs option is disabled When a general retainer is part of in the billing process, the retainer immediately is applied to the invoice balance. Only the general retainer portion of the transaction affects the G/L. The following example represents a $100 general retainer, of which $50 is applied to fees, $30 is applied to disbursements, and $20 remains unapplied. Lawyers’ fee accounts (4000.abc) General Bank General Bank and Billing Fees Journal

Client Disb Expense (5010) 100

50

General Bank and Billing Fees Journals

30

General Bank Journal

20

When the original retainer was received, it was credited to Client Disb Expense (5010) (not shown above). When the bill is created, the entire value of the general retainer is debited from Client Disb Expense (5010). The retainer balance is then applied as a payment to the invoice. The lawyers’ fee accounts

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Notes

Notes are credited for the value of the retainer applied to fees. Client Disb Expense (5010) is credited for both the value of the retainer applied to disbursements and for any unused general retainer that is returned to the account. The General Bank Journal displays a record of the retainer being reversed and reapplied. Since debits equal credits, the bank balance does not change. This transaction does not appear on the bank’s general ledger control account. Applying General Retainers Separate Hard and Soft Client Costs option is enabled Track Soft Costs to G/L option is enabled When general retainers are included in the billing process, the retainers immediately are applied to the invoice balances. Only the general retainer portion of the transaction affects the G/L. The following example represents a $100 general retainer, of which $40 is applied to fees, $30 is applied to hard costs, $20 is applied to soft costs, and $10 remains unapplied. Lawyers’ fee accounts (4000.xxx) General Bank Journal General Bank and Billing Fees Journals General Bank Journal

Client Disb Expense (5010)

Client Soft Costs (5011)

100 40

30

20

10

When the original retainer was received, it was credited to Client Disb Expense (5010) (not shown above). The entire value of the general retainer is debited from Client Disb Expense (5010). The retainer balance is then applied as a payment to the invoice. The lawyers’ fee accounts are credited for the value of the retainer applied to fees. Client Disb Expense (5010) and Client Soft Costs (5011) are credited for the value the retainer applied to disbursements. Client Disb Expense (5010) is also credited for any unused general retainer. The general bank is both debited and credited for the full amount of the retainer; therefore, its balance does not change. In addition, the transaction does not appear on the bank’s general ledger control account. Applying General Retainers Separate Hard and Soft Client Costs option is enabled

14

PCLaw Accounting

Notes Track Soft Costs to G/L option is disabled This transaction is identical to when the Track Soft Costs to G/L option is enabled. Since payment is being received against a soft cost, Client Soft Cost (5011) is used by default. The General Bank Journal displays a record of the retainer being reversed and reapplied. Since debits equal credits, the bank balance does not change. Also, this transaction does not appear on the bank’s general ledger control account.

Receiving Payments For Cash systems, fees and untracked soft costs are not realized on the general ledger until payment is received. Hard costs and tracked soft costs remain in their respective client expense accounts.

What You Should Know: Receiving Payments Separate Hard and Soft Client Costs option is disabled When costs are not separated, the portion of the payment allocated to cost goes entirely to Client Disb Expense (5010). The following example represents a $100 receive payment, of which $60 is applied to fees and $40 is applied to disbursements. General Bank (10xx) General Bank and Billing Fees Journals

60

lawyers’ fee accounts (4000.xxx)

Client Disb Expense (5010)

60

40

40

For partial payments, the default order for applying payments is as follows: • Taxes (if applicable) • Disbursements • Fees This order may be changed on the Data Entry tab of System Settings. If the Blend Tax Payments option is selected on the Data Entry tab of System Settings, taxes are paid in the ratio to the amount of disbursements and fees paid. If the order of payment dictates that disbursements are paid first, then the entire amount of disbursements and taxes on disbursements are paid before any of the payment is applied to fees or taxes on fees. The remainder of

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Notes

Notes the payment is applied to fees and taxes on fees in the same proportion. Receiving Payments Separate Hard and Soft Client Costs option is enabled Track Soft Costs in G/L option is enabled When soft costs are separated and tracked, the portion of the payment allocated to cost is divided between Client Disb Expense (5010) and Client Soft Costs (5011). The following example represents a $100 receive payment, in which $50 is applied to fees, $30 is applied to hard costs, and $20 is applied to soft costs. General Bank (10##) General Bank and Billing Fees Journals

50

Lawyers’ fee accounts (4000.xxx)

Client Disb Expense (5010)

50

30

30 Client Soft Costs (5011)

20

20

For partial payments, the default order for applying payments is as follows: • • • •

Taxes (if applicable) Hard Costs Soft Costs Fees

This order may be changed on the Data Entry tab of System Settings. Receiving Payments Separate Hard and Soft Client Costs option is enabled Track Soft Costs in G/L option is disabled This transaction is identical to when the Track Soft Costs to G/L option is enabled. Since the payment is being received against a soft cost, Client Soft Cost (5011) is used by default. When soft costs are tracked, an additional transaction exists at the start of the process. This transaction debits Client Soft Costs (5011) and credits a corresponding expense account. As a result, Client

16

PCLaw Accounting

Notes Soft Costs would usually have corresponding debit and credit entries over the life of the firm. When soft costs are not tracked, Client Soft Costs (5011) maintains a credit balance, as it only tracks costs when payment is received. The cost is never tracked in a corresponding expense account.

Changing/Writing Down Bills Since accounts receivables are not tracked in a Cash system, the writing down of an invoice only affects the General Ledger with regards to hard costs and tracked soft costs. The entire write down, including fees and untracked soft costs, is posted to the Write Up/ Down Journal.

What You Should Know: Posting Write Downs Separate Hard and Soft Client Costs option is disabled When costs are not separated, the user may write down both fees and disbursements, however only disbursements require the assigning of a G/L account. The following example represents a $100 write down of disbursements. Client Disb Expense (5010) Write Up/ Down Journal

100

Expense account (user defined) 100

If an invoice is written up, the reverse transactions occur. Posting Write Downs Separate Hard and Soft Client Costs option is enabled Track Soft Costs in G/L option is enabled When soft costs are separated and tracked, the user may write down fees, hard costs, and soft costs. Both hard costs and soft costs require the assigning of a G/L account. The following example represents a $100 write down of disbursements, of which $60 represents hard costs and $40 represents soft costs. Client Disb Expense (5010)

PCLaw 12

Client Soft Costs (5011)

Expense account (user defined)

17

Notes

Notes Write Up/ Down Journal

60

60 40

40

Posting Write Downs Separate Hard and Soft Client Costs option is enabled Track Soft Costs in G/L option is disabled When Track Soft Costs in G/L is disabled, the user may write down fees, hard costs, and soft costs; however, only hard costs require the assigning of a G/L account. The following example represents a $100 write down of disbursements, of which $60 represents hard costs and $40 represents soft costs. Client Disb Expense (5010) Write Up/Down Journal

60

Expense account (user defined) 60

Tracking Accounts Payable Costs may be allocated to a matter through Accounts Payable. Accounts Payable consists of two parts: • Creating new payables • Processing payables

What You Should Know: Creating New Payables If New Payables do not have allocations to matters, then the General Ledger is not affected; therefore, no general liabilities are posted to the ledger. If New Payables do have matter allocations, the portion of the payable allocated to the matter does affect the General Ledger as a hard cost. Since the allocation is a hard cost, both the Separate Hard and Soft Client Costs and the Track Soft Costs in G/L options have no bearing on how transactions are handled. The following example represents a $100 payable of which $60 is allocated to a matter. Client Disb Expense (5010)

18

Expense account (user defined)

PCLaw Accounting

Notes Purchases Journal $100 General Ledger is not affected. Client Costs Journal

60

60

Allocating costs to matters occur only in the New or Open Payable features of Accounts Payable. Once costs are allocated to matters, they become separate transactions. Processing the payable has no relevance to whether the cost is paid or outstanding within the matter. In addition, receiving a payment from a client towards a cost allocated to them has no relevance to whether the payable is paid or still outstanding. Processing a Payable Processing payables have no effect on a matter. The following example represents payment of a $100 payable, of which $60 was allocated to a matter. General Bank (10xx) General Bank Journal

100

Expense account (user defined) 100

Processing payables reduce the general bank account and posts the amount of the payment as an expense. If the payable is eligible for a discount, the credit for the general bank is reduced by the amount of the discount, and Accounts Payable Disc (4997) is credited. Accounts Payable Disc (4997) is an income account.

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Notes

Notes

Accounting Using the Modified Cash Method Modified Cash accounting differs from either Accrual or Cash systems in several key areas. Modified Cash systems have the ability to separate hard and soft costs. Soft costs are tracked as an expense. Sales tax is not included in the sample transactions, although reference to sales tax will be made when the situation warrants.

Tracking Client Costs Costs advanced to a client through the Billing feature or the Cost Recovery module are expense recoveries and are not described separately.

What You Should Know: Posting Expense Recoveries Separate Hard and Soft Client Costs option is disabled When not separated, soft costs post to Client Disb Recov (1210). The following example represents a $100 disbursement. Client Disb Recov (1210) Client Costs Journal

100

Expense account (user assigned) 100

Posting Expense Recoveries Separate Hard and Soft Client Costs option is enabled When separated, soft costs post to Client Soft Costs (5011). The following example represents a $100 expense recovery. Client Soft Costs (5011) Client Costs Journal

100

Expense account (user assigned) 100

Posting General Checks General checks allocate costs to matters as they occur. Checks with matter allocations consists of two transactions: a general check and an expense recovery. For hard costs, the Separate Hard and Soft Client Costs option does not affect this transaction.

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PCLaw Accounting

Notes The following example illustrates the results when posting an general check of $100 with a matter allocation of $70. General Bank (10##) General Bank Journal

Client Disb Clearing (5210) 100

Client Costs Journal

Client Disb Recov (1210)

70 70

70

Expense Account (user defined) General Bank Journal

30

When a matter is added in the allocation section of the General Check window, PCLaw automatically defaults to Client Disb Clearing (5210). Since the account is debited and credited during the two transactions, the account balance does not change.

Creating Bills Accounts Receivables are not used in Modified Cash systems. When an invoice is created, disbursements remain in Client Disb Recov (1210), and fees are not posted to the lawyers’ fee accounts. If there are general retainers, the retainer amount is transferred from Client Disb Recov (1210) and applied to billed fees and disbursements. Trust-to-general transfers have the same effect as general retainers on the general side of the transaction.

What You Should Know: Creating Bill with No General Retainers The G/L is not affected, and the transaction is posted to the Billing (Fees) Journal. Applying General Retainers When a general retainer is part of the billing process, the retainer is immediately applied to the invoice balance. Only the general retainer portion of the transaction affects the G/L.

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Notes

Notes The following example represents a $100 general retainer, in which $50 is applied to fees, $30 is applied to disbursements, and $20 remains unapplied. General Bank (10xx) (not posted) General Bank Journal

100

Client Disb Recov (1210)

Lawyers’ fee accounts (4000.abc)

100

General Bank and Billing Fees Journals

80

30

General Bank Journal

20

20

50

The entire value of the general retainer is debited in Client Disb Recov (1210). The retainer balance is then applied as a payment to the invoice. The lawyers’ fee accounts are credited for the value of the retainer applied to fees. Client Disb Recov (1210) is credited for both the value of the retainer applied to disbursements and for any unused general retainer that is returned to the account. The General Bank Journal is both debited and credited for the full amount of the retainer; however, the transaction is not reflected in the General Bank Control G/L account.

Receiving Payments For Modified Cash systems, fees are not realized in the general ledger, and disbursements remain in Client Disb Recov (1210) until payment is received. The Client Soft Costs (5011) option is also credited, if the Separate Hard and Soft Client Costs option is enabled.

What You Should Know: Receive Payment Separate Hard and Soft Client Costs option is disabled When costs are not separated, the portion of the payment allocated to the costs goes entirely to Client Disb Recov (1210). The following example represents a $100 receive payment, in which $70 is applied to fees and $30 is applied to disbursements. General Bank (10xx) Posts to General Bank and Billing (Fees) Journals

22

70 30

Lawyers’ fee accounts (4000.xxx)

Client Disb Recov (1210)

70 30

PCLaw Accounting

Notes For partial payments, the default order for applying payments is as follows: • Taxes (if applicable) • Disbursements • Fees This order may be changed on the Data Entry tab of System Settings. If the Blend Tax Payments option is selected on the Data Entry tab of System Settings, taxes are paid in the ratio to the amount of disbursements and fees paid. If the order of payment dictates that disbursements are paid first, then the entire amount of disbursements and taxes on disbursements are paid before any of the payment is applied to fees or taxes on fees. The remainder of the payment is applied to fees and taxes on fees in the same proportion. Receiving Payments Separate Hard and Soft Client Costs option is enabled When costs are separated, the portion of the payment allocated to cost is divided between Client Disb Recov (1210) and Client Soft Costs (5011). The following example represents a $100 receive payment, in which $50 is applied to fees, $30 is applied to hard costs, and $20 is applied to soft costs. General Bank (10##) General Bank and Billing Fees Journals

50

Lawyers’ fee accounts (4000.xxx)

Client Disb Recov (1210)

50

30

30

Tip: For partial payments, the default order for applying payments is as follows: taxes (if applicable), hard costs, soft costs, and fees. This order may be changed on the Data Entry tab of System Settings.

Client Soft Costs (5011) General Bank and Billing Fees Journals

20

20

Changing/Writing Down Bills A G/L account is not assigned when writing down fees on an invoice, since fees are not realized until payment is received. However, when writing down disbursements, an account is assigned.

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Notes

Notes Posting Write Downs Separate Hard and Soft Client Costs option is disabled When costs are not separated, the user cannot distinguish between hard and soft costs when writing down disbursements. The following example represents a $100 write down of disbursements. Client Disb Recov (1210) Write Up/Down Journal

100

Expense account (user defined) 100

If an invoice is written up, a reverse transaction occurs. Posting Write Downs Separate Hard and Soft Client Costs option is enabled When costs are separated, the user may write down either hard costs, soft costs, or both. The following example represents a $100 write down of disbursements, of which $60 represents hard costs and $40 represents soft costs. Client Disb Recov (1210) Posts to Write Up/ Down Journal

Client Soft Costs (5011)

60

Expense account (user defined) 60

40

40

Tracking Accounts Payable Costs may be allocated to matters through the Accounts Payable module. Accounts Payable consists of two parts: • Creating new payables • Processing payables

What You Should Know: Creating New Payables If new payables do not have allocations to matter, then the general ledger is not affected, and a general liability balance does not appear on the ledger. If new payables have matter allocations, the portion of the payable allocated to the matters affects the general ledger as a hard cost.

24

PCLaw Accounting

Notes The following example represents a $100 payable, of which $60 is allocated to a matter. Client Disb Recov (1210)

Expense account (user defined)

Purchases Journal $100 General Ledger is not affected. Client Costs Journal

60

60

A user can allocate costs to matters only in the New or Open Payable features of Accounts Payable. Once a cost is allocated to a matter, it becomes a separate transaction. Processing the payable has no relevance to whether the cost is paid or outstanding within the matter. In addition, receiving a payment from a client towards an allocated cost has no relevance whether the payable is paid or still outstanding. Processing Payables Processing a payable has no affects on a matter. The following example represents the processing of a $100 payable invoice, of which $60 was allocated to a matter. General Bank (10xx)

Posts to General Bank Journal

100

Expense account (user defined) 100

Processing a payable reduces the general bank account and posts the amount of the payment as an expense. If the payable is eligible for a discount, the credit for the general bank is reduced by the amount of the discount, and Accounts Payable Disc (4997) is credited. Accounts Payable Disc (4997) is an income account.

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Notes

Notes

Accounting using the Accrual Method Accrual accounting differs from either Modified Cash or Cash systems in several key areas. Since Accrual systems are most common among Canadian, UK, and Australian firms, a value added tax is included in the sample transactions.

Tracking Client Costs Costs advanced to a client through either the Billing or the Cost Recovery modules are expense recoveries and are not described separately.

What You Should Know: Posting Expense Recoveries An expense recovery allocates an existing expense to a client. The following example represents a $100 new payable without matter allocations. Client Disb Recov (1210) Client Costs Journal

Expense account (user assigned)

100

100

Posting General Checks A general check allocates a cost to the client as it occurs. A check with a matter allocation is a package of two transactions: a general check and an expense recovery. The following example represents a $100 general check, a $70 matter allocation, and $10 tax. Client Disb Clearing (5210)

General Bank (10##) General Bank Journal

100

70

Client Costs Journal

HST/GST/VAT Journal

26

70

10

Client Disb Recov (1210)

70

HST/GST/ VAT Payable (2400)

Expense Account (user defined)

10

30

PCLaw Accounting

Notes When a matter is entered in the allocation section of the General Check window, PCLaw automatically defaults to Client Disb Clearing (5210). Since the account is debited and credited during the two transactions, the account balance does not change.

Creating Bills In Accrual systems, the billing process transfers unbilled disbursements from Client Disb Recov (1210) to Accounts Receivable (1200). Fees are posted to Accounts Receivable (1200) and the corresponding lawyers’ fee accounts. Value added tax is posted to Accounts Receivable (1200) and HST/GST/VAT Payable (2400). If a general retainer or a transfer from trust is included in the billing process, then an additional general bank transaction occurs.

Tip: The default clearing account may be changed on the Other tab of System Settings.

What You Should Know: Creating Bills with No General Retainer When a general retainer is not included in the billing process, an A/R balance is created. The following example represents a $100 invoice, consisting of $60 fees and $40 disbursements. Added to the invoice is $10 tax. Accounts Receivable (1200) Billing Fees Journal

60

Billing Fees Journal

40

Client Disb Recov (1210)

Lawyers’ fee accounts (4000.xxx)

60 40 GST Payable (2400)

Billing Fees and HST/ GST/VAT Journal

10

10

Applying General Retainers When a general retainer is part of the billing process, the retainer is immediately applied to the invoice balance. Fees, disbursements, and value added tax are affected as shown in the example above. The following example represents a $100 general retainer, of which $70 is applied to an existing A/R balance and $30 remains unapplied.

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Notes

Notes Accounts Receivable (1200) General Bank Journal

Client Disb Recov (1210)

General Bank Journal (2400)

100

General Bank and Billing Fees Journals

100

70

General Bank Journal

70 30

30

The entire value of the general retainer is reversed from Client Disb Recov (1210), and the retainer balance is then applied as a payment to Accounts Receivables (1200). If the retainer balance is less than or equal to the A/R balance, the transaction is completed. If the retainer balance is greater than the A/R balance, the unapplied portion of the retainer is returned to Client Disb Recov (1210).

Receiving Payments In Accrual systems, payments reduce Accounts Receivables.

What You Should Know: The following example represents a $100 receive payment. General Bank (10##) General Bank and Billing Fees Journals

100

Accounts Receivable (1200) 100

For partial payments, the default order for applying payment is as follows: • Taxes (if applicable) • Disbursements • Fees This order may be changed on the Data Entry tab of System Settings. If the Blend Tax Payments option is selected on the Data Entry tab of System Settings, taxes are paid in the ratio of the amount of disbursements to fees paid. If the order of payment dictates that disbursements are paid first, then the entire amount of

28

PCLaw Accounting

Notes disbursements and taxes on disbursements are paid before any of the payment is applied to fees or taxes on fees. The remainder of the payment is applied to fees and taxes on fees in the same proportion.

Changing/Writing Down Bills In Accrual systems, there are two methods for writing down invoices: • Permanently writing off the bill • Provisionally writing off the bill

What You Should Know: Permanently Writing Off Bills Writing down an invoice reduces the accounts receivable balance. Lawyer fees may be reduced, expenses to the firm may be increased, and GST Payable may be reduced. The following example represents the write down of a $100 invoice, consisting of $60 fees and $40 disbursements. Added to the invoice is $10 tax. Accounts Receivable (1200) Write Up/Down Journal

40 60

Expense account (user defined)

Lawyers’ fee accounts (4000.xxx)

40 60 GST Payable (2400)

Write Up/Down Journal

10

10

If an invoice is written up, the reverse transactions occur. Provisionally Writing Off Bills A provisional write-off affects only the General Ledger and HST/ GST/VAT Journal. The entry is not posted to the Write Up/Down Journal. The user may request either the Write Up/Down Journal or the Receivables by Client report to display provisional write-offs, by selecting the Include Provision for Write Offs option when generating the selected reports. A provisional write-off affects the General Ledger in nearly the same manner as a permanent write-off. The only difference is the place for crediting Accounts Receivable (1200), whereas the provision is placed in Provision For Bad Debt (1201).

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Notes

Notes The following example represents the provisional write down of a $100 invoice, consisting of $60 fees and $40 disbursements. Added to the invoice is $10 tax. Provision For Bad Debt (1201) Does not post to Write Up/Down Journal

40

Expense account (user defined)

lawyers’ fee accounts (4000.xxx)

40

60

60 GST Payable (2400)

HST/GST/VAT Journal

10

10

Tracking Accounts Payable Costs may be allocated to a client through Accounts Payable. Accounts Payable consists of two parts: • Creating a new payable • Processing a payable

What You Should Know: Creating New Payables New Payables may or may not be allocated to matters. The follows is an example of a $100 New Payable with a $10 value added tax. $60 dollars of the payable is allocated to a matter. General Liabilities (2000) Purchases Journal

100

Client Costs Journal

Expense acc’t (user defined)

Client Disb Recov (1210)

100 60

60 HST/GST/ VAT Payable (2400)

HST/GST/VAT Journal

10

10

Allocating a cost to a matter occurs only in the New or Open Payable features of Accounts Payable. Once a cost is allocated to a matter, it becomes a separate transaction. Processing the payable has no relevance whether the cost is paid or outstanding within the matter. In addition, receiving a payment from a client towards an

30

PCLaw Accounting

Notes allocated cost has no relevance whether the payable is paid or still outstanding. Processing Payables Processing Payables has no effect on the matter. The following example represents the processing of a $100 payable invoice with a $10 value added tax. $60 of the payable was allocated to a matter. General Bank (10xx) General Bank Journal

110

General Liabilities (2000) 110

Processing payables reduces the general bank account and General Liabilities (2000). If the payable is eligible for a discount, the credit for the general bank is reduced by the amount of the discount, and Accounts Payable Disc (4997) is credited. Accounts Payable Disc (4997) is an income account.

Posting to Control Accounts Specific general ledger accounts in PCLaw are linked to journals such as General Bank, Billing Fees, or Client Costs. These accounts are referred to as control accounts. Data entry features that use control accounts, such as General Check, affect the General Ledger and the associated journal, simultaneously. The G/L account and journal should always display the same balance. For example, when creating a general check for bank account 1, you are asked for one G/L allocation to complete the two-sided accounting entry. The credit portion of the entry is allocated automatically to Gen Bank Acct 1 (1000).

Note: The terms reserved account and control account are interchangeable. Prior to version 7.10, the term reserved was used in the G/L Accounts window instead of control.

Using Control Accounts All data entry features using control accounts automatically post to that account. Other than entering opening balances, control accounts should not be used when allocating transactions to the General Ledger. When a reserved account is used inappropriately, such as when creating a general journal entry, PCLaw displays a warning prompt:

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Notes

Notes

PCLaw Notification Prompt

The prompt indicates you are using a G/L control account. A manual allocation to a control account does not affect the journal associated to the control account. Thus, the journal and control account will no longer balance. Example: Gen Bank Acct 1 (1000) reflects the balance of the General Bank Journal. It increases when a receipt is posted and decreases when a check is issued. A misallocation to this account affects the G/L only. Hence, the Trial Balance reflects the change to the account, but the General Bank Journal does not. Note: PCLaw provides the option for general journal entries that post to general or trust bank control accounts to be posted to their respective bank journals.

If it becomes necessary to adjust the balance in a control account, such as Gen Bank Acct 1 (1000), you should enter either a receipt or a check to affect both the journal and the control account. Follow this rule: If a control G/L account appears automatically on a data entry window, use it. If the account does not appear automatically, or if you are warned against using it, do not use it.

Determining when a G/L Account is a Control Account Options > Lists > G/L Accounts You may confirm that a G/L account is a control account using the G/L Accounts window on the Options > Lists pull-down menu. For PCLaw version 9.20 and higher, refer to the Control column in the Pop Up Help > G/L Accounts window. Control accounts display their type of control account, whereas non-control accounts are blank. For earlier versions of PCLaw, refer to the Control box on the bottom right hand corner of the G/L Accounts window. If the account is not a control account, the box will be blank. If it is a control account, the PCLaw feature associated with the account appears in the Control box.

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PCLaw Accounting

Notes

Pop Up Help - G/L Accounts window

The account type (asset, liability, etc.) for a control account cannot be changed. However, the nickname and account name may be adjusted to suit the user’s preferences.

Control Accounts in PCLaw The following chart lists all control accounts in PCLaw that are linked to related journals. Account Name

Nicknames

Linked to Journal

Accounting Method

General Bank Acct (1 to 99)

1000 to 1098

General Bank Journal

All

Trust Bank Acct (1 to 99)

1100 to 1198

Trust Bank Journal

All

Accounts Receivable

1200

Billing Fees Journal

Accrual

Provision for Bad Debts

1201

Write Up/Down Journal

Accrual

Client Disb Recovery

1210

Client Costs Journal

Accrual/Modified Cash

General Liabilities

2000

Purchases Journal

Accrual

Trust Funds Owed

2100

No journal

All

G.S.T. Payable

2400

GST Journal

All

Sales Tax Payable

2450

Sales Tax Journal

All

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Notes

Notes Account Name

Nicknames

Accounting Method

Linked to Journal

Accounts Payable Disc

4997

Purchases Journal

Accrual

Client Disb Expense

5010

Client Costs Journal

Cash

Client Soft Costs

5010

Client Costs Journal

Modified Cash

Client Soft Costs

5011

Client Costs Journal

Cash

Control Accounts

Reserved Accounts in PCLaw Warning: Although fee accounts are not directly linked to any journal, they can still be reconciled to the Billing Fees Journal for Accrual systems and the Payment Allocation Listing for Cash and Modified Cash systems. Manually posting to fees makes the account nonreconcilable.

Other accounts in PCLaw are reserved, but are not directly linked to a corresponding sub-journal. These accounts may be reserved for equity, fees, balance sheet year end adjustments, and other purposes. Although these accounts appear in G/L Accounts as control accounts, they may be manually adjusted. Account Name

Nicknames

Linked to Journal:

Accounting Method/ Type

Equity/Capital

3000

No journal

All - Partnership/ Corporation

Equity.{lawyer’s initials}

3000.abc

No journal

All - Partnership

Income for Alloc/Ret Earnings

3500

No journal

All - Partnership/ Corporation

Drawings

3501

No journal

All

Drawings.{lawyer’s initials}

3501.abc

No journal

All - Partnership

Fees

4000

No journal

All

Mark Up Income

4000.abc

No journal

All

Interest

4999

No journal

All

Suspense

9999

No journal

All

Reserved Accounts

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PCLaw Accounting

Notes

Using the Client Disb Clearing Account When creating a check that is allocated to a matter, G/L account nickname 5210 is filled in automatically in the allocation area of the check window. To use the Client Disb Clearing account (5210), the Use G/L Accounting option must be selected on the Other Tab of Options > System Settings.

Allocating to the Client Disb Clearing Account Client Disb Clearing (5210) appears automatically whenever a matter nickname is typed in the allocation section of the General Check or New Payable window. A check allocated to a matter is a package of two transactions. For the general check segment of the transactions, PCLaw: • Debits Client Disb Clearing (5210). • Credits the general bank control account associated with the bank account specified in the Acct box of the check. Client Disb Clearing (5210) 100

General Bank (10##) 100

For the expense recovery segment of the check, PCLaw: • Debits Client Disb Recov (1210) for Accrual and Modified Cash accounting systems. • Debits Client Disb Exp (5010) for Cash accounting systems. • Credits Client Disb Clearing (5210). Client Disb Recov/Exp (1210/5010) 100

Note: For the Accrual accounting method, substitute General Liabilities (2000) for the general bank account. For Modified Cash and Cash systems, this portion of the transaction is not posted to the general ledger.

Client Disb Clearing (5210) 100

The net effect on the clearing account is zero.

Guidelines for Using the Client Disb Clearing Account The disbursement clearing account balance should always be zero. If a non-zero balance is present, then a manual entry has been allocated to the account. These entries may be identified by examining a detailed General Ledger for the disbursement clearing

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Notes

Notes account. Any transaction that does not possess an offsetting entry is unable to be a clearing account entry. The following rules ensure the proper use of the disbursement clearing account: • •

Accept Client Disb Clearing (5210) as it appears automatically when allocating a cost to a matter. If Client Disb Clearing (5210) does not appear by default for any transaction, you should not manually specify this account.

Changing the Client Disbursement Clearing Account The Client Disb Clearing (5210) is created as the default clearing account in PCLaw. However, any account may be specified as the disbursement clearing account.

Tip: Regardless of the account selected to be used as the disbursement clearing account, the concept of the account functions on the same principle. The purpose for using a separate clearing account is to separate clearing account entries from other PCLaw transactions.

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Other tab of System Settings

In the Accounting Options area, in the Client Disb Clearing box, type or select the account nickname to use as the clearing account.

PCLaw Accounting

Notes

Expense Recovery Accounts Contra Expense Accounts In addition to basic Asset, Liability, Equity, Income, and Expense accounts, PCLaw utilizes the GAAP concept of Contra Expense accounts when recording Expense Recovery items. A contra expense account is a special type of expense account which generally accumulates credits instead of debits. Income accounts and Expense accounts both appear on the Income Statement. Since the common definition of contra is opposite, a contra expense account is an Income account that falls within the list of Expense accounts on the income statement. When an expense recovery is entered, PCLaw accumulates the recovery in contra expense accounts (i.e., G/L accounts with the word “recovery” in the title). The chart of accounts within PCLaw contains both expense and expense recovery accounts. For example, you will find Photocopy Expense (5520) and Photocopy Recovery (5521) accounts. Both accounts are expense accounts and affect the firm’s net profit. The difference lies in how expense information is presented on the Income Statement. To understand the roles of Expense and Expense Recovery accounts, take the example of a purchase of photocopy paper and toner by check for $90. The check is posted to Photocopy Expense (5520).

Using Only Expense Accounts Scenario 1: To make an expense recovery entry for $3.00 to Photocopy Expense (5520), PCLaw debits either Client Disb Recov (1210) for Accrual and Modified Cash accounting systems or Client Disb Expense (5010) for Cash accounting systems. Then, PCLaw credits the account you specify, in this case, Photocopy Expense (5520). The Income Statement reflects part of the transaction as follows: Expenses Photocopy Expense (5520)

87.00

Photocopy Recovery (5521)

0.00

Total Expenses

87.00

Using Expense Accounts Only

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Notes

Notes Photocopy Expense consists of a debit of $90.00 from the initial purchase of photocopy supplies and a credit of $3.00 from the expense recovery transaction.

Using Expense Recovery Accounts Scenario 2: When you make an expense recovery entry for $3.00 to Photocopy Recovery (5521), PCLaw debits either Client Disb Recov (1210) for Accrual and Modified Cash accounting systems or Client Disb Expense (5010) for Cash accounting systems. Then, PCLaw credits the account you specify, in this case, Photocopy Recovery (5521). The Income Statement reflects part of the transaction as shown below: Expenses Photocopy Expense (5520)

90.00

Photocopy Recovery (5521)

-3.00

Total Expenses

87.00

Using Expense Recovery Accounts

The Photocopy Expense consists of a debit of $90.00 from the initial purchase of photocopy supplies. Photocopy Recovery consists of a credit of $3.00 from the expense recovery transaction. The only difference is that Scenario 2 reports total photocopy expense before recoveries in one account and total photocopy recoveries in another account. Notice how the Total Expenses remain the same in each scenario.

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PCLaw Accounting

Financial Statements Notes Financial statements are comprised of the General Ledger, Trial Balance, Income Statement, and Balance Sheet. Activity is reported for a specified period of time, most commonly for the period consisting of a calendar current month. Statements report the profit, loss, and current worth of the company.

What Are Financial Statements? Before discussing each specific statement, we must first determine how financial statements differ from other PCLaw reports, with respect to appearance, options, and report period. Financial statements possess several basic differences when compared to PCLaw reports. Statements are produced on templates that can be changed or edited. PCLaw provides several templates for each statement type. The template may display year to date figures, prior year or budget comparisons, or a twelve month overview. Use the default PCLaw templates, modify them for the firm’s own requirements, or create new templates. Reports are produced using a fixed or customized layout. Although specific fields on the report can be added or removed, the actual format of the report must maintain a basic structure. G/L accounts do not store individual entries. Month end balances are saved separately to streamline statement creation; however, actual transactions are compiled from source journals to produce the requested statement. Source journals such as General Bank, Trust Bank, Client Cost, Billing Fees, and Purchases are primary reports in PCLaw. Financial statements and productivity reports pull their content from these journals. Detailed transactions on the General Ledger indicate the source journal from where the record is pulled.

Producing Financial Statements Financial statements can be accessed from several locations in PCLaw. Multiple G/L statements can be run simultaneously. For example, if a statement is open on your screen, a second statement can be produced without closing the first statement.

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Notes

Notes

The Common Tab of G/L Statements G/L > G/L Statements > Common Tab The Common Tab is the first tab to appear when opening the Statements window. It contains the more common components for producing G/L Statements.

Common tab of the Statements window

What You Should Know: Statement Selection • A minimum of one statement must be selected when producing a report, and up to 4 different statements can be run at one time. • A template must always be defined for each selected statement. • There are no default settings stored elsewhere in PCLaw for G/L statements. Range • When producing a statement for a specific account type, always select the First {Account Type} and Last {Account Type} options, instead of the actual first and last accounts. This will avoid accounts that are numbered out of sequence from being omitted from the statement. • When producing statements for all accounts, always use First Current Asset and Last Expense. Previous Report Period • Date values always report the last statement that was run, not the last accounting period that was closed.

40

Financial Statements

Notes Detailed Report • Check to show individual transactions posted to each account. • Only the General Ledger can show detail. • This option does not display detail on summarized entries, such as those found for expense recovery, general bank, and accounts payable. Run Reports on • This option is available to PCLaw version 10 and higher. • It only affects the appearance of the statement being produced, and does not repost entries. • Actually changing the accounting method is a multi-step procedure, that involves adjusting specific account balances. • Documentation to move from one accounting method to another is set out in the PDF Document Library at http:// support.lexisnexis.com/ltps/. This also includes the assistance of PCLaw Technical Support, as the setting must be changed in the PCLaw Data Maintenance utility.

The Other Tab of G/L Statements G/L > G/L Statements > Other Tab The Other tab contains additional options for producing G/L Statements.

Other tab of the Statements window

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Notes

Notes

What You Should Know: Print Zero Balance Accounts • If activity in an account during the reporting period brings the closing balance to zero, the account does not appear on a statement if the Print Zero Balance Accounts option is not selected. Department/Category/Cost Centre • Categories and Cost Centres are single dimension designations set out in the Add/New G/L Accounts window. • Departments are defined parameters, including G/L accounts, matters, and timekeepers that are selected from a maintained list. Show Parent and Sub Accounts • Refer to “Working With Parent and Sub Accounts” on page 63 for more information on parent and sub accounts. Run Consolidated Statements • Prior to PCLaw 10, this option was for PCLaw Pro only. • Check to produce combined financial statements for two firms. • Highlight the set of books with which to consolidate statements. • Type the user name for that set of books in the User Name box. • Type the user name password for that set of books in the Password box. • Consolidated Statements are recommended for use with an Income Statement or Balance Sheet only. • Refer to “Producing Consolidated Statements” on page 66 for more information.

Determining the Report Period The Income Statement displays information for a range of time, whereas the Trial Balance and Balance Sheet display a point in time. The General Ledger reports both the transactions for a range of time as well as the balance that is carried forward from the reporting period start date. This does not imply that the start date is insignificant when creating a Trial Balance or Balance Sheet. The start date affects the calculation of the statement. If the date range spans many months, the statement takes longer to produce.

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Financial Statements

Notes

Working with the General Ledger G/L > Statements > General Ledger The General Ledger lists all G/L accounts matching the selected criteria when producing the report. The ledger provides the opening and closing balance for each account for the report period, and if requested, it can display detailed transactions. The General Ledger is the default statement selected when the Statements window is opened.

Viewing Non-Detailed General Ledgers When Detailed Report is not selected on the Statements > Common window, the General Ledger displays the opening and closing balance for each account matching the selected criteria when producing the statement. Transactions are summarized into debit and credit entries by source journal and reserved account status.

Non-detailed General Ledger

For example, for Travel (4310), shown above, the general bank journal was debited for $6,900.00 and credited for $950.00 during the report period. For the same period, the account was also credited for $100.00 from the client costs journal. The Source column indicates the journal from where the debit or credit is derived. GB indicates general bank, while CER is short for the client expense recovery or the client costs journal. The terminology for the summarized entries may differ depending on the type of account. Delivery Expense (5500) is a non-reserved account, therefore, the description starts with the word ‘Summary’ such as ‘Summary of Debits’.

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Notes

Notes

How values on respective financial statements are determined by their space in time

For a reserved account, such as a bank account, the description may differ. Summary of Debits is replaced with Total Receipts, and Summary of Credits becomes Total Disbursements. Entries in windows directly linked to reserved accounts have the word Total at the start of the description line.

Non-detailed General Ledger reserved account

A reserved G/L account is linked directly to a specific journal and one or more data entry windows in PCLaw. For example, account 1000 is a bank account, linked to the general bank journal. When entering a firm receipt in this bank account, only a credit account is required, as the bank account G/L automatically receives the debit entry. Other features under the Data Entry > General Bank pulldown menu, such a General Check or Receive Payment option automatically credits or debits the bank G/L account. Accounts such as Client Disb Recov (1210) or Client Disb Exp (5010) may contain descriptions that begin with both Totals and Summary. The Total of Recovery entry includes all transactions entered through Expense Recovery, General Check, or New Payable when a matter nickname is specified. If an entry is manually allocated to either a Client Disb Recov or Exp transaction, that transaction is summarized separately as part of a Summary of Debits or Summary of Recoveries.

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Financial Statements

Notes

General Check window without displaying a value added tax

General Check window when a value added tax is deployed

For example: For Cash accounting systems; a cost is allocated to a matter on a general check, but instead of allowing PCLaw to automatically allocate the amount to the Client Ledger through Client Disb Clearing (5210), the user manually enters 5010. Thereby, 5010 serves as both a clearing account, and the destination account for the client cost. The result is a pair of entries as follows:

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Notes

Notes Entries

G/L

Posted to General Bank Journal

General Bank

Posted to Client Costs journal

5010

5010

5010

Dr

Cr $125

125

Explanation Appears on general bank journal Clearing account entry

125 125

Clearing account entry Appears on client ledger

Chart displaying how entries are posted in a Cash accounting system .

5010 entered manually and is used as a clearing account, creating an extra debit and credit that is not typical in an expense recovery entry. General Ledger displaying summarized and non-summarized entries (no tax)

For Accrual accounting systems collecting a value added tax, a cost is allocated to a matter on a general check, but instead of allowing PCLaw to automatically allocate the amount to the Client Ledger through Client Disb Clearing (5210), the user manually enters 1210. Thereby, 1210 serves as both a clearing account and the destination account for the client cost. The result is a pair of entries as follows: Entries Posted to General Bank Journal

Posted to Client Costs journal

G/L

Dr

General Bank

Cr $125

Explanation Appears on general bank journal

1210

116.82

Clearing account entry

2450

8.18

Appears on GST journal

1210 1210

116.82 116.82

Clearing account entry Appears on client ledger

Chart displaying how entries are posted in an Accrual or Modified Cash accounting system with value added tax

If an entry is manually allocated to Client Disb Recov (1210) or Client Disb Exp (5010), the entry is not included in Total of Recoveries. Instead, it is summarized by the source journal.

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Financial Statements

Notes

1210 entered manually and is used as a clearing account, creating an extra debit and credit that is not included in a typical expense recovery entry. General Ledger displaying summarized and non-summarized entries (after tax)

Viewing Detailed General Ledgers A detailed General Ledger requires the Detailed Report box in the Current Report Period section of the Statement > Common window to be checked. A detailed General Ledger displays the individual postings from all respective journals for the period of the statement. These entries are not contained in the General Ledger itself, but are read from the source journals each time the statement is run.

Detailed General Ledger

Some reserved accounts may not display detail for all transactions. These accounts have corresponding journals to display details of transactions that were automatically allocated to these accounts. Acc’t #

Account Name

Entry Description

Dr/Cr

Source Journal

1210

Client Disb Recov

Total of Recoveries

Dr

Client Costs

2000

General Liabilities

Total A/P

Dr

Purchases

5010

Client Disb Exp

Total of Recoveries

Dr

Client Costs

List of accounts that automatically summarize entries

Use the Client Costs Journal to view details of the Total of Recoveries entry. Select the same date range used for the General Ledger. Under the Other Tab, deselect the Include Accounts Payable Entries option. For Accrual systems only: Entries on the Client Costs Journal with source abbreviation WO must also be deducted manually from the total. These are disbursements added in the Billing Information

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Notes

Notes window. Disbursements added at the time of billing are posted directly to the Accounts Receivables (1200). Use the Purchases Journal to view details of the Totals of A/P entry. The summarized entry uses the End Date of the report period.

General Ledger displaying summarized entries and the report End Date

For Client Disb Recov (1210) and Client Disb Exp (5010) accounts, entries made through Expense Recovery and General Check, where a matter nickname has been specified, are summarized. For General Liabilities (2000), new payable entries where a matter nickname has been specified, are summarized.

Reading General Ledgers The default template for the General Ledger is GL.rgl. The standard format for the template is outlined as follows: Header • Page numbers are displayed in the top right hand corner. • The date the report is printed appears in the top left hand corner. • The center title displays the firm name, statement name, and the selected report period. Acct No./Account Name • Lists the G/L account nickname and the expanded account name. Date • Lists the transaction date when Detailed Report is checked. • Lists statement end date for summarized entries when Detailed Report is deselected. Srce • Lists the source journal where the transaction(s) are posted. Ref Lists one of the following: • • •

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The check or receipt number from general or trust bank entries. The reference number from client expense or general journal entries. The invoice number from A/R or A/P entries.

Financial Statements

Notes • The reference number does not appear for summarized entries. Entry # • Displays only for detailed entries. • Does not appear for summarized entries. Paid To • Lists the contents of the Paid To or Received From box for a general or trust bank transaction, the contents of the To box for expense recovery entries, the explanation Journal Entry for transactions from the General Journal. Description • Displays the contents from the Explanation box for individual transactions. • Displays text such as Total of Debits, Total of Recoveries, etc. for summarized entries. Debit/Credit Columns • A debit value increases the balance of most asset and expense accounts, as well as equity type accounts with a debit balance, such as Drawings. • A debit value decreases the balance of all liability, revenue, and accumulated depreciation accounts, as well as equity type accounts with a credit balance such as Capital. • A credit value increases the balance of all liability, revenue accounts, and accumulated depreciation accounts, as well as equity type accounts with a credit balance such as Capital. • A credit value decreases the balance of most asset and expense accounts, as well as equity type accounts with a debit balance, such as Drawings. Balance • The opening balance states the balance at the end of the day previous to the statement reporting period. • The closing balance is the sum of the opening balance +/- all debit/credit entries in the reporting period. • A negative balance is displayed in brackets. • A negative balance is considered as a balance in a credit position for an account that normally has a debit balance or a balance in a debit position for an account that normally has a credit balance. • Accounts are divided by a solid line below the closing balance.

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Notes

Notes

Selecting General Ledger Templates The exhibits for this topic use the GL.rgl template. G/L templates provided by PCLaw include the following: Template

Description

GL

Most detailed General Ledger template

GLNOPAY

Omits the Paid To column

GLSM

Detailed General Ledger with condensed token spacing

SGL

For simplified accounting, omits the Acct. No. column

SGLNOPAY

Omits the Acct. No and Paid To columns

SGLSM

Simplified template with condensed token spacing

List of General Ledger Templates

Working with Trial Balances G/L > G/L Statements > Trial Balance The Trial Balance lists all active, non-zero balance accounts and reports their balance in the respective debit or credit column. The columns are totalled, and an Overall Balance of zero should be reported at the bottom of the report. To give an accurate overall balance, the Trial Balance should be run for all accounts.

Reading Trial Balances Beneath the title on the Trial Balance is the caption: “For Period Ending:” followed by a date. Balances are reported as of the end date specified for the statement. Although you can enter a start date, all totals on the statement are full balances carried forward from day one for all asset, liability, and capital accounts, and from the start of the fiscal year for all retained earnings, income, and expense accounts. The start date determines how values on the report are calculated. Refer to “Calculating G/L Balances” on page 58 for more information.

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Financial Statements

Notes

Trial Balance

What You Should Know: Nickname/Account Name • Lists the G/L account being reported. • G/L accounts are sorted first by account type and then by nickname. • Account name is used if there a nickname field does not exist, such as in simplified accounting. •

Account types are as follows: • Current Asset • Fixed Asset • Short Liability • Long Liability • Equity • Retained • Income • Expense

Debits/Credits • The values for debits and credits are divided into two columns. • The debits and credits are summed in the Totals line. • In a two-sided accounting system, total debits and credits of all accounts must equal each other. Overall Balance • This value is the difference between the Debit balance accounts and the Credit balance accounts. • In all instances, the Overall Balance should be a zero value.

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Notes

Notes

Selecting Trial Balance Templates The Tbal.rtb template is used in the illustration at the top of the page. Trial Balance templates provided by PCLaw include the following templates: Template

Description

TBal

Most detailed Trial Balance template

TBalsm

Detailed Trial Balance with condensed token spacing

STBal

For simplified accounting, does not have a nickname column

STBalsm

Simplified accounting with condensed token spacing

Trial Balance Templates

Working with Income Statements G/L > G/L Statements > Income Statement The Income Statement compares revenue and expense accounts for a specified period of time. The difference between total revenue and total expense is reported as Net Income. To give an accurate Income Statement, the Income Statement should be produced for a single calendar month.

Reading Income Statements The Income Statement reports on a specific period of time. The balances listed are summed from items posted between the Start and End dates specified on the Statements > Common window. The Income Statement includes only two G/L account types, income and expense. Both account types are zeroed out at year end. If the Income Statement is run for the last month of the fiscal year, it calculates all income and expense for that report period. Year to Date sections display values from the start of the fiscal year. If the Income Statement is run for the first month of the next fiscal year, the year to date figures will calculate only from the start of the new fiscal year. This is true if year end has been run, or twelve months have passed since the last fiscal year.

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Financial Statements

Notes

Income Statement

If the Income Statement is run for several months, that includes a fiscal year end prior to the statement end date, the adjusting entries created by PCLaw for the year end will not appear on the statement.

What You Should Know: Revenue/Expense • The Revenue section includes all income accounts, such as lawyer fees, Interest Income, and Accounts Payable Discount. • The Expense section includes all expense accounts such as Bad Debt Expense, Client Disb Exp, and Suspense. • Net Income is the difference between Total Revenue and Total Expenses. • Both revenue and expenses are displayed as a positive entry on the Income Statement. • If a revenue account is in a debit position, or an expense account is in a credit position, the value is displayed in brackets. Columns • Current Period comprises the date range that the statement is run. • Year to Date calculates balances from the start of the fiscal year to the end date. • For each account, a dollar value is provided as well as the percentage that value represents of the total revenue or expense. • Comparison columns can change, depending on the template. • Percentages, budget figures, and previous year templates are available.

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Notes

Notes

Selecting Income Statement Templates The illustrations in this section are from the Income template, the default template in PCLaw. Income statement templates provided by PCLaw include the following: Template

Description

Income

Year to Date column displays account balances from the start of the fiscal year to the statement end date and the percentage of total revenue and expense that each account represents.

IncomeSM

Year to Date template with condensed token spacing.

IncBudg

Percentage column for current period and year to date are replaced with monthly and year to date budget figures, respectively.

IncomeD

Similar to the Income template, but groups accounts by department.

CompInc

Displays data from the previous year for both the current reporting period and year to date.

CompInc2

Similar to the CompInc template, but displays the account name to the right of the Current Period column.

CompIncD

Similar to the Compinc2 template, but groups accounts by department.

Incm12

Displays account balances by calendar month for a 12month period, backwards from the Current Report period.

Incm12SM

Account Balances by calendar month with condensed token spacing.

Income Statement Templates

Working with Balance Sheets G/L > Statements > Balance Sheet The Balance Sheet shows the worth of the firm. Like the Trial Balance, the Balance Sheet depicts a point in time. The equity accounts forecast how net income would be distributed, if an End of Year process was performed at the End Date of the Current Report Period. To provide an accurate overall balance, the Balance Sheet should be run for all accounts.

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Financial Statements

Notes

Balance Sheet

Reading Balance Sheets The Balance Sheet contains three separate sections. Assets can be current or fixed. A current asset is defined as an asset that can be converted quickly into cash. Liabilities can be short term or long term. The equity account type can have equity accounts that carry the balance forward indefinitely, or retained accounts that zero out at year end. For further detail on equity accounts, refer to “Understanding the Equity Section” on page 55. The balance for each account is contained in the left hand column. Totals for each subsection appear in the middle column. Section totals appear in the right-hand column. Total Assets should always equal Total Liabilities & Equity.

Understanding the Equity Section While asset and liability accounts display current balances, equity accounts are different. Values of individual lawyer equity accounts do not change over the course of the year, unless manual adjustments have been made to these accounts. Only when the End of Year procedure is performed does PCLaw post adjusting entries

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Notes

Notes to close out all income, expense, and retained earnings type equity accounts. G/L Account

Account Type(s)

Action at Year End

Asset

Current or Fixed Asset

Balance carries forward

Liability

Short or Long Term Liability

Balance carries forward

Capital/Equity (firm or lawyer)

Equity

Balance carries forward

Income for Alloc

Equity

Balance carries forward

Drawings

Retained

Balance is zeroed out

Retained Earnings (firm or lawyer)

Retained

Balance is zeroed out

Income

Income

Balance is zeroed out

Expense

Expense

Balance is zeroed out

How General Ledger Accounts are affected by Year End

A firm makes a profit during the year, and thus increases in value. The balance of the lawyer equity accounts do not change over the course of the same year. Therefore, the increase in value must be shown elsewhere on the Balance Sheet. This is achieved through two accounts: Retained Earnings and Income for Allocation. The sum of all Retained Earnings and Income for Allocation accounts on the Balance Sheet equals Net Income on the Income Statement for the same report period. Net Income is allocated to the lawyers’ Retained Earnings accounts using the Income Allocation Percent value, which is found under the Accounting Tab of Lawyers and Rates.

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Financial Statements

Notes

Accounting tab of Lawyers & Rates

In the current example, income is allocated as follows: DJD

60%

TOB

30%

Unallocated

10%

Net Income is allocated as follows: Income for Alloc 10% Retained Earnings - TOB 30% Retained Earnings - DJD 60%

Comparing Income Statement > Net Income to Balance Sheet > Retained Earnings

Net Income is allocated to retained type G/L accounts, but not equity type accounts. The allocated balance is stored in hidden Special Retained Earnings (10000) accounts. These accounts function transparently, and do not appear on any G/L statement. A Special Retained Earnings account exists for each partner. When a Balance Sheet is produced, these account balances are transferred to the appropriate Retained Earnings/Income for Alloc account, where they appear under the Equity section. PCLaw 12

Note: Special Retained Earnings accounts are separated from Retained Earnings accounts.

57

Notes

Notes A value must be temporarily stored to display the forecasted balance of all Retained Earnings accounts on the Balance Sheet prior to running the End of Year process. This value is called upon only when a Balance Sheet is created. If this value was posted directly to equity, an imbalance would exist in the Trial Balance and Income Statements, since special Retained Earnings is the difference between income and expenses. Therefore, special retained earnings accounts are outside the calculable range for all financial statements. If the Income Allocation Percentage box on the Lawyers & Rates > Accounting Tab is left blank, or if the total allocations for all partners does not add up to 100%, then the unallocated balance is posted to the Income for Alloc (3500) account. Income for Alloc (3500) works similar to Retained Earnings accounts, including having a special Retained Earnings account that stores the balance of unallocated net income for the Balance Sheet. Income for Alloc differs from Retained Earnings accounts, only in that it is not associated with a lawyer.

Selecting Balance Sheet Templates The illustrations in this section are from the BalSheet template, the default template in PCLaw. Balance Sheet templates provided by PCLaw include the following: Template

Description

BalSheet

A basic Balance Sheet displaying Asset, Liability, and Equity sections.

BalShSm

The BalSheet template with the line spacing reduced.

BudgBal

Compares the firms actual performance for the period to what was budgeted.

BudgBlSm

The BudgBal template with line spacing reduced.

Balance Sheet Templates

Calculating G/L Balances For the first month of the first year of a firm, calculating a G/L balance is a simple procedure. PCLaw scans the journals and compiles the entries posted to each G/L account. Since there is only one month’s data, the process does not take very long. Now, take the example of a multi-lawyer firm with several years of data. If PCLaw is required to scan each journal to determine both the opening balance and transactions posted for the current report

58

Financial Statements

Notes period for each account, the process may be immense. Therefore, a quicker way to produce financial statements is required.

Behind the Scenes: When a month is closed in PCLaw, the closing balance for each account is saved in a G/L Account Balance file. Therefore, when running statements for the next month, instead of PCLaw needing to reread the journals of the prior months to attain the opening balance, it can simply read the saved closing balances from the prior month. Then it can scan for transactions that occur during the current report period.

How the current month’s balance for a general ledger account is derived

The G/L Account Balance file is appended whenever a month is closed. For each G/L account, a record is added. If there are fifty G/ L accounts, fifty records are created. If ten months are closed, then the file contains five hundred records. Often when producing statements for a current month, the prior month has not been closed. PCLaw searches for the most recent closed month prior to the Start Date, reads the G/L Account Balance file, then compiles the requested information from that date forward. Running statements for a set of books with many months open takes longer to compile than for a set of books with only a few months open. Likewise, when running a statement using a start date several months prior to the last closed month, PCLaw reads the respective records in the G/L Account Balance file prior to the specified start date and skips the records for all subsequent month ends. Next, PCLaw searches for all entries through the Current Report Period > End Date to calculate the correct closing balances.

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Note: Only records after the Opening Balance Entry Date are read. Any transactions posted prior to the Opening Balance Entry Date are disregarded when a statement is produced.

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Notes

Notes

Common Troubleshooting: Backdated Entries If a PCLaw report is produced for the same period, transactions prior to the Opening Balance Entry Date are included on the report.

What happens when a statement is backdated beyond the latest closed month

If an entry is backdated into a closed month, running statements only for the current report period will not include that entry. However, if the start date is set prior to the backdated entry, then the entry is included on the statements.

Working with Departments G/L > G/L Statements > Other Tab Department Codes were introduced in the Virtual Training 1 Installing and Preparing PCLaw session as part of the initial setup for adding matters to PCLaw. Now, we will examine the expanded utilization for departments and the role they play in financial reporting. PCLaw allows you to organize financial statements by departments on two different levels. You can group general ledger accounts by departments, including assigning department accounts to timekeepers or produce financial statements for an individual department. In addition, you can use or change existing departments as provided by PCLaw or add your own.

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Financial Statements

Notes You can also categorize income by department. This level includes creating income G/L accounts for departments and using them in place of lawyer fee accounts. Departments can subsequently be applied to individual matters and used to track revenue during the billing/payment process. Summary by Department and Summary by Department by Lawyer sections can be included on some reports. Most reports can be generated by department.

Tracking G/L Revenue by Department Options > System Settings > Other Tab Traditionally, PCLaw tracks revenue using lawyer fee accounts. For both partnerships and corporations, all timekeepers are assigned a fee account. Revenue alternatively can be tracked by department. Income G/L accounts can be assigned for any department, and these accounts take the place of lawyers’ fee accounts. When changing how G/L revenue is tracked, the change is effective for future revenue only. Adjustments are not retroactively made to revenue previously posted to the General Ledger. Therefore, if the firm chooses to track G/L revenue by department instead of by lawyer, the lawyers’ fee accounts still appear on the prior period and comparative sections of any financial statement, until those periods are no longer included in the historical range of the financial statement.

Warning: In order for your financial statements to provide consistent results, do not repeatedly change how revenue is tracked over a period of time. Since historical information is not modified, changing the tracking method makes the financial statements difficult to use for comparative purposes.

Track G/L Revenue area on the Other tab of System Settings

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Notes

Assigning Departments General Ledger Departments can be assigned to the General Ledger for use when generating financial statements. Statements can be produced for individual departments. Assign departments to G/L accounts either by using the G/L Pop Up Help window on the Options > Lists pull-down menu or by using the G/L button in Options > Lists > Department Codes. Departments can be assigned to lawyer fee, draw, equity, and retained earnings accounts. Draw, equity, and retained earning accounts may not be activated for some lawyers and do not apply to corporations. Lawyers/TimeKeepers Assign departments to lawyer accounts using the Accounting Tab in Lawyers and Rates. Select the lawyer and click change to access the Accounting tab. Bank Accounts Departments can be assigned to bank accounts for use when creating financial statements. Statements can be produced for individual departments. Assign departments to back accounts using the Bank Account Pop Up Help on the Options > Lists pull-down menu. Matters If Track G/L Revenue by Department is enabled on the Other tab of System Settings, a Department box is added on the Common tab of the New Matter window and the Main tab of Matter Manager. Department codes assigned an income G/L account allocate revenue to that account, during the billing/payment process. Use department codes are assigned to matters, to generate reports or report summaries. If tracking revenue by department, the department field becomes mandatory for the New Matter window. It cannot be removed using the New Matter Settings option on the System Settings > Matter Tab. In addition, it must contain a value prior to saving data entry in New Matter and Matter Manager. Clients The default department can be set by client for any new matters created for that client.

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Notes

Realizing Revenue When Billing or Receiving Payments When an invoice is created it is given the department code for that matter. If the department code has an assigned income G/L account, then revenue is allocated to that account. For accrual accounting systems, revenue is allocated when the invoice is created. For modified cash and cash systems, revenue is allocated when payment is received.

Producing Reports by Department Certain PCLaw reports contain an optional Summary by Department section. Some also contain an optional Summary by Department and Lawyer section. These options can be selected on the Other tab of the reports. The options only appear if Track G/L Revenue by Department is enabled on the Other tab of System Settings. On the Matter tab of most matter-based reports, a Department area enables the report to be run for one or multiple departments. Custom Reports can also be produced by department by selecting the report on the Custom Report > Advanced tab.

Working With Parent and Sub Accounts G/L accounts of the same type can be grouped under a parent account. An Income Statement or Balance Sheet can display the sub account, the parent account, or both. Parent accounts can be used to group like accounts when creating Consolidated Income Statements. Parent accounts are for use with Income Statements and Balance Sheets only. They neither appear on General Ledgers, Trial Balances, nor on any other PCLaw report or journal.

Note: Prior to version 10, Parent and Sub Accounts were a PCLaw Pro only feature.

Parent Accounts A parent account is an umbrella account, under which all linked sub accounts are found. A parent account is not utilized by itself and cannot be the recipient of data entry. There are strict rules governing the creation and use of parent accounts. A parent account: • • •

Must have the same account type as its sub accounts. Cannot have a balance or any activity. Cannot be a reserved account.

Because of these rules, it is recommended to create a new account to serve as a parent account rather than to use an existing G/L account. PCLaw 12

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Notes For consistency on the Income Statement and Balance Sheet, all parent and sub accounts should be the same department type. An account is converted to a parent account when a sub account is first assigned to it, and not through any options in the parent account itself. At this point, the account created in this procedure is a regular G/L account. To create a parent account for general or trust bank accounts, do not create a new bank account. Create a regular G/L account with an account type of Current Asset.

Assigning Sub Accounts A sub account can be either a pre-existing or a newly created account. A parent account needs to be created prior to the subaccount being assigned to the parent. A parent account can have as few as one account assigned to it, or be assigned many accounts. Although a parent account cannot be a reserved account, a sub account can be reserved. A reserved account has the account type grayed out in the Type box. To revert a parent account back to a regular account, remove all references to the parent account in the Sub Account Of boxes for all sub accounts. If a parent account is removed, all references are removed for each sub account. The sub accounts become regular accounts.

Viewing a Chart of General Ledger Accounts A list of all accounts including parent and their associated subaccounts are available on the Pop Up Help - G/L Accounts window. The list must be sorted by Account Name (click the column heading) to display the accounts. Sub accounts are indented under the parent account. Click the Print icon to produce a Chart of General Ledger Accounts report.

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Pop Up Help - G/L Accounts window

Parent and sub accounts are only visible when viewing G/L accounts in a Tree format. Parent and sub accounts are not differentiated when viewing G/L accounts in a List format.

Producing G/L Statements for Parent/Sub Accounts An Income Statement or Balance Sheet can be produced to show sub accounts only, parent accounts only, or both sub and parent accounts. Selecting either sub or parent accounts do not affect the overall balance of the statement. Parent and Sub Accounts are not differentiated on the General Ledger or Trial Balance. When Show Sub Accts is selected, the Income Statement and Balance Sheet appear as they did prior to the addition of parent accounts. If Print Zero Balance Accounts is selected, the parent accounts appear on the statements with a balance of zero. However, the sub accounts are treated as regular accounts and are not grouped with the parent accounts. When Show Parent Accts is selected, the Income Statement and Balance Sheet display the parent accounts only with the summed balance of all linked sub accounts. Sub accounts do not appear on the statements even if Print Zero Balance Accounts is selected.

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Notes

Parent and Sub Accounts

Sub accounts appear as indented under the parent account. The balance of sub accounts are separated from the balance of regular accounts. A summation line Total {name of parent account} appears underneath with the sum of all parent accounts.

Producing Consolidated Statements

Tip: Consolidating statements does not change or transfer data on either set of books.

With Consolidated Statements you can run statements combining the data for two sets of books. The consolidating process places accounts from both sets of books onto one statement. Accounts with the same nickname are combined into the same account. Parent accounts can streamline the appearance of Consolidated Income Statements and Balance Sheets. The sets of books being consolidated may have neither the same accounts nor the same nicknames for similar type accounts. An example is lawyer equity and fee accounts. Common parent accounts can be created in both sets of books to better group similar account types.

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Reconciling PCLaw Notes PCLaw provides an exceptional tool, in the G/L Reconciliation report, in confirming your set of books is properly balanced for each month. The G/L Reconciliation report compares PCLaw journals with the Client Ledger and General Ledger. Any imbalance is displayed on the report. Once an imbalance is reported, its source needs to be isolated. This chapter offers troubleshooting tips for finding the source of any imbalance that may occur on the G/L Reconciliation report. A general ledger account that is directly associated with a journal is called a control account. For example, General Bank Account 1 has a G/L control account of 1000, Trust Bank Account 1 has a control account of 1100. This terminology is used throughout this topic.

Common Troubleshooting: This section contains useful tips for reconciling most reports in PCLaw, including the G/L Reconciliation report. These tips are recommended repeatedly throughout this document when reconciling the different sections of the G/L Reconciliation report. If there is an imbalance, run Verify Data Integrity A common cause of an imbalance between reports is an index file that does not properly refresh or update itself. To confirm the integrity of your index files, perform a Verify Data Integrity. 1. Select the Tools pull-down menu, click Verify Data Integrity. 2. Select all boxes for the section being compared on the G/L Reconciliation report. 3. When the Verify Data Integrity is completed, rerun the G/L Reconciliation report.

Warning: Verify Data Integrity could take a long time to complete due to data network speed and hardware components. Verify Data Integrity requires everyone to exit PCLaw.

If there is an imbalance in the Journal/ G/L comparison, reread G/L Information When producing the G/L Reconciliation report, confirm that the Reread G/L Information option is checked. If Reread G/L Information is not selected, items posted after the last time a G/L statement was produced may not appear on the report. Balance the journal to the Client Ledger first Some sections display balances in all three columns, Journal, Ledger, and G/L. If all three balances are different, always reconcile the Journal to the Ledger before reconciling either balance to the G/L.

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Notes Any change to the journal balance will reflect on the G/L; therefore, always ensure the journal balance is correct prior to adjusting the General Ledger balance. Locate the source of the imbalance by date By starting with a time when the values balanced, the source of the imbalance can be narrowed down by date. For example, if reports were (and still are) balanced at the end of the previous month, but are not balanced at the end of the current month, run the G/L Reconciliation report up the 15th of the current month. If the imbalance still appears, run the report until the 7th of the month and continue to cut the periods in half until the imbalance is narrowed down to a specific date. Look at a detailed journal, Client Ledger, or General Ledger for that date to find the source of the imbalance.

Tip: If the amount of the imbalance changes, then you are dealing with multiple entries.

If the report, when run to the 15th of the month is balanced, run the report to the 23rd, and continue to cut the periods in half to find the date the imbalance occurred. Locate the source of the imbalance by matter For an imbalance in accounts receivables, narrow down the source to a specific matter. For example, produce a Client Ledger or Billing Fees journal (firm totals only) for a range of clients by nickname from A to M, by using the Range of Clients option on the Matter tab for these reports. If the imbalance appears on this restricted report, narrow the range again to A to F. Continue until you can isolate the matter with the imbalance. If the imbalance is not between A to M, narrow down the N to Z range to locate the matter.

Tip: If the amount of the imbalance changes, then you are dealing with multiple entries.

Once the matter is known, you can run a detailed Client Ledger and Billing Fees Journal for the specific matter to find the item causing the imbalance. Has the historic report changed? If reports balanced at the end of the previous month, but not at this month end, rerun the G/L Reconciliation for the previous month to confirm that they still balance at that point in time. If not, then the source of the imbalance is an entry backdated prior to the last accounting period. The imbalance can often be isolated by running an audit trail by entry number, using a known entry number from the start of the current period. On the Audit Trail report, check for dates that occurred prior to the current period.

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Notes Is the imbalance consistent over time? If the value is consistent over time, then you must look for a backdated entry, an incorrect opening balance, or a possible corrupted entry. If the value changes over time, then the imbalance is most likely due to an incorrect data entry routine. One or more users are entering or allocating information incorrectly. This could also be an indication of more widespread data corruption.

Reconciling the Trust Bank This section contains useful tips for reconciling an imbalance in an area of the Trust Bank. If there is an imbalance in the Client/Journal column: Possible cause

Recommended correction

A partial entry: i.e. an entry that was interrupted before it could properly post to the ledger or journal. **This could be from a workstation stoppage, network issue, or power interruption.**

• Drill down on the entry on the Client Trust Ledger or Trust Bank Journal and remove it. Re-enter it, if needed. • Use the Register to remove the entry, either on the Ledger or Trust Tab. Reenter the transaction, if needed.

Imbalance in the Trust Bank > Client/Journal column

Follow these preliminary steps for identifying the source of the imbalance: 1. Narrow down by date when the difference occurs (refer to “Common Troubleshooting:” on page 67 for more information). 2. Run a detailed Client Trust Ledger and Trust Bank Journal for the date the imbalance occurred. The reports can be filtered by bank account to further narrow the search field. 3. Compare the entries on both reports to find the imbalance. 4. Remove the entry in question, and re-enter it.

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Notes If there is an imbalance in the Journal/ G/L column: Possible cause

Recommended correction

A non-trust transaction was allocated to a trust bank control account. **This transaction cannot originate from a trust bank data entry window as these windows do not provide a field to specify G/L accounts.**

• Use the Register to correct the G/L allocation for the entry with a proper G/L account other than the trust bank control account. • Create a G/L adjustment to move the imbalance from the trust bank control account to its proper G/L account.

Imbalance in the Trust Bank > Journal/G/L column

Follow these preliminary steps for identifying the source of the imbalance: 1. Narrow down by date when the difference occurs (refer to “Common Troubleshooting:” on page 67 for more information). 2. Run a detailed G/L for the control account in question for the date the imbalance occurred. 3. Review the Srce column for a source other than TB. 4. Drill-down on the entry to correct the G/L allocation. Also an offsetting General Journal entry can be made to correct the imbalance. If there is an imbalance between the sum of the individual trust G/L accounts and the Trust Funds Owed (2100) account: If the individual trust bank G/L accounts reconcile to their corresponding journals, then an improper allocation was made to Trust Funds Owed (2100). Refer to “If there is an imbalance in the Journal/ G/L column:” on page 70 to identify and correct this discrepancy.

Reconciling the General Bank This section contains useful tips for reconciling an imbalance in an area of the General Bank.

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Notes If there is an imbalance in the Journal/ G/L column: Possible causes

Recommended correction

A check or receipt was allocated to the general bank control account.

• Use the Register to change the G/L allocation to an account that is not a general bank control account.

A non-general bank entry was incorrectly allocated to a general bank control account.

• Use the Register to correct the G/L allocation to an account that is not a general bank control account. • Create a G/L adjustment to move the imbalance from the bank control account to its proper account.

An entry was backdated into a closed month.

• Reopen and close the month, or create a reversing entry for the same date.

An incorrect general bank opening balance was entered for the account.

• If no months are closed in PCLaw, use Tools > General Bank Opening Balances to correct the opening balance. • If months are closed, create a Firm Receipt for the amount of the opening balance. Allocate the receipt to the bank control account. This type of entry changes the General Bank Journal balance, but not the G/L balance.

An incorrect general ledger opening balance was entered for the general bank control account.

• If no months are closed in PCLaw, use Tools > General Ledger Opening Balances to correct the balance of the general bank control account. • If months are closed, create a G/L adjustment for the opening balance. Allocate the receipt to an expense account to affect the current year’s income, or to an equity account to leave income unaffected. This type of entry changes the G/L, but not the General Bank Journal balance.

Imbalance in the General Bank > Journal/G/L column

Follow these preliminary steps to identify the source of the imbalance: 1. Narrow down by date when the difference occurs (refer to “Common Troubleshooting:” on page 67 for more information). 2. Run a detailed General Bank Journal and a detailed General Ledger for the control account for the date the imbalance occurs. 3. Search in the G/L Acct column on the General Bank Journal, for the G/L nickname of the control account. Use the search for any instance of the nickname.

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Notes 4. Search in the Srce column of the general ledger for a source other than GB. 5. Drill-down on any entry to examine in greater detail.

Reconciling Accounts Receivable This section contains useful tips for reconciling an imbalance in an area of Accounts Receivables. If there is an imbalance in the Client/Journal column: Possible causes

Recommended correction

A billing process was interrupted with an invoice posted to the Client Ledger, but not to the Billing Fees Journal. **This is often shown by the appearance of an invoice number in the Bld Inv column of the Client Ledger, but that invoice number does not appear on the Billing Fees Journal.**

• Undo the bill. • If a ‘Billing on Invoice #’ entry does not appear on the Client Ledger for the invoice, cancel the invoice by performing the following: 1. Create an invoice for the same matter and the same invoice number. 2. Confirm on the Options Tab of the Bill Selections window, Prompt for Changes to Billed Amounts is checked. 3. Click the Cancel button in the Billing Information window. PCLaw displays a Billing Cancelled prompt. 4. Confirm on the Client Ledger that the invoice number has been removed from all transactions.

A payment is missing from the Billing Fees Journal. **This is shown by total receipts on the Client Ledger not matching total receipts on the Billing Fees Journal.**

• If the payment is within an unreconciled open month, remove the payment and reenter it. • If a payment is in a closed month, call PCLaw Technical Support.

An entry is missing from the client ledger. **This is shown by total billed fees or billed disbursements on the Client Ledger not matching total fees and disbursements on the Billing Fees Journal.**

• If the invoice is in an unreconciled open month: 1. Undo the bill (any payments made to the invoice must first be reversed). 2. Re-enter the missing entry. 3. Create the bill once again. 4. Re-enter all previously removed payments.

Imbalance in the Accounts Receivable > Client/Journal column

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Notes Follow these preliminary steps for identifying the source of the imbalance: 1. Narrow down by matter where the difference occurs (refer to “Common Troubleshooting:” on page 67 for more information). 2. Run a detailed Client Ledger and Billing Fees Journal for the matter with the imbalance. Reports should be run for all dates. 3. Compare the total billed fees, disbursements, taxes (if applicable), and receipts on both reports to further narrow the search. 4. Confirm all invoice numbers listed under the Bld Inv column of the Client Ledger appear on the Billing Fees Journal.

Tip: When producing the Billing Fees Journal, include Paid Invoices and Write Ups/Write Downs.

If there is an imbalance in the Journal/ G/L column: (For Accrual Accounting Systems Only) Possible cause

Recommended correction

A transaction is incorrectly allocated to Accounts Receivable (1200). **This is most probably the case if the A/R balance on the Client Ledger equals the Outstanding balance on the Billing Fees Journal.**

• Use the Register to correct the G/L allocation for the entry to a non general bank control account. • Create a G/L adjustment to move the imbalance from the general bank control account to its proper G/L account.

Imbalance in the Accounts Receivable > Journal/G/L column for Accrual Systems

Follow these preliminary steps for identifying the source of the imbalance: 1. Narrow down by date when the difference occurs (refer to “Common Troubleshooting:” on page 67 for more information). 2. Run a detailed Billing Fees Journal, Write Up/Down Journal, Payment Allocation Listing, and Accounts Receivable (1200) for the date the imbalance occurs. 3. On the General Ledger, use the Srce column to compare transactions to their source journal. • • •

A source of BJ corresponds to an invoice on the Billing Fees Journal. A source of GB corresponds to a payment on the Payment Allocation Listing. A source of WUD corresponds to a write up or down on the Write Up/Down Journal.

Tip: If the Client Ledger and Billing Fees Journal are not in balance, perform the steps in “If there is an imbalance in the Journal/ G/L column:” on page 73 before attempting to reconcile the G/L.

4. Drill-down on any entry to examine it in greater detail.

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Notes

Reconciling Client Disb Recov (1210) For Accrual Accounting systems only The reconciliation formula for Client Disb Recov (1210) is as follows:

Tip: Unbilled disbursements and unapplied general retainer balances are attained from the Client Ledger.

Unbilled disbursements - unapplied general retainers If there is an imbalance in the Journal/G/L column: Possible causes

Recommended corrections

A Client Expense Recovery is allocated to 1210 instead of an expense account. **This is shown by 1210 appearing in the G/L Acct column of the Client Cost Journal.**

• Drill-down on the entry on the Client Cost Journal and change the G/L allocation. • Post a general journal entry to reallocate the amount.

A non-client cost is allocated to 1210. **This is shown by a nonsummarized transaction in the 1210 G/L Acct column that is neither a billing nor general retainer entry.**

• Drill-down on the general ledger entry and change the G/L allocation. • Post a general journal entry to reallocate the amount.

An incorrect unbilled disbursement was entered as a matter opening balance for one or more matters.

• If no months are closed in PCLaw, use Tools > Matter Opening Balances to correct the balance. • If months are closed: 1. Create an Expense Recovery for the imbalance. 2. Allocate the receipt to 1210 account. • This type of entry will change the Client Cost Journal, but not the G/L balance.

An incorrect general ledger opening balance was entered for Client Disb Recov (1210).

• If no months are closed in PCLaw, use Tools > General Ledger Opening Balances to correct the balance of Client Disb Recov (1210). • If months are closed: 1. Create a G/L Adjustment for the opening balance. 2. Allocate the receipt to an expense account to affect the current year’s income, or to an equity account to affect firm capital only. • This entry affects the G/L, but not the Client Cost Journal.

Imbalance in Client Disb Recov (1210) > Journal/G/L column for Accrual Systems

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Notes Follow these preliminary steps for identifying the source of the imbalance: 1. Narrow down by date when the difference occurs (refer to “Common Troubleshooting:” on page 67 for more information). 2. Run a detailed Client Cost Journal for that date. Use the icon to search for any instance of 1210 (the Client Disb Recov nickname) in the G/L Account column.

Tip: If you are using a different nickname for Client Disb Recov, substitute that nickname in place of 1210.

3. Run a detailed Client Disb Recov (1210) for the date. Check the report for any individual transactions that are not the result of billing or general retainers.

Reconciling Client Disb Recov (1210) (For Modified Cash Systems Only) This section contains useful tips for reconciling an imbalance in the Client Disb Recov (1210) account in a Modified Cash system. For Modified Cash systems, the reconciliation formula for Client Disb Recov (1210) is: •

Unbilled disbursements + billed but unpaid disbursements - general retainers.

•

Unbilled disbursements and general retainer balances are attained from the Client Ledger.

•

Billed but unpaid balance is attained from the Billing Fees Journal.

If there is an imbalance in the Journal/ G/L column: Possible causes

Recommended corrections

An expense recovery entry is allocated to 1210 instead of an expense account. **This is shown by 1210 appearing in the G/L Acct column of the Client Cost Journal.**

• Drill-down on the entry on the Client Cost Journal, and change the G/L allocation. • Post a general journal entry to reallocate the amount.

A non-client cost is allocated to 1210. **This is shown by a nonsummarized transaction in Client Disb Recov (1210) that is not an applied payment.**

• Drill-down on the entry on the general ledger, and change the G/L allocation. • Post a general journal entry to reallocate the amount.

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Tip: Expense recovery, general check allocated to matters, and accounts payables allocated to matters appear as summarized entries. Any transaction incorrectly allocated to 1210 appears on the G/L as a separate transaction.

Warning: Do not reconcile if you are separating hard and soft costs, as only hard costs are reconciled on the G/L Reconciliation report. General Retainers are received as hard costs. At the time of billing, if a general retainer is applied to a hard cost, it is debited from Client Disb Recov (1210) as a hard cost. If a general retainer is applied to a soft cost, the retainer amount is debited from Client Soft Cost (5011) as a soft cost. Since Client Soft Cost (5011) is not tracked on the G/L Reconciliation report, an imbalance results in the Journal/ G/L column making Client Disb Recov (1210) a non-reconcilable account.

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Notes Possible causes An incorrect matter opening balance was entered for the matter.

Recommended corrections • If no months are closed in PCLaw, use Tools > Matter Opening Balances to correct the balance. • If months are closed: 1. Create an Expense Recovery for the imbalance. 2. Allocate the receipt to 1210 account. • This entry affects the Client Ledger but not the General Ledger balance.

An incorrect general ledger opening balance was entered for Client Disb Recov (1210).

• If no months are closed in PCLaw, use Tools > General Ledger Opening Balances to correct the balance of the bank ledger account. • If months are closed: 1. Create a G/L adjustment for the opening balance. 2. Allocate the receipt to an expense account to affect the current year’s income, or to an equity account to affect the firm capital only. • This entry affects the general ledger, but not the Client Cost Journal balance.

Hard and soft costs are separated, and a general retainer has been allocated to a soft cost.

• Create a G/L adjustment debiting Client Disb Recov (1210) and crediting Client Soft Cost (5011). • Imbalance is otherwise non-reconcilable.

Imbalance in Client Disb Recov (1210) > Journal/G/L column for Modified Cash

Follow these preliminary steps for identifying the source of the imbalance: Tip: If you are using a different nickname for Client Disb Recov, substitute that nickname in place of 1210.

Tip: Expense recovery, general check allocated to matters, and accounts payables allocated to matters appear as summarized entries. Any transaction incorrectly allocated to 1210 appears on the g/l as a separate transaction. 76

1. Narrow down by date when the difference occurs (refer to “Common Troubleshooting:” on page 67 for more information). 2. Run a detailed Client Cost Journal for that date. Use the icon to search for the any instance of 1210 (the Client Disb Recovery account nickname) in the G/L Acct column. 3. Run a detailed General Ledger for Client Disb Recov (1210) for the date. Check the report for any individual transactions that are not the result of payments on invoices.

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Notes

Reconciling Accounts Payable (For Accrual Accounting Systems Only) This section contains useful tips for reconciling an imbalance in the General Liabilities (2000) account. Only Accrual accounting systems use the general ledger to track accounts payables. If there is a imbalance in the Journal/ G/L column: Possible causes

Recommended corrections

A payable entry is allocated to 2000 instead of an expense account or Client Disb Recov (1210). **This is shown by 2000 appearing in the G/L Acct column of the Purchases Journal.**

• Drill-down on the entry on the Purchases Journal, and change the G/L allocation. • Post a general journal entry to reallocate the amount.

An AP payment made through the General Check feature is allocated to an expense account, instead of 2000. Include in A/P was selected in the General Check window. **This is shown by the appearance of a payment on the Payment Listing report that is not in General Liabilities (2000).**

• Drill-down on the entry on the Payment Listing, and change the G/L allocation. • Post a general journal entry to reallocate the amount.

A transaction is allocated to General Liabilities (2000) that was not added through Accounts Payable, such as paying a payable by the General Check window without selecting Include in A/P. **This is shown by a nonsummarized item in the 2000 G/L account that does not have A/P Payment on Account in its explanation.**

• Drill-down on the entry on the general ledger, and change the G/L allocation. • Post a general journal entry to reallocate the amount.

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Notes Possible causes

Recommended corrections

An incorrect opening balance was entered for the vendor.

• If no months are closed in PCLaw, use File > Vendor > Open Vendor > Opening Balances Tab to correct the balance. • If months are closed: 1. Create a Payable for the amount of the imbalance. 2. Allocate the payable to the 2000 account. • This type of entry will change the Payable Listing, but not the general ledger balance.

An incorrect general ledger opening balance was entered for General Liabilities (2000).

• If no months are closed in PCLaw, use Tools > General Ledger Opening Balances to correct the balance of the bank ledger account. • If months are closed: 1. Create a G/L Adjustment for the opening balance. 2. Allocate the imbalance to an expense account to affect the current year’s income, or to an equity account to leave income unaffected. • This type of entry will change the General Ledger, but not the Payable Listing balance.

Imbalance in Accounts Payable > Journal/G/L column for Accrual systems

Follow these preliminary steps for identifying the source of the imbalance: 1. Narrow down by date when the difference occurs (refer to “Common Troubleshooting:” on page 67 for more information). Tip: If you use a different nickname for General Liabilities substitute that nickname in place of 2000.

icon 2. Run a detailed Purchases Journal for that date. Use the to search for the any instance of 2000 (the nickname of the General Liabilities account) in the G/L Acct column. 3. Run a detailed Payment Listing to compare payments with those listed in General Liabilities (2000). Check the report for any transactions that are not the result of payments to accounts payable.

Tip: New payables are summarized into a total A/P entry. Any transaction incorrectly allocated to 2000 will appear on the G/L as a separate transaction.

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Notes

Reconciling Value Added Taxes (For Firms Collecting HST, GST or VAT) The GST Journal balance on the G/L Reconciliation report reflects the General Reconciliation balance as it appears on the HST/GST/ VAT Journal. If there is an imbalance in the Journal/ G/L column: Possible causes

Recommended corrections

In the allocation section of the General Check window, an item was allocated to G/L account 2400. **This is shown by the appearance of an item in the HST/GST/VAT Payable (2400) account, but not on the HST/GST/VAT Journal.**

• Drill-down on the entry on the HST/GST/ VAT Journal, and change the G/L allocation. • Post a general journal entry to reallocate the amount.

A HST/GST/VAT Remittance check was entered without using HST/ GST/VAT Category ‘Z’. **Entry appears on the GST journal without a ‘Z’ designation.**

• Drill down on the entry on the HST/GST/ VAT Journal, and change the HST/GST/ VAT category.

An incorrect opening balance was entered for the HST/GST/VAT journal.

• If no months are closed in PCLaw, use Tools > HST/GST/VAT Opening Balances Tab to correct the balance. • If months are closed: 1. Create a zero value General Check. 2. Select Y for Pay HST/GST/VAT. 3. Type the amount of the imbalance in the HST/GST/VAT box as a negative value. • This type of entry will change the HST/ GST/VAT Journal, but not the General Ledger balance.

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Notes

Notes Possible causes

Recommended corrections

An incorrect general ledger opening balance was entered for the HST/GST/ VAT Payable (2400).

• If no months are closed in PCLaw, use Tools > General Ledger Opening Balances to correct the balance of the bank ledger account. • If months are closed: 1. Create a G/L Adjustment for the opening balance. 2. Allocate the imbalance to an expense account to affect the current year’s income, or to an equity account to leave income unaffected. • This type of entry will change the general ledger, but not the HST/GST/VAT Journal balance.

Causes and recommendations for an imbalance in HST/GST/VAT > Journal/G/L column

Follow these preliminary steps for identifying the source of the imbalance: 1. Narrow down by date when the difference occurred to one date (refer to “Common Troubleshooting:” on page 67 for more information). 2. Run a detailed HST/GST/VAT Journal to compare transactions with those appearing on the detailed HST/GST/VAT Payable (2400) G/L. Check any transaction that appears on one report, but not the other by drilling-down on that entry.

What You Have Learned This section covered how PCLaw adheres to Generally Accepted Accounting Principles (GAAP), and how the general ledger accounts function. You should now be able to identify why and how Contra Expense Accounts are used, along with the three accounting methods of Cash, Modified Cash, and Accrual. You should be able to create financial statements, and understand the logic behind the calculations. Finally, you should be able to efficiently troubleshoot any imbalance that may occur between journals, Client Ledgers, and the General Ledger.

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Reconciling PCLaw