Legal Aspect of the Business Accounting






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Accounting is the practice of recording or settling accounts in financial transactions and determining income and expenses for tax and other financial purposes. In a legal setting, it is often used to determine the nature and extent of damages in a lawsuit, or can even be a remedy in some cases.

There are several types of accounting commonly used, which include, among others:

Accrual: the accrual method shows expenses incurred and income earned for a given period of time whether or not such expenses and income have been actually paid or received by that time.

Cash: the cash method records income and expenses only when monies have actually been received or paid out.

Completed Contract: the completed contract method reports gains or losses on certain long-term contracts. Gross income and expenses are recognized in the tax year the contract is completed.

Installment: the installment method of accounting is a way regulated utilities calculate depreciation for income tax purposes.

The accounting profession, which is largely self-regulated, suffered through a series of scandals since the late 1990's. These controversies required the FASB and the SEC, as well as other regulatory organizations, to consider new rules designed to improve financial reporting. Between 1996 and 2002, investors lost an estimated $200 billion in earnings restatements and stock meltdowns following failures in auditing processes.


  • Accountancy - Definition

    Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable.

  • Accounting and Auditing Enforcement Releases

    The list below provides links to financial reporting related enforcement actions concerning civil lawsuits brought by the Commission in federal court and notices and orders concerning the institution and/or settlement of administrative proceedings. This list only highlights certain actions and is not meant to be a complete and exhaustive compilation of all of the actions that fall into this category.

  • Accounting Terminology Guide

    The NYSSCPA has prepared a terminology glossary as an educational tool for journalists who report on and interpret financial information.

  • Ethical and Legal Obligations for Accounting

    The SEC was established in 1934 by Congress to help ensure stability in the market and protect investors. The Securities Exchange Act was also established in 1934, both of which were used to protect investors and help keep the securities market ethical.

  • Financial Accounting Standards Board (FASB)

    The mission of the Financial Accounting Standards Board (FASB) is to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports.

  • Governmental Accounting Standards Board (GASB)

    The mission of the Governmental Accounting Standards Board is to establish and improve standards of state and local governmental accounting and financial reporting that will result in useful information for users of financial reports and guide and educate the public, including issuers, auditors, and users of those financial reports.

  • IFRS Foundation

    The IFRS Foundation is an independent, not-for-profit private sector organization working in the public interest to develop a single set of international financial reporting standards through its standard-setting body, the International Accounting Standards Board (IASB).

  • Malpractice: Tax/Accounting Style - PCAOB

    The Public Company Accounting Oversight Board (PCAOB) is a private-sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002 to oversee the auditors of companies in order to protect investors and the public interest by promoting informative, fair, and independent audit reports.

  • Occupational Outlook Handbook - U.S. Department of Labor

    The Bureau of Labor Statistics of the U.S. Department of Labor is the principal Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy. Its mission is to collect, analyze, and disseminate essential economic information to support public and private decision-making. This handbook was published by the Bureau.

  • Office of the Chief Accountant

    The Office of the Chief Accountant is responsible for establishing and enforcing accounting and auditing policy to enhance the transparency and relevancy of financial reporting, and for improving the professional performance of public company auditors in order to ensure that financial statements used for investment decisions are presented fairly and have credibility.

  • U.S. GAAP Codification of Accounting Standards

    In the U.S., generally accepted accounting principles, commonly abbreviated as US GAAP or simply GAAP, are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privately-held companies, non-profit organizations, and governments. Generally GAAP includes local applicable Accounting Framework, related accounting law, rules and Accounting Standard.

Financial Statements

A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form that is easy for a reader to understand. A financial statement, also sometimes referred to as a "balance sheet," reports a company's assets, liabilities, and ownership equity at a given point in time. For large corporations, these statements are often complex and may include an extensive set of notes describing each item. While often used for a similar purpose, financial statements are less formal or thorough than a full audit of a company's financial records. The resources below further describe the practical and legal considerations of the financial statement.
  • Balance Sheets

    A balance sheet is a snapshot of a business' financial condition at a specific moment in time, usually at the close of an accounting period. This site provides a definition and description of balance sheets in basic accounting.

  • Cash Flow Forecasting

    Cash Flow forecasts help you to build a model of the way in which cash moves within a project or organization. They help you to predict whether the sales or income you forecast will cover the costs of operation. They also allow you to analyze whether a project will be sufficiently profitable to justify the effort put into it.

  • Income Statement

    An explanation of the income statement, which is one of the major financial statements used by accountants and business owners.

  • SEC - Beginners' Guide to Financial Statements

    This brochure is designed to help gain a basic understanding of how to read financial statements and its basic parts.

  • Statement of Cash Flows

    Information about Cash Flow Statements and the various regulatory requirements.

  • Understanding Cash Flow Analysis

    Article from Iowas State University about cash flow analysis.

Articles on HG.org Related to Finance and Taxation

  • The Fallout of Arthur Andersen and Enron on the Legal Landscape of American Accounting
    It may have been a decade ago, but the fallout of the accounting scandals of the late 1990's and early 2000's continue to resonate through both of the accounting and legal professions. The largely self-regulated accounting profession has enacted numerous changes that continue to evolve in response to the scandals and pressure from government agencies and the public.
  • General Solicitation and Advertising Now Permitted under Rule 506(c)
    As of today, September 23, Securities and Exchange Commission (“SEC”) rules implementing some provisions of the JOBS Act have become effective. Among them is the new Regulation D Rule 506(c).
  • How to Write Off Expenses for Meals and Entertainment on Your Corporate Taxes
    One of the most common questions often asked of corporate attorneys by small business owners who are just setting up their first company is how to write off expenses. Usually, two of the most important expenses these people want to write off are meals and entertainment expenses.
  • State Shuts Down Crowdfunding Website SoMoLend in Ohio
    Since the JOBS Act became law, numerous crowdfunding websites have popped up on the Internet. This month, the first enforcement action was brought against a crowdfunding website.
  • Rule 506(C) Question and Answer
    Private placement offerings under Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) are a cost effective and relatively quick way for private companies to raise capital before, during and after a going public transaction.
  • Fiscal Cliff Crisis Avoided? Estate Taxes in 2013
    In 2012, with the dreaded “Fiscal Cliff” looming, many were worried about the inaction that would cause the estate tax exemption level to fall to $1 million. However, in the first two days of the new year, Congress finally passed the American Taxpayer Relief Act of 2012 (ATRA) which makes permanent the $5 million exemption as well as portability.
  • Action Required: Portability
    The American Taxpayer Relief Act of 2012 (ATRA) extended and made permanent (i.e., until Congress changes its mind) a number of key estate tax provisions. This includes a $5 million ($5.25 including inflation) estate tax exemption and portability of a deceased spouse’s exemption to the surviving spouse. The result of this means that married couples can shelter up to $10.5 million of their estate from federal taxes.
  • And You Thought Your Legal Fees Were High...Banks' Legal Fees Top $103 Billion After Housing Bubble Burst
    If you have ever complained about your legal fees, or been reluctant to hire an attorney because you did not think you could afford it, just be glad you are not one of the six largest US Banks recovering from the collapse of the housing market and resulting financial crisis. Bloomberg reports that together, they have amassed a whopping $103 billion in legal costs since the beginning of the Great Recession.
  • IRS Provides Same Sex Couples Direction, Post DOMA Ruling
    The Supreme Court’s recent decision to allow same-sex couples to receive marriage benefits raised several questions that left many lawmakers, financial institutions and individuals anxious for answers. Now, finally, the IRS has issued guidance in Revenue Ruling 2013-17. A Revenue Ruling is the IRS’s interpretation of the law.
  • Crowdfunding, Crowdinvesting, Kickstarter, and the JOBS Act
    In 2012, the US federal government passed a bill called the JOBS act. Among its provisions was one allowing for small investments in exchange for equity in that company or project without having to go through the SEC or qualify as an investor. What is the difference between crowdinvesting and crowdfunding, what is Kickstarter, and how does it all work from a legal standpoint?