Misunderstood – Accounting Adjustments
Each year I try to teach my law clerk students how to complete accounting adjustments between buyer and seller, real estate agent and seller, and seller and lawyer. After years of doing this, I am pretty good at explaining each of the component adjustments. On tests most of the students can correctly calculate the individual adjustments.
However, a growing number of students struggle with an assignment where they have to consider how the law office accounts for items like the purchase price, deposit, commission, taxes, legal fees and file disbursements, and determine which statement to put them on for adjustment.
This has become so much harder in a digital world where money is a mysterious concept for many students.
This year I had some success by:
- a) introducing the concept of adjustments early – we worked through the adjustments between the buyer and the seller for about 15 minutes in every class all year; and
- b) talking about who pays for what, to whom, when, and why in each class as we reviewed each distinct subject – for instance title insurance.
This helped give students a feeling of mastery over the math and understanding that the adjustments are about fairness – each party paying its own share of the costs of the transaction.
I am thinking now that I could take this further by providing examples and having the students colour code who pays for an expense when it is incurred (for example the lawyer pays the title insurer) and using another colour to show who is ultimately responsible for that expense (In the case of title insurance it is the buyer). They could then visually see that while one person has paid for an expense the other person has to reimburse them for it – and hopefully the students can more easily then make the link that that item would have to go on the adjustments between the lawyer and its client – on the legal bill.
On the issue of analogies – many of my students have never bought or sold a home – but they have shared expenses with others. I compare the concept of adjusting property taxes on closing to sharing costs for coffees. Everyone understands that if one person buys coffee for themselves and another person that the second person pays for what they receive. If both coffees are small you split the cost. If the buyer got a large and the other person a small then the cost has to be divided based on value received. This is a pretty universal concept and well understood.