NATIONAL UNIVERSITY OF LESOTHO

Faculty of Law

L3411 – ACCOUNTING FOR LAWYERS

2024-2025Academic Year

1st Semester
Lesson-5

5.0 Welcome Remarks

In this Lesson we shall focus our eyes on what is an accounting cycle. You will see a
diagrammatic representation of the key elements of the cycle. Explanations will be
given of the elements and then start working on some of them. You will note that in
certain respects the accounting cycle represents much of what you have already
learned but only being presented in a particular order.

5.1. Balancing an accounting

In the Solution to Exercise 4.2 from Lesson 4, you saw a bit of how an account is
balanced. The purpose was to arrive at closing balances in order to carry them to
financial statements. Usually, all ledger accounts are balanced at the end of each
month. The following are typical steps that are followed in balancing a ledger
account:
1. Add up both sides of the account, that is, the debit and the credit sides.
2. Write down the bigger total on its side.
3. Subtract the smaller total from the bigger total.
4. Insert, just below the last entry on the smaller side, the differential amount
(that is, the amount constituting the difference) as a “balance carried down” or
just “balance c/d” on smaller side. The date of the “balance c/d” is the last day
of the accounting period in question.
5. Total up the smaller side, now after inserting the balance c/d amount.
6. The smaller side, with the differential amount, will now be equal to the bigger
side and insert that total.
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 7. Insert the differential amount below the total of the ‘bigger’ side as the balance
closing balance for the account, denoting it as “balance brought down” or just
“balance b/d”
8. The “balance b/d” is usually dated a later than the date of the “balance c/d” is
dated as of the last day of the month.
9. That is the balance that will be used as the opening balance for the following
month.

To illustrate the above steps, let’s take the Bank Account from the ledger book in
Exercise 4.2 of Lesson 4:

Dr Bank/Cash Cr
Date Particulars Foli Debit Date Particulars F Credit
o amount ol amount
(M) io (M)
2 Feb Capital: 20,000 2 Feb 21 Rent expense 3,400
21 T. Fako 3 Feb 21 Office equipment 9,000
25 Feb 21 Wages 5,000
28 Feb 21 Balance c/d 2,600
Total 20,000 Total 20,000
1 Balance b/d 2,600
March

Following the steps indicated above, the only changes to what we did in the Solution
to Exercise 5 are those highlighted in a red colour above.

5.2 The accounting cycle

In a diagram form, the accounting cycle follows this order:

See next page

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Accounting cycle
1

Transaction occurs

(evidenced by)
2
Source documents

(Details are recorded in)

3
Books of prime entry/journals

(Totals are posted to respective)

4
Ledger accounts

(Balances used to prepare a)

5
Pre-trial balance adjustments

(some balances used to prepare a)

(some affected by)
6
Adjustments

(totals posted to)

7
Adjusted general ledger

(Balances used to prepare)

8
Final Trial balance

(Used to prepare a set of)

8

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 Financial statements

Income statement 1 Balance sheet

5.2.1 Transactions
Transactions occur daily in any business. The same happens in a law firm. A
transaction is an agreement between two parties to make something happen, e.g
provision of legal services in one form or another. Cash does not necessarily
exchange hands in most transactions. Transactions could involve:
 Rendering legal services (with immediate payment of cash or payment to be
made later)
 Buying (on credit or cash (cash simply means immediate payment whether
actual handing of currency money or by cheque or some electronic means)
 Selling (on credit or cash)
 Paying
 Receiving money (being paid) (e.g. receiving money from a client or from the
owner by way of further injection of capital)
 Returning goods (e.g. defective furniture)
 Receiving goods previously sold (e.g. books sold by the law firm being found
to contain some material error)
 Etc

5.2.2 Source documents

Source documents are documents in paper or electronic form containing information
on business transactions. Under no circumstances may any entries be made in the
records of the business without a source document to substantiate the entry. A
specific source document is used for every type of transaction. Examples of source
documents used include:
 Receipt – for cash received
 Debit note – for fees after rendering legal services
 Tax invoices – for goods purchased or sold or services rendered or received
 Chequebook counterfoils – for payments made by cheque
 Cash register rolls
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  Bank deposit slips
 Credit memos
 Electronic receipts for electronic payments (even when emailed as proof of
payment or an electronic bank statement)
 Whichever source document that may be necessary to suit the requirements
of the activities of a business concerned.
Source documents are usually prenumbered, are collected systematically and filed in
numerical order for easier recording in appropriate books of prime entry according to
their nature.

5.2.3 Books of first entry/journals

5.2.3.1 General Ledger
The recognition of a transaction from a source document into a journal is called
journalising and a journalised transaction is called a journal entry. A general journal
is a fundamental tool in accounting that records all financial transactions in
chronological order as they occur on a daily basis. Here are some of its key features:

5.2.3.1.1 Key Features of a General Journal

1. Chronological Order
Transactions are recorded in the general journal in the order they occur, with the
date of each transaction noted.
2. Double-Entry Bookkeeping
Each transaction is recorded with equal debit and credit amounts, adhering to the
double-entry bookkeeping system. This ensures the basic accounting equation
remains balanced.
3. Detailed Transaction Information
Each general journal entry must contain the following information:
 the date of the transaction
 the name of the account(s) that must be debited
 the name of the account(s) that must be credited
 the corresponding amounts that must be debited and credited.
 a brief explanation of the transaction that is known as a narration.
A general journal provides a complete record of each financial event. It serves as an
important audit trail for verifying the accuracy of financial records. By understanding
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these key features, businesses can effectively utilize the general journal to maintain
accurate financial records and make informed decisions.

Example: If on 24 January 202x Fako & Associates Inc issued a debit note of
M30,000 to NUL for legal services rendered, a typical journal entry would look like
this:

General journal

Dr Cr

24 Jan 21 NUL M30,000

Fees M30,000
Being fees billed to NUL for
services rendered (or Fees for
services to NUL)

In this comprehensive journal entry, “NUL account” represents a

debtor, a current asset account, hence is it debited, while fees, as
income, is credited. The explanation is called a narration in accounting
terms because it narrates the reason for the transaction.

Activity: On 3 September 202X, AB Attorneys purchased a scanner, printer, laptop

and desktop for M56,000, paying M6,000 as deposit, with the balance payable over
a period of six months.

Journalise the above transaction in a general journal.

5.2.3.2 Special journals

Special journals in accounting are designed to streamline the recording of high-
volume transactions, allowing for more efficient tracking and organization compared
to the general journal. They categorize similar transactions, which simplifies the
posting process to the general ledger.
These books are necessary because if all transactions are recorded in a general
journal (which operates like a daily diary, recording every transaction that happens

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every day), it would be impractical to post from such huge amount of information to
the applicable ledger accounts. special books of prime entry or special journals are
separate account books that deal with transactions of the same type. A further
purpose of books of prime entry is to accommodate the specific needs of a particular
business or undertaking, to facilitate division of tasks (in large undertakings, you may
have a person whose job is just to deal with a specific book only), enabling several
people to work on different books of entry all at the same time. In that way, posting of
information to the general ledger becomes easier, with only balances from the
different books being posted. We have seen that balances from the general ledger
are used for preparation of financial statements, that is, an income statement and a
balance sheet. Those balances are also important to prepare a trial balance as you
can observe from the diagram above.

Transactions are classified into groups of similar nature; each type of repetitive
transactions being recorded in specific journals. A distinction is made for that
purpose, for example, between a cash transaction and a credit transaction. A further
distinction is made on cash transactions, namely, cash payments and cash receipts.

5.2.3.3 Differences between a general journal and special journals

The main differences between a general journal and special journals in accounting
can be summarized across several key aspects:
1. Purpose and Nature of Transactions
 General Journal: Used to record all types of transactions that do not fit into
specific categories, including adjustments, accruals, and non-repetitive
transactions.
 Special Journals: Designed to record transactions of similar nature, such as
fees, cash receipts, and cash payments. Each type of transaction has its own
journal (e.g., Fees Journal, Clients Journal, Cash Receipts Journal and Cash
Payments Journal) to streamline the recording process.
2. Suitability and Use
 General Journal: More suitable for small businesses with fewer transactions,
where maintaining multiple journals may be unnecessary.

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  Special Journals: Typically used by medium to large businesses that handle
a high volume of similar transactions daily, making it impractical to use only a
general journal
3. Method of Recording Transactions
 General Journal: Transactions are recorded using two or more-line entries
(debits and credits), providing detailed information for each transaction.
 Special Journals: Generally record transactions in a single line entry format
with summaries for each type of transaction, which simplifies the process.
4. Posting to Ledgers
 General Journal: All entries are posted individually to the general ledger.
 Special Journals: Totals from each special journal are periodically posted to
the general ledger rather than individual transactions, which reduces the
number of postings required.
5. Accumulation of Transactions
 General Journal: Transactions are recorded individually and posted as such.
 Special Journals: Transactions are accumulated over a period (e.g.,
monthly) and then posted as totals to the ledgers
6. Number of Columns Used
 General Journal: Typically has a simpler structure with basic columns for
date, description, debit, and credit.
 Special Journals: Often have multiple columns tailored to the type of
transactions being recorded, allowing for more detailed tracking of specific
information related to those transactions.
In summary, while both types of journals serve the purpose of recording business
transactions, special journals provide a more organized and efficient way to handle
high volumes of similar transactions compared to the general journal.

5.2.3.4 Types of special journals for a firm of attorneys

5.2.3.4.1 Fees journal
Attorneys’ firms typically find a fees journal quite effective, especially for those using
manual systems. Even those using automated accounting systems, a fees journal is
used quite extensively. The fees journal is one of the most important journals in an
attorney’s practice. All fees levied for services rendered to clients, either cash or on
account are recorded in the fees journal. The total of the fees journal is debited to
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the clients control account and credited to the fees earned account in the general
ledger. The relevant clients’ individual accounts in the clients’ ledger are debited with
the amounts as reflected in the fees journal. The following are the characteristics of a
fees journal:
 One line is sufficient to record a transaction. No comprehensive journal entry
is required for each transaction. Ordinarily, a journal entry has the following
elements:
o The account debited
o The account credited
o An explanation of the transaction or reason underling the transaction.
 However, no narration is needed for the specific journal since the function of a
specific journal is that of recording a particular type of transactions. Fees
journal typically records all transactions where legal services have been
rendered, fees charged but not yet paid. There is therefore no need for a
narration.
 The total amount in respect of fees for the month is posted to the general
ledger. As we have seen, posting entails two accounts. A total amount from
the fees journal would entail a debit the Clients Control Account (for a law
firm, a Clients Control Account represents debtors or accounts receivable but
exclusively from clients of the firm in respect of its legal services) and a credit
to the Fees Account. (Question: what if the firm sold some legal materials it
produces to the general public and it sold some worth M20,000 on credit?
Would that also legitimately find room in Clients Control Account?)

Example 1:
T. Fako & Associates had the following transactions for the month ended 28 th
February 202X:
1. On 2nd, the firm issued debit note 1001 to T. Potso for legal services rendered
in the amount of M5,000.
2. The firm argue P. Khali’s bail application in corruption case and issued debit
note 1002 in the amount of M10,000. The debit note was dated 5th Feb 202X.
3. On 9th L. McPherson received debit note number 1003 from the firm in the
amount of M7,000 for registration of his lease.

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 4. Debit note 1004 was emailed to Tizo Construction in the amount of M25,000
following settlement of the company’s legal dispute with Nyenye Construction.
The date of the debit note was 15th February 202X.
5. K. Lejone was issued with debit note number 1005 in the amount of M20,000
for registration of his bond.

Fako & Associates Fees journal for the month of February 202X
Date Debit note no. Client debited amount
Feb 202X, 1001 T. Potso 5,000
2 1002 P. Khali 10,000
5 1003 L. McPherson 7,000
9 1004 Tizo Construction 25,000
15 1005 K. Lejone 20,000
26
28 Debit Clients Control Account 67,000
28 Credit Fees Account 67,000

It is the total amount of M67,000 that will be posted to the general ledger and debited
in the Clients Control Account and credited in the Fees Account.

It is important to take note that the individual amounts in the example above are
posted daily to the accounts of the clients maintained in the clients ledger.
To avoid any confusion as to how the total amount from the Fees Journal should be
treated further on in the General Ledger, the Fees Journal may take the following
format:

Fako & Associates Fees journal for the month of February 202X
Date Debit note Details Dr Cr
no. (M) (M)
Feb 1001 T. Potso 5,000
202X, 2 1002 P. Khali 10,000
5 1003 L. McPherson 7,000
9 1004 Tizo Construction 25,000

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 15 1005 K. Lejone 20,000
26
28 Debit Clients Control A/c 67,000
28 Credit Fees A/c 67,000

Example 2: Clients ledger

Dr Clients ledger Cr
T. Potso
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
2 Feb Fees 5,000 Bank
21

P. Khali
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
5 Feb Fees 10,000 Bank
21

L. McPherson
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
9 Feb Fees 7,000 Bank
21

Tizo Construction
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
15 Feb Fees 25,000 Bank
21

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 K. Lejone
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
26 Feb Fees 20,000 Bank
21

You will note that:

 In the clients ledger, individual names of clients are used as constituting a
separate account.
 Fees are debited in the individual client accounts in the amount billed or in the
debit note issued.
 On the credit side, no amounts are reflected because the clients have not yet
paid.
 As clients pay, the individual client accounts will be credited, which will have
the effect of reducing or eliminating the balance on the debit side, depending
on how much they pay.
 When clients pay, the accounts that will be affected will be Bank and Clients
Control accounts in the general ledger, but in the individual clients ledger
accounts, it is the respective clients ledger accounts that get affected.
 Under ‘particulars’ on the credit side, you see ‘bank’ to indicate that the
payment will be recorded in ‘Bank’ account.

Example 3: Entries in the general ledger

Dr general ledger Cr
Clients control
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
28 Feb Fees 67,000
21

Fees
Date Particulars Foli Debit Date Particulars Fol Credit

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 o amount io amount
28 Feb Clients control 67,000
21

5.2.3.5 Control accounts and subsidiary accounts

Each entry in the fees journal represents a debit to a client’s account. You will
observe that from Examples 1 and 2 above. If the law firm has hundreds of clients, it
would mean that the same number of accounts are required in the general ledger in
respect of clients. The purpose of the General Ledger is to summarise the results of
business activities so that financial statements can be prepared. As indicated, a
general ledger containing all of the accounts in the Clients Ledger would be
unwieldy and cumbersome since that is where all the activities of the business have
to be balanced for preparation of the financial statements, as stated.

To avoid that, the individual clients accounts are therefore recorded in a separate
subsidiary ledger, as seen in Example 2 above in the case of clients ledger.
Important points:
 The general ledger records summarised debits and credits from subsidiary
ledgers
 The detail relating to the debits and credits is shown individually in subsidiary
ledgers. See Example 2.
 The entries in the subsidiary ledger are postings (the term ‘posting’ refers to
transfer of information from journals to a ledger, whether subsidiary or
general)
A Clients Control Account is a summary of the information emanating from the
clients ledger. Key points:
 A clients control account is maintained in a general ledger
 It records only final balance from balancing the individual clients accounts
in a clients ledger
 The balance in the clients control account must be equal to the grand total
of the totals under the individual clients accounts in the subsidiary ledger,
clients ledger

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  Should any error occur in the entries or posting procedure, the balance of
the clients control account will differ from that of the grand total of the
individual balances of the clients accounts.
 The total of the individual balances is arrived at by preparing an actual list
at the end of each month to check whether the accounts maintained in the
subsidiary ledger agree with the control account balance.

5.2.3.2 Cash book or cash journal

A Cash book or cash journal records all transactions involving money received,
whether in hard currency or deposited in the bank, and all cash payments, again
whether in hard currency or by cheque or some sort of electronic form from the bank.
The Cash Journal may then be split into:
 Cash receipts book/journal, and
 Cash payments book/journal.

(i) Cash receipts journal

This journal records only transactions concerning cash receipts. It may be
cash payments from clients or from other miscellaneous sources.
It’s format may be the following:
Date Doc no. Details Fol. Sundries Clients Bank
(Accounts R R R
credited)
Date of Receipt Name of Amount to be Amount to be Amount
tran-saction number client from credited if credited banked
whom cash cash is when cash is
is received received received from
or on other than clients
whose from a client
behalf cash
is received,
or sundry
account to
be credited
The analysis columns may be more in number depending on the frequency of
transactions involving the same account in the given accounting period as the
business may opt for. Entirely discretionary. This is part of management accounts
and may therefore be varied to suit management information requirements.

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 Example 4: Cash receipts journal

For the month of March 2021, the following receipts were received by
Fako & Associates Inc:

Date Receipt No Source Amount

4 101 T. Potso 3,000
10 102 P. Khali 5,000
15 103 L. Mcpherson 4,000
20 104 Tizo Construction 15,000
26 105 K. Lejone 13,000
27 106 interest received 3,000

The cash receipts journal would look like this:

cash receipts journal

Credits Debits
Date Receipt Accounts credited Sundries Clients Bank
03/21 No.
4 101 T. Potso 3,000 3,000
10 102 P. Khali 5,000 5,000
15 103 L. McPherson 4,000 4,000
20 104 Tizo Construction 15,000 15,000
26 105 K. Lejone 13,000 13,000
27 106 Interest received 3,000 3,000

Remarks:
 The column ‘accounts credited’ represents what will take place in
the individual accounts reflected thereunder.
 The corresponding amounts will be reflected in the credit side of
those accounts in the subsidiary ledgers.

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  The amounts represent a reduction in the balances of the individual
accounts in the subsidiary ledger. For example, in Example 2, the
balances in the individual clients ledger represent amounts that are
receivable by the firm, but with payments in this Example 4, those
balances in Example 2 will be reduced accordingly.
 In the case of interest received, it will be credited in its relevant
subsidiary ledger or the general ledger (if the transaction does not
occur too often, it may be taken straight to the general ledger, and
not via a subsidiary ledger) because it is income. You now know
that income is credited because it ultimately increases owner’s
equity.
 Interest received is reflected under sundries as a miscellaneous
item not occurring too often.
 The total in the ‘Clients’ column will be posted to the credit side of
the “Clients Control Account” in the General Ledger as “Bank” to
counterbalance the net balance standing in that asset account.

(ii) Cash payments journal

A cash payments journal is the direct opposite of the cash receipts journal:
 It records all transactions involving cash payments by the business.
 The column ‘Receipt No.’ will be “Cheque No.” or something that
evidences payment as a source document
 The column ‘Accounts credited’ will be ‘Accounts debited’.
 Bank will be credited because money is leaving the business
 There may be as many columns in addition to bank and sundries,
depending on the regularity and frequency of the same type of
transactions, such as salaries and wages as those have to be paid
every month.

cash payments journal

Debits Credits
Date Cheque Accounts debited Sundries Salaries Bank
No. & wages

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