The importance of accounting knowledge to in-house counsel

It is important and useful for in-house lawyers to understand some of the basic concepts of accounting as they apply to management of a department (See my posts of May 10, 2006 with data from Canadian law departments on the value of this knowledge; and May 7, 2006 on training for financial literacy.). My treatments of the following accounting concepts, skimpy but hopefully not completely wrong, deserves no kudos, but it brings some notions to the fore.

Accrual: How to treat legal costs incurred but not paid by a fiscal-period cutoff date (See my posts of Aug. 24, 2005 and Sept. 17, 2005 #4 about accruals.).

Capitalized and expensed legal spend: How to treat legal expenses incurred as part of a transaction, and therefore amortized over several years, as compared to current spend which is expensed during the fiscal year (See my posts of July 30, 2005 on capitalized legal expenditures; and Nov. 25, 2006 on stock options and how to account for their value.).

Depreciation: How to treat the loss of value over time of a tangible investment (See my posts of Oct. 18, 2006 on whether to include depreciation charges in the law department’s budget; and Dec. 23, 2005 with an example from payment for matter management software.).

Reserves: How to “set aside” amounts that are reasonably likely to be owed (See my posts of March 12, 2005 on a law department that funded its matter management system in return for reductions in reserves; March 12, 2005 and Dec. 10, 2005 on litigation reserves; July 20, 2005 on special-purpose reserve accounts; June 15, 2005 about credit for releasing reserves; and March 13, 2006 on a crude summary of FASB Rule 5.).

To be sure, there are many other accounting concepts that could be important to an in-house lawyer, but compared to these they do not have as much to do with law department management. For example, GAAP (Generally Accepted Accounting Principles) as to which over-arching set of principles see my post of July 20, 2005 on Allen & Overy’s GAAP-compliant disclosure of its financials, and goodwill, which is how to treat some assets acquired in a purchase. Then, too, there are income statements, cash flow statements, debits and credits and a whole profession’s jargon and concepts.

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