Fi

nanci
alAccount
ing(
5004)
Semester
:Autumn2020

ASSI
GNMENTNo.1

Q.1 Accountingissomet
imesdescr
ibedast
hel
anguageofbusi
ness.Whati
smeant
byt
hisdescr
ipt
ion?

Account
ingi
sof
tencal
l
edt
he“
Languageofbusi
ness.
”Iti
sameansofcommuni
cat
ing
i
nfor
mat
ionaboutabusi
ness.I
tsr
esponsi
bil
i
tyi
sappl
yi
ngat
hor
oughknowl
edgeoft
he
t
heor
yofaccount
ing,
thati
s,gener
all
yaccept
edpr
inci
plesofaccount
ingt
othepr
act
ical
f
iel
dofbusi
nessi
nor
dert
hati
ncomeandf
inanci
alposi
ti
onmaybest
atedf
air
ly.

Account
ingi
stheanal
ysi
sandi
nter
pret
ati
onofbook¬keepi
ngr
ecor
ds.I
tincl
udesnot
onl
ymai
ntenanceofaccount
ing r
ecor
dsbutal
so t
hepr
epar
ati
onoff
inanci
aland
economi
cali
nfor
mat
ion whi
ch i
nvol
vest
hemeasur
ementoft
ransact
ionand ot
her
ev
ent
sper
tai
ningt
oabusi
ness.
Tooper
ateabusi
nesspr
ofi
tabl
yandt
ost
aysol
vent
,thepr
ofi
tabi
l
ityandsol
vencyofa
busi
nessshoul
dbemeasur
edatr
egul
ari
nter
val
s.Fort
hat
,iti
sessent
ialt
oknow
whet
herabusi
nessi
sear
ningsuf
fi
cientpr
ofi
tsori
ncur
ri
ngl
ossesandi
thassuf
fi
cient
moneyt
opayof
fdebt
s.Account
ingpr
ovi
desal
lthesepi
ecesofi
nfor
mat
ionwhi
ch
enabl
ethemanagementt
ogui
det
hebusi
nessonapr
ofi
tabl
eandsol
ventcour
se.

Af
teranal
yzi
ngpr
oper
lyt
hei
nfor
mat
ionsuppl
i
edbyt
heaccount
ingst
atement
s,t
he
user
soft
hesamet
akedeci
sionsf
orf
utur
eact
ivi
ti
es.Si
nceaccount
ingsuppl
i
est
he
necessar
yinf
ormat
ion,
itper
for
ms,
inf
act
,aser
vicef
unct
ionand,
att
hesamet
ime,
iti
s
usedt
orepr
esenteconomi
cposi
ti
onofanent
it
y.Ther
efor
e,i
tbecomescl
eart
hat
keepi
ngofaccount
sisnott
hepr
imar
yobj
ect
iveofaper
sonoranent
it
y.

Ont
hecont
rar
y,t
hepr
imar
yobj
ect
ivei
stot
akedeci
sionont
hebasi
soff
inanci
alf
act
s
pr
esent
edbyaccount
ingst
atement
s.Thus,t
heunder
standi
ngofaccount
sisnott
he
basi
cobj
ect
ive;
itonl
yhel
pst
oreal
i
zeaspeci
fi
cobj
ect
ive.Assuch,
account
ingi
snotan
endi
nit
sel
fbutameanst
oanend.
Weexpr
essour
sel
vest
hroughourl
anguage.Si
mil
arl
y,t
her
esul
tsoft
heact
ivi
ti
esar
e
expr
essed t
hrough account
ing wi
tht
he hel
p off
inanci
alst
atement
s.Account
ing
measur
est
heper
for
mancesoft
hebusi
ness,t
hati
s,pr
ofi
tabi
l
ityandf
inanci
alposi
ti
on.
Thus,
thel
anguageofaccount
ingexpr
essest
hewhol
est
oryoft
heunder
taki
ngt
hrough
t
hev
ari
ouspr
ocessesofaccount
ing.Thepr
ogr
essoft
hef
ir
m caneasi
l
ybecompar
ed
andseenwi
tht
hehel
pofv
ari
ousaccount
ingdat
a.

Manyf
amouswr
it
ersofAccount
ingoft
hewor
ldhav
eregar
dedAccount
ingast
he
l
anguageofbusi
ness.Manexpr
esseshi
sfeel
i
ngst
hroughl
anguagei
nwr
it
tenand
v
erbalf
orm,si
mil
arl
y,v
ari
ousi
nfor
mat
ionoft
hebusi
nessor
gani
zat
ionar
eexpr
essed
andpr
esent
edt
hroughaccount
ingst
atement
s.
I
nlanguage,ef
for
tsar
emadet
oexpr
essapar
ti
cul
arf
eel
i
ngusi
ngwor
dsoneaf
ter
anot
her
.Si
mil
arl
y,i
n account
ing,
 
financi
alt
ransact
ions ar
erecor
ded i
n books of
account
s andt
her
efr
om pr
epar
ingf
inanci
alst
atement
svar
iousf
inanci
ali
nfor
mat
ion
ar
ecommuni
cat
edt
oconcer
nedper
sons.Account
ingf
urni
shesal
linf
ormat
ionabout
pastev
ent
s,cur
rentact
ivi
ti
esandf
utur
epossi
bil
i
tiesofabusi
ness.Recor
dingand
anal
yzi
ngpastandpr
esentf
inanci
alev
ent
s.
Account
ingpr
esent
sandcommuni
cat
esv
ari
ousi
nfor
mat
ioni
nthef
orm ofst
atement
s
andr
epor
tst
othei
nter
est
edpar
ti
esl
i
keowner
s,empl
oyees,management
,inv
est
ors,
buy
ers,
sel
l
erset
c.

Fr
om t
heseaccount
s,st
atement
s,andr
epor
ts,par
ti
esconcer
nedcanev
aluat
ethei
r
success-
fai
l
ure,f
inanci
alsol
vency
/insol
vencyet
c.Ofcour
se,hav
ingsoundcommand
ov
eraccount
ing l
anguage one can under
stand t
hisi
nfor
mat
ion.These 
fi
nanci
al
st
atement
sar
emeani
ngl
esst
othosewhodonothav
eknowl
edgeofaccount
ing,i
n
t
hesamewayasa newspaperi
sa bundl
eofpaper
sto an i
l
li
ter
ateper
son.So,
Account
ing f
unct
ions l
i
ke a l
anguage.One may t
hink i
tis notaptt
o compar
e
Account
ingwi
thl
anguagebutact
ual
l
y,i
tisnotso.Shor
thandi
sal
anguagebutt
he
per
sonswhoar
eignor
antofi
tcannotunder
standt
hissy
mbol
i
clanguage.

Si
mil
arl
y,i
tis noti
l
logi
calt
oter
m account
ing as a l
anguage ofbusi
ness.I
tis
meani
ngl
esst
othosewhoar
eignor
antoft
hisdi
sci
pli
ne.Nol
anguagei
nthewor
ldi
s
uni
ver
sal
.Si
mil
arl
y,account
ingl
anguageal
soi
snotunder
standabl
etoal
l
.Wi
tht
he
changes i
n soci
ety and human l
i
fel
anguages ar
e changi
ng.Si
mil
arl
y wi
tht
he
adv
ancementandcompl
exi
tyofbusi
nessaccount
ingl
anguagei
schangi
nggr
adual
l
y.
Ther
efor
e,i
tisaptt
osay
,Account
ingi
sthel
anguageofbusi
ness.

Toexpr
essasev
enti
naccount
ingori
nEngl
i
shwemustf
oll
ow cer
tai
nrul
es.Wi
thout
f
oll
owi
ngcer
tai
nrul
esdi
l
igent
ly,notonl
ydoesoner
unt
her
iskofbei
ngmi
sunder
stood
butal
so r
isks a penal
tyf
ormi
srepr
esent
ati
on,l
yi
ng orper
jur
y.Compar
abi
l
ityof
st
atement
sisessent
ial
tot
heef
fect
ivef
unct
ioni
ngofal
anguagewhet
heri
tisi
nEngl
i
sh
ori
naccount
ing.Att
hesamet
ime,l
anguagehast
obef
lexi
blet
oadaptt
oachangi
ng
env
ironment
.”

Ref
erence:

htt
ps:
//www.your
art
icl
eli
brar
y.com/
account
ing/
account
ing-
as-
the-
language-
of-
busi
ness/
49981

Q.2 Init
ssimplestf
orm,anaccounthasonl
ythr
eeel
ement
sorbasi
cpar
ts.What
ar
etheset
hreeel
ements?

Theel
ement
soff
inanci
alst
atement
sar
ethegener
algr
oupi
ngsofl
i
nei
temscont
ained
wi
thi
nthest
atement
s.Thesegr
oupi
ngswi
l
lvar
y,dependi
ngont
hest
ruct
ureoft
he
busi
ness.Thus,t
heel
ement
soft
hef
inanci
alst
atement
sofaf
or-
prof
itbusi
nessv
ary
somewhatf
rom t
hosei
ncor
por
atedi
ntoanonpr
ofi
tbusi
ness(
whi
chhasnoequi
ty
account
s).
Therear
ethr
eemai
nel
ement
soft
heaccount
ingequat
ion:
1.Asset
s
Acompany
’sasset
scoul
dincl
udeev
ery
thi
ngf
rom casht
oinv
ent
ory
.Thi
sconsi
stsofal
l
equi
pment
,pr
epai
dexpenses,r
ecei
vabl
es,andpr
oper
ty–any
thi
ngt
hebusi
nessowns
t
hatr
efl
ect
sit
sval
ue.Thesear
eit
emsofeconomi
cbenef
itt
hatar
eexpect
edt
oyi
eld
benef
it
sinf
utur
eper
iods.Exampl
esar
eaccount
srecei
vabl
e,i
nvent
ory
,andf
ixedasset
s.
2.Li
abi
li
ti
es

Thesecondcomponentoft
heaccount
ingequat
ioni
s.Thi
scat
egor
yincl
udesany
obl
i
gat
ionst
hecompanymi
ghthav
etot
hir
dpar
ti
es,
suchasaccount
spay
abl
e,orot
her
debt
s.Thesear
elegal
l
ybi
ndi
ngobl
i
gat
ionspay
abl
etoanot
herent
it
yori
ndi
vi
dual
.
Exampl
esar
eaccount
spay
abl
e,t
axespay
abl
e,andwagespay
abl
e.

3.Equi
ty

Thef
inalcomponenti
sequi
ty.Thi
scat
egor
yincl
udest
hev
alueofanyi
nvest
ment
s
madei
ntheor
gani
zat
ion,whet
hert
hrought
heowner
sorshar
ehol
der
s.Owner
’sequi
ty
wi
l
lequalany
thi
ngl
eftf
rom t
heasset
saf
teral
lli
abi
l
iti
eshav
ebeenpai
d.Thi
sist
he
amounti
nvest
edi
nabusi
nessbyi
tsowner
s,pl
usanyr
emai
ningr
etai
nedear
nings

4.
Rev
enue.Thi
sisan i
ncr
easei
n asset
sordecr
easei
nli
abi
l
iti
escaused byt
he
pr
ovi
sionofser
vicesorpr
oduct
stocust
omer
s.I
tisaquant
if
icat
ionoft
hegr
ossact
ivi
ty
gener
atedbyabusi
ness.Exampl
esar
epr
oductsal
esandser
vicesal
es.

5.Expenses.Thi
sist
her
educt
ioni
nval
ueofanassetasi
tisusedt
ogener
ater
evenue.
Exampl
esar
eint
erestexpense,
compensat
ionex
pense,
andut
il
it
iesexpense.

Oft
heseel
ement
s,asset
s,l
i
abi
l
iti
es,andequi
tyar
eincl
udedi
nthebal
ancesheet
.
Rev
enuesand expensesar
eincl
uded i
nthei
ncomest
atement
.Changesi
nthese
el
ement
sar
enot
edi
nthest
atementofcashf
lows.

Ref
erences:

ht
tps:
//gocar
dless.
com/
gui
des/
post
s/compl
ete-
gui
de-
to-
account
ing-
equat
ion/

ht
tps:
//www.account
ingt
ool
s.com/
art
icl
es/
what
-ar
e-t
he-
element
s-of
-f
inanci
al-
st
atements.
html

Q.
No.03WhenTor rett
iCompanybeganbusi nessonAugust1, i
tpurchasedaone-year
fir
einsurancepol i
cyanddebi t
edtheenti
recostof$7,200t
ounexpi r
edinsur
ance.
Torret
tiadjustsitsaccountsattheendofeachmont handclosesitsbooksatthe
endoft hey ear.
(a) Givet he adj ust
ing ent
ryrequi
red atDecember31 wi thr especttothis
 i
nsur ancepoli
cy.
(b) Fivet heclosi
ngent r
yrequiredatDecember31wi threspecttoinsurance
expense.Assumet hatthi
spol i
cyistheonlyi
nsurancepolicyTor
rett
ihad
duri
ngt heyear.
(c) Compar ethedol l
aramountappear i
ngintheDecember31adj ust
ingentry
(parta)wi t
ht hati
nt heclosingent
ry(par
tb).Arethedollaramountst he
same?Whyorwhynot ?Explai
n.
ANS:
(
a)

AccountExpl
anation Credi
t Debi
t
I
nsuranceExpenses 600
600
Unexpi
redI
nsur
ance

(
b)

AccountExpl
anati
on Credi
t Debi
t
I
ncomeSummar y 3000
3000
I
nsur
anceExpenses

(
c)
WhenTor
ret
tiCompanybeganbusi
nessonAugust1,i
tpur
chasesaone-
yearf
ir
e
i
nsur
ancepol
i
cyanddebi
tedt
heent
ir
ecostof$7,
200t
ounexpi
redi
nsur
ance.Tor
ret
ti
adj
ust
sit
saccount
satt
heendofeachmont
hat$600andcl
osesi
tsbooksatt
heendof
t
hey
earwi
th$3000.Thedi
ff
erencei
ntheamount
sofadj
ust
ingent
ryi
npar
t(a)and
cl
osi
ngent
ryi
npar
t(b)i
sbecauseacl
osi
ngent
ryi
saj
our
nalent
ryt
hati
spassedatt
he
end oft
he account
ing y
eart
otr
ansf
erbal
ances f
rom a t
empor
aryaccountt
oa
per
manentaccount
.Al
ltheexpensesandgai
nsori
ncomer
elat
ednomi
nalaccount
s
mustbecl
osedatt
heendoft
hey
earwher
east
headj
ust
ingent
ryar
ethej
our
nal
ent
ri
est
hatconv
ertanent
it
y’saccount
ingr
ecor
dinanaccr
ualbasi
sofaccount
ing.An
account
antmakesadj
ust
mentent
ri
esei
therbef
orepr
epar
ati
onoft
ri
albal
anceoraf
ter
pr
epar
ati
onoft
ri
albal
ance.

Q.4ConcordProductsusesaperpet
uali
nvent
orysyst
em.OnJanuar
y1theInvent
ory
accounthadabal anceof$84,
500.Duri
ngt hefir
stf
ew daysofJanuarythe
fol
lowingt
ransacti
onsoccur
red:
 Jan.2Purchasedmer chandiseoncreditfr
om SmithCompanyfor$9,200.
Jan.3Soldmer chandisef orcash,$22,000.Thecostoft hi
smer chandisewas
$14,300.
a. Pr epareentr
iesingeneraljour
nal f
ormtorecordt
heabovetransact
ions.
b. Whatwast hebal anceoft heInventor
yaccountatthecloseofbusi ness
January3?

Shownbel ow areselectedstati
sti
csfrom t
herecentannualrepor
tsoft
wowel
l
-
knownr etail
ers.
Sears,RoebuckandCo. BroadwaySt ores,
Inc.
Percentagei ncrease(decrease0innet 7.2% (0.
3)%
sales
Percentage i ncrease in compar abl
e 4.7% 3.
1%
storenetsales

(
a) Expl
ainthemeaningandsi
gni
fi
canceofeachoft
het womeasures.
(
b) Eval
uatetheper
formanceoft
hetwocompaniesbasedonthetwomeasur
es

(
A)ENTRI
ESI
NGENERALJOURNAL

Date Par
ticul
ars Debi
t$ Cr
edi
t$
Jan2 Mat
erial
A/C $9,
200

ToSmi t
hCompanyA/ C $9,
200
(
Mat er
ialPur
chasef r
om
SmithCompany )
Jan3 CashA/C $22,
000
ToMat eri
alA/C $22,
000
(Materi
alSol
df orcash)

(
B)BALANCEOFI
NVENTORYACCOUNT
(
1)Openi
ngBal
ance: $84,
500
(
2)AddMat
eri
alPur
chaseddur
ingt
hey
ear
: $9,
200
(
3)Tot
alMat
eri
alav
ail
abl
eforSal
e: $93,
700
(
4)Lesssol
ddur
ingt
hey
ear
: $22,
000
(
5)Bal
anceatt
heendoft
hey
ear
: $71,
700

Q.5Whi
chf
orm ofpar
tner
shi
pwoul
dbemostappr
opr
iat
eforal
awpr
act
ice?Expl
ain.

Tr
adi
ti
onal
l
y,l
awf
ir
mshav
ebeenr
unbypar
tner
shi
ps–agr
oupofseni
orl
awy
erswho
putt
hei
rownmoneyi
ntot
othef
ir
minr
etur
nforashar
eoft
hepr
ofi
ts.Howev
er,
int
he
moder
nlegalpr
ofessi
ont
her
ear
emanydi
ff
erentt
ypesofpar
tner
shi
p,wi
thal
otof
v
ari
ati
oni
nter
msofhowf
ir
msst
ruct
uret
hemsel
ves.

Thet
ypeofpar
tner
shi
pataf
ir
misani
mpor
tantf
act
ort
oconsi
derf
oranyaspi
ri
ng
l
awy
er.I
twi
l
lhav
eani
mpactont
hecar
eerpat
hsopent
oyouatapar
ti
cul
arf
ir
m andar
e
al
soani
ndi
cat
orofwhataf
ir
m’scul
tur
e–andday
-to-
dayl
i
fei
ntheof
fi
ce–wi
l
lbel
i
ke.
Pur
elyf
rom anappl
i
cant
’sper
spect
ive,
under
standi
nghowaf
ir
misst
ruct
uredcanhel
p
y
oui
mpr
essi
nani
nter
view.
TheEngl
i
shandWel
shl
egalpr
ofessi
onhasar
eput
ati
onf
orconser
vat
ism andt
radi
ti
on,
andt
hisi
sref
lect
edbyf
ir
ms’wi
despr
eaduseoft
het
radi
ti
onal‘
l
ockst
ep’par
tner
shi
p
model
.Howev
er,i
ncr
easi
ngdemandsf
orbet
terv
aluef
ormoneyf
orcl
i
ent
s,gr
eat
er
compet
it
ionf
orwor
kandt
hei
nfl
uenceofUSf
ir
mswhi
chwor
kver
ydi
ff
erent
ly,hav
e
seenmor
eor
gani
zat
ionsmodi
fyordepar
tfr
om t
hel
ockst
epappr
oach.

Bel
ow weexpl
aint
het
wobr
oadl
yopposedt
ypesofl
aw f
ir
m par
tner
shi
pandexpl
ore
somev
ari
ati
onswi
thi
n each,wi
thi
nsi
ght
spr
ovi
ded byHanh Nguy
en,par
tnerand
r
est
ruct
uri
ngandi
nsol
vencyspeci
ali
stat
 Char
lesRussel
lSpeechl
ys.
Lockst
ep
Thel
ockst
epmodeli
sthemostwi
del
yusedamongf
ir
msi
nbot
htheUKandt
heUS.I
n
t
hissy
stem,equi
typar
tner
s’pr
ofi
tshar
esi
ncr
easei
nli
newi
tht
hei
rseni
ori
tywi
thi
nthe
f
ir
m(i
e,how l
ongt
heyhav
ewor
kedt
her
e).Thi
smeanst
hatal
lequi
typar
tner
swho
j
oinedt
hef
ir
mint
hesamey
earwi
l
lbepai
dthesame,al
lsev
ent
h-y
earassoci
atesar
e
pai
dthesameandsoon,duet
oaut
omat
icannualpayi
ncr
eases.St
ri
ctl
yspeaki
ng,t
he
l
ockst
epmodelappl
i
esonl
ytoequi
typar
tner
s,butsomel
ockst
epf
ir
msappl
ythe
sy
stem t
osal
ari
edpar
tner
sandassoci
atest
oo.
Pr
os
Thel
ockst
epmodelcr
eat
escol
l
egi
ali
ty,st
abi
l
ityandcohesi
on,aswel
lasl
oyal
ty,by
pl
aci
ng emphasi
s on gr
oup achi
evementand t
eamwor
krat
hert
han compet
it
ion
bet
weenl
awy
ersatt
hesamef
ir
m.“
Alockst
epmodelpr
ovi
descer
tai
ntyi
nter
msof
par
tnerpr
ogr
essi
on,
”expl
ainsHanh.“
Apar
tnerwi
l
lknowwhathi
sorherr
emuner
ati
on
wi
l
lbe dependi
ng on t
hei
rseni
ori
tyatt
he f
ir
m.The pr
e-est
abl
i
shed cr
it
eri
on f
or
r
emuner
ati
onal
soar
guabl
yensur
esgr
eat
ert
ranspar
encyandemphasi
zest
hesenseof
shar
ingandsuppor
tbet
weenpar
tner
s–andt
hegai
nsandbenef
it
sfr
om di
ver
sif
ying
oppor
tuni
ti
esandspr
eadi
ngr
isk.I
ntheor
y,al
ockst
epmodelshoul
dcr
eat
eamor
e
col
l
egi
atecul
tur
einwhi
chl
awy
erspur
suet
hef
ir
m’sbesti
nter
est
srat
hert
hant
hei
rown,
whi
l
eal
sor
ewar
dingl
ongev
ityandl
oyal
ty,
aff
ordi
nggr
eat
ersecur
it
ytopar
tner
s.”
Cons
Thel
ockst
ep modelf
ail
stol
i
nkr
ewar
d wi
thi
ndi
vi
dualper
for
mance,whi
chcr
it
ics
bel
i
eveencour
agesi
nef
fi
ciencyand unf
airsi
tuat
ionswher
elesserper
for
mer
scan
‘
coast
’ont
hegr
eat
ercont
ri
but
ionsofot
her
s.“
Fir
msut
il
izi
ngat
radi
ti
onall
ockst
ep
sy
stem l
ackt
he f
lexi
bil
i
tyt
o dealwi
th under
per
for
ming par
tner
sas wel
las hi
gh
per
for
mingpar
tner
sir
respect
iveoft
hei
rseni
ori
ty,
”expl
ainsHanh.“
Lockst
epassumes
t
hatseni
orpar
tner
sgener
atemor
efort
hebusi
nesst
hanj
uni
orpar
tner
sandf
ail
sto
pr
oper
lyaccountf
ort
hespeedypr
ogr
essofhi
gherper
for
mingpar
tner
s.”
Modi
fi
edl
ockst
ep–mer
it
-basedpay
Manyt
opor
gani
zat
ions,i
ncl
udi
ngmagi
cci
rcl
efi
rms 
Linkl
ater
s and 
Slaught
erandMay
,
hav
econt
inuedt
out
il
izeal
ockst
epmodel
,bel
i
evi
ngt
hati
tsbenef
it
sfarout
wei
ghi
ts
dr
awbacks when i
tcomes t
oaf
ir
m’s ov
eral
lper
for
mance and l
ong-
ter
m heal
th.
Howev
er,par
ti
cul
arl
ysi
ncet
hef
inanci
alcr
isi
soft
hel
ate2000swhi
chputi
ncr
eased
pr
essur
eoncommer
ciall
awy
ersandt
hei
rcl
i
ent
s,somef
ir
mshav
emodi
fi
edt
hei
r
l
ockst
ep ar
rangement
stoi
ncl
udeanel
ementofper
for
mance-
based r
emuner
ati
on.
“
Mar
ketpr
essur
ecer
tai
nlyhasani
mpact
,”expl
ainsHanh.“
Fir
mshav
etopayat
tent
ion
t
owhatt
hei
rcompet
it
orsar
edoi
ng.Thei
ncr
easei
ncompet
it
ioni
nLondonf
rom,f
or
exampl
e,US f
ir
ms whi
ch ar
e eagert
orewar
dindi
vi
dualper
for
mance and hav
e
i
nfl
uencedsomef
ir
ms’
appr
oach.
”

I
nmanycasesf
ir
mshav
eabonussy
stem asanext
raf
orm ofi
ncent
ive,al
thoughev
en
t
hismaybebasedont
hef
ir
m’sov
eral
lper
for
mancet
haty
ear
,rat
hert
hant
iedt
othe
per
for
manceoft
hei
ndi
vi
dual
.Nonet
hel
ess,l
ockst
eppr
oponent
sar
guet
hatt
her
ewar
d
ofachi
evi
ngpar
tner
shi
pismor
ethanenoughofani
ncent
ivef
orgoodper
for
mance
amongt
het
ypesofpeopl
ethatt
heyempl
oy.
AsHanhexpl
ains:“
Arr
angement
sdependont
hecul
tur
eoft
hef
ir
m andt
het
ypeof
peopl
eiti
str
yingt
oat
tractt
othepar
tner
shi
p,whi
chwi
l
lofcour
seal
sobeaf
fect
edby
whatcompet
it
orsar
edoi
ng.Akeybenef
itofamer
it
-basedsy
stem i
sthati
taf
for
ds
gr
eat
erf
lexi
bil
i
tyt
oal
l
ow par
tner
stomov
eupanddownwi
thi
nther
ewar
dst
ruct
ure.
Suchasy
stem enabl
espar
tner
slooki
ngt
oret
ir
efr
om t
hei
rrol
esi
nhel
pingt
orunt
he
f
ir
mtocont
inuet
ofi
twi
thi
nthest
ruct
ureandr
emai
nani
mpor
tantpar
toft
hef
ir
m,
r
athert
hanbei
ngf
orcedoutduet
othedi
spar
it
ybet
weenwhatt
heycandel
i
verasf
ee
ear
ner
sandwhatt
heydr
aw.I
nthi
sway
,amer
it
-basedsy
stem cancr
eat
eamor
e
el
eganty
etpr
opor
ti
onat
est
ruct
ure.
”
Al
thoughmanyf
ir
msnowut
il
izeaf
orm ofmer
it
-basedr
ewar
d,t
hisdoesnoti
l
lust
rat
e
t
hef
ull
ext
entt
owhi
chi
tispossi
blet
odepar
tent
ir
elyf
rom l
ockst
ep.
Eatwhaty
ouki
ll
A col
orf
ulphr
aset
odescr
ibeapaymodelwhi
chi
sthecompl
eteopposi
teoft
he
t
radi
ti
onall
ockst
ep sy
stem.Fi
rmswi
th an ‘
eatwhaty
ou ki
l
l’appr
oach baset
hei
r
l
awy
ers’
compensat
ionont
her
evenuet
hateachi
ndi
vi
dualgener
ates.Of
ten,
thi
sent
ail
s
t
heuseofaf
ormul
atoaccountf
ort
hef
ir
m’sov
erheads,
wit
hpar
tner
sshar
ingt
hecost
s
ofr
unni
ngt
hef
ir
m,butt
henspl
i
tti
ngt
her
emai
ningpr
ofi
tsbasedonper
for
mance.I
n
t
hismodel
,af
ir
m maybemor
eaccur
atel
ydescr
ibedasacost
s-shar
ingar
rangement
bet
weeni
ndi
vi
dual
srat
hert
hanapar
tner
shi
p.
Ar
gument
sinf
avour
The‘
eatwhaty
ouki
l
l’sy
stem cer
tai
nlyr
ewar
dshi
gh-
achi
evi
ngi
ndi
vi
dual
sandkeeps
t
hem happy
,whi
l
eitmayal
sosui
tfi
rmst
hathi
real
otofpar
tner
slat
eral
l
y,assuch
par
tner
shi
ps wi
l
lnothav
e dev
eloped or
gani
cal
l
y,wi
tht
he accompany
ing wor
king
r
elat
ionshi
psandt
rustt
hatt
hisent
ail
s.I
tal
sopl
acesal
ltheemphasi
sonper
for
mance,
whi
chshoul
dint
heor
yensur
ethatal
laf
ir
m’sl
awy
erswor
khar
dtopul
lthei
rwei
ght
,
t
husboost
ingt
hef
inanci
alheal
thoft
hef
ir
m aswel
lit
sreput
ati
onamongcl
i
ent
s.Not
ev
ery
onei
sat
eam pl
ayer
,soan‘
eatwhaty
ouki
l
l’modelshoul
dgett
hebestoutof
l
awy
erswhohappent
obecompet
it
iveandi
ndi
vi
dual
i
sti
c.Apur
elymer
it
-basedmodel
canal
sobenef
itaf
ir
m’scashf
low,
asi
tincent
ivi
zespar
tner
stoensur
ethatcl
i
ent
spay
upi
nat
imel
ymanner–af
teral
l
,thepar
tner
sdon’
tgetpai
dunt
ilt
heyhav
erecei
veda
cl
i
ent
’sf
ee.
Ar
gument
sagai
nst
Thesy
stem maywor
ktot
hedet
ri
mentofaf
ir
m’scohesi
onandl
ong-
ter
m st
abi
l
ity
.
Pur
elymer
it
-basedmodel
shav
ebeencr
it
ici
zedast
oov
olat
il
e,wi
thagoodex
ampl
e
bei
ngt
he 
col
l
apseofDewey&Leboeuf
 i
n2012,whi
choper
atedapur
emer
it
-based
par
tnerr
emuner
ati
onmodel
.Eatwhaty
ouki
l
ldoesn’
taccountf
oressent
ialf
unct
ions
suchasr
efer
ral
sbet
weenaf
ir
m’sl
awy
ers,ast
her
eisnoi
ncent
ivet
oencour
aget
his
behav
ior
,whi
l
eital
so puni
shes t
hose l
awy
ers who engage i
nvi
talwor
kfort
he
dev
elopmentoft
hef
ir
m,suchast
hosewhot
akeupmanagementort
rai
ningr
oles.
Smal
lerpar
tner
shi
ps–t
he‘
monar
ch’
str
uct
ure
Themonar
chsy
stem i
sut
il
izedbyf
ir
msi
nwhi
chonel
awy
erhascl
earseni
ori
tyov
eral
l
t
heot
her
sandset
sthel
evelofr
emuner
ati
onf
oral
lot
herl
awy
ersatt
hatf
ir
m eachy
ear
.
Thi
ssui
tssmal
l
erpar
tner
shi
pswher
eonel
awy
eri
stheor
igi
nalandmai
ngener
atorof
busi
ness,whi
chcansui
tthef
ir
m’sot
herl
awy
ersbecauset
heyear
nmor
eundert
his
sy
stem t
hant
heywoul
difonl
yrel
yi
ngont
hewor
ktheybr
ingi
nthemsel
ves.
Ar
gument
sinf
avour
The monar
ch sy
stem can wor
k wel
lwhen t
he seni
orl
awy
er(
ormonar
ch)i
sa
r
easonabl
eandbenev
olentl
eader–goodmanagementski
l
lsar
ether
efor
eimpor
tant
.
When i
ncome i
sshar
ed f
air
lyand r
ewar
dsand expect
ati
onsar
e made cl
ear
,the
monar
chmodel
canbeav
iabl
ewayofoper
ati
ngf
orsmal
l
erf
ir
ms.
Ar
gument
sagai
nst
I
foneormor
eofaf
ir
m’sj
uni
orl
awy
ersdev
elopsi
ntoar
ainmakeri
nthei
rownr
ight
,the
modelwi
l
lcomeunderst
rai
n.Thi
scanl
eadt
odepar
tur
esf
rom t
hef
ir
m,par
ti
cul
arl
yif
t
heor
igi
nalseni
orl
awy
eri
snotwi
l
li
ngt
oshar
ethet
hrone,
whi
chmayputt
hel
ong-
ter
m
pr
ofi
tabi
l
ityoft
hef
ir
m atr
isk.

Howt
hisaf
fect
syou:f
act
orst
oconsi
derbef
oreappl
yi
ng
Thet
ypeofpar
tner
shi
paf
ir
m hasi
sani
mpor
tantf
act
ort
oconsi
derwhenconsi
der
ing
maki
nganappl
i
cat
ion. 
“Thef
orm ofr
emuner
ati
onmodelcani
mpact
 ont
hecul
tur
eof
t
hef
ir
m andt
her
efor
etheexper
ienceoft
rai
neesandassoci
ates,
”expl
ainsHanh.“
If
candi
dat
eswantt
osucceedataf
ir
m andst
ayt
her
eint
hel
ongt
erm,t
heywi
l
lneedt
o
bepr
epar
edt
o embr
acet
hecul
tur
ebecausei
twi
l
ldet
ermi
nehow t
heypr
ogr
ess.
Candi
dat
esshoul
dconsi
derwhi
chcul
tur
ewi
l
lmeett
hei
rcar
eeraspi
rat
ions.
”
Af
ir
m’schoi
ceofr
ewar
dst
ruct
urecoul
dal
sohav
eani
mpactont
hequal
i
tyoft
rai
ning
t
hatt
rai
neesr
ecei
ve.“
Thenat
ureoft
hepar
ti
cul
armodelcoul
ddi
ctat
epar
tnerbehav
ior
andt
hewor
kmor
ejuni
ormember
sar
egoi
ngt
oget
,”war
nsHanh.“
Wor
kingasaj
uni
or
ataf
ir
mthatr
ewar
dsamor
eindi
vi
dualappr
oachmaynecessi
tat
eget
ti
ngont
her
ight
si
deoft
her
ightpar
tner
stogett
hewor
kyouwant
.Thatmustbet
ruet
osomeex
tenti
n
anyf
ir
m,butIi
magi
nei
tismor
eacut
ein‘
eatwhaty
ouki
l
l’pr
act
ices.I
twoul
dpr
obabl
y
al
so i
mpacton per
for
mance r
evi
ews and t
her
efor
e qual
i
ficat
ion and pr
omot
ion
pr
ospect
s.Thehour
’sexpect
ati
ononj
uni
orsi
sal
way
shi
gheratan‘
eatwhaty
ouki
l
l’
f
ir
m,ast
heassoci
atesar
e–t
oadegr
ee–commodi
ti
esf
ort
hepar
tnert
odr
ivehar
dto
ear
nmor
eandgetr
ewar
dedmor
e.Thati
snotnecessar
il
yanegat
ive,
buti
sanex
ampl
e
ofhowt
her
emuner
ati
onsy
stem wi
l
lhav
eadi
rectaf
fect
”.
Makesur
ethaty
out
akeaf
ir
m’spar
tner
shi
pmodeli
ntoaccountwhendeci
dingwhi
ch
t
ypeofcar
eerpat
handday
-to-
daywor
kingat
mospher
ear
ebestf
ory
ou.

Ref
erence:

htt
ps:/
/www. l
awcareer
s.net/
Expl
ore/
Feat
ures/17032020-
What
-ar
e-t
he-
types-
of-
part
nershi
p-at
-l
aw-f
irms-and-
why-
do-t
hey-
matter