Legal Plan Services, Inc. is a company whose nature of business is based on services rendered to people who face any law suits. In order to avail the service, a person has to become a member of Legal Plan Services. The membership fee ranges between $14.95 to $26.00 per month, depending on the schedule of benefits allowed under state laws and regulations. So basically it is a sort of intangible business because there is no actual product or service that is being sold or rendered presently. It is meant for the future. Further, the members are offered legal assistance free of charge up to a certain number of hours, after which they are charged by the providing law firm with a 25% discounted rate. For rendering this kind of service to the members of Legal Plan Services, Inc. the provider law firm is entitled to get a fixed fee based on per capita system. The provider law firms get a commission of 34% of the membership fees. It is noticeable that the commission mentioned is for all the law firms and not for any single law firm. The hours for which the law firm has to give free service are fixed. Beyond that, the law firm can charge on an hourly basis, but it has to offer a discount of 25% on its normal charges. The company’s main objective is customer satisfaction.
The company has several sales associates also who procure business (members) for the company. A new sales associate has to pay a non-refundable one-time enrollment fee of $65. There is an option of training also for the sales associates, the charges for which are $184. These sales associates are commission based and can opt for one of the two commission systems available. According to the first option, commission is paid as and when revenue is earned from the members. The second option allows the sales associate to take commission in advance for a period of three years.
Assessment
There are a few concepts that Legal Plan Services should change in order to gain more profit. First of all, by the present payment system for the law firms, there are chances that the law firms become discontent because they have to give a discount of 25% to the members. Secondly, the advance commission being paid to the sales associates is not a good practice. It is understood that in case any member discontinues in between, the commission pertaining to that particular member that has been paid in advance to the sales associate is recovered from future income of the sales associate. This unnecessarily creates multiple entries and confusion. This also proves that the company is trying to exaggerate the figures in its financial reports in order to increase its transactions. If such commissions are included in the account books, the financial results will not be correct. Moreover, since Legal Plan Services pays advance commission for three years, the same will carry on reflecting in the accounts for the next three years. It is noticeable that such commissions are depicted in the assets. Three years is a long period and anything can happen. In case of any mishap with the sales associate, the advance commission that has been paid cannot be recovered.
The present accounting system is very complicated. If the company changes its commission policy, things might improve. Instead of paying the commission, the same can be calculated and credited to the commission payable. Consequently, the amount will show in the liability head. This will depict a correct status of accounts. “When expenditure is outstanding it amounts to a liability for the organization. It may have to be paid to a person or an organization. Any person or organization to whom we owe money is called a creditor… Since it is indicative of a creditor, it carries a credit balance and has to be shown on the liabilities side of the balance sheet.” (Edifier)
Journal Entries
Following are examples of the journal entries for the year 2000:
The above table depicts that the commission is in the credit side (since the same has been paid in advance). Actually commissions should not be paid in advance and the entry should be on the debit side. “Commission being an expense is debited to commission account. However, as it has not yet been paid, so commission payable account is given the credit and finally it is shown in the balance sheet as a liability,” (Gupta)
Conclusion
The current recognition procedures of Legal Plan Services are misleading because the resulting financial figures don’t depict a correct picture of the company’s performance. The basic concept of accounting is that, “In drawing up accounting statements, whether they are external ‘financial accounts’ or internally-focused ‘management accounts’, a clear objective has to be that the accounts fairly reflect the true ‘substance’ of the business and the results of its operation.” (Tutor2u)
Works Cited
Edifier,. “Conversion of Cash Basis Accounting to Accrual/Mercantile System Accounting.” Final Accounting: Need for Additional Information. Krishbhavara, n.d. Web.
Gupta, Anil. “Adjustments of Final Accounts.” Ezine Articles. HiTech Computer Services, 2007. Web.
Tutor2u,. “Accounting Concepts and Conventions.” Study Notes: Business Finance & Accounting. Tutor2u, 2012. Web.