Bookkeeping for lawyers: double entry, journal, ledger, cash book, trial balance and final accounts

1. Meaning and objects of bookkeeping

Bookkeeping is the art of recording business transactions in a set of books in a systematic manner, so that the financial position can be known at any time. Accounting is wider: it includes classifying, summarising and interpreting the records. The objects are:

• a permanent and reliable record of every transaction;
• knowing the result of the year (profit or surplus, loss or deficit);
• knowing the position: what is owned and owed;
• knowing the amount due from and to each person (each client);
• evidence for tax and for disputes, including complaints to the Bar Council.

2. The double-entry system

Every transaction has two aspects, a giving and a receiving, and both are recorded: one account is debited and another credited with the same amount. So the total of debits always equals the total of credits, which is the arithmetical check behind the trial balance. The traditional rules of debit and credit are:

• Personal accounts (persons, firms, clients): debit the receiver, credit the giver.
• Real accounts (assets: cash, bank, furniture, library): debit what comes in, credit what goes out.
• Nominal accounts (income and expenses: fees, rent, salaries): debit all expenses and losses, credit all incomes and gains.

Cash and credit transactions. A cash transaction is settled at once (a client pays fees in cash); a credit transaction is settled later (a bill for fees raised now, paid next month). Both are recorded, but in different books: cash transactions in the cash book, credit and other transactions in the journal.

3. The journal

The journal is the book of original entry, in which transactions are first recorded in date order, showing the account to be debited, the account to be credited, the amount and a short narration. Recording there is called journalising. Where a cash book is kept, the journal proper is used for transactions that do not pass through cash: credit fees, opening and closing entries, adjustments and rectification of errors.

4. The ledger

The ledger is the principal book of account, in which all the accounts are kept, each on its own page with a debit side (left) and a credit side (right). Entries are posted from the journal and cash book to the ledger. At the end of the period each account is balanced: the difference between the two sides is the balance carried down.

Its importance: it shows in one place everything about one person or one item; it tells how much each client owes or is owed; it is the source of the trial balance and the final accounts; and for an advocate, the client’s ledger account is the account Rule 25 of the Bar Council of India Rules requires, showing money received, expenses incurred and fees debited, with dates.

5. The cash book

The cash book records all cash (and, in a two-column form, bank) receipts on the debit side and all payments on the credit side, in date order. It is both a book of original entry and a ledger (it replaces the cash account in the ledger). Its forms are the simple cash book, the double-column cash book (cash and bank), and the triple-column cash book (cash, bank and discount). Small everyday expenses are kept in a petty cash book.

Why an advocate needs it: most of his receipts (fees, money for expenses) and payments (court fee, process fee, clerk’s salary) are in cash or bank; the cash balance can be checked daily against cash in hand; every receipt from a client is recorded with its date, which is what Rules 25 to 27 require; and it is one of the books the tax rules prescribe for a legal practitioner.

6. A worked set of entries

Advocate A starts practice on 1 April with Rs. 50,000 in the bank. On 3 April client C deposits Rs. 10,000 for court fee and expenses. On 5 April A pays court fee of Rs. 6,000 for C. On 30 April the case ends; the agreed fee is Rs. 3,000, which A appropriates from C’s balance, and refunds Rs. 1,000 to C.

• 1 April: Bank account Dr. 50,000; to Capital account 50,000 (the advocate brings in capital).
• 3 April: Bank account Dr. 10,000; to C (client) account 10,000 (C is the giver, so credited; A now owes C this money).
• 5 April: C (client) account Dr. 6,000; to Bank account 6,000 (paid for C, reducing what A holds for him).
• 30 April: C (client) account Dr. 3,000; to Fees account 3,000 (fee earned and appropriated under Rule 28; a journal entry, since no cash moves).
• 30 April: C (client) account Dr. 1,000; to Bank account 1,000 (balance refunded; C’s account is now nil).

C’s ledger account shows credits of 10,000 and debits of 6,000, 3,000 and 1,000: a nil balance. That is exactly the account Rule 30 lets C demand. The Fees account shows income of 3,000; the Bank account shows a balance of 53,000.

7. Trial balance

A trial balance is a statement of all the ledger balances on a date, debit balances in one column and credit balances in the other. If the double entry is complete, the totals agree. In the example: debit balance Bank 53,000; credit balances Capital 50,000 and Fees 3,000; total 53,000 on each side. Agreement does not prove there are no errors (an entry omitted entirely, or posted to the wrong client, will not show), but disagreement proves there is one.

8. Closing entries and final accounts

• Closing entries transfer the balances of nominal accounts (fees, rent, salaries) to the profit and loss account at the year end, so that those accounts start afresh next year.
• Profit and loss account (for a professional, often an income and expenditure account): income such as fees on the credit side, expenses such as rent, salaries, library and travel on the debit side; the difference is the net profit or loss.
• Balance sheet: a statement of assets (bank, office equipment, fees due from clients) and liabilities (capital plus profit, amounts held for clients, outstanding expenses) on the last day of the year. Money held for clients is a liability, not income, which is the accounting form of the trustee principle.
• Many individual advocates keep accounts on the cash basis and prepare a receipts and payments account; tax law allows either the cash or the mercantile system of accounting.

9. Commercial mathematics

The syllabus adds elementary arithmetic a lawyer uses: percentages (court fee as a percentage of the claim, GST); simple interest (I = P × R × T ÷ 100; interest on a decree under section 34 of the Code of Civil Procedure); compound interest (in loan and mortgage disputes); discount; and ratio and proportion (sharing among partners or heirs). For example, Rs. 1,00,000 at 9% simple interest for 2 years 6 months gives interest of 1,00,000 × 9 × 2.5 ÷ 100 = Rs. 22,500.

How this is examined

For “What is a ledger? State its importance”, give the definition, its form, posting and balancing, and the five points of importance in section 4. For the cash book, the definition, its kinds and the advocate’s reasons for keeping it in section 5. A short worked entry like the one above, written as a list, lifts a theory answer above the rest.