UNIT 5

ACCOUNTANCY FOR LAWYERS

Introduction:
For a layman, accountancy means a method of keeping a track of the money received and
the money spent. It is pervasive in nature. Starting from a simple housewife, who has to
manage her household expenses in a limited budget and merely involves keeping a track of
money in hand, received or earned and money spent on day to day expenses to a large
corporate entity where accounting not only implies keeping records of incomes earned and
expenses incurred but also complying with statutory requirements, a means to measure the
value of the business etc.
In the strict sense, accountancy can be defined as the principles of recording the incomes
earned and expenses incurred to earn the wealth, or assets created out of the income
earned and the liability taken upon towards running of an enterprise and generating
income and wealth.
Accountancy is not only important for small, medium and big entrepreneurs but also for
professionals like doctors, chartered accountants, lawyers and management consultants,
etc.

Accountancy in Legal Profession

The purpose of accounting, as explained earlier, is to keep a track of the incomes earned
and expenses incurred towards earning the income. Applying this concept to the legal
profession, an advocate needs to necessarily account for fees due and receivable against
every client and also to record expenditure incurred purely towards his efforts on individual
matters.
The receipts of an advocate may not always be towards fees. Advocates recover expenses
from the clients towards filing fees, cost of stationery and other ancillary expenses, which
are not to be met from the fees chargeable to the client. In this situation, it is all the more
important that the advocate keeps a proper track of the money that has been given to him
for expenses and identifies all the expenses against the particular receipts. In the absence
of such a method, and in the event the expenses exceed the amount given to the advocate
by the client, the advocate may end up paying costs for the client from the fees that he
receives for that particular matter.
It is also important that an advocate or a legal firm maintains a separate bank account which
should be used purely for expenses on behalf of clients and each receipt and expenditure
against the receipt should be properly credited and debited to the respective client account
in the books.
An advocate may sometimes receive a lump sum amount from a client towards fees.
However, the fees charged by an advocate to a client may be dependent on the stage the
matter has reached before a Court for example , filing of plaint, admission of suit matter,
initial arguments and final hearing before disposal of the matter, etc.
For an advocate, the major expenses include the cost of running an office, if any,
subscriptions to law journals, purchase of books, salaries of staff, if any, telephone, mobile
bills and in some cases, conveyance expenses etc.
At the end of a financial year, an advocate would also draw up his Profit and Loss Account
and Balance Sheet to understand the amount that he has earned out of his professional
practice and the assets and liabilities created during the year as a result of undertaking
professional practice. All this is not possible for an advocate who either does not keep a
proper record of his income and expenses.
Meaning of Accountancy:
Accountancy is the science, art and practice of an accountant.
An accountant maintains accounts i.e., statements of money to
be paid or received for goods, services etc. accountant records
money or financial transactions by the process of accounting.
Accounting is a discipline which records, classifies, summarizes
and interprets financial information about the activities of a
person or concern.
Thus, accountancy is the science of recording, classifying and
summarizing in a significant manner in terms of money
transactions and events which in part, at least of a financial
character and interpreting the results thereof.

The basic purpose of accounting is to present a complete financial picture of the

Advocates’ profession. This can be done with the help of two financial statements like
(i) Profit and loss account and
(ii) Balance sheet showing the assets and liabilities.
Hence, it is necessary to maintain proper accounts to calculate the following:
i) Annual Income
ii) Income Tax
iii) Professional Tax
iv) Amount due to the client or amount due by the client.

1. To calculate the annual income : To calculate the annual income of the Advocate
from the legal profession, it is necessary to maintain proper accounts of his income
from the profession. Maintaining this account is useful for Advocates as by knowing
his Annual Income , he can take steps to improve/expand his profession.

2. To Calculate income tax : Advocates are liable to pay Income tax for the income
derived from the profession. In order to calculate the amount payable as income tax,
he has to main Mitain proper accounts relating to his income and expenditure. To
calculate the taxable income he is entitled to deduct certain expenditure like rent,
 salary, telephone bill and other administrative expenditure. For this purpose also he
has to maintain proper accounts.

3. To calculate professional tax: Every six months the advocates are liable to pay
professional tax to the Government. The amount of professional tax varies
depending on the income. In order to calculate the amount of professional tax he
has to maintain the proper accounts.

4. To Ascertain the amount due from the client or due to the client: The account
relating to the amount received from the client and the amount received on behalf
of the client from others or from the court should be properly maintained. Then only
the amount due from the client can be calculated. This will help not only the client
but also the Advocate.

Definition of Accounting & Accountancy

Accounting includes recording, classifying, summarising, interpreting and analysing
financial transactions in a proper manner. However, the theory and practice of
accounting is known as accountancy.

Relevant Bar Council of India Rules: R 25- R 32

Rule 25: An advocate should keep the accounts of the client’s money entrusted to
him. The accounts should show the amounts received from the client, the expenses
incurred for him and the debits made on the account of Advocate fees with the
respective dates and all other
necessary particulars.

Rule 26 : Where moneys are received from the client, it should be entered whether
the amount have been received for the advocates fees or expenses. Amount
received for the expenses shall not be diverted towards Advocates fees without the
consent of the client in writing.

Rule 27: Where any amount is received on behalf of his client the fact of such
receipt must be intimated to the client as early as possible.

Rule 28: After the completion of the proceeding, the advocate shall be at the liberty
to take the settled fee due to him to the unspent money in his hand.

Rule 29: Where the fee has been left unsettled, the advocate shall take the fees
which he is legally entitled from the moneys of the client remaining in his hands,
after the completion of the proceeding. The balance shall be returned to the client.
Rule 30: A copy of the client account shall be furnished to him after getting the
necessary copying charges from him.

Rule 31: An advocate shall not make any agreements whereby client’s funds in his
hands are converted into loans to the advocate.

Rule 32: An Advocate shall not lend money to his client for the purpose of
conducting the case.

Accounting/Financial year is from 1st April to 31st March next year.

Rules relating to accounting under Income Tax Act.

Under the Income Tax Act, every lawyer is required to maintain the following books
of accounts and other documents to enable the Assessing Officer to calculate his
total income.

(i) Cash book

(ii) Receipt Voucher

(iii) Payment voucher

(iv) Journal

(v) Ledger.

1. Cash book: It is the book in which the amount/cash received by the Advocates
from the clients and others and the amount spent for the clients are written. This
book is useful for the Advocate to know the amount/cash in his hand on each day.

2. Receipt Voucher: It is the document prepared for recording the receipt of money
by cash or cheque. When an Advocate received money from the client, the Advocate
has to issue a receipt to the client. Advocate shall maintain receipt books record
with
serial number and in duplicate. The original receipt should be given to the client and
the duplicate shall be retained by the Advocate.

3. Payment Voucher: Payment vouchers are used to record such payments for
which receipts are not obtainable from the person to whom such payments are
made. For example bus fare, auto fare, court fees, stamps, refreshment expenses
etc. In such cases the Advocate signature in the payment voucher and the signature
of the person to whom payment is made may be obtained.
 4. Journal : Journal is the book of first entry or original entry. In the journal the
transactions are recorded in the order of their occurrence. It should contain the
following details

(i) Date of Transactions

(ii) Account to which the transaction relates

(iii) Amount to be debited,

(iv) Amount to be credited

(v) Explanation of the transaction.

5. Ledger: The transactions recorded in the journal are to be posted to the separate
heads of account in other book called as Ledger. In the ledger different pages are
allotted to the different heads of accounts. When the journal entries are posted to
the concerned heads of account in the ledger, the page number of the ledger should
be noted in the journal for easy reference.

Process of Accounting:
Accounting Process includes a series of procedures involving collection , processing
and communication of financial information.

i) Identifying Financial Transactions: The accounting process starts with identifying

& analysing business transactions. Not all transactions and events are entered
into accounting system. Only those pertaining to the business entity are included
in the process.

ii) Recording of Financial Transactions:

Business Transactions are then recorded, using the double entry system in the
journals. They are recorded in the form of journal entries containing two
accounts(one credited and one debited).
Transactions are recorded in Chronological order as they occur. Journals are also
known as ‘Books of Original Entry’.

iii) Preparing Ledger Accounts:

These financial transactions are then posted into ledgers which are also known as
‘ Books of final Entry’.

iv) Preparation of Trial Balance:

 After posting all the financial transactions to the ledger , the trial balance is
prepared to check whether the total debits are equal to total credits or not.
Wherever the errors are discovered, correction in entries are done.

v) Preparing Financial statements:

Preparation of Financial Statements are the end products of an accounting
system. It includes income statement , balance sheet, statement of cash flows
etc.

vi) Analysing Financial statements:

At the end of each financial year( 1st April to 31st March next year), the
Financial Statements are analysed to check whether profit has been earned or
loss incurred.

Advantages of Accounting:
i) Ascertainment of profit or Loss.
ii) Ascertainment of Financial position & progress of business/ profession.
iii) Ascertainment of amounts due to client /due from client.
iv) Prevention of errors and frauds
v) These can be used as documentary evidence.
vi) Important for tax purpose
vii) Helpful to the management

Disadvantages:
i) Do not provide complete and exact information always.
ii) Figures can be manipulated.
iii) Assets and Liabilities are clearly visible to everyone in Balance Sheet.
iv) Does not provide actual financial position, if some manipulation has been
done with the figures /entries.

Golden Principles of Accounting (3 Principles)

● Debit what comes in, credit what goes out:

This principle is applied in case of real accounts.
Real accounts involve machinery, land and building etc. Deals with material
assets/property. Reals accounts are further divided into two categories –
a) Tangible(can be physically felt/touched) Real Accounts: e.g Buiding, machinery,
stock, cash in hand etc.
b) Intangible Real Accounts: Related to such things which cannot be felt/touched. Such
as Goodwill, patents, trademarks etc.
 ● Debit the receiver, credit the giver.
This Principle is related to Personal A/C such as ,individuals, firms, companies
, etc. Such as debtors, creditors, banks, capital…..

Personal A/C is further divided into 3 Categories:

i) Natural Personal A/Cs includes all of God’s creation who has ability
to deal, in most cases, are people. E.g- Kumar’s A/C, Pooja’s A/C

ii) Artificial Personal A/Cs includes all created by laws such as Co-
operate Bodies, Institutions, Pvt. Ltd. Co., Club, Schools etc.

iii) Representative Personal A/Cs are those accounts which represent a

certain person/ group, directly or indirectly. E.g- if wages are paid in
advance to an employee then a Wages pre-paid A/C will be opened.
This A/C is a representative personal A/C indirectly linked to a person.

● Debit all expenses , credit all incomes & gains.

This principle is related to Nominal account. It is pertinent to note that in
every Nominal Account either there is expense/loss or income/gain. E.g
Purchase A/C,. Salary A/C Sales A/C, Electricity Bill A/C. etc.

BOOKKEEPING:
it is the art of recording business transactions in the books of accounts in a systematic
manner.
the recording of financial transactions of business in a methodical manner so that
information on any point in relation to them may be quickly obtained.

ESSENTIALS OF BOOKKEEPING.
Bookkeeping is the recording of transactions of only those activities of a business that
generally results in transfer of money or monies worth between business and the person
dealing with business and which effects the financial position of business.
it is recording of only monetary and financial aspects of business transaction.
it is recorded in a set of books known as 'Books of Account ' in a systematic manner in
accordance with the principles laid down in accountancy.
recording of business transactions in the books of account is intended to ensure that
the financial information at any point of business particularly about profit or loss or
financial position of business is readily available.
the scope of bookkeeping is narrow because it is concerned only keeping or
maintaining of books of accounts.

DISTINCTION BETWEEN BOOKKEEPING AND ACCOUNTING.

 Book keeping is just the process of recording business transaction in books of accounts. It
comprises recording business transactions in the books of accounts by preparing a trial
balance. However, it does not produce any financial statements like profit/loss account
balance sheet etc. No conclusion can be drawn from book keeping. Work of bookkeeping
is routine and clerical nature But accountancy is comparatively technical and complicated
in nature and needs of specialist person(accountant) to analyse the accounts.

CASH BOOK:
It is a book of original entry of payment and receipts of money in any transaction.
▪ it is used for recording receipts and payments of money(cash).

OBJECTS OF CASH BOOK:

1. To simplify recording of cash transaction.
2. To find out total cash receipts and cash payments during a given period.
3. To ascertain the balance of cash in hand and at Bank.

ADVANTAGES OF CASH BOOK

In a Cash Book all cash transactions are recorded in a classified manner.
When there is cash book much time and labour is saved.
Daily cash receipts and payments can be ascertained easily.
Mistakes in recording cash transaction can be easily found by checking the cash book.
misappropriation of money can be easily detected by verifying cash book.

DIFFERENT TYPES OF CASH BOOK.

A. Single column cash book(simple cash book/cash book with only cash column)
B. Double column cash book: cash book with cash and bank column.
C. Three column/triple column cash book: cash book with discount, cash, & bank column.

JOURNAL:
Book of original entry - all kinds of transactions are recorded(as soon as occurred) with
narration - in chronological order on day to day basis . Hence also called ‘Day book’
Meaning : It is a book of original entry. Term journal is derived from a French word ‘Jour’
which means day. Journal therefore means a day book or a daily record. It is a book of
original entry in which all transactions are recorded chronologically i.e. in order of their
occurrence. In journal each transaction is analysed into debit aspect & credit aspect & both
these aspects are recorded together in one entry with the brief explanation for each entry
called narration. Recording in Journal is known as Journalising the transaction or recording a
journal entry.

Essential features of Journal

1. It is a day book or daily record as it records each day transactions on same day or
whenever it takes place.
2. It records transactions chronologically.
3. Book of original entry.
4. Gives complete picture of each transaction as it contains narration.
5. Though it is book of original entry.
6. From the journal, transactions can be easily posted to appropriate accounts in the ledger.
Therefore it is helpful in preparing various accounts in ledger.

Advantages of journal
It provides chronological record of transactions (easy reference).
- provides quick and easy reference to any transactions .
- it has both credit & debit aspects of the transactions entered in Journal together which
provides complete record of each transaction in one place.
- by providing narration it helps to understand the purpose & nature of entry. - journal
avoids necessity of making entries in the ledger immediately.
- where Journal is maintained entries can be made into ledger from journal
- it helps in cross checking & checking the arithmetic accuracy.
- helps to detect errors in ledger.
- since Journal is a book of original entry, it is of high evidentiary value in the court of law.
Limitations of journal
- since all transactions are recorded in the journal , it becomes a bulky document
- the work of writing a journal is labourious and tedious.
- journal is a subsidiary book and does not provide the final information in the matter of
business.
- journal is useful only for small concerns and not for large concerns with large volumes of
business transactions.

Ledger:-
Ledger is derived from the Dutch word “legger” meaning “lye”. Therefore a ledger means a
book were various accounts lie. A Ledger is a book in which all transactions made by a trader
lie (recorded) in a classified permanent form.
Features of a ledger:-
• It is an analytical record of transactions.
• It is a derived or secondary record as entries are derived from a journal.
• It is a book of final entry
• Though it is a derived record it is a principal book of account. It is from this book that one
can obtain final information relating to profit, loss and financial position of business.

Need for ledger:-

The transactions are recorded in a journal according to order of dates. In a journal
transactions of some nature are found in different pages. One cannot know from the journal
the cumulative transactions of the same nature. Thus it becomes necessary to maintain a
ledger, where transactions of the same nature can be brought together in one place. In a
ledger transactions of the same nature are grouped together in one place, in one form of
account through a process called posting. As all transactions relating to a particular account
appear in a summarized and classified form, as an account one can easily find out the exact
position of balance of each account on each day.

Objective of ledger:-
• To provide analytical record of business transactions.
• To provide permanent record of all transactions.
• To indicate cumulative effect of all transactions relating to a person’s asset expense or
income i.e. a final position of each account on each date.
• To help in preparation of trial balance.
• To help in preparation of final account i.e. profit and loss A/C and balance sheet.
• It helps ascertain sales and purchases during a particular period.
• It helps ascertain assets of business and their values. • Helps to know amount due from
each debtor and amount due to each creditor.

Double-entry system:-
A system of making two or double entries in the opposite sides in two different accounts in
the books of each of the contracting parties is known as double-entry system of accounting.
The two entries are made in two different accounts in opposite directions – one in the debit
side (receiving) and other in the credit side (giving). - Entries should be made simultaneously
- Double entry system is a universally accepted accounting principle. It is based on the
accounting concept (standard) that every debit has a corresponding credit and vice versa. -
Total debit given to all accounts should be equal to total credit given to all accounts.

Trial Balance
Trial balance is a statement prepared with the debit and credit balances of the ledger
account to test the Arithmetic accuracy of the book.
Trial balance is a list of debit and credit total or test of debit and credit balances of all the
ledger account prepared on any particular date to verify if the entries in the books of
accounts are arithmetically correct.

Features of Trial Balance

- It is prepared on a particular date and not on a particular period.
- it must be prepared before final balance account.
- It is prepared in a separate sheet of paper and does not form a part of books of accounts.
- The preparation of trial balance is not obligatory.
- It is a list of all balances of ledger accounts, the trial balance may be prepared with
balances of all ledger accounts or total of all ledger accounts.
- It helps to check the accuracy of books of accounts. However, it is not conclusive proof
of the accuracy of the books of accounts because certain types of errors may remain
even if the trial balance tallies.
- Even though its preparation is not obligatory it is useful from the particular point of
view as no book keeper is quite sure of the accuracy of the books of accounts and the
trial balance helps to check the accuracy.

Objects of Trial Balance

- To bring balances of all the accounts in the ledger in one place so that the balance of
any particular account is found without going to the ledger.
- To indicate the correct nature of the balances of various accounts.
- To check accuracy of the books of accounts.
- To locate errors.

Limitations
- It is not a conclusive proof of accuracy as certain types of errors may persist.
- It is not a part of the books of account.
- Its scope is limited.

Advantages
- Facilities easy and quick preparation of final accounts.
- The errors in the books of accounts can be easily detected and rectified.
- It then shows final account. It reveals if it is a true account.
- The balance of ledger account found in the trial balance serves as a guide for the state
of affairs of the concerned.
- It serves as a lead to the management.
- During transfer of accounts ; the errors are rectified.