Notes for Accounting for Law Students 441 (Stellenbosch University) from the 2022 academic year. These notes cover everything from the nature and function of accounting up to and including conveyancing transactions. The notes include both theory and practical examples as covered in class. Using th...
ACCOUNTING FOR LAW STUDENTS
Chapters 1&2: Nature and function of accounting and accounting terms and functions
................................................................................................................................................. 4
Study material:......................................................................................................................... 4
Nature and function of accounting ........................................................................................... 4
Need for financial information .................................................................................................. 4
Financial reporting frameworks ............................................................................................... 5
Forms of enterprises................................................................................................................ 5
Accounting in attorney’s practice ............................................................................................. 6
Legal Practice Council Rules................................................................................................... 8
Business and trust concepts.................................................................................................... 8
Auditor’s report ........................................................................................................................ 9
Non-compliance with LPA and Rules of LPC .......................................................................... 9
Bookkeeping and the role of the attorney .............................................................................. 10
Chapters 3& 4 The basic accounting equation and accounting system........................ 10
Double entry system .............................................................................................................. 10
Accounting equation .............................................................................................................. 11
Terminology: accounting cycle and transaction..................................................................... 11
Textbook 3.5 examples ......................................................................................................... 13
Accounting system ................................................................................................................ 14
Chapter 5 Value-added tax ................................................................................................. 14
Introduction ............................................................................................................................ 14
Terminology: output tax and input tax ................................................................................... 14
Taxable and exempt supplies ................................................................................................ 15
Claiming input tax .................................................................................................................. 16
Accounting to SARS .............................................................................................................. 17
Calculations ........................................................................................................................... 17
VAT control ledger account ................................................................................................... 18
Tax returns, payments, and assessments ............................................................................. 19
Class example ....................................................................................................................... 19
Chapter 6: books of prime entry/books of first entry....................................................... 19
Introduction ............................................................................................................................ 19
Source documents................................................................................................................. 20
Books of prime entry.............................................................................................................. 20
Business cash book............................................................................................................... 21
Business bank account (general ledger) ............................................................................... 21
Petty cash book ..................................................................................................................... 22
Trust cash book ..................................................................................................................... 22
Trust bank account ................................................................................................................ 22
,Summary ............................................................................................................................... 23
Fees journal ........................................................................................................................... 23
Sheriffs and advocate journal ................................................................................................ 23
General journal ...................................................................................................................... 23
Chapter 7: cash controls and bank reconciliation ........................................................... 24
Introduction ............................................................................................................................ 24
Cash receipts and cash payments ........................................................................................ 24
Bank statement...................................................................................................................... 24
Reconciling items .................................................................................................................. 26
Reconciliation procedures ..................................................................................................... 27
SEMESTER TEST................................................................................................................. 28
Chapters 8 and 9: Ledger Accounts and control ............................................................. 28
Introduction ............................................................................................................................ 28
Ledger accounts .................................................................................................................... 29
Class example (R Attorneys) ................................................................................................. 29
Balancing ledger accounts .................................................................................................... 35
VAT control ledger account ................................................................................................... 36
Subsidiary ledgers and control accounts ............................................................................... 38
Example from textbook .......................................................................................................... 40
Chapters 10 and 11: adjustments, closing off, and financial statements ...................... 43
Introduction ............................................................................................................................ 43
Types of adjustments: ........................................................................................................... 44
Expenses in arrear and prepaid expense .............................................................................. 44
Expense in arrears or accrued expense ................................................................................ 44
Prepaid expenses .................................................................................................................. 45
Income received in advance and income receivable ............................................................. 45
Income received in advance .................................................................................................. 45
Income receivable ................................................................................................................. 46
Summary: .............................................................................................................................. 47
Stationery on hand ................................................................................................................ 47
Depreciation .......................................................................................................................... 47
Fixed term.............................................................................................................................. 47
Diminishing value method ..................................................................................................... 48
Journal entry .......................................................................................................................... 49
Bad debts and doubtful debts ................................................................................................ 49
Class example ....................................................................................................................... 51
Chapters 12 and 13: trust investments and trust transfer procedures .......................... 53
General overview................................................................................................................... 53
Study material........................................................................................................................ 53
,Introduction ............................................................................................................................ 53
S86(3) investment ................................................................................................................. 53
S86(4) investment ................................................................................................................. 56
Example 12.4......................................................................................................................... 57
Transfer procedures .............................................................................................................. 61
Example 2 in 13.4 .................................................................................................................. 62
Chapter 14: Correspondents .............................................................................................. 63
Overview................................................................................................................................ 63
Introduction ............................................................................................................................ 63
Correspondent account statement ........................................................................................ 64
Collection ............................................................................................................................... 65
Fee (receiving instruction and draft summons) ..................................................................... 65
Costs e.g., Sheriff (also e.g., counsel)................................................................................... 65
Collection commission ........................................................................................................... 65
Your 1/3 allowance ................................................................................................................ 65
Payment herewith .................................................................................................................. 66
From the statement: .............................................................................................................. 66
Books of instructed attorney .................................................................................................. 66
Cass example ........................................................................................................................ 73
Summary of steps.................................................................................................................. 74
Books of instructing attorney ................................................................................................. 77
Example in textbook: ............................................................................................................. 77
Example 14.5.2...................................................................................................................... 79
Class example: ...................................................................................................................... 81
Chapter 15: Conveyancing transactions ........................................................................... 82
Overview:............................................................................................................................... 82
Property transfer process ...................................................................................................... 83
Payment of the purchase price .............................................................................................. 84
Transfer costs ........................................................................................................................ 84
Occupational rent .................................................................................................................. 84
Transfer duty and VAT .......................................................................................................... 84
Upon registration of transfer .................................................................................................. 85
Class example ....................................................................................................................... 85
Class example 2 .................................................................................................................... 90
,Chapters 1&2: Nature and function of accounting and accounting terms and functions
Study material:
• Chapters 1&2 of textbook
• Legal Practice Act
o S34
o Chapter 7: handling of trust monies
• Rule 54 of Legal Practice Council Rules
• Obiter 2012 note by Palmer and Crocker “The payment of trust account interest: the ethical
duties of attorneys towards their clients and the implications of the new Legal Practice Bill
Nature and function of accounting
• Accounting is a language in which financial information is described in monetary terms
(rand value) and communicated to the users of the financial information
o The users need the information to make decisions
o Must be organised systematically to provide information which can be used by the
relevant users
• Basic examples:
o Transactions happen in businesses, like attorney’s practice
o Attorney renders services, needs funds to start business à capital
o Capital can be contributed to the business either by owner or can be acquired from bank
by way of a loan
§ Must then record that funds have arrived, recorded as CAPITAL
o Business needs certain equipment e.g., desks and laptops
§ The funds made available as capital will then be spent on purchase of assets
o If business sells goods, will need to buy trading stock which will be sold
o Attorneys will charge fees to clients which must be recorded as income earnt
§ When income earnt, client will either pay immediately or income will be due to the
attorney and attorney will have claim against client for outstanding fees
o Once income earnt, possible to incur and to pay expenses
§ E.g., rent, salaries, buy stationary, electricity, bills, etc.
§ Expenses may be paid or may be outstanding meaning attorney has liability to settle
outstanding amounts
• Accounting systems
o Systems/rules developed to record transactions which may happen in businesses (see
above for basic examples)
• Objectives of accounting
o Determine what the financial performance was à profits and losses over a period
§ Financial performance also = financial results
§ Measured over a period usually known as financial year
§ How did business perform over a period of time? Was a loss suffered or was a profit
made?
• Concept of profit or loss is determined by difference between income and expenses
§ Financial performance = income - expenses
§ Income statement
o And determine what the financial position is of an entity/business à net worth at a certain
point in time
§ Determined at the end of the financial year
§ Determine financial performance from the entire year, whereas with financial position
is the position at year end “where do we stand now?”
§ What is the business worth at a specific point in time?
§ Financial position = assets - liabilities
§ Balance sheet
Need for financial information
• Why do we need this information?
, • Must know whether goals for business (e.g., budget) was met, what was planned, what
were the results? Did you perform better this year than last year? Make decisions from
these insights
• Accounting is the process in terms of which transactions are
o Identified
§ To know when something is a transaction
o Classified
§ Was it an asset or did you pay for an expense?
§ Was it income?
o Measured
§ Put a Rand value to it
o And captured
§ If money was used to buy assets, reduce funds in bank account and increase
equipment/assets
o In a systematic manner to provide information which
§ Can be analysed and interpreted and which leads to effective decision making
• Users of financial information – who are they and why do they need this information?
o Investors/owners of business
§ Want to evaluate the success of the business, whether they are earning a good return
o Management
§ To determine whether they are doing a good job at managing the business
o Bank/creditors
§ To decide whether to make a loan available or not
§ To determine whether business can repay loan
o Employees
§ To determine whether they have job security
o Government
§ SARS
o Legal practice council (could fall under government)
§ Accounting records of an attorney will contain information on trust funds which must be
disclosed to the LPC
o Clients
Financial reporting frameworks
• NB to follow these rules for consistency, reliability, and transparency
o Need to protect investors to ensure records are not misleading and that the information
is transparent
• Previously SA GAAP à generally accepted accounting practices
• NOW à IFRS and IAS
o International financial reporting standards and International Accounting Standards
o Companies act requires SA Companies to follow these standards/rules in terms of how
to record transactions in books
o Ultimate aim of following these rules: present financial statements to the users
§ Documents in which you report on financial position and financial performance
o LPC rules also require attorneys practices to follow these rules (irrespective of whether
companies act applies)
Forms of enterprises
• Sole proprietorship
o If you are a single-person firm à operate firm in own name, no separate personality, if
insolvent you will be personally sequestrated, no separate taxpayer
• Partnership
o Need at least 2 people to form
o No max limits
o Not a juristic person
• Close corporation
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