Unit -5

NEED OR PURPOSE OF MAINTAINING ACCOUNTS BY LAWYERS

A business enterprise must keep a systematic record of its daily transaction. It is a legal duty. It
helps
to know where its stand and adjudge its performance. This systematic recording of transactions is
known as accounting. Since legal profession is a trade, lawyers are under duty to maintain
systematic accounts relating to the profession.
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 assests and liabilities.
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 also. By knowing his Annual Income , he can
take
steps to improve 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 maintain 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.
Need for Maintenance of Accounts: Keeping accurate records of financial transactions is crucial
for businesses to track their income, expenses, assets, and liabilities. It helps in financial
analysis, decision-making, and meeting legal requirements.
Book of accounts that to be maintained :
Books to be maintained by advocates :
1. Journal entry :
Journal :
The word journal is derived from a
French word ‘jour’ which means a daily, day book or log book. In this book transactions are reco
rded in a
chronological order i.e. in order of dates, as and when they take place.
Importance & Advantages of Journal
a. It provides a date wise record of all business transactions in a methodical
order. So, there’s less chance to leave the transaction unentered.
b. The use of journal ensures the observation of Double Entry system in the
recording of transactions.
c. The transactions recorded in the journals with details of the account debited
and credited and the amount of each transaction.
d. From journal adequate explanation of each entry may be obtained as every
entry in journal is supported by the narration relating to that transaction.
e. The use of journal simplifies ledger as details regarding the business
transaction and are not required to be noted down in the ledger.
f. From legal point of view, journal is more reliable evidence of business
transactions than the ledger.
2. Ledger :
a) ledger is a book of final entry.
b).posting in the ledger is made periodically.
c).The ledger information about a particular account is found at one place only.
d).Recording of transactions in the journal is called journalising and recording of transactions in t
he ledger is called posting.
e).A journal entry shows both the aspects debit as well as credit but each
entry in the ledger shows only one aspect.
f).Journal constitutes basic record for ledger entries.
3. Cash book:
a. Cash Book is a subdivision of Journal.
b.Recording transactions pertaining to cash receipts and payments.
c.Firstly, all cash transactions are
recorded in the Cash Book wherefrom they
are posted subsequently to the respective ledger accounts.
d. All cash receipts are recorded on
the debit side and all cash payments are recorded on the credit side.
e.All cash transactions are recorded
chronologically in the Cash Book.
f. The Cash Book will always show a debit balance since payments cannot
exceed the receipts at any time.
Kinds of Cash Book
Depending upon the nature of business and the type of cash transactions,
various types of Cash books are used. They are:
a) Single Column Cash Book
b) Two Column Cash Book or Cash Book with cash and discount columns.
c) Three Columnar Cash Book or Cash Book with cash, bank and discount
columns.
d) ‘Bank’ Cash Book or Cash Book with bank and discount columns.
e) Petty Cash Book.
a) Single or Simple Column Cash Book This is the simplest form of Cash Book
Is used when payments and receipts are mostly in the form of cash and
where usually no cash discount is allowed or received.
Two Column Cash Book Or Cash Book with Cash and Discount Columns.
This type of Cash Book is used when cash transactions involving discount allowed or received a
re affected.
Three Columnar Cash Book Or Cash Book with Cash, Bank and Discount Columns.
Instead of maintaining the bank
account in the ledger, it is found more convenient if it is included in the Cash Book as Cash Colu
mn.
‘Bank’ Cash Book :
Cash Book with Bank and Discount Columns.
Petty Cash Book:
The word ‘petty’ has its origin from the French word ‘petit’ which means small
The petty cash book is used to record items like carriage, cartage, entertainment expenses, office
expenses, postage and telegrams, stationery, etc.
The person who maintains this book is called the ‘petty cahsier’.
The petty cash book is used by many business concerns to save the much
valuable time.
To prevent over burdening of the main cash book.
4. Final accounts :
a. Trial balance :
Trial balance is a statement prepared with the balances or total of debits and
credits of all the accounts in the ledger to test the arithmetical accuracy of
the ledger accounts.
According to M.S. Gosav “Trail balance is a statement containing
thebalances of all ledger accounts, as at any given date, arranged in the form of
debit and credit columns placed side
by side and prepared with the object of
checking the arithmetical accuracy of ledger postings”.
Features :
i.A trail balance is prepared as on a
specified date.
ii.It contains a list of all ledger account including cash account.
iii.It may be prepared with the balances or totals of Ledger accounts.
iv.Total of the debit and credit amount columns of the trail balance must
tally.
v.It the debit and credit amounts are equal, we assume that ledger
accounts are arithmetically accurate.
vi. Tallying of trail balance is not a conclusive profit of accuracy of
accounts
b. Trading account :
Trading refers buying and selling of
goods. Trading A/c shows the result of
buying and selling of goods. This account is prepared to find out the
difference between the Selling prices
and Cost price.
Advantages of Trading Account
1. The result of Purchases and Sales can be clearly ascertained
2. Gross Profit ratio to Sales could also be easily ascertained. It helps to
determine Price.
3. Gross Profit ratio to direct Expenses could also be easily ascertained. And
so, unnecessary expenses could be
eliminated.
4. Comparison of trading account details with previous years details help to
draw better administrative policies.
C. Profit and loss account:
Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred
to credit side of Profit and Loss A/c.
Gross Loss is transferred to debit side of the Profit
Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss A/c
reveals Net Profit or Net loss at a given time of accounting year.
d. Balance sheet :
1. It shows accurate financial position of a firm.
2. It is a gist of various transactions at a given period.
3. It clearly indicates, whether the firm has sufficient assents to repay its
liabilities.
4. The accuracy of final accounts is
verified by this statement
5. It shows the profit or Loss arrived
through Profit & Loss A/c.
The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and Liabilities
of a business firm and which serves to ascertain the
Financial position of the same on any
particular date.”
Book Keeping:
Book-keeping is concerned with the recording of business transactions in a
systematic manner. This work is mechanical and repetitive in nature. It does not need specialised
skill and knowledge. It is usually entrusted to the junior level employees of the accounts
department who are known as Book-keepers.
Book-keeping is responsible for recording business transactions of financial nature in the books
of original entry. Each transaction is recorded with as many details as possible. The data of the
transactions, quantities and prices involved, the accounts to be debited and credited respectively,
the ledger folio number are all shown systematically. Each entry is made on the basis of
supporting, verifiable
documentary evidence.
Book-keeping is also responsible for posting every transaction to the ledger.
The debit and credit aspects are posted separately to the respective accounts with the correct
amount. In the ledges, the date of the transaction, the journal folio number and the amount are
clearly shown whenever a posting is made into an account.
Balancing of all the ledger accounts and subsidiary books at the end of the
accounting year, is another major work for book-keeping. Each account in the
ledger has to be balanced by totalling both sides of the account and the balance may be debit
balance or credit balance depending on which side of the account shows larger total amount.
Balances have to be carried forward to the subsequent accounting period.
Extracting, Trial Balance is also a task for book-keeping. The Trial Balance
ensures arithmetical accuracy of the accounts maintained. When there is any difference between
the debits and credits, verifying the ledger accounts, posting and balancing is essential to identify
mistakes and adjust the trial balance.
Book-keeping prepares the ground for the important steps of finalisation and interpretation
which are usually performed by “accounting”.
Object of Bookkeeping: The main objective of bookkeeping is to maintain accurate and
systematic records of financial transactions, which helps in assessing the financial health of a
business, making informed decisions, and fulfilling legal obligations.
Double Entry System :
Double entry system
This system was invented by an Italian named Iuco Pacioli in 1494
A. D. and it has spread all over the worldd, becoming as popular as Arabic numerals.
According to this system, every transaction has two aspects. One is benefil receiving aspect or
incoming aspect and the other one is benefit giving aspect or outgoing aspect. The benefit
receiving aspect is said to be a ‘debit’ and the benefit giving aspect is said to be a ‘credit’. For
every transaction, one account is to be debited and another account is to be credited in order to
have a complete record of the transaction. Therefore, every transaction affects two accounts in
opposite direction.
For example, ‘if furniture is purchased for cash’, it is a monetary
transaction. Furniture is benefit receiving aspect, it is debited. Cash is benefit giving aspect, it is
credited.
Therefore, the basic principle, under this system is that for every debit,
there must be a corresponding and equal credit and for every credit there must be a
corresponding and equal debit.
Meaning of debit and credit
The word Debit is derived from the Latin word Debitum which means Due for that. In short, the
benefit receiving aspect of a transaction is known as debit.
The word Credit is derived from the Latin word Creder which means Due
to that. The benefit giving aspect of a transaction is known as credit.
The abbreviations ‘Dr’ for debit and ‘Cr’ for credit are usually used.
By convention, the left hand side of an account is termed as debit side and right hand side of an
account is termed as credit side.
Advantages of Double Entry System
(i) Complete record: Double entry system enables businessmen to keep a complete, systematic
and accurate record of all business transactions.
Details of any transactions or events can be verified at any time.
(ii) Ascertainment of profit or loss: The systematic record maintained under double entry system
enables a business to ascertain the result of business operations for any given period. The owners
can know the profitability of business operations periodically.
(iii) Knowledge of financial position: With the help of Real and Personal
accounts, the financial position of the business can be ascertained with accuracy. This is done by
preparing balance sheet.
(iv) A check on the accuracy of accounts: Under the double entry system
‘Every debit has a corresponding credit’. The arithmetical accuracy of the books can be tested by
preparing a statement called ‘Trial Balance’.
(v) No scope for fraud: The firm is saved from frauds and misappropriations since full
information about all assets and liabilities will be available.
(vi) Tax authorities: The businessmen can satisfy the tax authorities if he
maintains his accounts books properly under the double entry system.
(vii) Amount due from customers: The account books will reveal the amount due by customers,
reminders can be sent to the customers who do not settle
their accounts promptly.
(viii) Amount due to suppliers: The trader can ascertain from the books of accounts the sums he
owes his creditors and make proper arrangements to pay them promptly.
(ix) Comparative study: Results of one year may be compared with those of previous years and
reasons for the change may be ascertined.
The Double Entry System is a fundamental concept in bookkeeping. It means that every
transaction has two aspects - a debit and a credit - which affect two different accounts. This
system ensures accuracy and maintains the accounting equation (Assets = Liabilities + Equity).
Closing of accounts:
Closing of accounts in the context of accountancy for lawyers refers to the process of finalizing
the financial records and transactions of a law firm at the end of a specific accounting period,
usually a fiscal year. This process involves several key steps:

1. Adjustments: Any necessary adjustments are made to ensure that the financial statements
accurately reflect the firm's financial position. This may include recognizing revenue, recording
expenses, and making provisions for any outstanding liabilities.

2. Preparation of Financial Statements: Once the adjustments are complete, the law firm prepares
its financial statements, including the Income Statement (Profit and Loss Statement) and the
Balance Sheet. These statements provide a snapshot of the firm's financial performance and its
assets, liabilities, and equity.
3. Profit Allocation: If there is a profit for the accounting period, the law firm determines how it
will be allocated among the partners or shareholders. This is typically based on predetermined
profit-sharing agreements or the firm's partnership agreement.

4. Closing Entries: Closing entries are made to transfer the balances of temporary accounts, such
as revenue and expense accounts, to the appropriate permanent accounts. This process resets the
temporary accounts to zero for the start of the next accounting period.

5. Retained Earnings: The closing entries also update the retained earnings account, which
represents the cumulative profits or losses of the law firm since its inception. The retained
earnings account is carried forward to the next accounting period.

6. Compliance and Reporting: Finally, the law firm ensures that all financial records and
statements comply with relevant accounting standards and legal requirements. These financial
statements may be used for internal purposes, such as performance evaluation, as well as external
purposes, such as tax filings or reporting to regulatory bodies.

Closing of accounts is an important process that ensures accuracy, transparency, and compliance
in a law firm's financial reporting. It allows for a clear understanding of the firm's financial
performance and helps in making informed business decisions.
7. Distribution of Profits: Once the profit allocation is determined, the law firm distributes the
profits to the partners or shareholders according to their agreed-upon profit-sharing
arrangements. This distribution can take various forms, such as cash distributions or additional
capital contributions.

8. Tax Considerations: Closing accounts also involves considering tax implications. Law firms
need to ensure compliance with tax regulations, including reporting income, deducting expenses,
and paying any applicable taxes. It's important to consult with tax professionals to navigate these
complexities.

9. Audit and Review: Some law firms may undergo an audit or review of their financial
statements by external auditors. This provides an independent assessment of the firm's financial
records and helps ensure accuracy, transparency, and compliance with accounting standards.
10. Financial Analysis: Closing accounts allows law firms to analyze their financial performance
and identify areas for improvement. By reviewing the financial statements and comparing them
with previous periods, firms can make informed decisions to enhance profitability and
operational efficiency.

11. Record Retention: Law firms must retain financial records for a specified period as required
by law and professional regulations. This includes keeping records of transactions, financial
statements, tax filings, and other relevant documents. Proper record retention ensures compliance
and facilitates future audits or inquiries.

Closing accounts is a crucial step in the accounting process for law firms. It enables accurate
financial reporting, profit distribution, tax compliance, and informed decision-making.
Cash and Bulk transaction:
Cash and bulk transactions are two important aspects of financial transactions.

When it comes to cash transactions, it refers to any exchange of goods or services where
payment is made in physical currency, such as coins or banknotes. Cash transactions are
commonly used in everyday situations like buying groceries or paying for services. It's important
to keep track of cash transactions for record-keeping and financial management purposes.

On the other hand, bulk transactions typically involve large quantities or amounts. This can
include bulk purchases, sales, or transfers of goods or assets. Bulk transactions are often done by
businesses or organizations to streamline operations, negotiate better deals, or manage inventory
efficiently. These transactions may require special considerations, such as logistics, storage, and
pricing.

Both cash and bulk transactions have their own significance in financial management. Cash
transactions provide immediate payment and flexibility, while bulk transactions can offer cost
savings and operational advantages. It's important to maintain proper documentation and record-
keeping for both types of transactions to ensure accuracy and compliance with accounting
standards.
Commercial mathematics:
 Commercial mathematics can indeed be relevant in the field of law, particularly in the area of
accounting for lawyers. Lawyers often need to understand financial statements, analyze financial
data, and navigate complex financial transactions when working on cases involving business
disputes, mergers and acquisitions, bankruptcy, or fraud investigations.

In the context of accounting for lawyers, commercial mathematics can help lawyers interpret
financial statements, calculate damages or losses in legal disputes, assess the financial health of a
company, and evaluate the financial impact of legal decisions. It can also be useful in
understanding tax implications, conducting forensic accounting investigations, and valuing assets
or businesses.

Having a solid understanding of commercial mathematics can enhance a lawyer's ability to

provide sound legal advice, negotiate settlements, and present financial evidence effectively in
court. It allows lawyers to analyze financial data and make informed decisions based on the
financial implications of legal matters.
PLACE OF KEEPING THE ACCOUNTS BOOKS.
The accounts books and documents relating to the accounts should be kept and maintained by the
advocate,
(i) At his office.
(ii) Where he is carrying on the profession more than one office, then at his head office. But
accounts can also be maintained separately for each branch at the respective branch office.
Penalty for not keeping Account Books: A Lawyer who is legally liable to maintain account
books, fails to maintain it or fails to retain it for the prescribed period (cash book and ledger-16
years, other books-8 years) is liable to pay penalty ranging from Rs.2000/- to 1,00,000/- (S.271
A ). Bar council Rules relating to accounting Accounting is an art of recording, classifying and
summarizing in a significant manner the event which are financial in character and interpreting
the result there of . An Advocate is under a duty to maintain proper accounts of money received
from his client and the amount received on behalf of client from others or from the court. The
rules relating to such accounting is dealt in rules 25 to 32 of the Bar Council Of India Rules
1975.

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 hi 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.

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.

The accounting year is 1st April to 31 st March next year.

1. Cash book : It is the book in which the amount 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 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 with serially
numbered receipt forms 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.

The ledger account of an advocate shall contain the following heads.

Clients Account : For each and every client separate pages shall be allotted in this
ledger and separate account shall be maintained for them.
(i) Fees Account : In this account the fees received from each and every client shall be
entered separately. From this account the total amount of fees received from all the
clients in a financial year can be ascertained.
(ii) Rent Account.
(iii) Salary Account.
(iv) Library Account.
(v) Printing and Stationary Account.
(vi) Postage and Telegram Account.
(vii) Electricity Charges.
(viii) Conveyance Charges.
(ix) Repair and Maintenance.
(x) Office Miscellaneous Expenses Account.
At the beginning of the ledger book the index may be given with the name of the
different heads of account and their respective pages for easy reference.

Bookkeeping :
in the context of a business is simply the recording of financial transactions.
Transactions include purchases, sales, receipts and payments by an individual
ororganization.
Accounting process includes the bookkeeping function, but is just one part of
theaccounting process.
There are some common methods of bookkeeping such as the single-entry
bookkeeping system and the double-entry bookkeeping system.
IMPORTANCE :
1. Limitation of human memory.
2. Owners and managers being different persons.
3. Preparation of financial statements.
4. Need for financial information.
5. Need of taxation authorities.
6. To know the assets and liabilities.
7. Helps to Planning and Decision making.
8. To improve the position of the business.
Elementary aspects of bookkeeping :
There are some common methods of bookkeeping such as
1. SINGLE-ENTRY BOOKKEEPING SYSTEM
2. DOUBLE-ENTRY BOOKKEEPING SYSTEM.
Meaning of Single Entry Book Keeping System :
Under single entry book keeping system, only one aspect of a transaction is recorded, so it is
known as incomplete system of recording transactions. Under it only records of cash and
personal accounts are maintained. In it, accounts relating to debtors ,creditors and cash are
prepared. It ignores all impersonal account like salaries, wages,sales, purchases,etc. It maintains
a cash book and personal accounts but does not record nominal and real accounts. It is not a
reliable system but it is still used by small organizations to keep the records of transactions.
Features of Single Entry Book Keeping System :
1. It maintains only accounts relating to person but it ignores the real and nominal accounts.
2. It prepares the cash book but both personal and business cash transactions are recorded in the
same book.
3. It is suitable to small traders having lesser numbers having lesser number of transactions.
4. It lacks the specific rules of maintaining books of accounts as a result there is no uniformity in
accounts of different firms.
5. Trial balance cannot be prepared under this system.
6. The profit or loss calculated under this system is only a guess.
Meaning of double entry book keeping system :
Double entry book keeping system is a modern and scientific system of recording the financial
transactions. It follows the principle that there are two aspects of each business transaction. Both
of these aspects i.e., one debit and another credit must be recorded in this system of book
keeping. The golden rule for it is that every debit must have a corresponding credit of same
amount.In other words, there are two parties in every transaction, one is giver and another is
receiver. Generally, the account of receiver is debited and the account of giver is credited.
Features of double entry book keeping system :
1. Double Effect- In it, every transaction has two fold effects i.e., debit and credit.
2.The double aspects of a transaction are recorded in opposite side of two
different accounts.
3. Equal effect- The amount of debit and credit aspects must be equal in terms of monetaryvalue.
The same amount of a transaction is shown in two books on opposite sides.
4. Classification of accounts- Under it, accounts are classified into three categories as personal
account, real account and nominal account.
5. Checking of Mathematical Accuracy- Since the amount is recorded on the debit and credit side
of two separated books, the total amount is always equal to the credit.
6.It helps to find the arithmetical accuracy of accounting records by preparing a trial balance.