K.GEETHA M.Com., B.Ed.

, K-SET
ACCOUNTANCY FOR LAWYERS
INTRODUCTION :
Accounting for lawyers introduces the field of accounting with an emphasis on financial
accounting and reporting. It is helpful to learn basic accounting terminology. They will
evaluate business transactions and learn to prepare the Financial statements (Profit and loss
account, Balance sheet) required by the GAAP (Generally Accepted Accounting Principles). It
will help to analyze the financial reports and explore how they are used to make business
decisions. This will introduce the standards utilised by the accounting profession, and will
incorporate current accounting issues from the real world financial statements for
companies such as Pepsi, Nike and others.
Basic accounting knowledge should be beneficial for lawyers to take up the cases : Wills and
trusts, Corporations, Family law, Bankruptcy, Tax law, Securities Law etc.,
NEED FOR ACCOUNTING :
Accounting has been perceived as the language of business. It is a means of communicating
business information to the people directly or indirectly involved with the business. As a
new language is to be learnt to converse and communicate, accounting is also required to
be learnt and practiced for communicating business events.
As the language of business, accounting has many things common with other languages. For
example, the various business activities of a firm are reported in accounting statements
using accounting language. Accounting language for becoming meaningful have two
components, i.e., i)Symbols and ii) Grammatical rules. For example, in accounting,
Numerals, words, debits, credits, balancing etc., are accepted as symbols which are unique
to the accounting discipline. The grammatical rules in accounting refers to the general set of
procedures followed for creating all financial data for the business.
Due to the existence of these identical components i.e., symbols and grammatical rules,
Accounting may be called the language of business.
“ACCOUNTING IS ABOUT ORGANISING, RECORDING, PRESENTING AND ANALYSING FINANCIAL
INFORMATION”
THE AMERICAN ACCOUNTING ASSOCIATION DEFINES “ACCOUNTING AS THE PROCESS OF
IDENTIFYING, MEASURING AND COMMUNICATING ECONOMIC INFORMATION TO PERMIT
JUDGEMENT AND DECISIONS BY USERS OF THE INFORMATION”.
ACCOUNTANCY IS THE LANGUAGE OF BUSINESS. IT IS THE MEDIUM THROUGH WHICH
FINANCIAL ASPECS OF AN UNDERTAKING ARE RECORDED, UNDERSTOOD AND
COMMUNICATED.
Business is one of the sources of earning Income. Whenever a business is started, it requires
investment of certain amount which is called as ”CAPITAL”. With this amount of capital the
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K.GEETHA M.Com., B.Ed., K-SET
business man may deal either with trading business or manufacturing business. In a trading
business he will buy goods at a lesser price and sell the same to others at a higher price. In
the case of manufacturing business, he has to buy raw materials and incur other expenses in
the form of wages and salaries, rent, power, insurance, tax, transport, postal and
telegraphic expenses and so on in the course of production and distribution of goods.
In a small sized business, the transactions are simple and less in number, but in a large sized
business, the transactions are numerous. These business transaction enable the business
man to know the result of his business which can be profit or loss for a given period of time.
In order to know the result of business, a business man has to remember all the
transactions over a period of time. This has given rise to maintenance of a set of accounting
books in which business transactions are chronologically recorded. The systematic recording
of business transactions enable the business man to account for every transaction without
missing any item. Such a system of maintenance of a set of accounting books to record
business transactions is known as “BOOK KEEPING SYSTEM”
NEED OR OBJECTIVES OF BOOK KEEPING : The art of recording business transactions in a
systematic manner is termed as book keeping. It is the name given to a system which is
concerned with recording and summarising business transactions accurately so as to know
the true state of affairs of a business.
Definition of Book Keeping : R.N.Carter in his book on Advanced accounting defines book
keeping as the science and art of correctly recording in books of accounts all those business
transactions that result in the transfer of money or money’s worth.
The objectives of book keeping can be summarises under the following headings :
1. MAIN OBJECTIVES : The main objectives of book-keeping are as follows :
a. To know the result of the business over a period of time. The result of business may
be profit or loss.
b. To know the financial position of a business at a point of time.
c. To maintain all records for a given period to serve as a permanent reference in
future.
d. To know the amount which a business owes to others for having bought goods on
credit basis.
e. To know the amount due to business by others on account of goods sold on credit
basis.
f. To meet provisions of various laws as in the case of Joint Stock Companies which
have to prepare accounts according to the provisions of Companies Act, Insurance
Act, Income tax Act etc.,
2. OTHER OBJECTIVES : The other objectives include :
a. To improve the business on the basis of past performance
b. To know the composition of capital in terms of size, the causes for change in capital
structure and whether maximum use of the same is made
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c. To exercise control over expenses and thereby increase profitability of the business
d. To know the position of cash so that in case of need further amount can be arranged.
e. To meet the requirements of tax and legal authorities.
ADVANTAGES OF BOOK – KEEPING : Accounting information is useful to the following
categories of persons :
A) To the Management of the business :
i) In evaluating various alternative proposals so as to take maximum benefit from
the best alternative
ii) In deciding matters such as elimination of unprofitable activity, department or
product, replacement of fixed assets, expansion of business etc.,
iii) Planning the various activities and planning of revenues and expenses and
arranging for finance in case of need.
iv) Comparing various years account to know the progress or deterioration of the
business and take actions to improve the business.
v) Accounting information helps in providing evidence in a court of law in case of
legal action taken by others
vi) Accounting information helps in assessing the income tax, sales tax and
property tax of the business.
vii) Accounting information constitutes one of the basis for borrowing loans from
external sources
viii) It helps to detect errors and frauds that have taken place in the business

B) To the investors :
i. Types of property owned by the business
ii. Sources and amount of earnings made or losses incurred by the business
iii. Particulars such as stock position, debts owed, debts due etc.,
iv. Whether rate of earning is high or low.

C) To the Employees : It provides information to employees so as to claim fair wages,

bonus and other welfare facilities :

D) To the government :
i. Accounting information helps government to extend subsidies and incentives
and other exemptions to certain types of business.
ii. The industrial progress can be known by the government of the country. It can
formulate industrial policies for further growth and development of industries
iii. It enables the government to assess the income from the industrial sector
iv. It helps in amending various laws or enacting laws governing the functioning of
business enterprises.
v. It helps the government in deciding price control, wage fixation, excise duties,
sales tax etc.,
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K.GEETHA M.Com., B.Ed., K-SET
E) To the consumers :
Consumers are not over charges as selling price is fixed on the total expenses incurred
by adding a reasonable rate of profit.

F) To the prospective investors : It helps the prospective investors in choosing the right
type of investment depending upon the profit earning capacity of the business
enterprises and the profit earned during the past few years.
G) To the new undertakings : New business enterprises decide to start the business based
upon the profit earning capacity and financial position of the existing business carrying
on similar activities.
H) To the creditors and suppliers : Creditors can decide the solvency position of the
business through the accounting information. Similarly, suppliers can also decide
whether goods can be sold in future on credit basis.
SYSTEMS OF BOOK KEEPING : Book keeping can be prepared and maintained under two
systems . They are known as a) Single entry system and b) Double entry system.
SINGLE ENTRY SYSTEM : Kohler in his book Dictionary for Accountants” has defined
Single entry system as a system of book-keeping in which, as a rule, only records of cash
and personal accounts are maintained. It is always incomplete double entry varying with
circumstances. This system is adopted by small business enterprises for the sake of their
convenience. Under this system only personal accounts of debtors and creditors and a
cash book is maintained. This system ignores the two – fold aspect of each transaction.
As only one aspect of the transaction is recorded under this system, it is called as single
entry system. So this system is considered an incomplete and unsatisfactory accounting
system. Accurate system of the operations of the business is also lacking under this
system.
DOUBLE ENTRY SYSTEM : This system of accounting is based on exchange value of every
business transaction. Every business transaction always involves exchange of money or
money’s value. As such we find two aspects in every business transaction, viz., the
receiving aspect and giving aspect. Under this system, every transaction is recorded
twice, one on the debit sider, i.e., the receiving aspect and the other on the credit side,
i.e., giving aspect. For example when a businessman buys goods worth Rs.20000 , he
exchanges money for goods. Similarly when he hires the services of a manager, he gives
the money for having derived the services. Thus every transaction has two aspects, one,
receiving of benefit and another giving benefit and both these aspects are recorded
under this system of book-keeping.
Features of double entry system :
1. It records two aspects of a transaction
2. It records both personal and impersonal aspects of a transaction
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3. While one aspect is debited, its corresponding aspect is credited
4. Because debit and credit aspects of all transactions are recorded, the totals of debit
and credit columns are always equal. This ensures the arithmetical accuracy of
accounts.
STEPS OR PROCEEDURE INVOLVED IN DOUBLE ENTRY SYSTEM OF BOOK KEEPING :
1. Recording of day-to-day transactions
2. Posting in Accounts
3. Balancing of ledger accounts
4. Preparation of Trial balance
5. Compilation of final accounts.
JOURNAL : Journal is a tabular record in which business transactions are analyzed in terms of
debit and credits are recorded in a chronological order prior to being transferred to the ledger
accounts. Because transactions are initially recorded in the journal. It is also referred to as the
book of original entry or primary entry.
JOURNALISING : The process of recording of the transaction in the journal is called
journalizing.
Narration : The statement written to explain a transaction is called Narration.
Steps in Journalising :
1. To identify the accounts involved in the transaction.
2. To see the category of accounts to which these accounts belong, viz., personal account,
real account and nominal account
3. Apply the relevant rules as to debit and credit and find out the accounts to be debited
and credited.
4. Record the transaction in the journal by means of an entry.
Features of journal
1. It is a record in which each days transactions are recorded on the same day
2. Entries are recorded in the journal in the chronological order of dates
3. It gives complete picture of each transaction, as it contains both the debit and credit
aspects of each transaction at one place along with a brief explanation.
4. The journal is a book of prime entry, as all the transactions are recorded first in the
journal
Uses of a journal :
1. Journal provides complete record of each transaction in one place by entering both
debit and credit aspects of each transaction in the journal
2. Journal helps to understand the purpose and the nature of the entry by providing
narration

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3. Journal helps in the understanding of the principles of double-entry system, as entries
are classified into debits and credits
4. Journal makes the detection of errors easy because the entries in the journal are made
date-wise.
Limitations of journal :
1. The work of preparing a journal is laborious and tedious
2. Journal will not be helpful to a business man in knowing the cash balance, bank
balance, debtors balance and creditors balance etc., each day
3. The journal will not provide final information on various matters of business
4. Journal is useful only for a small concern with a low volume of business transactions. It
is not very useful for a big concern with a large volume of business transactions.
LEDGER
A ledger is a book, file or other record containing individual accounts of a business used to
classify transactions and determine their cumulative effect on the accounts.
Need for ledger : Journal records all the transactions in a chronological order as they occur.
As the journal contains numerous transactions it is not possible to ascertain the net effect of
revenue and expenses account. For eg., there may be 100 or more transactions affecting
cash spread throughout the journal. So to ascertain net change in cash, all these effects are
to be brought together in cash account. This is accomplished through ledger. The focus of
ledger is on the individual accounts of the business. In this manner we can show for each
account the cumulative effect of all the transactions which affect that account.
Features of ledger :
1. It is an analytical record of transactions, as transactions are classified in the ledger
2. It is a secondary record as entries in the ledger are derived from the entries in the
journal.
3. It is a book of final entry. All business transactions are first recorded in the journal
and are finally entered in the ledger.
4. It is a permanent record of transactions.
Utility or Advantages of ledger :
Ledger is the life blood of accounting records. It has the following advantages :
1. Individual debtors and amounts owing to them can be easily known. In the same
way, individual creditors and amounts payable to them may be easily ascertained.
Statements for total debtors and total creditors may be prepared with convenience.
2. The assets existing in business and their book values may be known as and when
required
3. Nominal accounts are helpful in giving information about various expenses, losses,
incomes and gains
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4. One aspect of a transaction is recorded on the debit side of account, while the other
aspect is entered on the credit side of the account. This gives the advantage of
automatic checking of accounts. Due to this accuracy of books may be easily checked
by preparing a trial balance.
5. Periodical final accounts in the form of Trading account and profit and loss account
are helpful in ascertaining the profit or loss of a business organization. By trading
account we are able to know the gross profit or gross loss while profit and loss
account is prepared to find out the net profit or net loss.
6. With the help of capital accounts and drawings account, the capital existing in a
business at any time may be ascertained
7. The balances of accounts relating to assets, liabilities and capital are used in the
preparation of balance sheet. Thus the financial position of a business is scientifically
known.
8. Entries in the ledger are regarded trustworthy and reliable. They can be used for
settling disputes and may be produced in a court of law as a reliable evidence.
TRIAL BALANCE : A Trial balance is a statement showing the balances or total of debits and
credits, of all the accounts in the ledger with a view to verify the arithmetical accuracy of
posting into the ledger accounts. Trial balance is an important statement in the accounting
process which shows final position of all accounts and helps in preparing the final
statements.
Features of Trial balance
1. The trial balance is prepared as on a specific date.
2. Trial balance contains the list of all ledger accounts including cash account
3. Trial balance may be prepared with the balances or totals of ledger accounts
4. The total of the debit and credit columns of the accounts must be equal
5. The difference between the debit and credit side of the trial balance points out that
certain mistakes have been committed somewhere.
6. If both the debit and credit sides have the same total, it does not mean that there is
no mistake in accounting.

FINAL ACCOUNTS
Financial statements for an accounting period consisting of Trading, Profit and loss account
and Balance sheet are collectively called final accounts
Objectives of preparing final accounts :
1. To ascertain the net profit or loss of the business for a given period of time
2. To ascertain the financial position of the business at the end of that period.