ACCOUNTING FOR LAW STUDENTS

COALA1-B33

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
Week 1: Lesson 2
Introduction

[What Will Be Covered This Week:]

• Accounting terms and concepts - Legislation and rules
• Define the concepts: Assets, liabilities, owner’s equity, financial position and financial
performance.
• Understand the Accounting system
• Analyze, in tabular form, the effect of transactions on the basic accounting equation.
• Prepare an elementary Statement of Profit and Loss and Statement of Financial
Position for a sole practitioner.
 What will be covered
in today’s lesson?
Accounting terms and concepts:
Legislation

Week 1 Trust Concepts and Business

Money

Lesson 2 The Basic Accounting Equation

The Accounting Cycle

The Financial Statements

 CHAPTER 2
ACCOUNTING TERMS AND CONCEPTS – LEGISLATION AND RULES

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
 Accounting terms and concepts: Legislation
The Legal Practice Act 28
• Purpose: To protect the interests of clients (money held by attorney,
e.g., trust money).
Separate trust bank account
• This is compulsory. Client’s money to be deposited immediately.
Investment of surplus trust money
• Surplus client money can be invested in a separate interest-bearing
account if not immediately needed.
• This can be at the discretion of the practice or the client.
Interest earned on trust banking account and on investments made.
• To be paid over to the Attorneys fidelity fund.
Interest earned on investment of trust money
• Legal Practice Act > 95% to client, 5% to the fidelity fund.

Keeping of proper Accounting records

These records should reflect:
• money received and paid out.
• money invested and interest received.
• it can be trust investments, deceased and insolvent estates.
• any other relevant details.
Trust money – identity of owner unknown
• To be paid over to the fidelity fund after 1 year.
• The owner still retains the right to claim.
BUSINESS CONCEPTS TRUST CONCEPTS
Business money Trust money
• practice’s own funds, separate from the • Money held on behalf of clients. Mostly
client funds. to be held in a trust on behalf of clients.
• Includes fees charged to clients for • Includes money in the trust bank account
services rendered. and trust investments.
• Money reflected in the practice’s bank Trust banking account
accounts (can be more than 1).
• Separate bank account/s for trust funds –
Business creditors should be current account.
• People or institutions the practice owes • Deposits to be made immediately.
money.
• Payments from fund – only cheque or eft.
Trust creditors
• Clients whose money are in a trust.
Trust investments
• - Trust funds which have been invested at
the discretion of the practice or the
client.
 CHAPTER 3
THE BASIC ACCOUNTING EQUATION

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
The Basic Accounting Equation
Accounting entity

• A business is regarded as a separate unit from its owners for

accounting purposes.

ASSETS

• What a business owns.

• According to IFRS framework: A resource controlled by the entity,

because of past events; and from which future economic benefits are
expected to flow to the entity.
 Assets are divided into:

CURRENT ASSETS NON-CURRENT ASSETS

• They have a lifespan of less • They last for more than a

than a year year.
• They can be cash or easily • They are used to generate
convertible to cash economic benefits.
• They are not for resale.

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
The Basic Accounting Equation
LIABILITIES

• Are what a business owes.

• According to IFRS: A present obligation; arising from past events; the

settlement of which is expected to result in an outflow from the

entity of resources embodying economic benefits.

 Liabilities are divided into:

CURRENT LIABILITIES NON-CURRENT LIABILITIES

• Payable within a year. • Payable over a period

longer than 1 year.

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
The Basic Accounting Equation
OWNER’S EQUITY
• According to IFRS- the residual interest in the assets of the entity
after deducting all its liabilities.
CAPITAL INCOME EXPENSES DRAWINGS
According to IFRS: -
Money or assets Money received. E.gs: Decreases in economic Money withdrawn by
contributed by the fees earned, sales, benefits during the the owner for
owner to the business. interest income. accounting period; in personal use.
the form of outflows
or depletion of assets
or incurrences of
liabilities; that result
in decreases in equity;
other than those
relating to
distributions to equity
participants.
Test your knowledge

Give examples of current asset and non-current

assets.

List 3 types of non-current liabilities.

Name examples of expenses

How would you classify a trust creditor?

 CHAPTER 4
THE ACCOUNTING SYSTEM

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
THE ACCOUNTING CYCLE
Effects of transactions on the accounting equation

Assets = Owner’s equity + Liabilities

Current Capital + Current
Non-current Income + Non-current
Drawings -
Expenses -
Effects of transactions on the accounting equation
DOUBLE ENTRY SYSTEM
means that for every debit entry there must be an equal
corresponding credit entry.
STEPS TO FOLLOW:
•Read the transactions carefully
•Identify two accounts
•Classify the two accounts
•Are they increasing or decreasing?
•Refer to the rules for debiting and crediting ledger accounts –
•Amount to be recorded
Double entry: Increase & Decrease of different
elements
Assets = Capital - Drawings + Income – Expense + Liabilities
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
+ - - + + - - + + - - +
•Income increases equity, whereas expenses decrease equity.
CLASS ACTIVITY
 Record the transactions for January 2020 in
the Accounting equation for JJ
• 1 Owner deposits R100 000 into the business bank account
• 12 Bought vehicles for R50 000, cash.
• 16 Services were rendered for cash to the amount of R480.
Activity • 25 Bought equipment on credit for R10 000.
• 26 A cheque was issued for the receptionist’s salary to the
amount of R1 550
• 29 Received R700 from a debtor in settlement of his
account.
 SOLUTION

ASSETS = OWNER’S EQUITY + LIABILITIES

+ R100 000 + R100 000 0

- R50 000 0 0
+R50 000
+ R480 + R480 0
+ R10 000 0 + R10 000
- R1 550 - R1 550 0
+ R700 0 0
- R700
 CHAPTER 18
THE FINANCIAL STATEMENTS

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
 Elementary Statement of Profit or Loss OR The Statement
of Financial Performance
Statement of Profit or Loss
- It is a report compiled to determine the net profit or loss for the business for a
certain period.

- Expenses for a period are subtracted from the income of that specific period.

- If the income is more than expenses, then the business makes a profit.

- If the expenses are more than income, the business incurs a loss.

Income – Expenses = Net Profit / Loss

Statement of profit or loss – basic (To what extent did the
company achieve its main objective – to make profit?)
Elementary Statement of Financial Position

• Previously balance sheet.

• It reports on the financial position of a business at a specific time.
• It is based on the elements of the accounting equation: Assets, Liabilities
and Owner’s Equity.
• The difference between the value of assets owned and the liabilities
incurred represents the net asset value.
Owner’s Equity = Assets - Liabilities
Statement of financial position – basic (based on the
accounting equation – Assets= Equity + Liabilities)
Financial Statement Activity
Refer to past question papers and/or the prescribed textbook
What Happens Next?

• Throughout next week, you will learn about Value-added Tax (VAT)

in an attorney’s practice

• The journals (Books of Prime Entry).