Learning unit 1/2022

FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

1 THE NATURE AND FUNCTION OF ACCOUNTING

Contents
1. Introduction ............................................................................................................................. 2
1.1 What is accounting? ................................................................................................................ 2
1.2 The nature of accounting......................................................................................................... 3
1.3 Forms of ownership and users of financial statements ............................................................ 3
1.4 Internal controls....................................................................................................................... 4
1.4.1 Built-in control measures ............................................................................................. 4
1.4.2 Internal control systems/procedures ............................................................................ 5
1.5 Financial frameworks .............................................................................................................. 6
1.5.1 The Conceptual Framework ........................................................................................ 6
1.5.2 Accounting standards and statements......................................................................... 7
1.5.3 Accounting policies ..................................................................................................... 7
1.5.4 Fundamental theoretical principles that all general financial statements must be based
on in terms of the IAS .................................................................................................. 8
1.6 Financial statements ............................................................................................................. 10
1.6.1 The statement of financial position ............................................................................ 11
1.6.2 The statement of profit or loss and other comprehensive income .............................. 13
1.7 The double-entry principle ..................................................................................................... 14
1.8 What is a contra account? ..................................................................................................... 15
1.9 Word search.......................................................................................................................... 15
1.9.1 Find the accounting terms ......................................................................................... 15
1.9.2 Solution ..................................................................................................................... 16
1.10 Accounting crossword puzzle ................................................................................................ 17
1.10.1 Crossword puzzle.................................................................................................... 17
1.10.2 Crossword clues...................................................................................................... 17
1.10.3 Solution ................................................................................................................... 19
1.11 Flashcards ............................................................................................................................ 19

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Acronyms

CF Conceptual Framework for Financial Reporting

IFRS International Financial Reporting Standards
IASB International Accounting Standards Board
FRSC Financial Reporting Standards Council (South African Body)
SAICA South African Institute of Chartered Accountants
The Rules Rules of the Attorneys’ Profession
IAS 1 Presentation of Financial Statements

1. Introduction
Accounting is the bookkeeping method, which generates a financial record of all the business
transactions entered into by a business (entity). An accounting system generates the financial
records of the business and produces a summary of the income and expenses (statement of
profit or loss) and assets and liabilities (statement of financial position). Therefore, the
accounting system generates financial information in the format of financial statements.

As the physical and digital worlds have integrated over time, today's accounting information
systems are typically computer-based methods with special accounting software. Whether the
accounting information is computerised or written up by hand the principles of the debits,
credits and the double-entry system are still relevant and form the basis for the accounting
system. This module deals with the financial accounting concepts and principles that are
relevant to law practitioners as well as the accounting and recording of transactions that are
specific to the practice of a law practitioner.

1.1 What is accounting?

Accounting is a process consisting of the following three activities:

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The first activity involves identifying those events that are evidence of economic activity
(transactions) relevant to the particular business or entity.

and
The second relates to the recording of the monetary value of the economic events (transactions)
in order to provide a permanent history of the financial activities of the business. Recording
involves keeping a chronological diary of measured events in an orderly and systematic fashion.
This means that economic events are also classified and summarised.

and
The third activity encompasses the communication of the recorded information to interested users.
The information is communicated through the preparation and distribution of accounting reports,
the most common of which are known as financial statements.

1.2 The nature of accounting

Accounting is a means of communication used to convey Accounting uses words and figures to
specialised information about the finances of an entity. convey financial information to the users
of such information. These words and
If the recipient of this specialised information (the user of figures are known as the
financial information) does not understand it, the ➢ concepts,
information, which is conveyed, will have no value. ➢ principles, and
➢ procedures of accounting.

This knowledge will ultimately result in an understanding of the message contained in financial
statements

Every person involved in an entity uses financial

Accounting is a ‘‘language’’ used to
information to a greater or lesser extent.
Financial resources are limited, or ‘‘scarce’’, and if convey financial information to
we are to spend them we must plan properly. interested parties, i.e. users of the
Each of us also needs to know something about information.
accounting to manage our personal financial affairs.
Knowledge of accounting is thus also useful in this area.

1.3 Forms of ownership and users of financial statements

The four main forms of ownership are: Many users who analyse the information for various
➢ sole traders decision-making purposes, require financial information.
➢ partnerships The following are the most common users:
➢ close corporations ➢ Investors
➢ companies ➢ Creditors
➢ Employees
➢ Government
➢ Management

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Users of financial information – The fields of accounting –

Are divided into the following two ➢ Financial accounting is concerned with the provision of
categories: financial information to mainly external parties,
➢ Internal users, such as ➢ Management accounting is concerned with the
management or employees provision of financial information to people within the
➢ External users, such as investors, entity.
creditors, or government

Financial Accounting is concerned with the recording of transactions and the preparation of the
financial statements for the entity as a whole. International Financial Reporting Standards (IFRS)
govern financial accounting reporting, which consists of adhering to external international
standards. These standards ensure the comparability of financial statements between entities
and countries.

Management Accounting provides financial information for specific purposes. Managers use
this information in their decision-making, which leads to the attainment of the objectives of the
entity. Without this financial information, it would be difficult for management to manage the
business effectively.

In this module, we will be concentrating on financial accounting.

1.4 Internal controls

Rules 54.14.7.1 (54.14.7.1.1 to 54.14.7.1.4) of the Rules of the South African Legal Practice
Council (hereafter referred to as the Rules) require that internal controls are implemented to
ensure compliance with the rules and to ensure that trust funds are safeguarded.

Internal controls are the mechanisms, rules, and procedures put in place by an entity to ensure
the integrity of financial and accounting information, promote accountability and prevent fraud.
Internal control further ensures that the financial information provided by such a system is
complete, accurate and reliable, that the assets of the entity are protected against loss or fraud,
that management policies are implemented and that all parts of the system function properly.
The success of any accounting system depends on a good system of internal control. An
attorney’s practice is particularly dependent on such a system for its continued existence.

Internal control systems must be designed to suit the type of entity concerned, for example, a
sole proprietor, a partnership, or a personal liability company.

1.4.1 Built-in control measures

Built-in control measures include:

➢ numbered source documents
➢ dates on source documents

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➢ control accounts in respect of clients (also debtors or trade receivables) and trust creditors
(also known as trust payables)
➢ separate bank accounts (business and trust bank accounts)
➢ the keeping of petty cash according to the imprest1 system.
➢ the accurate analysis of all income and expenses
➢ a monthly trial balance which ensures that all accounts are properly balanced
➢ the reconciliation of bank accounts with bank statements
➢ the reconciliation of business creditors (also known as trade payables) with creditor
statements
➢ a non-current asset register.

1.4.2 Internal control systems/procedures

Internal control procedures include separation of duties, access controls, physical audits,
standardised documentation, trial balances, periodic reconciliations, and approval authority.

1 The imprest system is a financial accounting method for paying out and subsequently replenishing a fund
such as petty cash. At any point in time the cash on hand plus the value of the petty cash vouchers for
expenses paid should be equal to the original fixed imprest petty cash amount.
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Examples of internal control procedures are:

➢ efficient banking of all cash received
➢ all payments must be made by EFTs (electronic fund transfers)
➢ proper authorisation for all transactions
➢ proper demarcation (limits) of authorisation
➢ the separation of duties (e.g. the person who issues receipts may not record them in the
relevant cash receipts journals)
➢ an internal checking system (e.g. at least two staff members to check important
transactions; rotation of staff etc.)
➢ keeping registers for receipt books, invoice/debit notebooks and credit notebooks
➢ keeping unused receipt books, invoice/debit notebooks and a credit note
➢ the review of receipts against deposits
➢ the initialling of changes and receipts
➢ cash to be banked regularly
➢ only authorised signatories are allowed to sign on behalf of the entity
➢ no cash to be issued.

1.5 Financial frameworks

Rule 54.6 requires that a law firm shall keep in the official language of the Republic such
accounting records, which record both business account transactions and trust account
transactions. The rules also require the preparation of financial statements, which reflect fairly
the state of affairs and business of the firm and explain the transactions and financial position
of the firm. The financial statements must also comply with an acceptable financial framework
as applied in South Africa.

The financial frameworks that are acceptable in terms of the Rules are:
➢ the International Financial Reporting Standards (known as “IFRS”), and
➢ the International Financial Reporting Standards for Small and Medium Entities (known as
“IFRS for SMEs”)
The International Accounting Standards Board (IASB) issues these frameworks from time to
time.

1.5.1 The Conceptual Framework

Accounting, as a specialised medium of communication (refer 1.2 above), has its own specific
language (language of business) or jargon. If each business were to prepare financial
statements and reports according to its own accounting rules and its own interpretation of
accounting theory and principles, there would be chaos in the world of economics and
business.

The conceptual financial framework is a group of interrelated objectives and theoretical

principles that serve as a frame of reference for financial accounting and more specifically for
general purpose financial reporting. The objective of the conceptual framework is to provide
information that is useful to potential and existing investors, lenders, and other creditors.
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All general-purpose financial statements must have the same objectives and must be based
on the same fundamental theoretical principles. The objective of general purpose reporting is
to provide financial information about the reporting entity that is useful to existing and potential
investors, lenders, and other creditors in making decisions about providing resources to the
entity. These decisions involve buying, selling, or holding equity and debt instruments, and
providing or settling loans and other forms of credit. Potential and existing investors are
interested in the returns they expect, while creditors and other lenders are interested in
principal repayments and interest payments they expect.

The objective of creating standardised accounting rules, called accounting standards, for
particular issues (e.g. for the treatment of taxation in financial statements etc.) is to limit the
variety of available accounting practices and eliminate undesirable alternatives. The
accounting standards are not always rigid rules. Some standards allow more than one
desirable alternative.

1.5.2 Accounting standards and statements

In South Africa, the Financial Reporting Standards Council2 (FRSC) plays an important role in
the development of IFRS. The standardised accounting rules of the International Financial
Reporting Standards3 (IFRS) and the International Accounting Standards4 (IAS) are the
documented generally accepted accounting standards and practices as prepared by the
International Accounting Standards Board (IASB), approved by the FRSC for use in South
Africa and thereafter issued by the South African Institute of Chartered Accountants (SAICA).

The objective of creating accounting standards for particular issues (e.g. for the treatment of
interest paid in financial statements) is to limit the variety of available accounting practices, but
without striving for strict uniformity or creating a set of rigid rules for all circumstances. The
ultimate aim of accounting standards is to encourage widespread use of particular standards
in financial reporting and to eliminate undesirable alternatives.

1.5.3 Accounting policies

Transactions of a repetitive nature frequently occur, and the requirement of consistency means
that an entity must establish an accounting policy, which determines how such transactions
will be treated.

LBL
An accounting policy is thus a set of decisions about how the entity
will treat the same type of transactions in order to ensure consistent
performance.

In the case of transactions that can be dealt with in various ways, it is necessary that the entity
disclose the accounting policy it adopted in its notes to the financial statements. For example,

2
Financial Reporting Standards Council –
http://www.thedtic.gov.za/wp-content/uploads/FRSC-Rules_Procedure.pdf
3
International Financial Reporting Standards – https://www.ifrs.org/
4
International Accounting Standards
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an entity has to indicate what basis it has used to deal with the depreciation of property, plant
and equipment.
1.5.4 Fundamental theoretical principles that all general financial statements must be
based on in terms of the IAS

(a) Underlying assumptions

In accordance with the conceptual framework for financial reporting and the framework for
the preparation and presentation of financial statements issued by the IASB, the financial
statements are prepared on the accrual basis and based on the assumption that the
business is a going concern.

(i) Going concern (ii) Accrual basis

A business is a going concern when it will The effect of transactions and events
continue to trade in the foreseeable future on a business’s resources must be
and is not likely to cease trading imminently included in the periods in which those
and have its assets liquidated (sold off). The transactions and events occurred and
elements of the financial statements, i.e. not when the cash flow took place.
assets, liabilities, owners’ equity, income and Expenses incurred to produce income
expenses will thus be included in the financial must be included in the same financial
statements at their original cost less period, even if they occurred in
depreciation/impairment and not at different periods. This is referred to as
liquidation values (forced selling values). the “matching of costs with revenue”.

(b) Fundamental qualitative characteristics

The information in the financial statements must be useful to the users of the statements.
To be useful, the information should be relevant and faithfully presented.

(i) Relevance (ii) Faithful representation

Only relevant information needs to be Financial information must faithfully
disclosed separately in the financial represent transactions and other
statements. The relevance of the information events. The following characteristics
is based on the nature and materiality of the will ensure faithful representation:
information.

Materiality Nature
Information that is significant enough In certain instances, the nature of the
is disclosed separately. Minor items information alone is sufficient to determine its
are included in the financial relevance, for example, where information,
statements but are not separately irrespective of its materiality, can affect the
disclosed. decisions of the user.

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Completeness
All the information that a user needs in order to be able to understand the
economic events and transactions should be included in the financial
statements.

Neutrality
Reliable information should be neutral (without bias) in that it should not
present information in a manner that will achieve a predetermined result.

Free from error

The faithful representation of information does not imply that the information is
accurate. It implies, however, that the event or transaction is free from error
and that the process followed to provide the reported information was without
errors.

(c) Enhancing qualitative characteristics

The enhancing qualitative characteristics improve decision-usefulness of financial
reports. The conceptual framework also recognises that the enhancing qualitative
characteristics cannot make information useful if that same information is irrelevant or
not faithfully represented.

Comparability
Information should be comparable between different entities or time periods.

Verifiability
Independent and knowledgeable observers are able to verify the information.

Timeliness
Information is available in time to influence the decisions of users.

Understandability
Information shall be classified, presented clearly and concisely.

(d) The cost versus the benefit of financial reporting

The cost of providing financial reporting must be justified by the benefits of reporting that information.

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1.6 Financial statements

The objective of financial statements is to provide information about the financial position,
financial performance, and cash flows of an entity that is useful to a wide range of users in
making economic decisions. To meet that objective, financial statements provide information
about an entity's:
➢ assets
➢ liabilities
➢ equity
➢ income and
➢ expenses, including gains and losses contributions by and distributions to owners (in their
capacity as owners)
➢ cash flows [IAS 1.9].

In terms of IFRS, a complete set of financial statements of an entity should comprise the
following:

which reflects all assets, liabilities and equity of

a statement of financial position
an entity at a particular date

which reflects the financial performance of the

a statement of profit or loss and
entity, indicating a net profit or loss for a specific
other comprehensive income
period

which reflects the movement in:

(a) the capital and current accounts of the
a statement of changes in equity partners in a partnership; or
(b) the shareholding and retained profits or losses
of a company for a specific period

which reflects the actual cash movements in and

a statement of cash flows
out of the entity for a specific period

which reflect the accounting policy of the entity

and expand on the line items in the statement of
notes to the financial statements
financial position and the statement of profit or
loss and other comprehensive income

Before we can discuss the basics of accounting, we need to know what the statement of
financial position and the statement of profit or loss and other comprehensive income consist
of.

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In terms of the Conceptual Framework, the information that must be used in the preparation
of financial statements is grouped into elements according to their economic characteristics,
which make up the financial statements. These elements are grouped under two headings,
namely, the elements that pertain to the financial position in the statement of financial position
and the elements that pertain to the financial performance in the statement of profit or loss
and other comprehensive income.

Statement of Statement of
financial Statement of financial
position at the financial Contributions position at the
beginning of performance by and end of the
the period distributions period
to equity
Assets minus Income holders Assets minus
liabilities minus liabilities
equals equity expenses equals equity

1.6.1 The statement of financial position

The statement of financial position provides information about the following:

➢ The economic resources available to the entity to generate future benefits.

➢ The financial structure of the entity with emphasis on own and borrowed capital, which
may also be used to predict future borrowing needs.
➢ The liquidity position of the entity. Liquidity is an entity’s potential ability to pay its short-
term debts. In other words, it is the availability of cash and other items, which can easily
be converted into cash to pay short-term debt. This information may also be used to
predict the availability of cash, after settling debts for the same period.
➢ The solvency of the entity’s position. Solvency refers to the extent to which an entity’s
assets exceed its liabilities. It may also be used to predict the availability of cash over
longer periods to meet debts as they fall due.
➢ The elements that are directly related to the financial position are assets, liabilities and
equity.

(a) Assets
Assets are defined as a present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce economic benefits.

The asset definition identifies all cash accounts as assets because the economic benefits have
already flowed to the entity. In other words, bank accounts, savings accounts, petty cash
accounts and cash float accounts are classified under assets if the balances are favourable.

There are also items, which are expected to result in future economic benefits flowing to the
entity, i.e. trade receivables (also called debtors or client accounts). Debtors are
individuals/firms, which owe money to the entity. The money they owe is expected to flow to
the entity in future (a potential inflow) when the debtors pay their accounts.
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All items that an entity has control over or can be resold will be regarded as assets. These
include inventory, vehicles, property, equipment, furniture etc. Stationery and other
consumables are meant to be consumed by the entity within one year and are therefore treated
as expenses during the year. At year-end, if there are material consumables and stationery on
hand, it is considered to be inventory, and a stocktake will be done to determine a value for
the statement of financial position.

(b) Liabilities
Liabilities are debts. If you have a liability in financial terms, it means that you owe money to
someone or some entity. A liability is defined as a present obligation of the entity to transfer
an economic resource as a result of past events. Examples of liabilities are mortgages, loans
from owners, loans from banks and other external parties, accounts payable (creditors) and
bank overdrafts.

(c) Owners’ equity

Equity is defined as the residual interest in the assets of the entity after deducting all its
liabilities. Equity represents the interest of the owners in the net assets of an entity, which
means the part of the assets against which there is no claim from other parties.

Equity differs from liabilities in that liabilities are obligations which must be settled out of the
assets of the entity, while equity is not an obligation which has to be settled. Equity is not a
claim against assets; it is what is left over after all liabilities are deducted from assets.

There are two methods by which the owner’s equity in an entity can be calculated.

➢ The first method is to make use of the basic accounting equation. If you have the total
value of the assets of the entity, as well as the total value of the liabilities of the entity,
then you can calculate the owner’s equity by subtracting the liabilities from the assets.
The figure you arrive at should indicate how much money the owner(s) may withdraw
from the entity if the business activities were to be terminated on that day.

Equity = Assets ― Liabilities Notes

– or + – or + – or + A decrease in an account is a – and

an increase in an account is shown
as a +

➢ Equity can also be expressed in terms of the basic accounting equation given below:

Assets = Equity + Liabilities Notes

– or + – or + – or + A decrease in an account is a – and

an increase in an account is shown
as a +

Refer to 2.3 for a discussion of the accounting equation and illustrated examples.

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The second method that can be applied to calculate the value of the owner’s equity in the entity
is to do the following calculation:
➢ In the case of a sole proprietor or a partnership:
Capital contributions by the owner/partners, plus profits (past and current) of the entity,
minus drawings by the owner/partners.
➢ In the case of a company:
Issued share capital, plus accumulated reserves, plus retained earnings (accumulated
profits minus accumulated losses).

1.6.2 The statement of profit or loss and other comprehensive income

Profit is used as a measure of performance or as the basis for other measures such as return
on investments or earnings per share. The elements that are directly related to the financial
performance are income and expenses. Profit for the year is calculated by subtracting the
expenses from the income of an entity. [Profit = Income less expenses]

(a) Income

Income is defined as increases in assets or decreases in liabilities that result in increases in

equity, other than those relating to contributions from holders of equity claims. The entity earns
income through its normal everyday business operations.

For instance in the case of the sale of goods, the inflow of assets will be the money banked in
the bank account and the increase in profit is an increase in equity. Income consists of revenue
and gains. Revenue arises from the ordinary business activities of the entity and examples are
sales, fees, interest, dividends and rental income. Gains may or may not arise from ordinary
business activities of the entity. An example of a gain that arises from the ordinary business
activities is a profit on the sale of depreciable non-current assets such as machinery. Examples
of gains that do not arise from ordinary business activities are profit on the sale of office
buildings and profit on the sale of non-current assets.

Revenue and gains

Revenue and gains arising from ordinary Gains not arising from ordinary
business activities business activities
➢ sales ➢ profit on the sale of office buildings,
➢ fees and
➢ interest received ➢ profit on the sale of non-current
➢ dividends assets
➢ rental income
➢ profit on the sale of depreciable non-
current assets such as machinery

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(b) Expenses
Expenses are defined as decreases in assets, or increases in liabilities that result in decreases
in equity, other than those relating to distributions to holders of equity claims. Expenses are
costs incurred by the business in order to run the business for the financial accounting period.

Expenses consist of losses as well as those expenses that arise in the course of the ordinary
activities of the entity. Examples of expenses are advertisements, purchases of trading stock,
salaries and wages, stationery, depreciation and losses on the sale of non-current assets.

1.7 The double-entry principle

An account consists of a left-hand side and a right-hand side and is presented in a “T” format.
The left-hand side is referred to as the debit side and the right-hand side is referred to as the
credit side. The name of the “T-account” is written across the centre at the beginning of each
account (i.e. Motor vehicles).

The double-entry principle states that for every debit entry into an account, there must be a
corresponding credit entry into another account. Each entry refers to its corresponding entry
in the other account.

The double-entry principle is easily demonstrated using the following accounting equation:

Assets = Equity + Liabilities

A = E + L

The accounting equation should always balance.

Take note of the following important points:

➢ A minimum of 2 accounts must always be used.

➢ The equation must always remain in balance (i.e. each debit must have a
corresponding credit)
➢ A transaction can occur on one side of the equation only, for example:
– An entity purchases equipment for cash. You will credit the asset – bank (decrease
cash) – and debit the asset – equipment (increase equipment)
– A debtor settles his account owed to the entity. You will credit the asset – debtors
control by the amount paid (reduce debtor) – and debit the asset – bank (increase
cash).

The reality for a financial accounting student is that the double-entry rules are not a concept
to understand – They are rules to be learnt.
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When analysing a transaction, always ask the following four questions:

1. Which two accounts are involved in the transaction?

2. Do the accounts form part of assets, equity or liabilities?
3. Did the assets, equity or liabilities increase or decrease?
4. Which one of the accounts must be debited and which one must be credited?

1.8 What is a contra account?

As a general rule, we use the opposite or contra account to describe the transaction. In this
transaction, the contra account is capital. The source of this increase to the bank account
is capital – the owner investing in the business. If we were to describe each transaction
occurring within the T-account above as "bank," it would not adequately describe why our bank
account increased or decreased. All transactions would just be listed as "bank."

Using the opposite or contra account gives us a much better description of the transaction.

1.9 Word search

1.9.1 Find the accounting terms

T F R T L M A T E R I A L I T Y
C D E P R E C I A T I O N Q R I
X E E U S A D P R O F I T Z J M
G B R B H C N G E P U N U Q W L
C I P M T C O S E U R C E C K I
R T R Q A O G H A R N O F A C A
W M O E M U R Y P C I M V I O B
I H P X H N R S D H T E F N Z I
D Z E P F T D R L A U I A V B L
G C R E D I T O R S R Q O E A I
M Z T N G N Z R T E E W C N N T
O K Y S T G J A S S E T R T K Y
K J F E V F V F U H T U E O F H
N Y F S E Q U I T Y O S D R M A
E Q U I P M E N T J A D I Y O O
C Q V D O U B L E - E N T R Y A

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Accounting Property Creditors Expenses

Debit Equipment Journal Profit
Credit Furniture Ledger Materiality
Transaction Debtors Depreciation Purchases
Income Inventory Equity Bank
Asset VAT Liability Double-entry

1.9.2 Solution

Notes

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1.10 Accounting crossword puzzle

1.10.1 Crossword puzzle

13 4

5 15

6 7

8 9

10

11 16

17

12

14

18

1.10.2 Crossword clues

Across Down
2. The residual interest in the assets of the 1. A complete collection of all the accounts and
entity after deducting all its liabilities. (6) transactions of a company. (6)
5. Any items that are bought with the 3. A present obligation of the entity to transfer
intention of selling the item to a customer. an economic resource as a result of past
(9) events. (8)
10. An instructed attorney acting on an 4. A qualitative characteristic of accounting
instructing attorney’s behalf. (13) information that makes a difference in
11. An accounting entry that either increases decision-making. (9)
an asset or expense account or 6. What money must be deposited in a
decreases a liability or equity account. (5) separate banking account? (5)
12. A tax that governments impose on income 7. A concept or convention within accounting
generated by businesses and individuals. relating to the importance/significance of an
(6) amount, transaction, or discrepancy. (11)
14. All transactions with credit suppliers will 8. A set of rules or procedures, which are
be recorded in the ........... ledger. (9) followed by an entity to prepare its financial
15. The acronym for Value Added Tax. (3) statements. (6)

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18. Any items sold to customers in the normal 9. An accounting entry that either increases a
course of business. liability or equity account or decreases an
asset or expense account. (6)
11. All transactions with credit customers will be
recorded in the ......... ledger. (7)
13. Acronym for “Basic Accounting Equation”.
(3)
16. A present economic resource controlled by
the entity because of past events. (5)
17. A .......... is a detailed record of all the
transactions done by a business. (7)

Word Bank

Policy Credit Correspondent Equity Liability

Income Debit VAT Debtors Ledger
Purchases Relevance Creditors Asset Sales
Trust Materiality Journal

Notes

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1.10.3 Solution

1 L
2 E Q U I T Y
D
G 3 L
E B 4 R I
5 P U R C H A S E S 15 V A T
E L B
6 T E 7 M I
R V A L
8 P 9 C U A T I
10 C O R R E S P O N D E N T
L E T C R Y
I D 11 D E B I T 16 A

C I E A S
Y T B L 17 J S
T 12 I N C O M E
O T U T
14 C R E D I T O R S Y R
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18 S A L E S

1.11 Flashcards

A flashcard is a card containing little information, i.e. a question or a statement, with the answer
or description on the back. A flashcard can be used as an aid to learning by increasing your
retention of information. (Print out the pages with the flashcards, cut out the shapes and stick
the statement and answer back to back. Use the flashcards to test your knowledge.)

The following flashcards relate to accounting transactions:

(a) Identify how each of the following transactions affects the assets, liabilities or equity of
the business.

1.
Increase in Assets
Increase in Equity
The owner pays capital into the bank.
2. Increase in Assets
Increase in Liabilities

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Goods are purchased on credit terms.

3.

Goods are purchased for cash. Assets increase and decrease

4.

Equipment is sold for cash. Assets increase and decrease

5.

Decrease in Assets (Bank)

Accounts payable is settled in cash.
Decrease in Liabilities

6.

Accounts receivable is settled in cash. Assets increase (Bank) and decrease

7.

The owner takes cash for personal use. Decrease in Equity (Drawings)
Decrease in Assets (Bank)

8.

The owner pays a liability of the business Decrease in Liabilities

from personal funds.
Increase in Equity (Loan to Owner)

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9.

Equipment is purchased using cash. Assets increase and decrease (Bank)

10.

Decrease in Assets (Bank) and

Employee wages are settled in cash.
Decrease in Equity

11.

Increase in Assets and

Purchased supplies on account.
Increase in Liabilities

12.

Increase in Assets and

Received cash for performing a service.
Increase in Equity (Revenue)

(b) What are the following general ledger accounts used for?

1.
Accounts receivable
Trade receivables Amounts due from customers or clients
Debtors

2.
Accounts payable Amounts owed to suppliers for goods
Trade payables and services purchased
Creditors

(c) Identify whether the following accounting entry is a debit or a credit.

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1.
The owner of the business invests
R100 000, is the accounting entry to the Credit
capital account a debit or a credit?

2.
Rent is prepaid for an office for the
business, is the accounting entry to the Debit
prepaid rent account a debit or a credit?

3.
Office equipment is purchased on account
from a supplier, is the double-entry to the Debit
equipment account a debit or a credit?

4.
Stationery is purchased for cash, is the
double-entry posting to the stationery on Debit
hand account a debit or a credit entry?

5.
The business carried out work for a
customer and was paid in cash, is the entry Credit
to the revenue account a debit or a credit?

6.
Work was completed and invoiced to a
customer for payment within 30 days. Is the Debit
posting to accounts receivable a debit or a
credit?

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7.
Insurance for the next year was paid in
advance in cash, is the double-entry Credit
bookkeeping entry to the cash account a
debit or a credit?

8.
Cash was paid to a supplier for goods
supplied by them on credit terms, is the Debit
entry to accounts payable a debit or credit
entry?

9.
Cash was received on account from a
customer for partially completed work, is the Debit
entry to the cash account a debit or a
credit?

Notes

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FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

2 DOUBLE-ENTRY SYSTEM AND SOURCE DOCUMENTS

Contents
Learning outcomes ................................................................................................................... 2
Key concepts ............................................................................................................................ 2
Acronyms ................................................................................................................................ 2
2. Introduction ...................................................................................................................... 3
2.1 The double-entry system ................................................................................................. 4
2.2 Summary of types of accounts and impact of transactions .............................................. 6
2.3 Descriptions of individual accounts .................................................................................. 7
2.4 The basic accounting equation ........................................................................................ 9
2.4.1 Right-hand side and left-hand side of BAE ........................................................... 9
2.4.2 How to apply the basic accounting equation ....................................................... 10
2.4.3 4 STEPS to determine the result of a transaction ............................................... 11
2.4.4 Examples illustrating the application of the double-entry system ....................... 14
2.5 Recordkeeping ............................................................................................................... 22
2.5.1 What is the accounting cycle? ............................................................................. 22
2.5.2 Completion of source documents ........................................................................ 25
(a) Internal source documents.......................................................................... 25
(b) External source documents (also referred to as supporting documents) .... 26
2.5.3 Recording of source documents.......................................................................... 27
2.6 Overview of the recording of transactions ...................................................................... 41
2.7 Completion of books of first entry................................................................................... 41
2.8 Self-assessment exercises ............................................................................................ 42
2.9 Terminology and definitions – cheat sheet..................................................................... 45

The key to success in accounting is practise, practise and more practise.

The following concept cards are available for this learning unit:

CONCEPT o Effect of transactions on specific types of accounts

CARDS
o The accounting cycle (x2)

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o Overview of the recording of transactions

Learning outcomes

After working through this learning unit, you should be able to:
• define cash transactions
• define source documents
• explain the difference between internal source documents and external business
documents
• explain the applicable source documents involved in different cash transactions
• complete different business documents

Key concepts

• Double-entry system
• Accounting equation
• Assets
• Liabilities
• Owners’ equity
• Recordkeeping
• Accounting cycle
• Cash transactions
• Source documents
• Internal source documents
• External source documents
• Purchase order
• Sales order
• Delivery note
• Goods received note
• Cash slips
• Cash register rolls
• Cash invoices
• Receipts
• Delivery note
• Petty cash voucher
• Credit card slip
• Deposit slip
• Internet banking: Notice of payment (EFT)

Acronyms
BAE Basic accounting equation
LPA Legal Practice Act, 28 of 2014
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LPC Rules Legal Practice Council Rules

2. Introduction

The financial records of an entity only deal with transactions that are measured in monetary
terms. The duality of the financial accounting system better known as the double-entry system
is a method whereby the transactions are recorded systematically to show the giving and
receiving of value.

The accounting cycle details the formal accounting process. The steps discussed in this
learning unit are as follows (indicated by yellow shading):

Transactions ― The accounting process starts once a transaction has taken place.

Source documents ― Source documents provide the evidence for a transaction having taken
place

Books of prime entry ― The source document is prepared and the information is entered
into the books of prime entry

Ledger accounts ― The entries from the books of prime entry are posted to the
general ledger, creditors’ ledger, and debtors’ ledger.

Trial balance ― The trial balance is drawn up from the accounts in the
general ledger

Financial statements ― The financial statements are drawn up from the trial
balance

Please remember the following points at all times:

RECAP • Total debits in the transaction must equal the total credits in that
transaction!
• For every debit, there must be a credit!
• Debits are on the left, credits are on the right!
• The equation must balance!

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2.1 The double-entry system

The double-entry system implies that there are two sides or aspects to every business
transaction and this translates to –
LBL
See Lessons
For every debit there must be a corresponding credit Debit &Credit

See the following example:

• If you buy a pair of soccer boots for R250.
– You receive the pair of boots (Side 1)
– The store gives you the boots (Side 2)

• If you pay R250 to the shop assistant.

– The shop assistant receives the cash (Side 1)
– You give the cash to the shop assistant (Side 2)

LBL
When an entity receives cash – the bank account is debited See Lessons

When an entity pays cash – the bank account is credited Bank account

This means that every transaction of the entity will result in an amount being recorded in at
least TWO accounts. Luca Pacioli introduced the rules of the Double-Entry System in 1494.
The double-entry principle provides a logical method of recording transactions. In using the
double-entry system the monetary (money value) of each transaction must be entered on the
debit side of one ledger account as well as on the credit side of another ledger account. The
entry in one ledger account refers to the corresponding entry in the other ledger account.

As the entries in the two ledger accounts have been entered on opposite sides, the use of the
double-entry system allows for cross references. Each transaction is entered in two separate
accounts on opposite sides, and it is therefore possible to check and control the arithmetical
and accounting accuracy of the work. If each transaction is recorded so that the debit and credit
entries are equal, the same sum of all the debits to the account must equal the sum of all the
credits. This can be explained by way of the accounting equation.

The rules will be applied as follows:

– All asset and expense accounts must be increased on the left (debit) side of the account
and decreased on the right (credit) side of the account.

Dr ASSETS & EXPENSES Cr

+ (increase) - (decrease) Cr

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– All liability and income accounts must be increased on the right (credit) side of the account
and decreased on the left (debit) side of the account.

Dr LIABILITIES & INCOME Cr

- (decrease) + (increase)

In short, a ledger is a book/record containing a set of individual accounts in which transactions

of the same kind are grouped together.

An account looks like a T-form with the left side called the debit side and the right side called
the credit side. An example follows:

Debit (abbreviated to Dr) Account name Credit (abbreviated to Cr)

The debit side of the account is The credit side of the account is
the side that shows gains in value the side that shows value given

In this learning unit, we will discuss the general ledger, which contains all the assets, liabilities,
owners’ equity, income and expense accounts of the business.

As part of your preparation for this learning unit you must know the following categories of items
in the general ledger and what they are –

LBLL What is an asset? Assets are resources owned by the business,

See Lessons
which have economic value and a business uses to Assets
generate income.

LBLL What is a liability? Liabilities are creditors’ interest or interests of

See Lessons
parties other than the owner(s). Liabilities are Liabilities
therefore the debts of the business.

LBLL What is an expense? An expense is a cost related to the day-to-day See Lessons
running of a business. An expense is a debit. Expenses

LBLL What is income? Income is the revenue a business receives from

See Lessons
selling services and goods to clients or customers Income
and returns on investments.

LBLL What is equity? Equity is the interest which the owner has in the
See Lessons
business and which the entity therefore owes to Equity
him.

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2.2 Summary of types of accounts and impact of transactions

The following table summarises the effect of the transactions on the specific types of accounts:

- Costs and
Assets = Liabilities + Owner's Equity + Income - Drawings
Expenses
Normal balance Debit Credit Credit Credit Debit Debit
Increase to account Debit Credit Credit Credit Debit Debit
balance Left Column of Acc Right Column of Acc Right Column of Acc Right Column of Acc Left Column of Acc Left Column of Acc
Decrease to Credit Debit Debit Debit Credit Credit
account balance Right column of Acc Left Column of Acc Left Column of Acc Left Column of Acc Right Column of Acc Right Column of Acc
Account example NON-CURRENT NON-CURRENT OWNER'S EQUITY INCOME EXPENSES DRAWINGS
ASSETS LIABILITIES Capital Commission received Advertising Drawings
Land and buildings Long-term loan Fees Audit fees
Equipment Mortgage bond Interest received Credit losses
Furniture Office rent received Insurance
Vehicles CURRENT Sales Interest paid
Computer equipment LIABILITIES Services rendered Fuel
Investments Short-term loan Office rent paid
Law library Bank overdraft Rental paid
CURRENT ASSETS (Negative) Repairs and
Inventory Accounts payable maintenance
Accounts receivable (Creditors) Salaries and wages
(Debtors/Clients) Trust creditors Stationery
Bank account Telephone
(Positive) Water and electricity
Cash on hand
Acc = Account

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2.3 Descriptions of individual accounts

Accounts form the basis of the accounting system. The following are descriptions of generally
used accounts in the books of legal practitioners:

(a) ASSETS – Non-current assets

Property The account for the recording of the transactions relating to land and
buildings (property) purchased for the business.
Equipment or The account for the recording of the transactions relating to equipment
computer equipment or computer equipment purchased for the business.
Furniture The account for the recording of the transactions relating to furniture
purchased for the business.
Motor vehicles The account for the recording of the transactions relating to motor
vehicles purchased for the business.
Law library An account for the recording of the transactions relating to the
accumulation of legal books.
Investment (longer Long-term investments are assets that a business intends to hold for
than 12 months) more than a year. It is not the intention of the business to realise the
investment within the next 12 months from the financial year-end.

(b) ASSETS – Current assets

Accounts receivable Accounts receivable are amounts due to the business from
customers/clients that have received goods or services on credit. The
amounts arise from providing services or products to clients and they
have not yet paid the business.
Accrued income Accrued income is income that has not been received in the
accounting period when the underlying obligation was fulfilled.
Since the obligation was fulfilled, the business is entitled to the
corresponding income and therefore the income is recognised and
a liability is created for the amount owing. (See Learning unit 5)
Bank account A bank account is a financial account held between a bank, i.e.
ABSA and the customer, i.e. SA Attorneys. This account records the
cash transactions (cash inflows and outflows) between the bank and
the customer. If the bank owes money to the business, it is referred
to as a favourable balance. If the business owes the bank money, it
is referred to as an unfavourable balance.
Deposit This account is used to record deposits, e.g. a deposit paid to the
municipality for the connection of water and electricity.

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Inventory The account for the recording of the transactions relating to inventory
purchased by the business for resale or for the manufacturing of a
product.
Investments (short- Short-term investments are assets that a business does not intend to
term) hold for more than a year. The intention is to realise the investment
within a period of less than 12 months from the financial year-end.
Petty cash The petty cash account is the account used for the recording of small
cash payments that are impractical to pay by EFTs.
Prepaid expenses A prepaid expense is an expenditure paid for in one accounting
period, but for which the underlying asset will not be consumed
until a future period. When the asset is eventually consumed, it is
charged to expenses. (See Learning unit 4)
Trust clients’ The trust clients’ accounts are the accounts for recording the money
accounts owed by the clients to an attorney’s practice (i.e. debtors of the
attorney’s practice). The trust clients’ accounts arise from credit
transactions.
VAT control account The account for the recording of the transactions relating to VAT. VAT
is payable to SARS. Both Output VAT (Credit side) and Input VAT
(Debit side) are recorded in the VAT control account. This account
may be an asset from time to time as the business can be entitled to
a refund from SARS.

(c) LIABILITIES – Non-current liabilities

Long-term loans A loan is an amount of money that has been loaned from a bank or
financing institution and has to be repaid to the lender. The term long-
term refers to loans that are repaid in specific instalments over a
longer period of time (i.e. a term of 5–10 years). Long-term loans may
have a fixed interest rate, or a floating interest rate (based on the
reserve bank prime rate).
Mortgage loan A mortgage loan is a long-term loan for financing the purchase of a
property or building. The property or building serves as security for the
mortgage loan.

(d) LIABILITIES – Current liabilities

Accounts payable Accounts payable is money owed by a business to its suppliers. The
(business) amounts arise from people who have supplied the business with
goods and services but the supplier has yet to be paid.

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Accrued expenses An accrued expense is an expenditure for which the underlying

asset was consumed but was not yet paid. The business therefore
incurred the expense and should recognise the expense together
with the liability to pay the expense. The liability is called an
accrued expense. (See Learning unit 4)
Bank overdraft A bank account where the business owes the bank money. It is
(Negative) referred to as an unfavourable balance.
Income received in Income received in advance is income received in one accounting
advance period, but for which the underlying obligation will only be fulfilled in
the next accounting period. When the obligation is eventually
fulfilled, it is recognised as income. (See Learning unit 4)
Short-term loan A loan is an amount of money that has been loaned from a bank or
financing institution and has to be repaid to the lender. Loans are
repaid in instalments and interest is charged on the outstanding
amount. Short-term loans refers to loans that are generally repaid
within a few months or a year.
Trust creditors The money that is in a trust account at any point in time belongs to the
clients of the legal practice and the clients are referred to as trust
creditors of the legal practice.
VAT control account The account for the recording of the transactions relating to VAT. VAT
is payable to SARS. Both Output VAT (Credit side) and Input VAT
(Debit side) are recorded in the VAT control account.

2.4 The basic accounting equation

The financial position of an entity is indicated by this equation. By using the equation, any
unknown elements of the statement of financial position can be calculated. In the accounting
records, all the figures must “balance”. This is what makes the recording process so effective.
All transactions must balance in the form of an equation. This equation is termed the basic
accounting equation (BAE).

2.4.1 Right-hand side and left-hand side of BAE

When preparing an equation the right-hand side will always equal the left-hand side. The
assets are on the left-hand side and the equity and liabilities are on the right-hand side. The
transactions can affect the BAE in four different ways.

➢ An increase on the left-hand side and an equal increase on the right-hand side –

Left-hand side = Right-hand side

Assets Equity + Liabilities

+100 000 +100 000

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➢ A decrease on the left-hand side and an equal decrease on the right-hand side –

Left-hand side = Right-hand side

Assets Equity + Liabilities

–100 000 –100 000

➢ An increase and an equal decrease on the left-hand side –

Left-hand side = Right-hand side

Assets Equity + Liabilities

+100 000
–100 000

➢ An increase and an equal decrease on the right-hand side

Left-hand side = Right-hand side

Assets Equity + Liabilities

+100 000
–100 000

2.4.2 How to apply the basic accounting equation

The equation is as follows:

OWNERS’ EQUITY = ASSETS – LIABILITIES;

OR
ASSETS = OWNERS’ EQUITY + LIABILITIES

RECAP
Memorising the simple accounting equation will help you learn the debit
and credit rules for entering amounts into the accounting records.

As you can see, assets equal the sum of liabilities and owner's equity. This makes sense when
you think about it because liabilities and equity are essentially just sources of funding for
companies to purchase assets. The expanded accounting equation is as follows:

ASSETS = LIABILITIES + CAPITAL + REVENUE – EXPENSES – DRAWINGS

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The following is the expanded accounting equation in the format of a diagram:

LBL
The owner’s drawings represent cash taken out of the business See Lessons
Drawings
by way of a salary or goods taken for own use.

2.4.3 4 STEPS to determine the result of a transaction

All transactions measurable in monetary value will have an effect on the financial results of the
entity. With the recording of every transaction, there will be a change in the financial position
of the entity and since the basic accounting equation (BAE) reflects the financial position of
the entity, each recorded transaction will affect the BAE.

Notes

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The following table represents a logical method of recognising a transaction.

STEPS
Step 1 Identify the accounts affected by the transaction.
What is the account? (i.e. Equipment)

Step 2 Will the transaction cause an increase or decrease in the account?

(i.e. Account is increasing as equipment was purchased)

Step 3 Classify the account.

What is the type of account? (i.e. Asset, Expense etc.)

Step 4 Step 2 PLUS Step 3 equals effect on Step 1

EXAMPLE
2.1

S. Africa deposited R100 000, as capital into the business bank account of SA Attorneys.
Recognise the transaction in the accounting records of the business using the 4-step method.

EXPLANATION
2.1

Transaction Deposit of R100 000 Deposit of R100 000

Step 1 Bank Capital
Step 2 The transaction will increase the The transaction will increase the
“bank account” “capital account”
Step 3 Asset Equity
Step 4 Debit the asset, Bank, to increase it. Credit the equity, Capital, to increase it.

Prepare the BAE incorporating the information from the above table:

Assets = Equity + Liabilities LBLL

+100 000 +100 000 ―

bank account (dr) capital account (cr) ―
Notes See Lessons
Explanation
The BAE is an accounting equation that must balance after each transaction. 2.1
S. Africa deposited R100 000, as capital into the business bank account of SA
Attorneys. To increase the bank account (an asset), debit the account. The

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opposite entry is a credit to the Capital account. The equity account is credited
to increase the owner’s equity in the business.

EXAMPLE 2.2

SA Attorneys purchased computer equipment and paid R85 000 for the equipment. Recognise
the transaction in the accounting records of SA Attorneys using the 4-step method.

EXPLANATION
2.2

Transaction Payment of R85 000 Payment of R85 000

Step 1 Computer equipment Bank
Step 2 The transaction will increase the The transaction will decrease the
“computer equipment account” “bank account”
Step 3 Asset Asset
Step 4 Debit the asset, computer Credit the asset, Bank, to increase it.
equipment, to increase it.

Prepare the BAE incorporating the information from the above table:

Assets = Equity + Liabilities LBLL

+85 000 ― ―
Computer equipment
(dr)
-85 000 ― ― See
Bank account (cr) Lessons
Explanation
Notes 2.2

The BAE is an equation that must balance after each transaction. SA Attorneys
purchased computer equipment and paid R85 000 for the equipment. To
increase the computer equipment account (an asset), debit the account. The
opposite entry is a credit to the Bank account. The Bank account is an asset and
an asset account is decreased by crediting the account.

Notes

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2.4.4 Examples illustrating the application of the double-entry system

The following examples illustrate the double-entry system:

EXAMPLE
2.3

Assume a business buys equipment for R2 000 by EFT. How would the bookkeeper record
this transaction?

EXPLANATION
2.3

In this case the business has paid money to purchase equipment. The double entry will be
made as follows:

Dr Bank account Cr
- R2 000

Dr Equipment Cr
+ R2 000

STEPS – The bookkeeper must show that cash of R2 000 has left the business.
– Since cash is an asset, the principles pertaining to assets will be used.
– The cash balances have decreased and assets decrease on the credit side.
 the bank account is credited.
– In return for the cash payment, the business has received equipment.
– Equipment is an asset and therefore assets have increased.
– Assets increase on the debit side of the account the equipment account
is debited.

The rules of double-entry state that all debits should equal all credits. In this case, we have
debited the equipment account and credited the bank account. The double-entry rule has been
applied successfully.

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EXAMPLE 2.4

Assume a business receives a loan of R10 000 from the bank. How would the bookkeeper
record this transaction?

EXPLANATION
2.4

In this case, the business has received a loan from the bank. The double entry will be made
as follows:

Dr Bank account Cr
+ R10 000

Dr Bank loan Cr
+ R10 000

STEPS
– The bookkeeper must show that cash of R10 000 has flowed into the
business.
– Since cash is an asset, the principles pertaining to assets will be used.
– The cash balances have increased and assets increase on the debit side.
 the bank account is debited.
– At the same time, the business has incurred a debt (a liability).
– The bank loan is a liability, and the rule that applies to liabilities states
that liabilities increase on the credit side.
– Loan debts increase on the credit side of the account the bank loan
account is credited.

The rules of double entry state that all debits should equal all credits. In this case, we have
debited the bank account and credited the loan account. The double-entry rule has been
applied successfully.

EXAMPLE 2.5

Assume a business pays the telephone account of R550. How would the bookkeeper record
this transaction?

EXPLANATION
2.5

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In this case, the business has paid money. The double-entry will be made as follows:

Dr Bank account Cr
- R550
Dr Telephone expenses Cr
+ R550

STEPS – The bookkeeper must show that cash of R550 has flowed out of the
business. The business has spent money on an item that cannot be changed
back into cash.
– Since cash is an asset, the principles pertaining to assets will be used.
– Cash has decreased (credit bank) and an expense has been incurred
(telephone expense).
– Expenses have increased and the telephone account should be debited.
Remember: expenses increase on the debit side.

Once again, an account has been debited and another account credited. The rules of double-
entry state that all debits should equal all credits. In this case, the expense account (telephone)
has been debited and the bank account credited. The double-entry rule has been applied
successfully.

EXAMPLE 2.6

Assume a business receives R3 500 cash for services rendered. How would the bookkeeper
record this transaction?

EXPLANATION
2.6

In this case, the business has received money. The double-entry will be made as follows:

Dr Bank account Cr
+ R3 500

Dr Services rendered Cr
+ R3 500

STEPS – The bookkeeper must show that cash of R3 500 has flowed into the
business.

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– Since cash is an asset, the principles pertaining to assets will be used.

– The balance of the bank account will therefore increase and assets
increase on the debit side.
 the bank account is debited.
– The money was received for services rendered.
– This means that the services rendered account will be credited.
– This is an income account, and all income accounts increase on the credit
side.

Once again, we have debited one account and credited another. The rules of double-entry
state that all debits should equal all credits. In this case, the expense account (telephone) has
been debited and the bank account credited. The double entry rule has been applied
successfully.

EXAMPLE
2.7

SA Products opened its doors on 1 April 2020. The entity uses the periodic inventory system
and is not registered as a VAT vendor (inventory systems will be discussed in more detail in
learning unit 3). The following transactions took place during the first month of business:

Date Transactions
2 The owner, Mr South made a capital contribution to the business, being R5 000 cash
and equipment with a fair market value of R2 000.
5 Purchased trading inventory per cheque, R1 000.
9 Sold inventory for cash, R2 500.
12 Purchased trading inventory on credit, R600.
19 Paid monthly insurance of R1 000.
23 Sold inventory on credit, R7 000.
27 Purchased equipment per electronic funds transfer (EFT), R3 000.
29 Paid wages per cash, R800.
30 Paid the water and electricity account, R1 100.

REQUIRED:
Indicate the effect of the transactions under the accounting equation.

EXPLANATION
2.7

DAY ASSETS = OWNERS’ EQUITY + LIABILITIES

R R R
2 + 2 000 Equipment + 2 000 Capital 0

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+ 5 000 Bank + 5 000 Capital

5 - 1 000 Bank - 1 000 Purchases # 0
9 + 2 500 Bank + 2 500 Sales * 0
#
12 0 - 600 Purchases + 600 Accounts payable
#
19 - 1 000 Bank - 1 000 Insurance 0
23 + 7 000 Accounts receivable + 7 000 Sales * 0
27 - 3 000 Bank 0 0
+ 3 000 Equipment
29 - 800 Bank - 800 Wages # 0
#
30 - 1 100 Bank - 1 100 Water and electricity 0
#
expenses
*
income

EXAMPLE 2.8

SA Traders entered into the following transactions during July 2020. The entity uses the
periodic inventory system and is not registered as a VAT vendor.

Date Transactions
1 Sold inventory on credit to A. South – R1 300.
3 Bought stationery for cash – R1 000.
4 Purchased office furniture and paid by business credit card from Africa Bank –
R20 000.
6 B. Africa owed SA Traders R1 780 and paid R1 700 in full settlement of his account.
8 Credit card sales of R15 000.
11 A delivery vehicle was purchased on credit from Natal Motors for R75 000. A deposit
of R35 000 was paid immediately and the outstanding balance is still due to
Natal Motors.
13 Paid printing costs by electronic fund transfer (EFT) – R1 200.
15 Paid the insurance account by EFT – R1 345.
22 Received an invoice from SA Traders for the purchase of packing material – R1 450.
25 Paid R6 350 by EFT for a computer purchased for the owner’s son.
26 Paid the business telephone account – R1 005.

REQUIRED:
Indicate the effect of the transactions under the accounting equation.

EXPLANATION
2.8

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DAY ASSETS = OWNERS’ EQUITY + LIABILITIES

R R R
1 + 1 300 Accounts receivable + 1 300 Sales * 0
3 - 1 000 Bank - 1 000 Stationery # 0
4 + 20 000 Office furniture + 20 000 Accounts payable
#
6 + 1 700 Bank - 80 Discount allowed
- 1 780 Accounts receivable
8 + 15 000 Bank + 15 000 Sales *
11 - 35 000 Bank + 40 000 Loan liability
+ 75 000 Motor vehicle
13 - 1 200 Bank - 1 200 Printing # 0
15 - 1 345 Bank - 1 345 Insurance # 0
#
expenses
*
income

ASSETS OWNERS’ EQUITY LIABILITIES

DAY = +
R R R
22 - 1 450 Packing materials # + 1 450 Accounts payable
25 - 6 350 Bank - 6 350 Drawings 0
26 - 1 005 Bank - 1 005 Telephone # 0

EXAMPLE 2.9

List each of the following ledger accounts under one of the categories in the table below.
“Furniture” is inserted as an example.

ASSETS EQUITY LIABILITIES

Non- Current Capital Income Expenditure Non-current Current
current assets liabilities liabilities
assets
Furniture

Ledger accounts to be classified:

(a) land and buildings
(b) mortgage
(c) petty cash
(d) postage
(e) interest income
(f) vehicles
(g) salaries
(h) debtors (Accounts receivable)
(i) creditors (Accounts payable)
(j) bank overdraft

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(k) fees earned

(l) electricity deposit
(m) subscriptions

EXPLANATION
2.9

ASSETS EQUITY LIABILITIES

Non-current Current Capital Income Expenditure Non-current Current
assets assets liabilities liabilities
(a) land and (c) petty (e) interest (d) postage (b) mortgage (i) creditors
buildings cash income (g) salaries (j) bank
(f) vehicles (h) debtors (k) fees (m) subscriptions overdraft
(l) electricity earned
deposit *

* Electricity deposit is an amount paid by the entity to serve as security for the payment of the electricity account.
The amount will be paid back to the entity if they sell the land and buildings and will no longer make use of the
electricity; therefore, it is not an expense but a current asset.

EXAMPLE
2.10

A. South is a partner in SA Attorneys. SA Attorneys commenced operations on 1 May 2020.

The following transactions took place during the first month:

May 1 Cash deposited in the bank as opening capital, R25 000.

2 A. South made his private computer equipment available to the business, R9 000.
3 Additional equipment purchased and paid for by EFT, R12 000.
4 Fees were charged for work done on account for North Suppliers, R4 200.
6 Vehicle purchased on credit from Zulu Limited, R22 400.
10 SA Attorneys received R2 000 in cash for fees earned from West Finance.
17 North Suppliers paid R2 200 on their account.
28 Wages paid, R4 000.
30 Paid R9 000 to Zulu Limited in part settlement of the business’ account.

REQUIRED:
Use the accounting equation in the format below to analyse the above-mentioned
transactions.

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Date Assets = Equity + Liabilities Effect on accounts

NB: (1) Show the effect of each transaction on the accounting equation with a plus sign (+)
for an increase and a minus sign (–) for a decrease.

Notes

EXPLANATION 2.10

Date Assets = Equity + Liabilities Effect on accounts

01/05 + 25 000 + 25 000 Cash received will increase the bank,

therefore assets increased. The cash was
received.
02/05 + 9 000 + 9 000 Equipment received from partner. Assets,
equipment increases and capital, equity
increases.
03/05 + 12 000 Cash used to purchase equipment. Assets,
- 12 000 equipment increased and an asset, bank
decreased.
04/05 + 4 200 + 4 200 Services rendered on account. Assets,
debtors increased and income (fees)
therefore equity increased.
06/05 + 22 400 + 22 400 Vehicle purchased on credit. Assets,
vehicles increased and liabilities, long-term
loan increased.
10/05 + 2 000 + 2 000 Cash received will increase the bank,
therefore assets increased. The cash was
for installation fees, an income, therefore
equity increased.

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17/05 + 2 200 Payment received from debtor. Assets,

- 2 200 bank increased and an asset, debtors
decreased.
28/05 - 4 000 - 4 000 Paid wages. Cash paid will decrease bank,
therefore assets decrease. Wages
(expenses) increases, therefore equity
decreases.
30/05 - 9 000 - 9 000 Cash used to pay creditor. Assets, bank
decreased and liability, creditor decreased.
75 600 44 200 31 400

Assets (R75 600) = Equity (R44 200) + Liabilities (R31 400)

2.5 Recordkeeping

Rule 54.6 of the Legal Practice Council Rules (LPC Rules) requires that all legal practitioners
that conduct a trust account practice MUST comply with PART XII of the Rules and keep
accounting records. The accounting records will contain the day-to-day transactions of all
monies received, held or paid by a legal practitioner on his own account (his business) or for,
or on behalf of any person (the trust).

An accountant, employed by a legal practice, should be aware that there are different stages
in the process of recordkeeping. There needs to be a set of detailed records in which all the
necessary information pertaining to every transaction should be recorded. These detailed
records are known as the subsidiary journals. There is also a need for a set of accounts with
summarised balances which is known as ledgers. At the end of a financial period, statements
of performance and position need to be compiled.

LBL
The financial statements are a set of accounts (summarised) See Lessons
Financial
showing the financial results of the legal practice. statements

2.5.1 What is the accounting cycle?

The accounting cycle (See summary on p.23) is a set of steps that are repeated in the same
order every period. The starting point of the cycle is the recording of the business
transactions and leading up to the preparation of financial statements. The key steps in the
accounting cycle include recording journal entries, posting to the general ledger, preparing the
trial balances, making adjusting entries, and creating financial statements. An accountant
should be aware at all times, at which stage of the accounting cycle the recording process is.
The sole purpose of recording transactions and keeping track of expenses and revenues is to
convert the data into meaning financial information by presenting it in the form of financial
statements. Financial statements are composed of the following components:
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– statement of financial position (balance sheet)

– statement of profit or loss and other comprehensive income (income statement)
– statement of owner’s equity, and
– statement of cash flows.

Notes

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The accounting cycle is summarised as follows:

The accounting cycle

Step 1: Transaction
CASH CREDIT
OR
Step 2: Source document (duplicate or original)

Receipts Payments
Deposit slip EFT (Electronic fund Invoice
Receipt transfer – internet Credit note
banking)
Till slip Petty cash voucher
Bank statement

Step 3: Subsidiary journals (books of first entry)

CRJ SJ
CPJ SRJ
PCJ PJ
PRJ

Post all journals to the general ledger and subsidiary ledgers

Step 4: General ledger Subsidiary ledgers

Apply accounting equation rules Apply accounting equation rules
and

Dr Cr Details Debit Credit Balance

Post to trial Use to create Do not post to trial balance. Use balances to
balance financial statements create debtors and creditor statements.

Step 5: Trial balance

Debits = Credits
Step 6: Financial statements

Statement of profit or Statement of changes in equity Statement of financial

loss and other position
comprehensive income
Income – expenses Capital – drawings + profit – loss Assets = equity + liabilities

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2.5.2 Completion of source documents

Source documents are the forms prepared by a business that document all the financial
transactions of the business, i.e. buying goods or providing a service. The business forms
include purchase orders, receipts, invoices etc. For every transaction, a source document
needs to be completed, e.g. when the firm receives cash, a receipt is issued and when services
are rendered on credit (customer pays later), an invoice or debit note is issued. There are two
types of source documents, namely:

(a) Internal source documents

Internal source documents are those documents prepared by the entity itself to record
transactions with external clients. Source documents are usually drawn up in duplicate. The
original will be given to the other party to the transaction and the duplicate will remain with
the entity to enable the entity to record the transaction in their accounting records.

Examples of internal source documents are:

• cash register rolls
• duplicate cash sales invoices
• duplicate receipts
• petty cash vouchers
• duplicate bank deposit slips

An internal source document, cheques, has been excluded from the list above. Cheque
counterfoils (cheque stubs in the cheque book) used to be an internal source document but
this format of payment will no longer be available as cheques are being phased out by the
banks from 31 December 2020. A cheque is a signed, written instruction given by the payer to
their bank to pay money from their account to the payee.

The following is an example of a cheque:

The current formats of payments that will be discussed for this module are:
Electronic payments ► internet banking
► credit card payments
► cash send transactions, and
► Snapscan or Zapper payments (Uses QR codes)
Other payments ► cash payments and
► debit cards
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QUICK
NOTE
A QR code is a machine-readable code consisting of an array of black and
white squares, typically used for storing URLs or other information for
reading by the camera on a smartphone.

The source document for an internet payment is an electronic fund transfer (EFT) notice of
payment and for a credit card payment a signed credit card slip. A credit card is a payment
card issued to a user (cardholder) to enable the user to pay a supplier for goods and services.
The card is issued to the user based on the agreement to pay back to the card issuer (i.e. the
bank) the amount paid plus other agreed charges (service fee and interest).

A debit card is a payment card (issued by a bank for the making payments from the bank
account of the cardholder), which allows the cardholder to transfer money electronically from
their bank account to the bank account of the supplier when making a purchase. A debit
card eliminates the need to carry cash to make purchases. The source document for a debit
card payment is a signed debit card slip.

The cash send transactions are a popular method of drawing money for the petty cash imprest
system. The source document for a cash send transaction is the document printed by the ATM
(Automatic Teller Machine).

Snapscan is a smartphone application and it is a contactless mobile payment solution, which

makes it easy and safe to pay and receive payments in a store, online, and at home. There is
no need for a card, cash or an EFT. Snapscan makes use of QR codes for processing the
payments. Zapper works on the same basis as Snapscan.

(b) External source documents (also referred to as supporting documents)

External source documents are the documents prepared by the other party to the transaction
and received by the business as proof that the transaction did take place. The business will
receive the original source document and the entry into the accounting records is recorded
from this original source document received. Examples of external source documents are:
► original cash purchases invoices
► original receipts
► credit card slips
► debit card slips
► cash slips
If a customer or debtor of the business makes a payment by credit card, the credit card receipt
will only be settled overnight and therefore will not reflect in the bank statement until the
following day.

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2.5.3 Recording of source documents

Example 2.11 illustrates the situation when SA Business is the seller (i.e. retailer). Example
2.12 illustrates the situation when SA Business is the buyer (i.e. customer) of goods.

The diagram below shows the flow of goods between manufacturers, retailers and customers:

Manufacturer Retailer Customer

Consider the following transactions entered into by a business called SA Business. The
transactions are discussed as follows:

► Example of the source document that generates the transaction

► The effect of the transaction on the accounting equation
► The general ledger accounts affected by the transaction; and
► An explanation of the aforementioned.

SA Business (Seller) to SA Business (Buyer)

Customer from Supplier
EXPLANATION 2.11 EXPLANATION 2.12
(a) Purchase order Received from customer Sent to supplier
(b) Delivery note Sent to customer with Received from supplier
delivery of goods with delivery of goods
(c) Goods received note Made out by customer Made out by SA
Business
(d) Invoice Sent to customer Received from supplier
(e) Statement of account Sent to customer Received from supplier
(f) Remittance advice Received from customer Sent to supplier
(g) Electronic fund transfer EFT payment made to EFT payment made to
customer supplier
(h) Receipt Sent to customer Receipt received from
supplier

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EXAMPLE
2.11

The discussion is based on the following diagram, which illustrates the movement of the
accounting source documents (these source documents form part of the syllabus):

(a) Purchase order

(b) Delivery note

(c) Goods received note

SELLER
BUYER

(d) Invoice

(e) Statement from supplier

(f) Remittance advice

(g) Electronic fund transfer (EFT)

(h) Receipt

The following information was included in the purchase order and will be used as part of the
illustration:

Price per Total

Item unit price
code Description Quantity R R
IBM1334 Tool box 2 2 600 5 200
IBM2043 Electrician tool kit 1 4 000 4 000
IBM6033 Screw driver set 4 200 800
10 000
Ignore VAT VAT @ 15% 0
Total price 10 000

EXPLANATION
2.11

(a) Purchase order

SA Business (seller/retailer) received a purchase order (a) from their customer, S. Africa
(buyer) and the requested goods were pulled from inventory. SA Business is the seller of the
goods.

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(i) What is a purchase order?

QUICK
NOTE
Purchase order (a) ― A buyer-generated source document used to place an
order with a vendor or supplier. When accepted by the seller, it becomes a
legally binding contract between the buyer and the seller. Purchase orders
are used when a buyer wants to purchase supplies or inventory on account.

(ii) Example of a purchase order (source document):

(iii) The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
A transaction has yet to take place. Once the delivery note has been signed by the customer
the invoice can be generated.

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(b) Delivery note

A delivery note was processed and the goods left the premises for delivery to S. Africa.

(i) What is a delivery note?

QUICK Delivery note (b) ― A document that accompanies a shipment of goods that
NOTE
lists the description and quantity of the goods delivered. A copy of the delivery
note, signed by the buyer is returned to the seller as a proof of delivery.

(ii) Example of a delivery note (source document):

(iii) The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
A transaction has yet to take place. Once the delivery note has been signed by the customer
the invoice can be generated.

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(c) Goods received note

In this instance, it is the accounting system of the customer, which will generate the goods
received note. This source document does not affect the accounting records of SA Business.

(i) What is a goods received note?

QUICK
NOTE Goods received note – A document prepared by the buyer at the point of
receipt, recording the receipt of goods. The goods received note (GRN) and
the purchase order are compared before the buyer makes payment.

(ii) Example of a goods received note (source document):

(iii) The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
A transaction has yet to take place. The goods received note is issued by the customer but
does not affect the accounting records of SA Business.

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(d) Invoice
The goods are delivered and SA Business issues an invoice to S. Africa. The invoice specifies
what the customer/buyer (S. Africa) must pay the seller (SA Business).

(i) What is an invoice?

QUICK
NOTE Invoice – A document issued by a seller to the buyer that indicates the
quantities and costs of the products or services provider by the seller

(ii) Example of an invoice (source document):

Acoustics Tax Invoice

25 Trade Centre
Centurion, Gauteng, 0157
012 667 6465
[email protected]
VAT Reg. No. 12345678

Bill To: Invoice Number 2001321

Client Name
Date
Client Address
Terms
City, State Postal code
Due Date
VAT Reg. No.
Amount
Description Quantity Unit price
R
IBM1334 Tool box 2 2 600 5 200
IBM2043 Electrician tool kit 1 4 000 4 000
IBM6033 Screw driver set 4 200 800
10 000
VAT @ 15% 0
Total price 10 000

(iii) The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities LBLL

+10 000 +10 000 ―

Accounts receivable (dr) Sales (cr) ―

Notes See Lessons

Source
Once the customer has received the goods, the sale has been concluded and document
invoice
an invoice is issued to the customer. The accounts receivable account
increases and is therefore debited. The opposite entry is the increase in the
sales account and this account must be credited (double-entry system).

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(e) Statement from a supplier

(i) What is a statement?

QUICK
NOTE Statement – An accounting statement is summary of accounting activities/
transactions incurred over a period (i.e. a month).

(ii) Example of a statement (source document):

(iii) The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
There is no entry in the accounting records. The statement is sent to the customer and is a
summary of all the transactions for the month. The transaction has already been recorded
when the invoice was issued (see section (d) above).

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(f) Remittance advice

(i) What is a remittance advice and an electronic fund transfer?

QUICK
Remittance advice – Is a statement detailing a payment made by the customer
NOTE
and the customer sends remittance advice to the supplier. This informs the
supplier of the payment of an invoice (or group of invoices).

Electronic fund transfer (EFT) ― An EFT is a payment transaction that takes

place over an online network, either among accounts at the same bank or to
different accounts at separate financial institutions.

(ii) Example of a remittance advice (source document):

Notes

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(iii) Example of an EFT proof of payment (source document):

(iii) The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
The customer has sent through a remittance advice of an EFT payment that has been made
to SA Business. SA Business will issue a receipt (Refer to (g) below).

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(g) Receipt

(i) What is a receipt?

QUICK
NOTE Receipt ― A source document which is written acknowledgement that the
seller has received payment (goods or money) from the buyer.

(ii) Example of a cash receipt (source document):

(iii) The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities LBLL

+10 000 ― ―
-10 000 See Lessons
Bank (dr) ― ― Source
document
Accounts receivable (cr) remittance
advice
Notes
The remittance advice is sent to the seller as proof that the payment of the
account has been made. The seller issues a receipt. The original receipt is sent
to the buyer and the duplicate receipt is used to enter the payment into the CRJ.
The accounts receivable account decreases and is therefore credited and the
bank account increases and is therefore debited.

This transaction has been completed.

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EXAMPLE
2.12

Consider the following transactions entered into by a business called SA Business.

SA Business is now the buyer of the goods. The discussion of the transactions will consider
the source documents that generate the transaction, the effect of the transaction on the
accounting equation and the explanation will be based on the following diagram, which
illustrates the movement of accounting source documents (these source documents form part
of the syllabus):

(i) Purchase order

(j) Delivery note

(k) Goods received note

SELLER
BUYER

(l) Invoice

(m) Statement

(n) Remittance advice

(internet payment)

(o) Receipt

EXPLANATION
2.12

SA Business sends a purchase order through to South Suppliers for the purchase of the
following goods:

Price per Total

Item unit price
code Description Quantity R R
IBM1334 Tool box 2 2 600 5 200
IBM2043 Electrician tool kit 1 4 000 4 000
IBM6033 Screw driver set 4 200 800
10 000
Ignore VAT VAT @ 15% 0
Total price including VAT 10 000

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(i) Purchase order

The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
A transaction has yet to take place. Once the delivery note has been signed by the customer
the invoice can be generated.

(j) Delivery note

The goods arrive at the premises of SA Business with a delivery note from South Suppliers.
The goods are checked to the delivery note of South Suppliers and signed as proof that the
goods have been received. SA Business issues a goods received note.

The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
A transaction has yet to take place. Once the delivery note has been signed by the customer
the invoice can be generated.

(k) Goods received note

SA Business has received the goods and issues a goods received note (GRN).

The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
A transaction has yet to take place. Once the delivery note has been signed by the customer
the invoice can be generated.

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(l) Invoice

Once the invoice is received, the amount owed of R10 000 is recorded.

The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

+R10 000 ― +R10 000
Inventory ― Accounts payable
Notes
SA Business has received the goods and an invoice from the supplier. The inventory account
increases and is therefore debited. The opposite entry is the increase in the accounts
payable account (South Suppliers) and this account must be credited (double-entry system).

(m) Statement

SA Business has received the goods and the invoice. The amount owing of R10 000 has been
recorded and SA Business receives a statement from South Suppliers for the invoices due for
payment up until the end of the month.

The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
The transaction has been recorded. The statement from the supplier does not generate
another transaction.

(n) Remittance advice (Proof of payment)

SA Business has received the goods and the invoice. The amount owing of R10 000 has been
recorded. SA Business makes an internet payment of R10 000 to South Suppliers.

The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

- R10 000 ― - R10 000
Bank ― Accounts payable

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Notes
SA Business makes an internet payment and sends through proof of payment to South
Suppliers (Either an EFT notification, SMS or a fax). The bank account, an asset, is
decreased and therefore credited. The opposite entry is a debit to accounts payable as the
liability has decreased.

(o) Receipt

SA Business has received the goods and the invoice. The amount owing of R10 000 has been
recorded. SA Business makes an internet payment of R10 000 to South Suppliers. South
Suppliers acknowledges receipt of the payment by issuing a receipt.

The effect of the transaction reflected in the source document:

Assets = Equity + Liabilities

― ― ―
― ― ―
Notes
The receipt from the supplier (South Suppliers) does not generate another transaction.

This transaction has been completed.

Notes

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2.6 Overview of the recording of transactions

Transaction types

Equity and
Asset Asset and equity Asset and liabilities
liabilities
– Purchasing an asset for – Contribution of – Purchasing an – Expenses on
cash capital asset for credit credit
– Receipt of payment from – Drawings by owner – Payment made to a
a debtor – Cash income creditor
– Investing of cash – Credit income – Entering into a loan
– Transfer from investment – Cash expenses agreement
to bank account

Dr Asset Cr Dr Asset Cr Dr Asset Cr Dr Expense Cr

Increase Decrease Increase Decrease Increase Decrease Increase Decrease

Dr Equity Cr Dr Liabilities Cr
Decrease Increase Decrease Increase

Dr Income Cr
Decrease Increase

Dr Expense Cr
Increase Decrease

Account types

2.7 Completion of books of first entry

(See Learning unit 4)
The accountant employed by a law practice will be aware that there are different stages in the
process of recordkeeping. The different stages form part of the accounting cycle.

As part of the accounting cycle there will be:

• a set of detailed records in which all the necessary information pertaining to every business
transaction is recorded.
• These detailed records are known as the subsidiary journals.
• There is also a need for a set of accounts with summarised balances, which is known as
ledgers.
• At the end of a financial period, statements of performance and position need to be
compiled. The statements that are known as financial statements are the most
summarised records of the firm.

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A journal entry is like a set of instructions compiled after the transaction is analysed. The
carrying out of these instructions is known as posting.

A posting is recording the information contained in the journal in the ledger accounts. The
journal entries do not change when the posting is done; the journal entry is the instruction for
debiting or crediting a general ledger account. The account that is debited or credited in the
journal entry will be debited or credited in the general ledger.

LBL An accountant should at all times be aware of where the

See Lessons
recording process is in the accounting cycle. (Grey shading in Accounting
cycle
attached document)

2.8 Self-assessment exercises

Question Answer
What is a transaction?

How do you know a

business transaction has
taken place?

What does bookkeeping

entail?

What is the double-entry

system?

List the steps in the financial

accounting cycle.

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What is an account?

How do you decide which

accounts to set up?

What is accounts
receivable?

What is accounts payable?

What is an expense?

What is income?

What is the accounting

requirement?

What is the double-entry

procedure?

What is the commonly used

abbreviation for a debit?
What is the commonly used
abbreviation for a credit?

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What is a journal entry?

Explain the nature of

(i) assets
(ii) equity
(iii) liabilities

What category of account is

accounts payable?

What element is accounts

payable?

What is a current asset?

What is a current liability?

What do you call the

collection of all accounts
and transactions for a
business?

What is posting?

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2.9 Terminology and definitions – cheat sheet

What is an asset? What is a liability? What is an expense?

Assets are resources owned Liabilities are creditors’ An expense is a cost related
by the business, which have interest or interests of parties to the day-to-day running of a
economic value and a other than the owner(s). business. An expense is a
business uses to generate Liabilities are therefore the debit.
income. debts of the business.
What is income? What is equity? Property
(Non-current asset)
Debit balance
Income is the revenue a Equity is the interest which The account for the recording
business receives from selling the owner has in the of the transactions relating to
services and goods to clients business and which the land and buildings (property)
or customers and returns on entity therefore owes to him. purchased for the business.
investments.
Equipment or computer Furniture Motor vehicles
equipment (Non-current (Non-current asset) (Non-current asset)
asset) Debit balance Debit balance Debit balance
The account for the recording The account for the The account for the recording
of the transactions relating to recording of the transactions of the transactions relating to
equipment or computer relating to furniture motor vehicles purchased for
equipment purchased for the purchased for the business. the business.
business.
Law library Bank account Accounts receivable
(Non-current asset) (Current asset) (Current asset)
Debit balance Debit balance Debit balance
An account for the recording A bank account is a financial Accounts receivable are
of the transactions relating to account maintained by a amounts due to the business
the accumulation of legal bank, i.e. ABSA, wherein from customers/ clients that
books. financial transactions (cash have received goods or
inflows and outflows) services on credit. The
between the bank and the amounts arise from providing
business are recorded. If the services or products to
bank owes the business clients and they have not yet
money, it is referred to a paid the business.
favourable balance. If the
business owes the bank
money, it is referred to as an
unfavourable balance.

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Inventory Trust clients account Petty cash

(Current asset) Debit (Current asset) Debit (Current asset) Debit
balance balance balance
The account for the recording The trust clients’ accounts The petty cash account is
of the transactions relating to are the accounts for the account used for the
inventory purchased by the recording the money owed recording of small cash
business for resale or for the by the clients to an payments that are
manufacturing of a product. attorney’s practice (i.e. impractical to pay by EFTs.
debtors of the attorney’s
practice). The trust clients’
accounts arise from credit
transactions.
Long-term loans Short-term loan Accounts payable (business)
(Non-current liability) Credit (Current liability) Credit (Current liability) Credit
balance balance balance
A loan is an amount of A loan is an amount of Accounts payable is money
money that has been money that has been owed by a business to its
borrowed from a bank or borrowed from a bank or suppliers. The amounts
financing institution and has financing institution and has arise from people who have
to be repaid to the lender. to be repaid to the lender. supplied the business with
The term long-term refers to Loans are repaid in goods and services but the
loans that are repaid in instalments and interest is supplier has yet to be paid.
specific instalments over a charged on the outstanding
longer period of time (i.e. a amount. Short-term loans
term of 5–10 years). Long- refers to loans that are
term loans may have a fixed generally repaid within a
interest rate, or a floating few months or a year.
interest rate (based on the
reserve bank prime rate).
Trust creditors Bank overdraft (Negative) VAT control account
(Current liability) Credit (Current liability) Credit (Current liability) Credit
balance balance balance
The money that is in a trust A bank account where the The account for the
account at any point in time business owes the bank recording of the transactions
belongs to the clients of the money. It is referred to as relating to VAT. VAT is
legal practice and the clients an unfavourable balance. payable to SARS. Both
are referred to as trust Output VAT (Credit side)
creditors of the legal practice. and Input VAT (Debit side)
are recorded in the VAT
control account.

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FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

3 SUNDRY ITEMS

Contents
3.1 Learning unit outline ............................................................................................................ 3
3.2 Inventory .............................................................................................................................. 3
3.2.1 Introduction ............................................................................................................ 3
3.2.2 Recording of inventory during the year for the periodic inventory system ............... 4
3.2.3 Schematic representation of a periodic inventory system ....................................... 6
3.2.4 Recording of end of year adjustments for the periodic inventory system ................ 9
3.2.5 Schematic representation of a perpetual inventory system ................................... 11
3.2.6 Inventory valuation methods ................................................................................. 12
3.2.7 Illustration of movement of inventory units for the perpetual inventory system ..... 13
3.2.8 Journal entries during the year for the perpetual inventory system ....................... 13
3.2.9 Mark-up on cost .................................................................................................... 14
3.2.10 Comparison of entries for perpetual inventory system and periodic inventory system
.............................................................................................................................. 17
3.2.11 Recording of end of year closing entries for the perpetual inventory system ........ 19
3.2.12 Recording of drawings and donations of inventory ............................................... 19
3.2.13 Self-assessment exercise ..................................................................................... 22
3.3 Depreciation ...................................................................................................................... 25
3.3.1 What is property, plant and equipment? ............................................................... 25
3.3.2 What is depreciation? ........................................................................................... 26
3.3.3 Schematic representation of depreciation ............................................................. 28
3.3.4 Schematic representation: Depreciation – straight-line method ............................ 29
3.3.5 Schematic representation: Depreciation – reducing-balance method ................... 30
3.3.6 Self-assessment exercise ..................................................................................... 31
3.4 VAT (Value Added Tax) ..................................................................................................... 32
3.4.1 Introduction ........................................................................................................... 32
3.4.2 What is VAT? ........................................................................................................ 32
3.4.3 What is a VAT vendor and who must register as a VAT vendor? ......................... 32
3.4.4 Schematic representation of the concept of VAT .................................................. 33
3.4.5 Tax periods ........................................................................................................... 34
3.4.6 Output VAT and Input VAT ................................................................................... 34
3.4.7 Different categories of supplies ............................................................................. 35
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3.4.8 Responsibilities as a VAT vendor ......................................................................... 36

3.4.9 Tax invoices .......................................................................................................... 37
3.4.10 The accounting treatment of VAT ......................................................................... 37
3.5 Bank reconciliations ........................................................................................................... 46
3.5.1 Introduction ........................................................................................................... 46
3.5.2 Steps in the bank reconciliation process ............................................................... 48
3.5.3 Schematic representation: Bank reconciliation ..................................................... 49
3.5.4 Subsequent bank reconciliations .......................................................................... 54
3.5.5 Self-assessment exercises ................................................................................... 60

Concept cards
The following concept cards are available for this learning unit:

CONCEPT o Inventory cycle

CARDS
o Perpetual inventory method
o Periodic inventory method
o Depreciation
o Straight-line depreciation method
o Reducing balance depreciation method
o VAT
o Bank reconciliation

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3.1 Learning unit outline

This learning unit will deal with sundry items that affect the statement of profit and loss and the
statement of financial position. The items to be discussed are:
– Inventory
– Depreciation
– VAT (Value Added Tax); and
– Bank reconciliations

3.2 Inventory

Learning outcomes

After studying this learning unit, you should be able to:

• define a perpetual inventory control system
• define a periodic inventory control system
• explain the difference between a periodic and a perpetual inventory control system
• define the first-in, first-out method
• calculate the value of cost of sales and gross profit
• record inventory transactions in the accounting records

Key concepts

• Perpetual inventory control system

• Periodic inventory control system
• First-in, first-out method
• Mark-up
• Cost of sales
• Gross profit

3.2.1 Introduction
In most cases inventory is the largest current asset of a trading entity. It is important that a trading
entity is at all times able to supply the demand for its different types of merchandise. Trading
entities (entities that buy and sell goods) keep inventory on hand (unsold goods) in order to supply
their customers with different types of goods. Additional purchases are made to replace the sold
inventory. A business makes a profit by selling the inventory for more than what it paid to buy the
inventory. In determining the profit of a trading entity, it is important to determine the cost of the
goods sold (cost of sales).

The discussion of inventory has been included in the learning material as law practitioners may
deal with inventory in their interaction with clients in the following situations:
• Drawing up contracts
• Remedies for breach of contracts
• Legalities regarding insurance claims etc.
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The inventory cycle is summarised as follows:

Purchase of goods at cost Inventory purchased for cash –

price (inventory) Cash payment to supplier

Inventory purchased on credit –

Amount owed to supplier

Inventory is held by
business until it is sold
The business has made a
profit on the transaction – Inventory cycle
SP – CP = profit
Sale of goods at selling
price (inventory)

Goods sold on credit – Amount

owed by customer

Goods sold for cash – Cash

received from customer

3.2.2 Recording of inventory during the year for the periodic inventory system
Under the periodic inventory system, the purchase of inventory is not recorded in the inventory
account. A separate account known as the purchases account is used to record these
purchases.
Under the periodic inventory system, the cost of sales is not determined at the time of the
recording of the sale. The cost of sales can only be determined at the end of the financial period
after a physical inventory count has been done.
The cost price of inventory sold during an accounting period will be determined as follows:
R
Cost price of inventory at the beginning of the financial year * XXX
Add: Cost price of inventory purchased during the financial year (the total
amount spent on purchases) XXX
XXX
Less: Cost price of inventory at the end of the financial year, determined by a
physical inventory count (the unsold inventory) (XXX)
XXX
* closing inventory of previous year

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To keep inventory records, calculate cost of sales and value inventory are determined by using
either the perpetual inventory system or the periodic inventory system as follows:

Recording of inventory

Periodic inventory system Perpetual inventory system

The periodic inventory system does not Perpetual means continuous. This is a system
keep continuous, up to date records of where a business keeps continuous, moment-to-
inventory on hand. Many small moment records of the number, value and type of
businesses use a periodic system of inventories that it has at the business.
inventory.

The entity will only have accurate records A computerised accounting system – where each
periodically (i.e. at certain points in time). item of inventory is linked to the electronic
accounting records – creates a perpetual system.

The records will be accurate once the Products that have barcodes are automatically
journal entries are processed to account recorded as having been sold at tills in a
for the values of the inventory stock take. supermarket when they are “swiped”. Inventory
levels are automatically decreased as soon as
the invoice has been entered and completed at
the till.

Mark-up on cost – Cost of sales is the cost of goods sold over the period, the mark-up
percentage is the gross profit percentage of the cost price.

Notes

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3.2.3 Schematic representation of a periodic inventory system

(The term refers to the periodic inventory counts that are performed by the entity)
Periodic inventory system

NB: The inventory account is updated at regular intervals after

completing a stock take

Advantages: Disadvantages:
1. Easy to maintain 1. Lack of accurate, real time inventory
2. Cost efficient information could lead to inefficient
management of inventory
2. Little control
3. Delayed results

Step 1 – Inventory at BOY

Dr Inventory account Cr
Closing balance previous R R
period = Opening inventory this Opening balance (Step 1) xxx Adjustment (Step 4) xxx
period Adjustment (Step 4) xxx Closing balance xxx
xxx xxx
Step 2 – Purchases

Cash transaction: Credit transaction:

Record inventory purchases
in the purchases account Debit: Purchases Debit: Purchases
Credit: Bank Credit: Creditors control
Step 3 – Revenue

Recognise revenue (sales) as Cash transaction: Credit transaction:

the sales take place. Debit: Bank Debit: Debtors control
Credit: Sales Credit: Sales

INVENTORY: No recognition
Step 4

Close off the purchases Debit: Cost of sales

account with a journal entry Credit: Purchases

Opening inventory
Stock take + Purchases
Step 4 + Sales returns
– Purchases returns
Update closing inventory and – Closing inventory (= stock take value)
calculate cost of sales = Cost of sales

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The accounting entries (VAT is ignored) associated with a periodic inventory system can be
summarised as follows:

STEPS Purchase of inventory for cash:

– Dr Purchases (under the periodic inventory system, purchases are regarded
as an expense that reduces equity)
– Cr Bank (the asset, bank, decreases when money is paid out)
– The transaction is recorded in the cash payments journal at cost price.
Purchase of inventory on credit:
– Dr Purchases (see above)
– Cr Creditor (creditors is a liability account which is created or increased)
and Cr Creditors control
– The transaction is recorded in the purchases journal at cost price.
Sale of merchandise for cash:
– Dr Bank (the asset increases with the money received)
– Cr Sales (an income account which increases equity)
– The transaction is recorded in the cash receipts journal at selling price.
Sale of merchandise on credit:
– Dr Debtor (an asset which is created or increased) and
– Dr Debtors control
– Cr Sales (see above)

EXAMPLE 3.1

The information for recording inventory using the periodic inventory system is as follows:

1. A business started the financial year with R20 000 inventory on hand.
2. Inventory of R10 000 was purchased by the business on 30/04 for cash.
3. Inventory of R15 000 was purchased by the business on 31/05 on credit.
4. Inventory of R22 000 was sold by the business on 30/04 for cash.
5. Inventory of R26 000 was sold by the business on 31/10 on credit.

Notes

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EXPLANATION
3.1

The journal entries1 to record the inventory purchased during the financial year are as follows:
GJ1
Dr Cr
Date R R
30/04 Purchases (expense) 10 000
Bank 10 000
Purchase inventory for cash
31/05 Purchases (expense) 15 000
Creditors control 15 000
Purchase inventory on credit

Dr Purchases Cr
Date R Date R
30/04 Cash purchase GJ1 10 000
31/05 Credit purchase GJ1 15 000

The journal entries to record the inventory sold during the financial year are as follows:
GJ2
Dr Cr
Date R R
30/06 Bank 22 000
Sales (Revenue) 22 000
Sell inventory for cash
31/10 Debtors control 26 000
Sales (Revenue) 26 000
Sell inventory on credit

Dr Sales Cr
Date R Date R
30/06 Cash sales GJ2 22 000
31/10 Credit sales GJ2 26 000

1 A journal entry is a chronological record of accounting transactions and each journal entry has a debit and
a credit.
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3.2.4 Recording of end of year adjustments for the periodic inventory system
In a periodic inventory system there are no entries entered into the accounting records during the
financial year for cost of goods sold. At the end of the financial year (when a physical inventory
count is performed) the accounts “inventory" and “cost of goods sold" are adjusted.

In this step-by-step example of the recording of periodic inventory of an entity, the entity started
the financial year with R20 000 inventory on hand (opening inventory at the beginning of the year).
The following is the inventory T-account2 that looks as follows:

Dr Inventories Cr
Date R Date R
01/01 Balance (opening) b/d 20 000

At the end of the financial year an inventory count was performed and inventory to the value of
R40 000 was counted. Therefore, at the end of the financial year the following adjustments are
processed:
General journal
GJ3
Dr Cr
Date R R
31/12 Cost of sales 25 000
Purchases 25 000
Transfer total purchases to the cost of sales account

Dr Purchases Cr
Date R Date R
30/04 Cash purchase GJ1 10 000 31/12 Cost of sales GJ3 25 000
31/05 Credit purchase GJ1 15 000
25 000 25 000

The above closing entries (entries at the end of the financial year) are in line with the formula to
calculate cost of sales at the end of the year:

Cost of Opening Closing

Purchases
sales inventory inventory

2 An account is a summary record of all transactions relating to a particular item in an entity. In conventional
accounting in books, the account has the format of the letter T and is therefore called a T-account.
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The inventory account reflects an amount of R20 000 and needs to be adjusted to the inventory
count amount of R40 000 (physical count) at the end of the year. This is done in two steps:

Step 1: The amount of R20 000 is cancelled, and

Step 2: The inventory amount of R40 000 is then added to the account.

The contra account is “cost of sales."

The accounting entries will look as follows at the end of the year:
GJ4
Dr Cr
Date R R
31/12 Cost of sales 20 000
Inventory (opening balance) 20 000
Transfer opening inventory to the cost of sales account
31/12 Inventory (closing balance) 40 000
Cost of sales 40 000
Record closing inventory and adjust cost of sales

Asset
Dr Inventory Cr
Date R Date R
01/01 Balance (opening) b/d 20 000 31/12 Cost of sales GJ4 20 000
31/12 Cost of sales GJ4 40 000 Balance (closing) c/d 40 000
60 000 60 000
Balance (opening) b/d 40 000

Expense
Dr Cost of sales Cr
Date R Date R
31/12 Purchases 25 000 31/12 Inventory (closing) 40 000
31/12 Inventory 20 000 31/12 Cost of sales 5 000
45 000 45 000

At the end of the financial period the purchases account is credited

(closing off of account) and the cost of sales account is debited.

Dr Purchases Cr
Date R Date R
31/12 Purchases 45 000 31/12 Cost of sales 45 000

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3.2.5 Schematic representation of a perpetual inventory system

Perpetual inventory system

Continuous updating of inventory accounts – real

time tracking of inventory levels

Advantages: Disadvantages:
1. Greater control over inventory 1. Expensive to implement
2. Provides real time information that 2. Time consuming to keep the detailed level
could aid management’s decision- records
making regarding purchases,
discounts and returns
3. Reduces the need for physical
inventory counts Inventory account
Opening balance xxx Cost of sales xxx

1. Closing balance previous period = Bank/Creditors control xxx Closing balance xxx
Opening inventory this period (Purchases)

xxx xxx

Cash transaction: Credit transaction:

2. Record inventory purchases in the
Dr: Inventory Dr: Inventory
inventory account Cr: Bank Cr: Creditors’ control

Inventory
Cash transaction:
3. Recognise revenue (sales) and cost Debit: Bank Recognition of cost
of goods sold as the sales take Credit: Sales of sales:
place Debit: Cost of sales
Credit: Inventory

Inventory
Credit transaction:
Debit: Debtors’ control
Credit: Sales
4. Inventory account balance updated
in real time

Notes

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3.2.6 Inventory valuation methods

When a trading entity purchases an inventory item, the price paid at the beginning of the financial
year may not be the same price that is paid for the inventory item at a later stage in the financial
year. Not all inventory (goods) are sold by the end of the financial year, and the trading entity will
need to place a value on the inventory still on hand at the end of the financial year.

LBL
The valuation method used by the trading entity to determine the See Lessons
cost of the inventory (and therefore the cost of sales) should be Inventory
the one that brings the most realistic determination of profit in valuation

the particular entity. method

The three most used valuation methods in practice are the following:

– First in, First out (FIFO) method: According to this method, the items that were
purchased first are sold first. Inventory on hand is therefore valued at the latest prices.

– Last in, First out (LIFO) method: According to this method, the items that were purchased
last are sold first. The inventory at the end of the financial year is therefore valued at the earlier
prices. This method falls outside the scope of this module and therefore will not be discussed
in any examples.
– Weighted average method: According to this method the total cost of the goods on hand is
divided by the number of units available for sale in order to determine an average cost per
unit. This method falls outside the scope of this module and therefore will not be discussed in
any examples.

You will only be tested on the FIFO method of inventory valuation.

Notes

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3.2.7 Illustration of movement of inventory units for the perpetual inventory system
If an entity keeps very detailed accounting records of the inventory on hand then each receipt of
goods is recorded (purchase) and each sale of goods is recorded (cost of goods sold).

EXAMPLE 3.2

The following table illustrates the movement in inventory for a month for one type of inventory:

Water pumps Goods received Goods sold

02/02/2020 10 @ R1 000
03/02/2020 51
06/02/2020 8 @ R1 100
16/02/2020 4
22/02/2020 7
26/02/2020 4 @R1 200

EXPLANATION
3.2

The following table shows how to cost the inventory using the perpetual inventory system:

Water Goods Goods Units on Cost Balance

pumps received sold hand
02/02/2020 10* @ R1 000 10* 10 000 (10 x 1 000) 10 000
03/02/2020 51 52 (10* – 51) (5 000) (5 x 1 000) 5 000
3
06/02/2020 8 @ R1 100 134 (52 + 83) 8 800 (8 x 1 100) 13 800 (5 x 1 000) +
(8 x 1 100)
16/02/2020 45 96 (134 – 45) (4 000) (4 x 1 000) 9 800 (1 x 1 000) +
(8 x 1 100)
22/02/2020 710 2 (96 – 710) (7 600) (1 x 1 000) + 2 200 (2 x 1 100)
(6 x 1 100)
26/02/2020 411 @ R1 200 411 4 800 (4 x 1 200) 7 000 (2 x 1 100) +
(4 x 1 200)
Total inventory on hand
– 6 units costing R7 000 6 7 000

3.2.8 Journal entries during the year for the perpetual inventory system
When a business keeps a perpetual record of inventory and additional inventories are acquired,
the inventories account is continuously updated. This happens after each sale of inventory. When
the periodic inventory system is in place and inventory is purchased the “purchases" account is

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used to record the receipt of inventory. At the end of the year, the cost of sales and
inventories accounts do not have to be adjusted as it has been done throughout the year.

STEPS – The bookkeeper must show that goods have been received by the business.
The business has spent money on an item that will form part of the goods on
hand (inventory) of the business.
– Since inventory is an asset, the principles pertaining to assets will apply.
– Cash has decreased (credit bank) and an asset has been purchased (debit
inventory of water pumps).
– Inventory (asset) has increased and will be debited. Remember: Assets
increase on the debit side. The opposite entry is the bank account and it will
be credited (Assets decrease on the credit side).

3.2.9 Mark-up on cost

Cost of sales is the cost price (CP = R10 000) of the goods that were sold during a period.
The selling price (SP = R15 000) is what the inventory was sold for.
The mark-up percentage on cost is the gross profit percentage of the cost price.

R %
Cost price 10 000 100
Profit (mark-up) 5 000 50
Selling price 15 000 150

To calculate the cost price when the mark-up percentage (20%) and selling price (R12 000) are
given, you will use the following formula:

Formula

Cost price = Selling price x 100 ÷ (100 + mark-up percentage on cost)

CP = 12 000 x 100/120 = R10 000

R %
Cost price 10 000 100
Profit (mark-up) 2 000 20
Selling price 12 000 120

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To calculate the selling price when the mark-up percentage (20%) and cost price (R12 000) are
given, you will use the following formula:

Formula

Sales price = cost price + (cost price x mark-up percentage on cost)

SP = 12 000 + (12 000 x 20%) = R14 400

R %
Cost price 12 000 100
Profit (mark-up) 2 400 20
Selling price 14 400 120

EXAMPLE 3.3

The information for recording inventory using the perpetual inventory system is as follows:
1. A business started the financial year with R20 000 (01/04) inventory on hand.
2. Inventory of R10 000 was purchased by the business on 30/04 for cash.
3. Inventory of R15 000 was purchased by the business on 30/05 on credit.
4. Inventory of R22 000 (selling price) was sold by the business on 31/05 for cash.
5. Inventory of R26 000 (selling price) was sold by the business on 31/10 on credit.
6. The mark-up on inventory cost is 25%.

EXPLANATION
3.3

When a perpetual inventory system is used and inventories are purchased the journal entries to
record the inventory purchased during the financial year are as follows:
GJ1
Dr Cr
Date R R
30/04 Inventory (asset) 10 000
Bank 10 000
Purchase inventory for cash
30/05 Inventory (asset) 15 000
Creditors control 15 000
Purchase inventory on credit

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When the inventory is sold, the following entries are made:

GJ2
Dr Cr
Date Details R R
31/05 Bank (asset) 22 000
Sales (Revenue) 22 000
Sell inventories for cash
31/05 Cost of sales (22 000 x 100/125) 17 600
Inventories (asset) 17 6001
Cancel out inventories and record cost of sales
31/10 Debtors control 26 000
Sales (Revenue) 26 000
Sell inventory on credit
31/10 Cost of sales (26 000 x 100/125) 20 800
Inventories (asset) 20 8002
Cancel out inventories and record cost of sales

Inventory to start business amount

given in Example 3.3 Asset

Dr Inventory Cr
Date R Date R
01/04 Opening balance 20 000 31/05 Cost of sales GJ2 17 6001
30/04 Cash purchase GJ1 10 000 31/10 Cost of sales GJ2 20 8002
31/05 Credit purchase GJ1 15 000

Expense
Dr (Cost price of inventory sold) Cost of sales Cr
Date R Date R
31/05 Sale of inventory GJ2 17 600 31/12 Inventories (closing)
31/10 Sale of inventory GJ2 20 800 31/12 Balance c/d

Balance b/d
Income/Revenue

Dr (Selling price of inventory sold) Sales Cr

Date R Date R
2 31/05 Bank GJ2 22 000
31/10 Debtors control GJ2 26 000

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Asset
Dr (Selling of inventory for cash) Bank Cr
Date R Date R
31/05 Sales GJ2 22 000 30/04 Inventory GJ1 10 000
30/05 Inventory GJ1 15 000

Asset
Dr (Selling of inventory on credit) Debtors control Cr
Date R Date R
31/10 Sales GJ2 26 000

LBL The big difference between the perpetual and periodic inventory See Lessons

systems is the continuous adjustment of inventory (perpetual Perpetua/

inventory) or an adjustment only at certain times (periodic inventory). Periodic

3.2.10 Comparison of entries for perpetual inventory system and periodic inventory
system
The following explanation reflects the differences between the recording of inventory on the
perpetual inventory system and the periodic inventory system.

EXPLANATION
3.4

On 1 May 2020, a business purchased 1 000 units of merchandise at R120 per unit. This purchase
will be recorded as follows for each inventory system:

Perpetual inventory system

Dr Cr
Date Details R R
01/05 Inventory (1 000 x 120) 120 000
Accounts payable 120 000
Purchase inventories for cash

Under periodic inventory system, all purchases during the

Periodic inventory system accounting period are recorded in the "Purchases" account.

Dr Cr
Date Details R R
01/05 Purchases (1 000 x 120) 120 000
Accounts payable 120 000

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Purchase inventories for cash

On 6 May 2020, the business sold 350 units of inventory for R200 per unit on credit.

Perpetual inventory system

Dr Cr
Date Details R R
06/05 Accounts receivable (350 x 200) 70 000
Sales 70 000
Sale of inventory for cash
06/05 Cost of goods sold (350 x 120) 42 000
Inventory 42 000
Cancel out inventories and record cost of sales

Under the perpetual inventory system, the changes in the

inventory account are recorded after each transaction.
Periodic inventory system
Dr Cr
Date Details R R
06/05 Accounts receivable (350 x 200) 70 000
Sales 70 000
Sale of inventory for cash
Under the periodic inventory system, the following journal entry is recorded at the end of the
accounting period:

Dr Cr
Date Details R R
31/05 Inventory (350 x 200) 96 000
Purchases 96 000
Sale of inventory for cash

Quantity of inventory on hand at end of financial period:

= 1 000 units purchased – 200 units sold = 800 units left
Cost of inventory on hand at end of financial period:
= 800 units x R120 cost per unit = R96 000

Dr Cr
Date Details R R
31/05 Cost of goods sold 24 000
Purchases 24 000
Cost of inventory sold

Cost of goods sold

= Total purchases – closing balance of inventory
= (1 000 units x R120 cost per unit) – (800 units x R120 cost per unit)
= 120 000 – 96 000
= R24 000

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3.2.11 Recording of end of year closing entries for the perpetual inventory system
The closing off entries required at the end of the financial year under the perpetual inventory or
periodic inventory system are the same, with one exception. For the periodic inventory system,
an entry is made in the “Inventory account” to adjust the balance to the amount of inventory that
was counted and valued at year-end. Otherwise, the steps are the same:

EXAMPLE 3.5

The following transactions for Africa Suppliers took place during May 2020:

1. On 1 May 2020 Africa Suppliers purchased 1 000 units of goods at R30 per unit on credit.
2. On 15 May 2020 Africa Suppliers sold 200 units of goods at R50 per unit on credit.
3. Determine the value of inventory at the end of May 2020.

REQUIRED:

For each of the inventory systems prepare the journals for the purchase and sale of goods.
Prepare the general ledger accounts for purchases or cost of sales and inventory and for the
month ended 31 May 2020.

EXPLANATION
3.5

(a) Perpetual inventory system

Journal entries
GJ
Debit Credit
Date Detail R R
01/05 Inventory – Goods (1 000 x 30) 30 000
Accounts payable 30 000
Purchase of goods
15/05 Accounts receivable (200 x 60) 12 000
Sales 12 000
Sale of goods
15/05 Cost of goods sold (200 x 30) 6 000
Inventory – Goods 6 000
Cost of goods sold

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General ledger

Dr Inventory Cr
Date R Date R
01/05 Credit purchase GJ 30 000 15/05 Cost of sales GJ 6 000
31/05 Balance c/d 24 000
30 000 30 000

Dr Cost of sales Cr
Date R Date R
15/05 Sale of inventory GJ 6 000

(b) Periodic inventory system

Journal entries
GJ
Debit Credit
Date Detail R R
01/05 Purchases (1 000 x 30) 30 000
Accounts payable 30 000
Purchase of goods
15/05 Accounts receivable (200 x 60) 12 000
Sales 12 000
Sale of goods

Under periodic inventory system, the following journal entry is recorded at the end of the
accounting period.

Debit Credit
Date Detail R R
15/05 Inventory – Goods (800* x 30) 24 000
Purchases 24 000
Cost of goods sold

* 1 000 (units purchased) – 200 (units sold) = 800 units left

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General ledger

Dr Inventory Cr
Date R Date R
31/05 Purchases GJ 24 000 31/05 Balance c/d 24 000
24 000 24 000

Dr Purchases Cr
Date R Date R
01/05 Credit purchase GJ 30 000 31/05 Inventory sold 24 000
31/05 Balance c/d 6 000
30 000 30 000

3.2.12 Recording of drawings and donations of inventory

LBLL See Lessons

Inventory taken
Inventory taken by owner for personal use.
by owner for
personal use

(a) Use the following accounting equation to record the effect of inventory (R10 000 at cost
price) taken by the owner for personal use:

Assets Equity Liabilities Notes3

(b) Use the following accounting equation to record the effect of inventory (R10 000 at cost
price) donated by the business:

Assets = Equity + Liabilities Notes

3 Why is this the effect of the transaction?

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The following table represents the journal entries required for recording the above inventory:

Transaction Perpetual inventory Periodic inventory

account account
(a) Inventory taken by owner for personal use Dr Drawings* Dr Drawings
Cr Inventory Cr Purchases
(b) Donation of inventory Dr Donations Dr Donations
Cr Inventory Cr Purchases

* If a business owner has withdrawn goods for personal use, (Cost R10 000), then the amount must be
recorded as drawings of the owner and not as an expense for the business.

Notes

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3.2.13 Self-assessment exercise

Complete the following table by applying your knowledge acquired from working through the
learning unit (Solutions to the self-assessment exercise are included in “Lessons” for Learning
unit 3):

Question Answer
What is inventory?

What category of account is

inventory?

What is a current asset?

What is the FIFO method of

valuing inventory?

What is the perpetual inventory

system?

What is the periodic inventory

system?

What is cost of sales (COS)?

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 Learning unit 3/2022

Question Answer
How is cost of sales
calculated?

An inventory items mark-up

percentage is 40% and the
selling price is R280. Calculate
the cost price.

An inventory item’s mark-up

percentage is 60% and the
cost price is R280. Calculate
the selling price.

An inventory items selling price

is R300 and the cost price is
R120. Calculate the mark-up
% (Gross profit % – GP%).

How is a “donation” of
inventory recorded?

How is “inventory taken for

personal use” recorded?

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3.3 Depreciation

Learning outcomes

After studying this learning unit, you should be able to:

• differentiate between non-current asset and a current asset
• understand why there is a provision for depreciation
• apply the different depreciation methods
• comprehend methods of calculating depreciation charges
• identify the factors to be considered when choosing a depreciation method; and
• determine the impact on profits by using different depreciation methods
• record depreciation transactions in the accounting records

Key concepts
• Non-current asset
• Property, plant and equipment
• Depreciation
• Accumulated depreciation
• Carrying amount
• Useful life
• Residual value
• Straight-line deprecation method
• Reducing balance deprecation method

3.3.1 What is property, plant and equipment?

A business that buys and sells products normally has some property, plant and equipment as part
of the non-current assets of the business. Property, plant and equipment is a category of assets
that are tangible items owned by a business, which are used to produce or supply goods or
services, for rental to others, or for administrative purposes. The most important aspect of
property, plant and equipment is that the assets are expected to be used for more than one
financial period and therefore it is necessary to make a provision for depreciation. Examples of
property, plant and equipment are:
– Buildings (Expected period of use 20 years)
– Vehicles (Expected period of use 5 years)
– Trucks (Expected period of use 5 years); and
– Furniture (Expected period of use 7 years)

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The opposite of a non-current asset is a current asset, which refers to an asset that will be used
up within a period of one financial year. Examples of current assets are:
– Inventory (Refer to section 3.1)
– Trade debtors
– Trust debtors; and
– Cash and cash equivalents (Bank accounts)
Current assets are not depreciated.

3.3.2 What is depreciation?

When an entity buys an asset that is intended to be used in the entity for more than one financial
year, that asset is described as a non-current asset. Through their continuous use, these non-
current assets lose value through wear and tear. This loss of value is known as depreciation.

Depreciation for accounting purposes refers to the allocation of the cost of the asset to the
financial periods in which the asset is used. Depreciation is provided in terms of the
matching principle (an accounting principle) that requires that the expenses incurred during the
financial period be recorded in the same financial period as the related revenue (also known as
the matching of revenues to expenses principle). Depreciation is calculated for each accounting
period using an agreed method of depreciation.

The following are methods of calculating depreciation:

• Straight-line method
According to this method, depreciation is calculated on the cost of the asset using a pre-
determined depreciation rate. The depreciation rate could be given as a percentage (i.e. 15%
per year) or number of years (i.e. written off over the useful life of 5 years). Where the
economic (useful) life of the asset can be estimated with certainty, this can be used to
determine the depreciation rate.

If a non-current asset was bought for R5 000 and its depreciation rate was given as 10% per
annum, the annual depreciation will be:

Cost of asset x depreciation rate = depreciation

R5 000 x 10% = R500.

This method can be used when the useful life of an asset can be estimated with certainty.
The expected useful life is then used to determine the depreciation rate. If an asset was
bought for R10 000 and it is expected to have a useful life of 5 years the annual depreciation
will be calculated as follows:

R10 000/5 years = R2 000.

The useful life of an asset is an estimation of the length of time the asset can reasonably be
used to generate income (revenue) and therefore be a benefit to the business. The original
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cost of the asset is adjusted based on the depreciation calculated. The adjusted value of the
asset is shown in the books as the carrying amount.

If the asset is expected to have some value after its economic life, this value is known as
residual value. To calculate the depreciation, the residual value must first be deducted from
the cost of the asset before the depreciation rate is applied.

• Reducing balance method

Based on this method, the annual depreciation is calculated on the carrying amount of the
asset. The carrying amount is obtained by deducting the accumulated depreciation (total
depreciation to date) on the asset from the original cost of the asset. The depreciation rate is
then applied to the carrying amount to calculate the depreciation.

(Cost of assets – accumulated depreciation) x depreciation rate = depreciation

If a non-current asset was bought for R5 000 and its depreciation rate was given as 10% per
annum, the annual depreciation will be:

Year 1:
(Cost of assets – accumulated depreciation) x depreciation rate = depreciation
(R5 000 – R0) x 10% = R500

Year 2:
(Cost of assets – accumulated depreciation) x depreciation rate = depreciation
(R5 000 – R500) x 10% = R450

QUICK
NOTE If the asset was bought during the financial year, the depreciation needs to
be apportioned for the months the asset was in use. For example, a business
with a 28 February financial year-end bought an asset on 1 October. The
depreciation charge will be apportioned for 5 months.
(1 October to 28 February)

Notes

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3.3.3 Schematic representation of depreciation

Depreciation (Expense – Debit) Accumulated depreciation (Credit)

Depreciation is the amount by which the cost The amount of a long-term asset’s cost that
of a physical asset reduces in value each has been allocated to the depreciation
year. The cost of the asset is allocated expense since the time that the asset was
systematically over its useful life or life acquired.
expectancy.

Statement of profit or loss and

Statement of financial position
other comprehensive income
Methods of calculating depreciation
Straight-line method Reducing-balance method
Advantages Disadvantages Advantages Disadvantages
• Easy to calculate • Depreciation not • Easy to calculate • Cannot reduce book
• Uniform expense related to usage • Matches cost with value of asset to zero
charge from month • Ignores possible revenue by providing • Requires a high rate
to month decline in efficiency of higher depreciation of depreciation other-
• Calculated on asset over time on new assets and wise it takes a long
original cost the cost is reduced time to write down to
as the efficiency of its residual value
the asset declines

Example of calculation
On 1 January 2016, Moot Traders purchased a delivery vehicle for R100 000. The financial year-
end of Moot Traders is 31 December.

Straight-line method at 10% pa Reducing-balance method at 10% pa

(Cost price – accumulated depreciation)
Cost price x depreciation rate
x depreciation rate
R100 000 x 10% = R10 000 Dec 2016 R100 000 x 10% = R10 000
Dr Depreciation R10 000 Dr Depreciation R10 000
Cr Accumulated depreciation R10 000 Cr Accumulated depreciation R10 000
R100 000 x 10% = R10 000 Dec 2017 (R100 000 – R10 000) x 10% = R9 000
Dr Depreciation R10 000 Dr Depreciation R9 000
Cr Accumulated depreciation R10 000 Cr Accumulated depreciation R9 000
R100 000 x 10% = R10 000 Dec 2018 (R100 000 – R19 000) x 10% = R8 100
Dr Depreciation R10 000 Dr Depreciation R8 100
Cr Accumulated depreciation R10 000 Cr Accumulated depreciation R8 100
R100 000 x 10% = R10 000 Dec 2019 (R100 000 – R27 100) x 10% = R7 290
Dr Depreciation R10 000 Dr Depreciation R7 290
Cr Accumulated depreciation R10 000 Cr Accumulated depreciation R7 290

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3.3.4 Schematic representation: Depreciation – straight-line method

Advantages Disadvantages Example of calculation

• Easy to calculate • Depreciation is On 1 January 2016 MOOZ Traders purchased a delivery
• Uniform expense not related to vehicle for R100 000. The financial year-end of MOOZ
charge from month usage Traders is 31 December
to month • Ignores possible Straight-line method at 10% per annum
• Calculated on decline in Asset Cost price x depreciation rate
original cost efficiency of asset
over time Dec 2016 100 000 x 10% = R10 000
Dec 2017 100 000 x 10% = R10 000
Dec 2018 100 000 x 10% = R10 000
Dec 2019 100 000 x 10% = R10 000

Time-line (The depreciation is being written off at 10% per year, which equates to the cost of the delivery
vehicle being charged as an expense of the business over a period of 10 years.)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
R10 000 R10 000 R10 000 R10 000 R10 000 R10 000 R10 000 R10 000 R10 000 R10 000

Annual journal entry

(The amount of depreciation (a debit) being charged as an expense every year.)

Debit Credit
Depreciation R10 000
Accumulated depreciation R10 000

Accumulated depreciation is a credit and is deducted from the

cost of the asset in the statement of financial position.
Posted to general ledger

Dr Depreciation Cr Dr Accumulated depreciation Cr

Accumulated Depreciation R10 000
depreciation R10 000

Statement of profit and loss and other Statement of financial position (SFP):
comprehensive income: disclosed as disclosed in the notes for property plant
expense and equipment (PPE)

Property, plant and equipment includes the delivery vehicle. PPE is shown at carrying
amount (CA) in the SFP, which is Cost less Accumulated depreciation.
In this case for Y1, CA = R100 000 – R10 000 = R90 000.

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3.3.5 Schematic representation: depreciation – reducing-balance method

Advantages Disadvantages Example of calculation

• Easy to calculate • Carrying amount On 1 January 2016 MOOZ Traders purchased a
of asset will not be delivery vehicle for R100 000. The financial year-end
reduced to zero of MOOZ Traders is 31 December
• Matches cost with • Requires a high Reducing balance method at 10% per
revenue by providing depreciation rate Asset annum
higher depreciation otherwise the (Cost price – accumulated depreciation)
on new assets, and asset will take a x depreciation rate
matches cost of asset long time before it
Dec 2016 100 000 x 10% = R10 000
with efficiency of is written down to
asset as value of its residual value Dec 2017 (100 000 – 10 000) x 10% = 9 000
asset decrease Dec 2018 (100 000 – 19 000*) x 10% = R8 100
Dec 2019 (100 000 – 27 100*) x 10% = R7 290
* 10 000(Y1) + 9 000 (Y2) = 19 000
* 10 000(Y1) + 9 000 (Y2) + 8 100 (Y3) = 27 100
Time-line
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
R10 000 R9 000 R8 100 R7 290 R6 561 R5 905 R5 314 R4 783 R4 305 R3 874

General journal: Year 1 General journal: Year 2

(The amount of depreciation (a debit) being charged as an expense every year.)
Debit Credit Debit Credit
Depreciation R10 000 Depreciation R9 000

Accumulated depreciation R10 000 Accumulated depreciation R9 000

YEAR 1: Posted to general ledger Expense

Dr Depreciation Cr Dr Accumulated depreciation Cr

Accumulated R10 000 Depreciation R10 000

depreciation

YEAR 2: Posted to general ledger

Dr Depreciation Cr Dr Accumulated depreciation Cr

Accumulated R9 000 Balance b/d R10 000

depreciation Depreciation R9 000

Statement of profit and loss and other Statement of financial position:

comprehensive income: disclosed as disclosed in the notes for property
an expense plant and equipment (PPE)

Property, plant and equipment includes the delivery vehicle.

PPE is shown at carrying amount (CA) in the SFP, which is Cost less Accumulated depreciation.
In this case for Y1, CA = R100 000 – R10 000 = R90 000.
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3.3.6 Self-assessment exercise

Complete the following table by applying your knowledge acquired from working through the
learning unit (Answers to the self-assessment exercise are included in “Lessons” for Learning
unit 3):

Question Answer

What is a non-current asset?

What is a current asset?

What is depreciation?

What are the methods of

depreciation?

What is accumulated
depreciation?

What is the useful life of the

asset?

What is the carrying amount of

an asset?

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3.4 VAT (Value Added Tax)

Learning outcomes

After studying this learning unit, you should be able to:

• demonstrate an understanding of the principles and application of VAT
• list and explain relevant VAT terminology
• calculate the amount of VAT applicable
• record VAT transactions in the accounting records

Key concepts

• Value Added Tax (VAT)

• VAT vendor
• Entity
• Output VAT
• Input VAT
• Standard rated supply
• Zero-rated supply
• Exempt supply

3.4.1 Introduction
This learning unit aims to provide a brief and basic outline of some of the more founding principles
of VAT as well as the calculation of the VAT owed by the vendor to the South African Revenue
Service (SARS) or the VAT owed by SARS to the vendor and the accounting treatment thereof.
VAT is levied in terms of the Value-Added Tax Act, 89 of 1991.

3.4.2 What is VAT?

VAT is a tax added to the cost of a product or service and is levied for purposes of generating
revenue for government. VAT is often referred to as a tax on consumption of goods or services,
and is levied at 15% on the supply by a vendor of goods or services in the course or furtherance
of any entity carried on by a vendor.

3.4.3 What is a VAT vendor and who must register as a VAT vendor?

QUICK • A “person” in this learning unit refers to sole proprietors, partnerships,

NOTE
close corporations, public companies, state-owned companies, personal
liability companies and private companies.
• A VAT vendor is defined in the Value Added Tax Act (referred to as the
Act) as any person who is or is required to be registered under the Act.

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3.4.4 Schematic representation of the concept of VAT

VALUE ADDED TAX (VAT) = 15%

Categories of supplies

Added to the cost of a product or service and is levied

Zero Standard
for purposes of generating revenue for government. Exempt
rated rated

Cost price: R1 600 Cost price: R1 840 (value added) Cost price: R2 116 (value added)
+ 15% VAT: R240 + 15% VAT: R276 + 15% VAT: R317.40
= Selling price: R1 840 = Selling price: R2 116 0 = Selling price: R2 433.40
0

How do you calculate VAT?

If the amount given is excluding VAT: If the amount given is including VAT:
Cost price x 15% = VAT Selling price / 115 x 15 = VAT
E.g. R1 000 x 15% = R150 E.g. R1 150 / 115 x 15 = R150

Recording in financial records

Asset Liability
VAT input = VAT that can be VAT output = VAT that
claimed back from SARS Inflow the business owes SARS Outflow
of cash of cash

VAT vendor pays R1 840 (inclusive) cash for VAT vendor receives R2 116 (inclusive) cash for
stationery: Debit: Stationery R1 600 fees: Debit: Bank R2 116
Debit: VAT input R240 Credit: Fees earned R1 840
Credit: Bank R1 840 Credit: VAT output R276
Dr VAT output Cr Dr VAT input Cr
Date Details R Date Details R Date Details R Date R
2020 VAT control 276 2020 Cash receipts 276 2020 Cash payments 240 2020 VAT control 240
Dr VAT control Cr
Date Details Fol R Date Fol R
2020 VAT input 240 2020 VAT output 276
2020 Bank 36
Amount paid over to SARS at month end Recorded in the business cash payments journal (BCPJ)

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The Act requires any person to register as a vendor for VAT purposes in South Africa if the
person carries on an “entity” in South Africa, and:

• the total value of taxable supplies made by that person exceeds or is likely to exceed the
registration threshold of R1 million for a twelve-month period. Such persons are liable for
compulsory registration as a vendor, or

• the value of taxable supplies by that person does not exceed the registration threshold of R1
million but exceeded R50 000 in the past twelve months or will exceed R50 000 within 12
months of registration. Such a person may register voluntarily.

Persons who do not meet the R1 million registration threshold but comply with certain
requirements relating to ownership, can register for turnover tax. The rate of turnover tax applies
on a sliding scale from 0% to 3% based on actual turnover (receipts).

3.4.5 Tax periods

The vendor is required to file VAT returns to SARS in a specific tax period allocated by SARS to
the vendor. The periods are:
▪ Category A: two-month periods ending on uneven months (January, March etc.)
▪ Category B: two-month periods ending on even months (February, April etc.)
▪ Category C: monthly periods
▪ Category D: six-month periods ending February and August (for farmers)
▪ Category E: twelve-month periods ending on the same date as the year-end of the vendor
for income tax purposes.

3.4.6 Output VAT and Input VAT

Output VAT in relation to a vendor is defined as the tax charged in respect of the supply of goods
and services by the vendor. The tax charged is collected from the recipient of such goods and
services by the vendor and is required to be paid over to SARS, even though the customer may
not yet have paid for the goods or services.

Input VAT is defined as the VAT incurred on the supply of goods or service to the vendor. Also
included in the definition of Input VAT is the deemed Input VAT deduction on the acquisition of
second-hand goods. Input VAT is only deductible to the extent that it is incurred for the purpose
of consumption, use or supply, in the course of making taxable supplies (e.g. Fees). An Input VAT
deduction may be claimed for a period of five years from the date of receipt of the tax invoice.

Net: VAT payable or refundable The difference between the amount of Output VAT attributable
to a tax period, and the deductible Input VAT not previously claimed by a vendor represents the
VAT payable to or refundable by SARS. To the extent that the Output VAT exceeds the allowable
Input VAT deductions, a VAT payment will be due to SARS. Where a vendor’s permissible Input
VAT deductions exceed the amount of Output VAT for a tax period, a VAT refund may be claimed
from SARS.

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 Learning unit 3/2022

A vendor is required to retain a valid tax invoice as proof of any input tax deductions which are
made. These tax invoices as well as other records of transactions must be retained for a period
of at least five years.

3.4.7 Different categories of supplies

For VAT purposes all supplies are treated as either being a standard rated supply, a zero-rated
supply or an exempt supply. Supplies (good or services) that are standard rated or zero-rated
are considered to be “taxable supplies” as defined.

Standard rated supplies are supplies that are subject to VAT at the prescribed rate of 15%. The
supply of goods and services are generally subject to VAT at the standard rate unless such supply
is specifically zero-rated or exempt in terms of the Act. Vendors making standard rated supplies
are required to levy Output VAT at the prescribed rate of 15% on the value of the supply which
must then be paid over to SARS. Such vendor may claim its Input VAT deductions on goods or
services acquired in the course of making such taxable supplies.

A zero-rated supply is a taxable supply on which VAT is levied at the rate of 0%. Therefore no
output tax will be payable to SARS in respect of zero-rated supplies. Section 11 of the VAT Act
sets out specific instances of supplies of goods and services that may be zero-rated. Vendors
making zero-rated supplies are entitled to claim their Input VAT deductions on goods or services
acquired in the course of making such zero-rated supplies.

An exempt supply is not a taxable supply. An exempt supply is the supply of goods or services
upon which neither VAT at the standard rate or zero-rate is chargeable. Supplies which constitute
exempt supplies are specifically provided for in section 12 of the VAT Act. Vendors may not claim
an input tax deduction in respect of goods or services acquired in the course or furtherance of
making exempt supplies. A person that makes only exempt supplies cannot register as a vendor
as such person will not be seen to be carrying on an “entity” as defined.

No VAT can be claimed or charged on exempt supplies.

The main differences between zero-rated and exempt supplies are:

▪ Suppliers of zero-rated goods/services may be registered for VAT, but vendors of exempt
supplies may not.
▪ The supplier of a zero-rated item may claim Input VAT on the inputs made to render the
particular zero-rated supply. No Input VAT may, however, be claimed on the inputs to
exempt supplies.

The following supplies are zero-rated supplies in a legal practice:

▪ Services to welfare organisations
▪ The sale of an entity (or part thereof) as a going concern
▪ Fuel

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 Learning unit 3/2022

The following supplies are exempt from VAT:

▪ Sheriff (messenger of the court) tariffs
▪ Interest received on clients’ overdue balances
▪ Interest paid
▪ Residential accommodation
▪ Educational services

Although the following items may include VAT at 15%, no Input VAT may be claimed as they are
specifically excluded in the VAT Act:
▪ Entertainment expenses
▪ Membership fees in respect of membership of any club of a sport participating, social or
recreational nature
▪ Goods and services not utilised for taxable supplies
▪ Salaries and wages
▪ Goods and services purchased from a non-vendor (i.e. a person or entity who is not
registered for VAT with the exception of a notional Input VAT such as second-hand goods
▪ Passenger vehicles

Expenses paid out of the trust money of clients, and expenses paid on behalf of clients by a legal
practice are not services rendered to the legal practice but to the client. The practice can therefore
not claim Input VAT on the payments. The individual clients can claim the Input VAT.
Examples of such payments are:

▪ Advocate fees
▪ Rates and taxes on conveyancing transactions
▪ Occupational rent etc.

3.4.8 Responsibilities as a VAT vendor

Persons registering as vendors should bear in mind the duties associated with being a vendor.
These include, inter alia, the collection or levying of VAT on taxable transactions, the issuing of
tax invoices within 21 days from the time the supply was made, record retention for a period of
five years and the submission of VAT returns and payments of the VAT liability. VAT is due and
payable on the 25th day of the month following a one-, two-, six- or twelve-month period assigned
to the vendor by SARS.

Notes

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 Learning unit 3/2022

3.4.9 Tax invoices

The VAT Act prescribes that a tax invoice must contain certain details about the taxable supply.
As from 8 January 2016, the following information must be reflected on a tax invoice where the
consideration (price) exceeds R5 000 for it to be considered valid:

(1) It must contain the words “Tax Invoice”, “VAT Invoice” or “Invoice”
(2) Name, address and VAT registration number of the supplier
(3) Name, address and where the recipient is a vendor, the recipient’s VAT registration number
(4) Serial number of invoice and the date of issue
(5) Accurate description of goods and and/or services, indicating where applicable that the
goods are second-hand goods
(6) Quantity or volume of goods or services supplied
(7) Value of the supply, the amount of tax charged and the consideration of the supply

For tax invoices where the consideration is R5 000 or less, the information in (1), (2), (4), (5) and
(7) above is required.

3.4.10 The accounting treatment of VAT

Every registered VAT vendor that renders a service or sells products to other entities is obliged
to charge VAT on these supplies, except in cases where the supply is deemed to be zero-rated
or exempt of VAT.

The process will be explained by means of the following example:

EXAMPLE 3.6

Mrs Nkosi is charged fees to the amount of R10 250 (excluding VAT) for her divorce and a R250
collection fee (excluding VAT) for collecting R2 500 from her husband.

The following expenses have been paid from the business bank account:
• R460 for office supplies
• R2 000 for salaries
• R500 for fuel, and
• R1 725 for office rent

All these payments were accompanied by valid tax invoices and include VAT at 15% where
applicable.

REQUIRED:

Calculate the amount of VAT payable to SARS.

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EXPLANATION
3.6

VAT VAT
calculation amount
R R
Output VAT: Services rendered (R10 250 + R250) = R10 500 10 500 x 15% 1 575
(Excluding VAT)
(285)
Input VAT: Office supplies R460 (Including VAT) 15/
460 x 115 60
Salaries R2 000 (Including VAT) Exempt –
Fuel R500 (Including VAT) Zero-rated –
Office rent R1 725 (Including VAT) 1 725 x 15/115 225
Net VAT payable 1 290

Explanation for office supplies and office rent

Both the figures already include VAT. The inclusive amounts are therefore equal to 100% +
15%.The amounts need to be divided by 115% and multiplied with 100% to get the amounts
before VAT. VAT can then be calculated by multiplying the “before” VAT amounts with 15%. A
simplified method as applied in the above calculation is to combine the two calculation by dividing
the “after” VAT amounts by 115% and multiplying the answer with 15%.

EXAMPLE 3.7

Complete the following table on the basis that all supplies were done via a valid tax invoice (where
applicable).

Can Input VAT Should Output

EXPENSES / INCOME / be claimed VAT be charged
PAYMENTS RECEIPTS back? and paid over? COMMENTS
Example: As long as the vehicle
Vehicle purchased for YES is not a passenger
business use vehicle
Example: Cash
Standard supply @
received for YES
15%
services rendered
Drawings of cash by
one of the partners
Drawings of
stationery by one of
the partners
Services rendered
on credit
Purchase fuel for the
delivery vehicle
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EXPLANATION 3.7

Should
Can Input Output VAT
VAT be be charged
EXPENSES / INCOME / claimed and paid
PAYMENTS RECEIPTS back? over? COMMENTS
Stationery purchased
YES Standard supply
on credit
Drawings of cash by Cash withdrawn has
one of the partners NO already been taxed
Drawings of stationery Input VAT was claimed
by one of the partners YES on the stationery
Services rendered on Standard supply on
credit YES invoice basis
Purchase fuel for the
YES Zero-rated supply
delivery vehicle

EXAMPLE 3.8

The following transactions of SA Attorneys took place during June 2020:

SA Attorneys charged a client, A. South, fees to the amount of R12 650 (VAT inclusive) for her
divorce and a R667 collection fee (VAT inclusive) for collecting R2 500 from her husband.

The following expenses have been paid from the business bank account:
• R4 600 for rental of office space
• R20 000 for salaries
• R1 955 for stationery

All the payments were accompanied by valid tax invoices and include VAT at 15% where
applicable.

REQUIRED:

Account for the above transactions in the accounting records of SA Attorneys.

Notes

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 Learning unit 3/2022

EXPLANATION 3.8

QUICK Summary of the impact of the transactions ―

NOTE
Fees levied
► SA Attorneys has levied fees to a client. VAT is included in the amounts
levied.
► The transactions will increase the income of SA Attorneys.
► The increase of income is a credit.
► The VAT included in the income to be received is a VAT output (credit -
current liability).
► The fees levied are debited to the clients’ accounts (an asset).
Expenses
► SA Attorneys have incurred expenses. VAT is included in the amounts paid.
► The transactions will increase the expenses of SA Attorneys.
► The increase of expenses is a debit.
► The VAT included in the expenses paid is a VAT input (debit - current asset).
► The payment from the bank account reduces the bank account (an asset)
which means the bank account is credited.

Accounting records of SA Attorneys for June 2020

In the general ledger, there is an account for clients (debtors) control (B1). This account represents
the Clients ledger (a sub-ledger). In the clients ledger, there will be a separate account for each client
i.e. A. South. The balance of A. South’s account in the clients ledger will reflect as R13 327. At the
end of each financial period a “List of client accounts” is prepared and the total of the list must equal
the balance on the client’s control account in the general ledger.

1. Fees journal
FJ
Details Clients VAT
control output Fees
Date Fol. R R R
30/06 A. South (Divorce) TCL1 12 650 1 650 11 000
30/06 A. South (Collection fees) TCL1 677 97 580
13 327 1 747 11 580
B1 B3 N1

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2. Business cash payments journal

BCPJ
Sundry VAT
accounts input Bank
Date Details Fol. R R R
30/06 Rental of office space N2 4 000 600 4 600
30/06 Salaries N4 20 000 – 20 000
30/06 Stationery N3 1 700 255 1 955
24 700 855 26 555
B3 B2

3. General ledger accounts

Dr Fees earned N1 Cr
2020 R 2020 R
30/06 Fees earned FJ 11 580

Dr Clients control account B1 Cr

2020 R 2020 R
30/06 Fees earned FJ 13 327

Dr Bank account B2 Cr
2020 R 2020 R
30/06 Cash payments 26 555

Dr VAT control account B3 Cr

2020 R 2020 R
30/06 Cash payments BCPJ 855 30/06 Fees earned FJ 1 747

The balance on the VAT control account is R892 (1 747 – 855).

Therefore, there is an amount of R892 owing (credit balance) to SARS for
output tax.

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Dr Office rental N2 Cr
2020 R 2020 R
30/06 Business bank BCPJ 4 000

Dr Stationery N3 Cr
2020 R 2020 R
30/06 Business bank BCPJ 1 700

Dr Salaries N4 Cr
2020 R 2020 R
30/06 Business bank BCPJ 20 000

4. Clients ledger account

Dr A. South TCL1 Cr
2020 R 2020 R
30/06 Fees levied FJ 12 650
30/06 Fees levied FJ 677
13 327

5. List of client accounts

R
A. South 13 327
13 327 *

* The balance of the ledger account “Clients control account (B1)” is R13 327.

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3.4.11 Self-assessment exercise

Question Answer
What is VAT an acronym for?

What is VAT?

What is the VAT Act?

What is an indirect tax?

What is the current VAT rate?

What is the government's

revenue service?

What is a VAT vendor?

When do you register as a VAT

vendor?

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Question Answer

What is a zero-rated product?

What does it mean to say “VAT

inclusive or including VAT”?

What does it mean to say “VAT

exclusive or excluding VAT”?

What is the VAT percentage

(15%) based on?

What is Output VAT?

What is Input VAT?

Can you advertise prices

excluding VAT?

Calculate the amount of Output

VAT for the transaction.
Client A is invoiced for fees.
The fees levied are R10 000
(VAT inclusive).

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Question Answer
Record the above transaction FJ
re. fees levied, in the applicable Clients VAT output Fees
journal. Detail R R R

Record the above transaction Dr VAT control account Cr

re. fees levied, in the applicable
general ledger account.
Dr Clients control Cr

Dr Fees Cr

Calculate the amount of Input

VAT for the transaction.
Paid an invoice for a laptop –
R9 200 (VAT inclusive).

Record the above transaction BCPJ

re. purchase of laptop in the Computer
applicable journal. equipment VAT input Bank
Detail R R R

Record the above transaction Dr VAT control account Cr

re. purchase of laptop in the
applicable general ledger
account. Dr Computer equipment Cr

Dr Bank Cr

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3.5 Bank reconciliations

This section of the learning unit will explain the purpose of a bank reconciliation and describe the
various reconciling items. This will enable you to prepare a bank reconciliation statement.

Learning outcomes

After studying this learning unit, you should be able to:

• explain the purpose of a bank reconciliation
• list the various reconciling items
• prepare a bank reconciliation statement.

Key concepts

• Electronic fund transfer (EFT)

• Deposit
• Debit order
• Bank costs (e.g. Service fees)
• Interest
• Bank statement

3.5.1 Introduction
The rules for the Attorneys’ Profession require that the accounting records of a legal practice
(including the bank reconciliation statement) be updated and balanced on a monthly basis. A
business can arrange with the bank to issue a bank statement at regular intervals, usually
monthly.

The bank statement shows, among other things, the opening balance for the period, bank
transactions made during the period and the closing balance for the period. Since bank
transactions made by the business are also recorded in its cash journals, the balance shown in
the bank statement SHOULD agree with the balance in the bank account as per the general
ledger of the business. This is rarely the case.

Some of the reasons why the two balances do not agree are as follows:

▪ Outstanding electronic fund transfers (EFT’s): there are electronic fund transfers (EFT)
made by the business to creditors and third parties during the period, which have not yet been
debited in the bank statement.

▪ Outstanding deposits: these are deposits banked in the bank account by the business
during the statement period but which have not yet been credited in the bank statement.

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▪ Direct deposits: these are deposits made by clients and third parties directly into the bank
account of the business, which have not yet been included in the cash receipts journal. The
deposits include both cheque deposits and electronic fund transfers.

▪ Direct electronic fund transfers and debit orders: these are payments/transfers to service
providers (e.g. insurance companies) directly by the bank; which have not yet been included
in the cash payments journal.

▪ Bank charges: these comprise of service fees, commissions, ledger fees etc. Because of
the nature of these charges, they can only be recorded in the cash payments journal when the
bank statement is received.

▪ Interest charged on overdraft: this is the cost of overdrawing the bank account. The bank
statement will reflect a debit balance. Again, the bank interest can only be recorded in the
cash payments journal when the bank statement is received.

▪ Errors made by the business or the bank: these can be errors made when entering the
incorrect amounts in the cash journals or bank statement e.g. R255 instead of R225 or R546
instead of R456.

The reasons listed above can be classified under the following categories:

a) Entries in the cash journals, but not in the bank statement

The following items must be entered in the bank reconciliation statement:
• Outstanding deposits
• Outstanding electronic fund transfers

b) Items in the bank statement, but not in the cash journals

These following items must be entered in the cash journals:
• Direct deposits
• Bank charges
• Direct electronic fund transfers and debit orders
• Interest on overdraft

c) Items which can affect either the bank statement or the cash journals
Errors made by the bank must be corrected in the bank reconciliation statement and errors
made by the business must be corrected in the cash journals.

LBL
Deposits are shown as debit entries in the bank account in the
general ledger but as credit entries in the bank statement. See Lessons
Deposits and
Payments are shown as credit entries in the bank account in the payments
general ledger but as debit entries in the bank statement.

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A favourable balance is shown as a debit in the bank account in the general ledger and a
credit in the bank statement and an unfavourable balance as a credit in the bank account in
the general ledger and a debit in the bank statement.

QUICK A favourable bank account is an asset to the business. To increase the bank
NOTE
balance the general ledger account is debited and the payments made from the
bank account are credited to the bank account in the general ledger.
The accounting equation is as follows:
Assets = Equity + Liabilities
+ receipts ― ―
- payments ― ―
If the business has a favourable balance with the Bank, the account of the
business in the accounting records of the Bank with be unfavourable for the
Bank. The Bank owes the business the deposited funds. The balance in the
Bank’s accounting records will be a credit as it is a liability for the Bank.

3.5.2 Steps in the bank reconciliation process

The bank reconciliation statement can be prepared by following the steps listed below:

STEPS
1. Compare the debit column of the bank statement with the cash payments
journal in the accounting records. Tick off items, which appear in both the
bank statement and the cash journal.
2. Compare the credit column of the bank statement with the cash receipts
journal in the accounting records. Tick off items that appear in both the bank
statement and the cash receipts journal.
3. Update the cash receipts journal and the cash payments journal with the
items in the bank statement, which are not in the cash journals, i.e. bank
charges. Correct any errors made in the cash journals.
4. Use the totals obtained from the updated cash journals to prepare an
adjusted bank account in the general ledger (i.e. balance the ledger account).
5. Prepare the bank reconciliation statement. Always start with the closing
balance as per the bank statement. Taking the outstanding deposits and
outstanding electronic fund transfers listed under a) in section 3.5.1 above,
into account. Correct any errors made by the bank, in the bank reconciliation
statement. The final balance on the bank reconciliation statement should
agree with the closing balance as per the adjusted bank account.

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3.5.3 Schematic representation: Bank reconciliation

Step 1: Obtain bank statement, cash receipts journal and cash payments journal
Aim of bank reconciliation is to ensure that all cash
Bank transactions are correctly recorded in the records of Cash journals
statement the business.

Prepared by bank Prepared by business

External source document Internally generated journals from source documents
Bank records all deposits and with- All cash receipts are recorded in the cash receipts journal.
drawals from bank account All cash payments are recorded in the cash payments journal.
Step 2: Compare the bank statement and the journal
Cash
receipts
journal
Cash
payments
journal

Tick all transactions that appear on the bank

statement and in one of the cash journals

Step 3: Record all transactions that appear only on the bank statement in the correct
cash journal
Examples: Cash receipts journal Examples: Cash payments journal
• Direct deposit from client • Correction of error
• Interest received from bank • Debit order
• Correction of errors • Bank charges
• Interest paid to bank
• Correction of errors

Step 4: Prepare the bank account in the general ledger

Dr Bank Cr
R R
Opening Balance (favourable) xxx Opening Balance (unfavourable) xxx
Cash receipts xxx Cash payments xxx
xxx xxx
New Balance (favourable) xxx New Balance (unfavourable) xxx
closing closing
Step 5: Prepare the bank reconciliation statement
(All transactions in cash journals not appearing on bank statements)
Bank reconciliation statement as at …
Debit Credit
Balance as per bank statement Unfavourable Favourable
Credit outstanding deposits xxx
Debit outstanding payments xxx
Balance as per bank account Favourable Unfavourable
xxx xxx
Amounts should balance

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3.5.4 First bank reconciliation of the business

EXAMPLE 3.9

The following are the accounting records of Mann Attorneys for the month ended 30 September
2020:

Bank statement of Mann Attorneys for September 2020

2020 Debits Credits Balance

Date Details R R R
01/09 Deposit (Owner’s capital) 2 400 2 400
01/09 Deposit (EFT from client) 500 2 900
07/09 EFT paid 001 420 2 480
09/09 Deposit (EFT from client) 1 240 3 720
13/09 EFT paid 002 64 3 656
19/09 EFT paid 003 – Municipality 104 3 552
20/09 Deposit (EFT from client) 160 3 712
21/09 EFT paid 004 1 288 2 424
22/09 Service fee 1 2 423
26/09 Deposit (EFT from client) 1 680 3 943
27/09 EFT paid 005 – Monate Ltd 600 3 343
28/09 EFT paid 006 48 3 295
30/09 Bank charges 10 3 285
Service fee 5 3 280
Debit order – insurance 300 2 980
Deposit (EFT from client) 200 3 180

Cash receipts journal (bank column only) for September 2020

2020 Amount
Date Particulars R
01/09 A. Mann (Owner’s contribution) 2 400
05/09 A. South (client) 500
09/09 B. Gauteng (client) 1 240
20/09 S. Africa (client) 160
26/09 C. Kwazulu (client) 1 680
28/09 D. Western (client) 480
Total 6 460

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Cash payments journal (bank column only) for September 2020

2020 Amount
Date Details R
06/09 EFT paid 001 – T Yoti 420
12/09 EFT paid 002 – Stationery 64
18/09 EFT 300 – Municipality 104
20/09 EFT paid 004 – Town Furnishers 1 288
26/09 EFT paid 005 – Monate Ltd. 600
28/09 EFT paid 006 – Green Stores 48
29/09 EFT paid 008 - Rolke Engineers 612
Total 3 136

REQUIRED:

a) Complete the cash receipts journal and the cash payments journal of Mann Attorneys for
September 2020 from the information given above.
b) Compile the bank reconciliation statement of Mann Attorneys at 30 September 2020.

EXPLANATION
3.9

When a business entity starts its operations for the first time, the bank reconciliation is relatively
simple. The only accounting records needed to do the reconciliation are the cash receipts journal,
the cash payments journal and the bank statement. Both the bank account in the general ledger
and the bank statement will not have opening balances.

STEPS
1. Compare the debit column of the bank statement with the cash payments
journal. Tick off items, which appear in both the bank statement (debit column)
and cash payments journal. Outstanding items will be the service fee (R6), cash
fees (R10), debit order (R300), and a credit card (CC) payment to Rolke
Engineers (R612). When the CC payment was made the bank system was offline.

2. Compare the credit column of the bank statement with the cash receipts
journal. Tick off items, which appear in both the bank statement (credit
column) and the cash receipts journal. Outstanding items will be the direct
deposit (R200) and the cash sales (R480) deposited on 28 September 2020.

3. Update the cash receipts journal and the cash payments journal with items in
the bank statement, which are not in the cash journals.

4. Use the totals obtained from the updated cash receipts journal and cash
payments journal to prepare an adjusted bank account.

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5. Prepare the bank reconciliation statement.

1. Cash receipts journal (abridged)

Amount
Details R
Original total 6 460
Direct deposit – A. Thlape 200
Total 6 660

2. Cash payments journal (abridged)

Amount
Details R
Original total 3 136
Service fee 16
Debit order 460
Total 3 612

3. Adjusted bank account

Dr Adjusted bank account Cr
R R
Total receipts 6 660 Total payments 3 612
Balance c/d 3 048
6 660 6 660
Balance b/d 3 048

4. Bank reconciliation statement of Mann Attorneys at 30 September 2020

Dr Cr
Details R R
Credit balance as per bank statement 3 180
Credit outstanding deposit: 28 September 2020 480
Debit outstanding CC payment 612
Debit balance as per bank account 3 048
3 660 3 660

QUICK A credit balance (favourable) on the bank statement is shown in the credit
NOTE
column of the bank reconciliation statement.

If the bank statement had a debit (unfavourable/overdrawn) balance, it would

be shown in the debit column of the bank reconciliation statement.

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EXAMPLE
3.10

In this example Steps 1 and 2 have already been done.

The bank account in the accounting records of Western Stores showed an unfavourable balance
of R1 040 on 31 October 2020. On the same date, the business bank statement showed a
favourable balance of R1 400. A comparison of the bank statement with the cash journals
revealed the following differences:

a) A deposit of R760 on 31 October 2020 was not credited in the bank statement.
b) Electronic fund transfer 007 for R3 700 has not been included in the bank statement by
31 October 2020.
c) The bank made the following charges:
• interest on overdrawn account of R390, and
• service fees of R110.
e) Original totals:
• cash receipts journal, R9 100
• cash payments journal, R10 140.

REQUIRED:

a) Complete the cash journals of Western Stores for October 2020 from the information given
above.
b) Compile the bank reconciliation statement of Western Stores at 31 October 2020.

EXPLANATION 3.10

Cash payments journal for October 2020

Amount
Details R
Original total 10 140
Interest on overdraft 390
Service fees 110
Total 10 640

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Dr Adjusted bank account Cr

R R
Total receipts 9 100 Total payments 10 640
Closing balance c/d 1 540
10 640 10 640
Opening balance b/d 1 540

Bank reconciliation statement as at 31 October 2020

Dr Cr
Details R R
Credit balance as per bank statement 1 400
Credit outstanding deposit 760
Debit outstanding EFT payment: no. 007 3 700
Debit balance as per adjusted bank account 1 540
3 700 3 700

3.5.4 Subsequent bank reconciliations

Bank reconciliation where a bank reconciliation statement was prepared in the previous
financial period

Where a bank reconciliation statement was prepared in the previous period, the first step will be
to ascertain whether the cheques, electronic fund transfers and deposits outstanding as per the
previous bank reconciliation statement appear in this period’s bank statement. The items that
appear in this period’s bank statement must be ticked off first and those still outstanding from the
previous period must be noted and shown in the current period’s bank reconciliation statement
as outstanding. The “normal” procedures for bank reconciliation statements will then be followed
to prepare the bank reconciliation statement for the current period.

Notes

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EXAMPLE
3.11

Natal Traders is a general dealer in food and other household items in the rural areas of
Mpumalanga. Natal Traders prepared the following bank reconciliation statement for July 2020.

Bank reconciliation statement for July 2020

Dr Cr
Details R R
Credit balance as per bank statement at 31 July 2020 974
Credit outstanding cash deposit 360
Debit balance as per adjusted bank account 1 334
1 334 1 334

The business received the following bank statement for August 2020:

Debit Credit Balance

Date Details R R R
Aug 1 Balance 974
Bank deposit 360 1 334
6 Bank deposit 1 000 2 334
7 EFT payment 48 900 1 434
ATM fees 8 1 426
Service fees 12 1 414
EFT payment 49 400 1 014
12 Deposit 384 1 398
13 EFT payment 50 168 1 230
15 EFT payment 51 77 1 153
15 EFT payment 52 71 1 082
16 EFT payment 53 136 946
19 Bank deposit 800 1 746
20 Direct deposit 80 1 826
27 EFT payment 54 70 1 756
30 EFT payment 55 750 1 006
Debit order payment 550 456

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 Learning unit 3/2022

Cash receipts journal for August 2020 (Abridged) (CRJ)

Amount
Details R
S. African 1 000
Cash sales 384
A. South 800
Cash sales 583
Total 2 767

Cash payments journal for August 2020 (Abridged) (CPJ)

Amount
Details R
EFT048 900
EFT049 400
EFT050 168
EFT051 77
EFT052 71
EFT053 136
EFT054 70
EFT055 750
Total 2 572

REQUIRED:

a) Complete the cash journals of Natal Traders for August 2020 from the information given
above.
b) Post the cash journals to the bank account in the general ledger.
c) Prepare a bank reconciliation statement for August 2020.

EXPLANATION
3.11

QUICK
NOTE As part of the explanation for clearing the items between the bank statement
and the cash payments journal and cash receipts journal the relevant parts of
the question have been replicated below. When answering the question you
would not need that, as you would use the information in the question as your
workings.

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The first step is to clear the items that were shown as

Bank reconciliation statement for July 2020 outstanding in the bank reconciliation of the previous month.

Dr Cr
R R
Credit balance as per bank statement at 31 July 2020 ƶ 974
Credit outstanding cash deposit 360
Debit balance as per adjusted bank account 1 334
1 334 1 334

The business received the following bank statement for August 2020:

Debit Credit Balance

Date Details R R R
Balance ƶopening balance of bank statement is the closing
Aug 1 974
balance per the July bank reconciliation
Bank deposit 360 1 334
6 Bank deposit 1 000 2 334
7 EFT payment 48 900 1 434
ATM fees 8 1 426
Service fees 12 1 414
EFT payment 49 400 1 014
12 Deposit 384 1 398
13 EFT payment 50 168 1 230
EFT payment 51 77 1 153
EFT payment 52 71 1 082
16 EFT payment 53 136 946
19 Bank deposit 800 1 746
20 Direct deposit [o/s] 80 1 826
27 EFT payment 54 70 1 756
30 EFT payment 55 750 1 006
Debit order payment 550 456

Notes

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Cash receipts journal for August 2020 (Abridged) (CRJ)

Amount
Details R
S. African 1 000
Cash sales 384
A. South 800
Cash sales [o/s] 583
Total 2 767

Cash payments journal for August 2020 (Abridged) (CPJ)

Amount
Details R
EFT048 900
EFT049 400
EFT050 168
EFT051 77
EFT052 71
EFT053 136
EFT054 70
EFT055 750
Total 2 572

The following are the steps for answering the required section of the question:

STEPS 1. Update the cash receipts journal and the cash payments journal with items in
the bank statement, which are not in the cash journals.

2. Use the totals obtained from the updated cash receipts journal and cash
payments journal to prepare an adjusted bank account.

3. Prepare the bank reconciliation statement.

Updated cash receipts journal for August 2020 (Abridged)

Amount
Details R
Original total 2 767
Direct deposit 80
Total 2 847

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Updated cash payments journal for August 2020 (Abridged)

Amount
Details R
Original total 2 572
Bank costs 8
Service fee 12
Debit order 550
Total 3 142

Dr Adjusted bank account Cr

R R
Opening balance b/d 1 334 Payments 3 142
Receipts 2 847 Closing balance c/d 1 039
4 181 4 181
Opening balance b/d 1 039

Bank reconciliation statement for August 2020

Dr Cr
R R
Credit balance as per bank statement 456
Credit outstanding deposit 583
Debit balance as per bank account 1 039
1 039 1 039

The bank reconciliation

balances!!

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3.5.5 Self-assessment exercises

Question Answer
What is a bank reconciliation?

What is the aim of a bank

reconciliation?

Why is it necessary (important)

to perform a bank
reconciliation?

What type of items are

reconciling items in a bank
reconciliation?

Describe the difference

between the bank account in
the general ledger and the
bank statement.

What is the starting point of a

bank reconciliation?

What is the procedure for

performing a bank
reconciliation?

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FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

4 RECORDING OF TRANSACTIONS IN THE BOOKS OF FIRST ENTRY

Contents
Learning outcomes ............................................................................................................................. 2
Key concepts ...................................................................................................................................... 3
Acronyms ........................................................................................................................................... 3
4. Introduction ................................................................................................................................ 4
4.1 Accounting cycle........................................................................................................................ 4
4.2 Overview of the recording of transactions .................................................................................. 5
4.3 Purpose of books of first entry ................................................................................................... 5
4.4 Cash records ............................................................................................................................. 7
4.4.1 Cash receipts.................................................................................................................. 7
4.4.2 Cash payments ............................................................................................................... 9
(a) General business expenses ................................................................................. 9
(b) Expenses incurred in respect of the clients of the attorney’s practice ................... 9
4.5 The recording of business money in an attorney’s practice ...................................................... 10
4.5.1 Introduction ................................................................................................................... 10
4.5.2 Books of first entry – business account ......................................................................... 10
(a) Business cash receipts journal ........................................................................... 10
(b) Business cash payments journal ........................................................................ 11
4.6 The recording of trust money in an attorney’s practice ............................................................. 15
4.6.1 Introduction ................................................................................................................... 15
4.6.2 Books of first entry – trust account ................................................................................ 16
(a) Trust cash receipts journal ................................................................................. 16
(b) Trust cash payments journal .............................................................................. 17
(c) Bank charges and interest received on the trust bank account .......................... 18
4.7 Books of first entry – Fees journal............................................................................................ 19

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4.8 Books of first entry – General journal ....................................................................................... 20
4.8.1 General journal adjustments for errors .......................................................................... 20
4.8.2 General journal adjustments for uncommon transactions.............................................. 21
(a) Interest charges to clients accounts that are in arrears ........................................ 21
(b) Closing year-end entries and other year-end adjustments ................................... 22
4.8.3 General journal transactions ......................................................................................... 27
4.8.4 Sheriffs and advocates journals .................................................................................... 31
4.8.5 Books of first entry in an attorney’s practice – combined example ................................ 32
4.8.6 Petty cash journal ......................................................................................................... 35
4.8.7 Transfer journal ............................................................................................................ 38
4.9 Match the name of the journal to the description of the journal ................................................ 38
4.10 Self-assessment exercises ...................................................................................................... 40
4.11 Flashcards ............................................................................................................................... 42

Learning outcomes

After studying this learning unit, you should be able to:

• demonstrate an understanding of the accounting process
• distinguish between books of first entry and ledgers
• distinguish between cash and non-cash transactions
• identify trust and business transactions
• demonstrate an understanding of the differences between trust and business money
• determine which journal should be used for each transaction
• explain the principle of trust and business cash journals
• distinguish between the cash receipts journal and cash payments journal
• distinguish between the trust and business cash journals (bank accounts)
• explain the principle of a petty cash book
• record petty cash transactions and balance the petty cash book
• list the various journals and describe their separate functions
– fees journal
– advocates journal
– sheriffs journal
– general journal
• explain when a journal is used
• prepare the different journal entries
• demonstrate an understanding of the entries that are made when receiving and paying
accounts on behalf of clients in respect of:
– counsel fees
– tracing agent fees
– witness fees
– advocate fees, and
– sheriff fees

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 Learning unit 4/2022

Key concepts
• Transaction
• Books of first entry
• Cash journals
• Petty cash book/journal
• Fees journal
• Advocates journal
• Sheriffs journal
• General journal
• Ledgers
• Trust transactions
• Business transactions
• Payments on behalf of clients
• Trust money

Acronyms
BCRJ Business cash receipts journal
BCPJ Business cash payments journal
CL Clients ledger
FJ Fees journal
GJ General journal
LPA Legal Practice Act, 28 of 2014
LPC Rules Legal Practice Council Rules
TJ Transfer journal
TCL Trust creditors ledger
TCRJ Trust cash receipts journal
TCPJ Trust cash payments journal

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4. Introduction

In practice, there are transactions that occur repeatedly during the accounting process and
instead of entering them all into the ledgers, which is impracticable books of first entry are
used. The transactions are summarised in the books of first entry and contain the information
such as names of parties to the transaction, description of transactions, source document
numbers etc.

4.1 Accounting cycle

The accounting cycle details the formal accounting process. The steps discussed in this
learning unit are as follows (indicated by yellow shading):

Transactions The accounting process starts once a transaction has taken place.

Source documents Source documents provide the evidence for a transaction having taken
place.

Books of prime entry The source document is prepared and the information is entered
into the books of prime entry.

Ledger accounts The entries from the books of prime entry are posted to the
general ledger, creditors’ ledger, and debtors’ ledger.

Trial balance The trial balance is drawn up from the accounts in the
general ledger.

Financial statements The financial statements are drawn up from the trial
balance.

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4.2 Overview of the recording of transactions

Transaction types

Equity and
Asset Asset and equity Asset and liabilities
liabilities
– Purchasing an asset for – Contribution of capital – Purchasing an asset – Expenses on credit
cash – Drawings by owner for credit
– Receipt of payment from a – Cash income – Payment made to a
debtor – Credit income creditor
– Investing of cash – Cash expenses – Entering into a loan
– Transfer from investment to agreement
bank account

Dr Asset Cr Dr Asset Cr Dr Asset Cr Dr Expense Cr

Increase Decrease Increase Decrease Increase Decrease Increase Decrease

Dr Equity Cr Dr Liabilities Cr
Decrease Increase Decrease Increase

Dr Income Cr
Decrease Increase

Dr Expense Cr
Increase Decrease

Account types

4.3 Purpose of books of first entry

Rule 54.6 of the Law Society requires that accounting records containing the day-to-day
transactions of all monies received, held or paid by a law practitioner on his own account (his
business) or for, or on behalf of any person (the trust), be kept.

Books of first entry are books where the transactions are listed when they first occur, with their
entries being made on a daily basis before they are posted to their respective ledger accounts.
The information in the source documents is used to record the entries in the books of first
entry. The purpose of the journals is to make a detailed, chronological analysis of transactions
as depicted by the source documents.

Although all transactions can be reflected by means of a double-entry in a T-format, it would

be beneficial for any attorney’s firm to first analyse each transaction in a journal or book of first
entry.

For every transaction, a source document needs to be completed. When the firm receives
cash, a receipt is issued and when services are rendered on credit (customer pays later), an
invoice or debit note is issued etc.
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The purpose of the journals is to make a detailed, chronological analysis of transactions as

depicted by the source documents. Different journals are used for different types of
transactions and the following are examples of the books of first entry that will be encountered
in an attorney’s practice:

LBL
Journal name Journal description

Business cash The business cash receipts journal and the See Lessons
BCRJ
receipts journal business cash payments journal are used to
Business cash record flows of cash into and out of the See Lessons
payments journal business bank account. BCPJ

Trust cash receipts See Lessons

journal The trust cash receipts journal and trust cash TCRJ
payments journal are used to record flows of
Trust cash cash into and out of the trust bank account. See Lessons
payments journal TCRJ

The sheriffs journal is used to record claims for See Lessons

Sheriffs journal SJ
services rendered on credit by sheriffs.
The advocates journal is used to record claims See Lessons
Advocates journal AJ
for services rendered on credit by advocates.
The general journal is used to record those
See Lessons
General journal transactions that cannot be recorded in any of GJ
the aforementioned journals.
The petty cash journal is used to record flows of See Lessons
Petty cash journal PCJ
cash into and out of the business petty cash.
The transfer journal is used for transfers from a
See Lessons
Transfer journal client’s trust creditors account to his or her TJ
business account.

Notes

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4.4 Cash records

In terms of section 86(2) of the Legal Practice Act, 28 of 2014 (LPA) and rule 35.7 of the Rules
of the Legal Practice Council (LPC Rules), every practising attorney must open and keep two
separate bank accounts with a banking institution in the Republic, namely
► a business bank account; and

The business bank account is used for receipts and payments relating to ordinary business
transactions. In some instances, payments can be made from the business bank account
on behalf of clients. These payments are not recommended and must be limited. An
attorney should not make payments on behalf of a client from the business bank account,
based on a promise from the client that the amount will be returned.

► a trust bank account.

The trust bank account is used for receipts of trust money entrusted by clients to the
attorney and payment of trust money to third parties as mandated by the client. The bank
statement must contain a reference to the fact that it is an account opened and maintained
in terms of section 86(2) of the LPA.

The trust bank account and trust creditors will be discussed in section 4.6.

One of the following methods may be used to keep cash records:

(1) Business money and trust money are recorded separately by keeping:
• a cash receipts and cash payments journal for business transactions; and
• a cash receipts and cash payments journal for trust transactions.
(2) A combined cash book with a bank column for business transactions and another bank
column for trust transactions.

The first method is applied in this guide.

4.4.1 Cash receipts

Please note: “Cash” receipts include both physical cash and electronic fund transfers (EFT)
received. The following steps are taken to record cash receipts.

STEPS Step 1: Initial procedures

For internal control purposes, two employees have to open the mail and
record it in a postal register. After sorting the mail according to the
attorney’s preference, it is handed over to the secretary of the attorney
who has to acknowledge receipt thereof in the postal register. The
secretary then files all relevant correspondence in specific client files.

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After taking into account the instructions of the attorney, the cash
received is handed over to the cashier who acknowledges receipt thereof.
The receipt numbers and amounts are recorded in the postal register
opposite the clients’ names.

Step 2: Initial procedures for the receipt of electronic fund transfers

(EFT)

The staff member responsible for the bank reconciliation must draw bank
statements on a daily or weekly basis to see if there are any EFT deposits
in the bank account. A copy of the bank statement must be filed in the
client’s file and handed over to the attorney for his instructions.

Step 3: Identifying cash receipts

All cash and EFT receipts must be clearly identified by the attorney, and
he/she must indicate, according to the client files, whether it is business or
trust money.

Upon receipt of the cash, a receipt, pre-numbered and in triplicate, must be

issued. This receipt must clearly indicate:

► the date
► from whom the money was received
► the amount in words and in figures
► the purpose for which the money was received
► the accounts affected; and
► the name of the issuer of the receipt.
The trust receipt books and the business receipt books should be separate.

Step 4: Recording of the cash receipts in the book of first entry

Cash receipts are listed individually and in number sequence in the business
cash receipts journal and the trust cash receipts journal respectively.

Step 5: Deposit the cash in the bank accounts

An attorney’s practice must have two separate bank accounts. The bank
columns in the business cash receipts journal and the trust cash receipts
journal are added separately and the totals must agree with the relevant
deposit slips.

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4.4.2 Cash payments

Business entities make payments by electronic fund transfer (EFT), except in the case where
small amounts such as postage stamps or cleaning materials are purchased via the petty cash.

An attorney’s practice has a separate series of source documents, namely one for business
payments and one for payments from the trust bank account. An attorney must therefore
determine beforehand whether the payment are to be made from the business bank account
or trust bank account. The following section identifies the different categories of cash payments
in an attorney’s practice:

(a) General business expenses

General business expenses are all money paid out by the attorney for his own account and
include for example office rent, insurance, telephone expenses, membership fees, salaries
and wages and other expenses incurred as a result of the day-to-day business activities of the
attorney’s practice.

(b) Expenses incurred in respect of the clients of the attorney’s practice

Expenses incurred in respect of the clients of the attorney’s practice can be paid from either
the business bank account or the trust bank account depending on whether the client has
money available in his or her trust account. If money was deposited in the trust bank account,
which was not specifically earmarked for another purpose, the expenses must be paid from
the trust bank account. If money was not deposited, the payment must be made from the
business bank account. An account statement must be prepared and sent to the client/debtor.

If the payment was made from the trust bank account, the relevant trust creditor account must
be debited. The payment of the expenses from the business bank account on behalf of the
client is debited to the relevant client/debtor account.

Examples of such payments are:

– Travelling expenses incurred in the investigation of a case
– Advocate fees
– Sheriff fees, and
– Tracing fees.

QUICK
NOTE
The clients of an attorney’s practice are debtors and thus included in the
current assets in the accounting records.

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If a service provider (e.g. advocate, sheriff etc.) is used on a regular basis, the law firm can
record the services rendered in an advocates journal and the sheriffs journal. (Refer to section
4.8.4.)

The treatment of trust creditors who previously deposited amounts for expenses to be paid out
of the trust bank account is discussed in Learning unit 7.

As in the case of cash receipts, the attorney determines (by means of the client’s file) from
which bank account (business or trust) the payment must be made.

4.5 The recording of business money in an attorney’s practice

An attorney’s practice has two main categories of income and expenses in the practice. An
attorney’s practice incurs expenses necessary to operate the practice as a business (i.e. cost
of renting a premises, water and electricity costs, telephone costs etc.). The practice also
receives clients’ money in order to make payments on behalf of those clients (i.e. transfer
duties).

4.5.1 Introduction

The cash journals are specialised journals used to record the receipt or payment of cash by a
business. The journals are a chronological listing of all receipts and payments including both
cash and EFTs. There is more information about the transactions recorded in the cash receipts
journal and cash payments journal, which prevents the entering of too much detail in the
general ledger. The information recorded in the cash receipts journal and cash payments
journal is used to make postings to the subsidiary ledgers (debtors ledger and creditors ledger)
and to relevant accounts in the general ledger.

4.5.2 Books of first entry – business account

The business cash receipts journal records the receipts of cash deposited in the business bank
account and the business cash payments journal records the payments made from the
business bank account.

(a) Business cash receipts journal

All cash flows into the business bank account are recorded in the business cash receipts
journal. In an attorney’s practice, the business cash receipts journal should contain only a few
entries. Normally, the business cash receipts journal should be compiled from the business
receipt books. Because deposits can be made in the business bank account for a number of
reasons, the business cash receipts journal may contain various analysis columns.

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Example of the details of each column of the cash receipts journal:

Business cash receipts journal

Clients
Doc Sundries control Bank
Date no. Details Fol. R R R
Date of Receipt Name of client from whom Client Amount to be Amount to be Amount
tran- number cash is received or on ledger credited if cash is credited when banked
saction whose behalf cash is account received other cash is received
received, or sundry account number than from a client from clients
to be credited

(b) Business cash payments journal

All cash payments made from the business bank account are recorded in the business cash
payments journal. In an attorney’s practice there are various day-to-day expenses pertaining
to general office administration, for example, office rent, stationery expenses, salaries etc. that
need to be paid.

The business cash payments journal must be written up numerically from the business EFT
documents and from the entries obtained from the business bank statement such as bank
charges. In addition to these business expenses, an attorney can pay expenses on behalf of
a client that must be recovered from such client. For this reason, the attorney must ensure that
the payment documentation is properly completed. Due to payments being made for various
purposes, the business cash payments journal may have several analysis columns. From
these journals, the bank reconciliation (Learning unit 3) is prepared and posting is done to the
different ledger accounts as discussed in Learning unit 5.

Example of the details of each column of the cash payments journal

Business cash payments journal

Clients
Doc Sundries control Bank
Date no. Details Fol. R R R
Date of EFT no Name of client to whom Client Used when there Amount to be Amount
tran- payment is made or on ledger is no column for debited when withdrawn
saction whose behalf payment is number the specific money is paid to from bank
made or of sundry account account to be clients
to be debited debited

LBL See
A very important rule is that no trust receipts or payments are Lessons
Trust
recorded in the business cash receipts/payments journal. transactions

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EXAMPLE 4.1

The following information relates to the attorney’s practice, SA Attorneys. The practice is
registered as a VAT vendor. VAT at 15% is included where applicable.

Business bank transactions during March 2020:

Date Details
1 SA Attorneys deposits R10 000 into the business bank account as capital. Receipt
no. 21 is issued.
4 Pays office rent for March 2020 to S. Africa by EFT no. 31, R2 300.
Receives payment from A. South of R18 240 in cash for services rendered on
28 February 2020. Receipt no. 22 is issued.
7 Cash is drawn for petty cash, R1 600.
9 Pays R920 for advertisements per EFT no. 32.
12 Pays R1 150 per EFT no. 33 for membership fees to the Law Society.
14 Issues receipt no. 23 to C. Natal in settlement of his account, R969.
19 Pays short-term insurance for the period 1 April 2020 to 30 June 2020 per EFT no.
34, R6 900.
24 Pays the following expenses:
EFT no. 35 Water and electricity, R1 035.
EFT no. 36 Telephone, R690.
EFT no. 37 Salaries, R4 788.

REQUIRED:

Prepare the business cash receipts journal and the business cash payments journal of
SA Attorneys for March 2020.

EXPLANATION 4.1

(a) Use the following layout to draw up the business cash receipts journal:
Business cash receipts journal
Clients
Doc Sundries control Bank
Date no. Details Fol. R R R
Date of Receipt Name of client from Client Amount to be Amount to be Amount
tran- number whom cash is received or ledger credited if cash credited when banked
saction on whose behalf cash is account is received cash is received
received, or sundry number other than from from clients
account to be credited a client

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The business cash receipts journal is prepared as follows:

Business cash receipts journal of SA Attorneys for March 2020

Output Clients
Sundries VAT control Bank
Date Doc. Details Fol. R R R R
1 21 Capital 10 000 10 000
4 22 A. South 1 18 240 18 240
14 23 C. Natal 1 969 969
10 000 19 209 29 209

2. Use the following layout to draw up the business cash payments journal:

Business cash payments journal

Clients
Doc Sundries control Bank
Date no. Details Fol. R R R
Date of Cheque Name of client to whom Client Used when Amount to be Amount
tran- number payment is made or on ledger there is no debited when withdrawn
saction whose behalf payment is number column for the money is paid from bank
made or of sundry specific account to clients
account to be debited to be debited

The business cash payments journal is prepared as follows:

Business cash payments journal of SA Attorneys for March 2020

Sundries Input VAT Bank

Date Doc. Details Fol. R R R
4 31 Office rent 2 000 300 2 300
7 CW2 Petty cash 1 600 1 600
9 32 Advertisements 800 120 920
12 33 Law Society Membership 1 000 150 1 150
19 34 Insurance 6 000 900 6 900
24 35 Water and electricity 900 135 1 035
36 Telephone 600 90 690
37 Salaries 4 788 4 788
17 688 1 695 19 383

1 Fees are first recorded in the fees journal where the Output VAT is recorded separately.
2
Cash withdrawal
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EXAMPLE 4.2

The following information relates to the attorney’s practice, SA Attorneys. The practice is
registered as a VAT vendor. VAT at 15% is included where applicable. The following business
bank transactions took place during May 2020:

Date Details
1 S. Africa contributes R20 000 in cash as a capital contribution. Receipt no. 41 is
issued.
5 Receives an EFT from A. South in settlement of her account, R798. Receipt no. 42
is issued.
8 Pays office rent for May 2020 to E. North by EFT no. 110, R1 610
10 Receives R2 394 from G. Langa for services rendered during April 2020. Receipt
no. 43 is issued.
16 Pays the annual membership fee to the Law Society per EFT no. 111, R1 495.
20 Cash withdrawal for petty cash, R1 100.
23 Pays the telephone account per EFT no. 112, R529.
25 Pays salaries per EFT no. 113, R3 762.
27 Receives an EFT from H. Mpuma as payment on his account, R1 000. Receipt no.
44 is issued.

REQUIRED:

Prepare the business cash receipts journal and the business cash payments journal of SA
Attorneys for May 2020.

EXPLANATION 4.2

Refer to Example 4.1 for the required layout of a business cash receipts journal and a business
cash payments journal.

Business cash receipts journal of SA Attorneys for May 2020

Clients
Doc Sundries VAT control Bank
Date no. Details Fol. R R R R
1 41 Capital 20 000 20 000
5 42 A. South 798 798
10 43 G. Langa 2 394 2 394
29 44 H. Mpuma 1 000 1 000
20 000 4 192 24 192

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Business cash payments journal of SA Attorneys for May 2020

Doc Sundries VAT Bank

Date no. Details Fol. R R R
8 110 Office rent 1 400 210 1 610
16 111 Law Society Membership 1 300 195 1 495
20 Petty cash 1 100 1 100
23 112 Telephone 460 69 529
25 113 Salaries 3 762 3 762
8 022 474 8 496

4.6 The recording of trust money in an attorney’s practice

The trust cash receipts journal records the receipts of cash deposited in the trust bank account
and the trust cash payments journal records the payments made from the trust bank account.

4.6.1 Introduction

Trust money, as the name indicates, is money entrusted to an attorney, to be held in trust by
the attorney and to be dealt with according to the client’s instructions. Money received by an
attorney in respect of a matter for which the final fee cannot be accurately calculated until the
date of receipt of the deposit, for example, a property transaction, forms part of trust monies
according to Section 86(2) of the LPA. The attorney must ensure that this position of trust is
not abused; hence the reason for all the rules and regulations relating to the handling of trust
money.

Trust money remains the property of the client or another party until the instruction is executed
or the fees in that regard are debited to the client. As long as it is in the attorney’s possession,
the attorney must safeguard such money to the best of his or her ability. Trust monies do not
form part of the assets of the practitioner and may therefore not be claimed by a creditor of the
practitioner.

Trust money may comprise, inter alia:

• money paid in by clients with regard to services still to be rendered, as well as related
expenses
• money paid in by a third party (the buyer) in respect of purchase transactions
• money to be refunded to a nominated person
• transfer of money from the business bank account to the trust bank account

Trust payments (EFTs) may be:

• expenses paid for a specific purpose (e.g. advocates)
• money paid to third parties according to the client’s instructions (e.g. the seller of property)
• payment to the instructed attorney in respect of correspondent transactions

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• transfer of money from the trust bank account to the business bank account in respect of
the amount owing to the attorney. The amount owing to the attorney must be a legitimate
debit entry made in the client’s account in the clients ledger after services have been
rendered.

4.6.2 Books of first entry – trust account

In terms of section 86 of the LPA and the LPC Rules, a legal practitioner must keep a separate
trust bank account at a banking institution in the Republic, and he or she must deposit the
money held or received by the attorney on behalf of any person into this account. The LPA
and LPC Rules stipulate that the name of the trust bank account must specifically indicate that
it is an account in terms of the Act. (Refer to Learning unit 7 for examples.)

(a) Trust cash receipts journal

On receipt of trust money, an attorney must issue a proper receipt to the client. Such receipts
must be bound in numerical sequence and must indicate:

(a) the date

(b) from whom the money was received
(c) the amount in words and in figures
(d) the purpose for which the money was received
(e) the account(s) affected
(f) the name of the issuer of the receipt

The trust cash receipts journal must be completed from the duplicate receipts in the trust
receipt book, in numerical order.

Receipts are the main source documents in respect of all money received. A receipt must
contain full particulars, especially as regards the trust creditor account to be credited. It is not
always the person who pays the amount (e.g. in the case of a property transaction) whose
account must be credited. Where a property transaction is involved and the seller is your client,
a third party will deposit the purchase price.

The bank statement is also a source document from which receipts (e.g. interest on the trust
bank account) can be entered in the business cash receipts journal. (As discussed under 4.4.1
Step 2 – EFT receipts.)

Sometimes an attorney’s practice receives money for purposes other than a trust, for example
from a client (with no funds in trust) who settles his or her account. This money may be
deposited directly into the business bank account.

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The following is an example of the columns usually encountered in the trust cash receipts
journal (TCRJ):

Trust cash receipts journal of SA Attorneys – February 2020

TCRJ
Trust
Receipt Sundries creditors Bank
Date no. Details Fol. R R R
04/02 308 S. Africa 150 150
309 A. South 50 50

The trust creditors ledger is completed from the individual entries in the trust cash receipts
journal and the trust creditors control account (pertaining to receipts) is completed in the
general ledger from the total of the trust cash receipts journal.

(b) Trust cash payments journal

When a trust Electronic Cash Payment (EFT) is made, the supporting document must be
completed in full and must indicate the following:
• the date
• to whom the EFT was made
• the account affected
• the reason for the payment; and
• the amount

A trust EFT may only be issued after the following considerations were taken into account:
• The EFT is made in favour of the client or his beneficiary
• The supportive documentation is available
• The EFT is made regarding a specific trust matter

The trust cash payments journal is completed from the EFT supporting document in numerical
sequence (source document).

EFT payments from trust creditors that are deposited into the trust bank account are credited
on the trust bank statement.

An EFT payment cannot be made from the trust account if the client concerned has insufficient
funds in his or her trust account. Insufficient funds in a client’s trust account would imply a
debit balance, which is not permissible in terms of the LPA and the LPC Rules. This means
that another client’s trust money is being used to finance that particular client’s debit account.
If a client requests an attorney to pay an amount from the trust money on his or her behalf, the
attorney must never rely on a promise by the client that money will be deposited at a later
stage.
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The following is an example of the columns usually found in a trust cash payments journal
(TCPJ):
Trust cash payments journal of SA Attorneys – February 2020
TCPJ
Transfer to
Trust business
creditors bank
Sundries account account Bank
Date EFT no. Details Fol. R R R R
08/02 5001 E. North – municipal rates C6 45 45
5002 F. Cape/D. West – transfer
duty C6 2 380 2 380

The column “Transfer to business bank account relates to transfers of trust money from trust
creditors to business clients (debtors).

(c) Bank charges and interest received on the trust bank account

Bank charges are debited to a firm’s bank statement.

An attorney’s practice always has two accounts with the bank:
► a business bank account, and
► a trust bank account.

Bank charges in respect of a trust bank account can be dealt with in three ways:

• by debiting the trust bank statement with the bank charges in respect of the trust bank
account; or
• by debiting the business bank statement with the bank charges in respect of the trust bank
account; or
• a separate bank account can be opened. Interest earned on the trust bank account is then
deposited into this account. All bank charges will be paid from this account.

If the trust bank statement contains bank charges, the firm must transfer money from the
business bank account to the trust bank account to cover these bank charges and thus prevent
a deficit on the trust bank account. This is called the buffer system.

If the business and trust accounts are kept at the same bank, the attorney’s practice can also
instruct its bankers not to debit the trust bank account with bank charges, but to debit its
business bank account with such charges. This method of dealing with bank charges ensures
that there is no deficit on the trust bank account as a result of bank charges being debited to
the latter account without the necessary transfer of funds being made. Keep in mind that trust
money is held in trust on behalf of clients and may never be used for any other purpose. This
method is thus preferred.

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At the end of a financial year, the attorney’s practice requests its bank to certify the amount of
bank charges in respect of the trust bank account that has been debited to its business bank
statement. This certificate enables the auditors to vouch for the bank charges incurred in
respect of the trust bank account. All money held in trust by an attorney earns interest. Unless
otherwise stipulated by a client (e.g. in the case of an offer to purchase, where the interest
accrues to the purchaser), this interest is paid over to the Legal Practitioners Fidelity Fund.

Such interest is applied to cover bank charges on the trust bank account, the insurance of trust
creditors against fraudulent use of their money, and audit fees relating to the trust accounts.
The auditors issue an audit report (to the Law Society of the province concerned) regarding
bank charges, interest earned and trust funds. The Law Society then refunds the bank charges
and a portion of the audit fees to the firm.

In this module, we shall always assume that bank charges in respect of the trust bank account
are debited to the business bank statement.

4.7 Books of first entry – Fees journal

The fees journal is probably the most important journal in an attorney’s practice because fees
charged to each client on whose behalf services are rendered is recorded in the fees journal.

It is possible, but not preferable, to debit fees through the fees journal to a trust creditors’
account if this account reflects a credit balance. It is recommended that fees be debited to the
client’s account.

An example of the entries in the fees journal is as follows:

Fees journal of SA Attorneys for January 2020
FJ23
Clients
control Fees
Date Details Fol. R R
2 C. Natal (Drawing up of will) D4 3 600
12 T. Zulu (Consulting and drawing up of rental contract) D15 4 100
22 H. Mpuma (Completion of income tax return) D9 1 700
9 400 9 400
31 Dr – Clients control account B4
31 Cr – Fees account N1

In the clients ledger, the individual accounts of clients will be debited, while in the general
ledger, the clients control account will be debited and the fees earned account will be credited
with the total amount.

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The following source documents are relevant:

(i) Fees register – All attorneys’ fees, together with the relevant details, are recorded in the
fees register from the client files.
(ii) Debit notes or invoices – Pre-numbered debit notes or invoices are then issued in
triplicate or quadruplicate.
(iii) Client files – The debit notes or invoices are recorded in the fees journal from client files.
The files, therefore, serve as a source document for recording purposes.
4.8 Books of first entry – General journal

The following transaction is used to illustrate a basic entry in the general journal:
Equipment was purchased on credit from a supplier (SA Stores) on 1 January 2020 for
R150 000.
Account Dr and Cr columns and Journal page no.
Date debited monetary unit
J1
2020 Debit Credit
Account
Date Details credited Fol. R R
01/01 Equipment N10 150 000
Liability (Creditor SA Stores – TC1) B11 150 000
Equipment purchased on credit

Indentation – indicates that Journal

the account must be credited narration Debit
amount Credit
Account
codes amount
4.8.1 General journal adjustments for errors

The general journal may be used for adjustments between trust creditors when it is necessary
to correct errors.

EXAMPLE 4.3

H. Mpuma deposits R3 000 on 1 January 2020 towards the costs of handling his divorce and
receipt no. 6218 is issued to him. The account of W. Mpuma is, however, erroneously credited
with the R3 000.

EXPLANATION 4.3

The error will be corrected via the general journal as follows:

Date Dr Cr
2020 Details Fol. R R
01/01 W. Mpuma (trust creditor) L6 3 000
H. Mpuma (trust creditor) L16 3 000
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Adjustment of incorrect posting – refer to receipt 6318

4.8.2 General journal adjustments for uncommon transactions

Certain transactions take place that cannot be recorded in any one of the journals discussed
so far. We will then make use of a general journal to record these transactions.

The following examples are typical transactions entered in the general journal:
► the purchase of consumable goods such as stationery on credit
► the purchase of fixed assets on credit
► the sale of fixed assets on credit
► transactions whereby the owner takes non-cash items from the business, e.g. office
computer taken for private use
► transactions whereby the owner contributes assets other than cash
► interest charges to clients accounts that are in arrears
► closing year-end entries and other year-end adjustments

Work through the following examples of uncommon transactions that are recorded in the
general journal:

(a) Interest charges to clients’ accounts that are in arrears

EXAMPLE 4.4

The client account of S. Africa of R15 400 is 6 months in arrears. If the clients account has
been outstanding for longer than three months SA Attorneys charges the client interest on the
overdue account at 10% per annum. The account of S. Africa was due for payment on 1 April
2020.

EXPLANATION 4.4

The interest on the overdue account of S. Africa will be accounted for via the general journal
as follows:

Date Dr Cr
2020 Details Fol. R R
01/06 S. Africa (client) A6 385
Interest receivable N6 385
Interest charged on overdue account (15 400 x 10% x 3/12)

QUICK ― The name of the two accounts affected by the transaction is recorded in
NOTE
the details column. The name of the account to be debited is recorded on

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the first line while the name of the account to be credited is recorded on
the second line.
― A short description of the transaction, a journal narration.

(b) Closing year-end entries and other year-end adjustments

The financial statements are prepared at the end of the financial period but before the
statements are prepared the correctness of the accounting records needs to be assured. For
example, all the income and expense items pertaining to a specific financial period must be
taken into account. The following is relevant:
The income earned during an The adjustments ensure
The cash received or accounting period should match compliance with the
paid during the period with the expenses incurred to matching concept by
is not necessarily the earn the income during the providing for expenses, by
period during which accounting period. Adjust the recording income received
the income was accounts by allocating the in advance, depreciation
earned or the expense income or expense items to the charges and expenses paid
incurred. correct accounting period. in advance.

► Accrued expenses
An accrued expense is an expenditure for which the underlying asset was consumed but was
not yet paid. The business therefore incurred the expense and should recognise the expense
together with the liability to pay the expense. The liability is called an accrued expense.

When adjusting accruals and prepayments, it is necessary to –

– identify the specific account to be adjusted

– determine the outstanding amount or the prepaid amount
– record the adjustment (general journal)

EXAMPLE 4.5

The financial year of SA Attorneys ends on 31 December each year. SA Attorneys pays
monthly rent of R12 000 for their premises. The accounting records of the law practice showed
that rent was paid for ten months during the financial year ended 31 December 2020.

REQUIRED:

1. Record the necessary adjustment and the closing entry in the general journal of SA
Attorneys.
2. Post the journal entry to the general ledger of SA Attorneys.

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EXPLANATION 4.5

1. General journal
GJ1
Date Dr Cr
2020 Details Fol. R R
31/12 Rental expense N1 24 000
Accrued expense B1 24 000
Adjustment for rent owing (12 000 x 2)
31/12 Profit or loss account N2 144 000
Rental expense N1 144 000
Closing transfer for the year ended 31 December 2020
(12 000 x 12)

2. General ledger

Dr Rental expense N1 Cr
2020 R 2020 R
31/12 Bank* CRJ 120 000 31/12 Profit or loss account GJ 144 000
31/12 Accrued expense GJ 24 000
144 000 144 000

Dr Accrued expense B1 Cr
2020 R 2020 R
31/12 Balance c/d 24 000 31/12 Rental expense GJ 24 000
24 000 24 000
01/01 Balance b/d 24 000
* Total rent payments made during the financial year (given for the sake of completeness). The payments would
have been recorded on a monthly basis on the date the payment was made. The entries were recorded in the
CPJ and then posted to the Rental expense account.

Dr Profit or loss account N2 Cr

2020 R 2020 R
31/12 Insurance GJ1 144 000

► Accrued income
Accrued income is income that has not been received in the accounting period when the
underlying obligation was fulfilled. Since the services were rendered the business is entitled to

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receive payment and therefore the income is recognised (Cr – Services rendered) and a debtor
is created for the amount receivable (Dr – Accounts receivable).

This is income earned by the business in respect of services rendered but for which no
payment has been received. Accrued income is shown as current assets.

EXAMPLE 4.6

SA Business earned R12 500 in advertising income from advertising placed in magazines and
newspapers for the year ended 31 December 2020. SA Business only received R9 850 during
the year from the client S. Africa.

REQUIRED:

1. Record the necessary adjustment and the closing entry in the general journal of SA
Business.
2. Post the journal entries to the general ledger of SA Business.

EXPLANATION 4.6

The advertising income will be accounted for via the general journal as follows:

1. General journal
GJ1
Date Dr Cr
2020 Details Fol. R R
31/12 Accrued income B1 2 650
Advertising income N6 2 650
Adjustment for advertising earned but not yet received
(12 500 – 9 850)
31/12 Advertising income N1 12 500
Profit or loss account N2 12 500
Closing transfer for the year ended 31 December 2020

2. General ledger

Dr Advertising income N1 Cr
2020 R 2020 R
31/12 Profit or loss account GJ1 12 500 31/12 Bank* CRJ 9 850
31/12 Accrued income GJ1 2 650
12 500 12 500

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Dr Accrued income B1 Cr
2020 R 2020 R
31/12 Advertising income GJ1 2 650 31/12 Balance c/d 2 650
2 650 2 650
01/01 Balance b/d 2 650

Dr Profit or loss account N2 Cr

2020 R 2020 R
31/12 Advertising income GJ1 12 500

► Income received in advance

Income received in advance is income received in one accounting period, but for which the
underlying obligation will only be fulfilled in the next accounting period. When the obligation is
eventually fulfilled, it is recognised as income.

Income received in advance is not yet earned so it must be deducted from total income to
arrive at the correct income earned during the financial year. Income received in advance is
shown as current liabilities.

EXAMPLE 4.7

SA Business sub-lets part of its premises for a monthly rental of R12 800. During the financial
year ended 31 December 2020 the tenant made a total payment of R166 400.

REQUIRED:

1. Record the necessary adjustment and the closing entry in the general journal of SA
Business.
2. Post the journal entries to the general ledger of SA Business.

Notes

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EXPLANATION 4.7

The rental income received in advance will be accounted for via the general journal as follows:

1. General journal
GJ1
Date Dr Cr
2020 Details Fol. R R
31/12 Rental income N1 12 800
Income received in advance B1 12 800
Adjustment for rental income received in advance
(166 400 – (12 800 x 12))
31/12 Rental income N1 153 600
Profit or loss account N2 153 600
Closing transfer for the year ended 31 December 2020

2. General ledger

Dr Rental income N1 Cr
2020 R 2020 R
31/12 Income received in GJ1 12 800 31/12 Bank* CRJ 166 400
advance
31/12 Profit or loss account GJ1 153 600
166 400 166 400

Dr Income received in advance B1 Cr

2020 R 2020 R
31/12 Balance c/d 12 800 31/12 Rental income GJ1 12 800
12 800 12 800
01/01 Balance b/d 12 800

Dr Profit or loss account N2 Cr

2020 R 2020 R
31/12 Rental income GJ1 153 600

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► Prepaid expenses

A prepaid expense is an expenditure paid for in one accounting period, but for which the
underlying asset will not be consumed until a future period. When the asset is eventually
consumed, it is charged to expenses. The nature of certain expenses may compel a business
to pay for them in advance. Insurance premiums are good examples of such expenses.
Prepaid expenses are shown as current assets.
EXAMPLE 4.8

SA Business paid R9 000 for insurance on 1 January 2020. This payment was for insurance
cover for 18 months. The financial year of SA Business ends on 31 December each year.

REQUIRED:

1. Determine the amount that was prepaid for insurance.

2. Record the necessary adjustment and the closing entry in the general journal of
SA Business.
3. Post the journal entries to the general ledger of SA Business.

EXPLANATION 4.8

Monthly insurance cover = R9 000/18 = R500

Insurance expense = R500 x 12 = R6 000
Prepaid expense = R500 x 6 = R3 000

The prepaid expenses of SA Business will be accounted for via the general journal as follows:
GJ1
Date Dr Cr
2020 Details Fol. R R
31/12 Prepaid insurance B1 3 000
Insurance N1 3 000
Adjustment for prepaid insurance
31/12 Profit or loss account N2 6 000
Insurance N1 6 000
Closing transfer for the year ended 31 December 2020

2. General ledger

Dr Insurance expense N1 Cr
2020 R 2020 R
31/12 Bank* CPJ 9 000 31/12 Prepaid expenses GJ1 3 000
31/12 Profit or loss account GJ1 6 000

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9 000 9 000

Dr Prepaid expenses B1 Cr
2020 R 2020 R
31/12 Insurance GJ1 3 000 31/12 Balance c/d 3 000
3 000 3 000
01/01 Balance b/d 3 000

Dr Profit or loss account N2 Cr

2020 R 2020 R
31/12 Insurance GJ1 6 000

4.8.3 General journal transactions

A journal entry signed by an authorised person and a journal voucher in the client files serves
as source documents for the recording of transactions. For example, support of a credit loss
(a bad debt written off), correspondence from an attorney may be attached (e.g. a
correspondent).

Amounts are posted separately to the various accounts in the general ledger, clients and trust
creditors ledgers.

The accounting system should also be adjusted to allow for the control accounts. In the cash
books, petty cash book, fees journal, transfer journal, trust journal, sheriffs journal, advocates
journal and general journal summaries should be made for client and trust creditor accounts,
so that these totals, as summarised in paragraph 6.7 (in Learning unit 6), can be posted to the
appropriate control accounts in the general ledger. The individual amounts in the books of
prime entry are posted to the personal accounts of the clients and trust creditors in the
subsidiary ledgers, and do not form part of the double-entry system.

Notes

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EXAMPLE 4.9

The following transactions relate to the accounting records of S. Africa for March 2020. The
business is registered as a VAT vendor. VAT at 15% is included where applicable.

Amount
(Incl. VAT)
Date Details R
1 Purchases stationery on credit from Langa Stores 690
5 The account of a client, E. North was debited with fees earned
instead of the client J. North. A correction is necessary. 2 300
8 S. Africa takes a business computer for private use 4 025
27 Charges interest to a client, H. Mpuma’s overdue account @ 15%
p.a. for 6 months. The client owes S. Africa R6 000. ?

REQUIRED:

Prepare the general journal of S. Africa for March 2020.

When a clients account is debited or credited, the entry is a two-legged

EXPLANATION 4.9 entry. The client’s account (H. Mpuma – CL2) in the clients ledger is
debited and the clients control account (B5) is debited in the general
ledger. The clients control account represents the clients ledger.

General journal of S. Africa for March 2020

Debit Credit
Date Details Fol. R R
1 Stationery N10 600
VAT control (Input VAT) B8 90
Creditors control/Langa stores (See explanation in bubble) B11/C1 690
Stationery purchased on credit
5 J. North (Client) CL1 2 300
E. North (Client) CL6 2 300
Reallocation of fees earned from J. North to E. North
8 Drawings B2 4 025
VAT control (Output VAT) B8 525
Equipment B4 3 500
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Business computer taken by S. Africa for private use

27 Clients control/H Mpuma B5/CL2 450
Interest receivable N1 450
Interest charged on overdue account (R6 000 x 15% x 6/12)
EXAMPLE 4.10

The following transactions relate to the accounting records of A. South for May 2020. The
business is registered as a VAT vendor. VAT is included at 15% where applicable. The
financial year-end is 31 May 2020.

Amount
(Incl. VAT)
Date Details R
10 A. South takes stationery for own use 920
20 Purchases a cash register on credit from PC Electronics 9 775
31 Provides for depreciation on the delivery vehicles 10 000
31 Rental for premises (June 2020) 14 950

REQUIRED:
Prepare the general journal of A. South for May 2020.

EXPLANATION 4.10

General journal of A. South for May 2020

Debit Credit
Date Details Fol. R R
10 Drawings B2 920
VAT control (Output VAT) B8 120
Stationery N10 800
Stationery taken by the owner for personal use
20 Computer hardware Asset B7 8 500
VAT control (Input VAT) B8 1 275
Creditors’ control (PC Electronics – TC 8) B11 9 775
Cash register purchased on credit
31 Depreciation – delivery vehicles Expense N6 10 000
Accumulated depreciation – delivery vehicles B6 10 000
Provision for depreciation Asset
31 Rental for premises paid in advance N11 14 950
VAT control (Input VAT) Expense B8 1 950

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Rental for premises (Matching concept3) B12 13 000

Rental for premises for June 2020 paid 31 May 2020

4.8.4 Sheriffs and advocates journals

The purpose of the sheriffs and advocates journals is to record all items regarding claims for
services rendered by advocates and sheriffs. The sheriffs and advocates journals are
completed from statements received from the sheriffs and advocates for services rendered to
the clients of the law firm.

The following entries are an example of the sheriffs journal:

Sheriffs journal – January 2020

Dr Cr
Date Details Fol. R R
30 Client – A. South CL1 200
Client – S. Africa CL2 175
Sheriff (Randburg West) BC1 375
31 Dr – Clients control account GL4 375

The advocates journal will be similar to the sheriffs journal. These journals are not essential
since the general journal can be used for the same purpose. However, in a simplified system,
it is useful to keep the sheriffs and advocates journals separate. If the sheriff or advocate is
not regularly used by the law practice, their accounts need not be recorded in the sheriffs and
advocates journals or in the general journal, if the payment from the business bank account is
made immediately on receipt of the invoice.

The advocate and sheriff fees must be paid out of the business bank account unless the trust
money for the specific client is earmarked for these expenses, in which case the payment must
be made from the trust bank account.

Notes

3
This journal entry is crediting the “Rental of premises account” and thereby reducing the “Rental of premises expense” for
the year ended 31 May 2020. This is because the expense that was paid on 31 May was actually the expense for June
2020 the next financial year.
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4.8.5 Books of first entry in an attorney’s practice – combined example

The following example deals with the recording of trust transactions in the books of first entry
of an attorney’s practice.

EXAMPLE 4.11

The following information for July 2020 relates to SA Attorneys, an attorney’s practice:
1. Trial balance at 30 June 2020

Debit Credit
Details R R
Capital 50 000
Equipment 28 000
Law library 15 000
Business bank 5 550
Trust bank 4 827
Trust creditors control: 4 827
A. South 2 465
S. Africa 1 500
C. Natal 862
Clients control: 1 075
S. Africa 325
T. Zulu 750
Sheriff costs 25
Stationery on hand 400
54 852 54 852

2. Transactions that took place during July 2020

Date Transaction
1 Paid the net amount of R2 465, collected from J. Jan, to the instructing attorneys
A. South Attorneys.
2 Paid the water and electricity account of SA Attorneys, R664.

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4 Received R7 650 from J. East in respect of the registration of a bond. It is expected

that the registration will take place in August 2020.
6 Paid Advocate H. Mpuma R1 100 with a trust EFT (Advocate H. Mpuma is to act as
the defence counsel for S. Africa in a forthcoming court case).
9 Debited fees of R2 450 in respect of D. Western’s divorce case, to his account.
13 Received R3 450 from F. Cape, a client who requested SA Attorneys to act as his
defence counsel in a forthcoming court case.
14 Paid the Sheriff’s office R25 for the delivery of a summons to N. Berry.
16 Charged interest of R410 on the arrear account of T. Zulu.
21 Paid S. Stationers R464 for the supply of stationery.
28 Paid the office rent for July, R3 600.
Paid the telephone account received from Telkom SA Limited, R295.
31 Issued a debit note of R245 to G. Langa in respect of fees for drawing up his will.

REQUIRED:

Prepare the following in the accounting records of SA Attorneys for July 2020:
The subsidiary journals, properly totalled:
1. Trust cash receipts journal
2. Trust cash payments journal
3. Business cash payments journal
4. Fees journal
5. General journal

EXPLANATION 4.11

SA ATTORNEYS

1. Trust cash receipts journal – July 2020

TCRJ7
Trust
creditors
control Bank
Date Details Fol. R R
04/07 J. East (trust creditor) TCL4 7 650 7 650
13/07 F. Cape (trust creditor) TCL5 3 450 3 450
11 100 11 100
31/07 Cr – Trust creditors control GL15
31/07 Dr – Trust bank account GL6
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Notes

2. Trust cash payments journal – July 2020

TCPJ7
Trust
creditors Bank
Date Details Fol. R R
01/07 A. South (trust creditor) TCL1 2 465 2 465
06/07 S. Africa (trust creditor) (Advocate H. Mpuma) TCL2 1 100 1 100
3 565 3 565
31/07 Dr – Trust creditors control GL15
31/07 Cr – Trust bank account GL6

3. Business cash payments journal – July 2020

BCPJ7
Sundries Bank
Date Details Fol. R R
02/07 Water and electricity GL8 664 664
14/07 Sheriff’s fee (client) GL5 25 25
21/07 Stationery GL9 464 464
28/07 Office rent GL10 3 600 3 600
28/07 Telephone GL11 295 295
5 048 5 048
31/07 Cr – Business bank account GL7

4. Fees journal – July 2020

FJ7
Trust
creditors Bank
Date Details Fol. R R
09/07 D. Western (client) (fees i.r.o. divorce) CL3 2 450
31/07 G. Langa (client) (settling of will) CL1 245
31/07 Dr – Clients control GL14 2 695
31/07 Cr – Fees account GL12 2 695

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5. General journal – July 2020

GJ7
Dr Cr
Date Details Fol. R R
16/07 T. Zulu (client)/ Clients control CL4/GL14 410
Interest receivable GL13 410
Interest charged on account in arrears

4.8.6 Petty cash journal

Petty cash refers to a small amount of cash that a business uses to pay small amounts without
having to make use of an EFT. Such items (payments) do not justify the issue of an EFT. In
such instances, items are paid from petty cash. “Petty” means “small”, and this is what the
petty cash system was designed for – to pay for small expenses. Examples of typical petty
cash expenses are postage, milk, tea, coffee and stationery.

Usually a business makes use of an imprest system, whereby a fixed amount is made available
at the beginning of each month of trading (i.e. R1 000). The amount recorded as petty cash in
the general ledger is equivalent to the fixed amount. Under the imprest system, the petty cash
custodian should at all times have a combination of cash and petty cash receipts that equals
R1 000 (the imprest petty cash balance).

EXAMPLE 4.12

A business started the month of January with a R1 000 imprest amount in the petty cash box.
During January petty cash expenses amounted to R800. How much money needs to be drawn
to make up the petty cash imprest amount for February?

EXPLANATION 4.12

R800 is needed. (The amount that was spent is replaced to arrive at R1 000.) All petty cash
expenses should be recorded in the petty cash journal.

EXAMPLE
4.13

The following information relates to the attorney’s practice of SA Attorneys. The practice is
registered as a VAT vendor. VAT at 15% is included where applicable. The petty cash account
showed a debit balance of R150 on 1 March 2020.

The following petty cash transactions took place during March 2020:
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Amount Voucher
Date Item purchased / payment made (incl. VAT) no.
2 Pens and pencils R69 20
5 Stamps R23 21
11 Milk and sugar R12 22
24 Registration of letter to G. Langa (a client) R15 23
31 Restore the imprest amount ?

REQUIRED:

Prepare the petty cash journal of SA Attorneys for March 2020.

EXPLANATION 4.13

Petty cash journal of SA Attorneys for March 2020

Sta- Enter-
tion- Pos- tain- Clients
Doc Total Doc Total ery tage VAT ment control
Date no. Receipts Fol. R Date no. Payments Fol. R R R R R R
1 Balance b/d 150 2 20 Pens and
pencils 69 60 9
5 21 Stamps 23 20 3
11 22 Milk and
sugar 12 12
31 Bank Registration
(restore of letter
imprest) 119 24 23 (Langa) 15 15
119 60 20 12 12 15
31 Balance c/d 150
269 269
Apr 1 Balance b/d 150

QUICK Although SA Attorneys is a registered VAT vendor there is no VAT claimable on

NOTE
the expense, Registration of letter, as the expense is not an expense incurred for
SA Attorneys, but an expense incurred on behalf of a client – Langa. The expense
is therefore claimed back from the client.

Notes

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EXAMPLE 4.14

The following information relates to the practice of SA Attorneys. The practice is registered as
a VAT vendor. VAT at 15% is included where applicable. The petty cash account showed a
debit balance of R400 on 1 May 2020.

Petty cash transactions during May 2020:

Amount Voucher
Date Item purchased / payment made (incl. VAT) no.
4 Stamps R46 86
8 Printing paper R115 87
11 Milk and sugar R136 88
25 Registration of letter to B. Gauteng R30 89
31 Restore the imprest amount ?

REQUIRED:

Prepare the petty cash journal for SA Attorneys for May 2020

EXPLANATION 4.14

Petty cash journal of SA Attorneys for May 2020

Enter-
Sta- tain- Clients
Doc Total Doc Total tionery Postage VAT ment control
Date no. Receipts Fol. R Date no. Payments Fol. R R R R R R
1 Balance b/d 400 4 86 Stamps 46 40 6
31 Bank 327 8 87 Printing
(restore paper 115 100 15
imprest)

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11 88 Milk and
sugar 136 136
25 89 Registration
of letter
(Gauteng) 30 30
327 100 40 21 136 30
31 Balance c/d 400
727 727
Jun 1 Balance b/d 400

4.8.7 Transfer journal

There are several different types of journals and a journal specific to a legal practitioner is a
transfer journal. The transfer journal will be discussed in Learning unit 7.

4.9 Match the name of the journal to the description of the journal

Match the description of the journal given in Column B with the name of the journal given in
Column A:

Column A Column B
Business cash receipts A journal for recording all items regarding claims
journal for services rendered by sheriffs.
Business cash payments A journal used to record unique journal entries that
journal cannot be processed in any other journal.
A journal used to record all cash paid out by the
Trust cash receipts journal
business.
A journal for recording all items regarding claims
Trust cash payments journal
for services rendered by advocates.
A journal used to record all cash paid out from the
Fees journal
trust account.
A journal used to record all cash received by the
Transfer journal
business.

Sheriffs journal A journal used to record all cash received in trust

and deposited in the trust bank account.
A journal for recording the transfers of amounts or
Advocates journal
balances of trust creditors.
A journal for recording the services rendered to
General journal
clients.

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Notes

Solution to matching name of journal with description of journal

Column A Column B
A journal for recording all items regarding
Business cash receipts
claims for services rendered by sheriffs.
journal
Business cash payments A journal used to record unique journal entries
journal that cannot be processed in any other journal.
A journal used to record all cash paid out by
Trust cash receipts journal
the business.
A journal for recording all items regarding
Trust cash payments
claims for services rendered by advocates.
journal
A journal used to record all cash paid out from
Fees journal
the trust account.
A journal used to record all cash received by
Transfer journal
the business.

Sheriffs journal A journal used to record all cash received in

trust and deposited in the trust bank account.
A journal used for recording the transfers of
Advocates journal
amounts or balances of the trust creditors
A journal for recording the services rendered
General journal
to clients.

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4.10 Self-assessment exercises

Question Answer
Why is there a distinction
between cash and credit
transactions?

What is a cash receipts

journal?

What is a cash payments

journal?

What is trust money?

What are trust accounts

of a law practitioner?

What is the difference

between a business cash
receipts journal and a
trust cash receipts
journal?

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Are trust funds the

property of the legal
practitioner?

What is the difference

between a business cash
payments journal and a
trust cash payments
journal?

What is a fees journal?

When would it be `
necessary for funds to be
transferred from the trust
creditor ledger accounts
to the clients business
account?
What is a transfer
journal?

What is a general
journal?

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4.11 Flashcards

1.

Name the two bank accounts, which an

A business bank account and a trust bank
attorney must open in order to comply
account.
with section 84 to 86 of the Legal
Practice Act, 28 of 2014.

2.

State whether payments on behalf of

clients can also be made from other cash Yes. Such payments are recorded in the
sources. If so, name the book of first petty cash journal.
entry in which you would record such
payments.

3. Receipts and bank statements

Receipts must be pre-numbered and issued in
List the source documents that an
triplicate, with
attorney uses to complete the cash • the person who made the payment
receipts journal, and explain the control receiving the original;
• the first copy being filed in the client’s
measures that are employed in respect of
file; and
these source documents. • the permanent copy remaining in the
receipt book, from where the entry is
made in the cash receipts journal.

4. The following details should be clearly

indicated on the receipt:
When business money is received, a pre- • the date
numbered receipt is issued. List the • from whom the money was received
details that should be indicated on this • the amount in words and in figures
receipt. • the purpose of the receipt (nature)
• the account concerned
• the issuer of the receipt

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5.

With what should the balance of the The balance of the petty cash book
petty cash book tally? should tally with the physical cash in the
petty cash box.

6.

From which bank account is petty cash The business bank account.
funded?

7.

List the source documents applicable to The fees register, debit notes and client
fees levied, and name the book of first files. Fees charged are recorded in the
entry in which these are recorded. fees journal.

8.

List an example of an entry made in the The charging of interest on clients

general journal. accounts, which are in arrears.

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9.

Name the source document from which

Statements received from the sheriffs.
the sheriffs journal is completed.
.

10.

Name the source document from which

Statements received from advocates.
the advocates journal is completed.

11. Trust money is money entrusted to an

attorney, to be held in trust by him or her
and to be dealt with according to the
Define the term “trust money” and give instructions of the client, for example:
three examples of such money. • deposits of clients for services still to be
rendered, as well as for expenses incurred
in this regard
• money deposited by a third party (e.g. the
purchaser) in respect of a purchase
transaction
• money which has been deposited and must
be paid over to another party

12.

Why does trust money not form part of Trust money does not form part of the
the assets of an attorney’s practice? assets of an attorney’s practice because
it belongs to a third party.

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12.
A legal practitioner is obliged to keep a
Explain what section 86 of the Legal
separate trust bank account with a
Practice Act, 28 of 2014 requires of a
banking institution in the Republic and
legal practitioner as regards to the
must deposit any money held or received
handling of trust money.
on behalf of any person in this account.

13.

Interest earned on trust money is Bank charges on the trust bank account.
Insurance of trust creditors against
applied to cover certain expenses of an
fraudulent use of their money.
attorney. Name these expenses. Audit fees relating to trust accounts.

14.
– No amount exceeding the debit balance on
Explain three requirements that must be the client’s account may be transferred
from the clients trust account.
complied with before money may be
– No amount exceeding the credit balance on
transferred from the trust creditors
the clients trust account may be
account of a client to his or her account
transferred.
in the clients ledger. – The client must be aware of such a transfer
and must have no objection to it.

15.

Name the three subsidiary journals The transfer journal

involved in a transfer from a trust The trust cash payments journal
creditors account to an account in the The business cash receipts journal
clients ledger.

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16.

The trust cash receipts journal

Name the journals from which postings to The trust cash payments journal
the trust creditors ledger are made. The transfer journal
The general journal

17.

Name the two accounts of which the The trust creditors control account
balances must tally in respect of trust The trust bank account
money.

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 Learning unit 5/2022

FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

5 LEDGER ACCOUNTS, TRIAL BALANCES AND FINANCIAL STATEMENTS

Contents
5.1 Introduction ............................................................................................................................... 2
5.2 Accounting cycle ....................................................................................................................... 3
5.3 Legal accounting ....................................................................................................................... 3
5.4 Summary of subsidiary journals (books of first entry) ................................................................ 3
5.5 Discussion of general ledger accounts ...................................................................................... 5
5.6 Posting to the general ledger ..................................................................................................... 5
5.7 Balancing of a ledger account ................................................................................................... 6
5.8 Clients ledger, business creditors ledger and trust creditors ledger ........................................... 8
5.9 Trust creditors control account and clients control account........................................................ 8
5.10 Preparation of a trial balance .................................................................................................. 31
5.11 Preparation of adjusting and closing accounting entries ......................................................... 34
5.12 Preparation of financial statements ........................................................................................ 37
5.13 Self-assessment exercises ..................................................................................................... 41
5.14 Self-evaluation of processes .................................................................................................. 43

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 Learning unit 5/2022

Learning outcomes
After working through this learning unit, you should be able to:
• Prepare the accounts in the general ledger.
• Prepare a clients control account and the trust creditors control account.
• Reconcile the balance of the clients control account with the total of the client list.
• Reconcile the balance of the trust creditors control account with the total of the trust
creditors list.
• Prepare a trial balance.

Key concepts
• ledger account
• general ledger
• clients ledger (accounts receivable/debtors ledger)
• trust creditors ledger (accounts payable)
• business creditors ledger (accounts payable)
• balancing ledger accounts
• trial balance
• statement of profit or loss and other comprehensive income
• statement of financial position

5.1 Introduction

The general ledger is a collection of all the accounts and transactions of a business. Each
account in the general ledger has an identification number and a name. The accounts are
generally listed in the order – assets, liabilities, equity, revenues, and expenses.

The transactions of the business are posted from the journals (*) to the general ledger. Thus,
the information contained in the journals is recorded in the ledger accounts. The journal’s list
the information for each transaction. By posting the information to the ledger accounts, the
cumulative information for each type of transaction is recorded in a single account.

(*) Business cash receipts journal, Business cash payments journal, Trust cash receipts
journal, Trust cash payments journal, Fees journal, General journal…

Notes

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 Learning unit 5/2022
5.2 Accounting cycle

The accounting cycle details the formal accounting process. The steps discussed in this
learning unit are as follows (indicated by yellow shading):

Transactions ― The accounting process starts once a transaction has taken place.

Source documents ― Source documents provide the evidence that a transaction took place.

― The source document is prepared and the information is entered

Books of prime entry
into the books of prime entry.

― The entries from the books of prime entry are posted to the
Ledger accounts
general ledger, creditors ledger, and debtors ledger.

― The trial balance is drawn up from the accounts in the

Trial balance
general ledger.

― The financial statements are drawn up from the trial

Financial statements
balance.

RECAP When a business transaction requires a journal entry, the following rules apply:
• The journal entry must have at least 2 accounts with 1 DEBIT amount and at
least 1 CREDIT amount.
• The DEBITS are listed first and then the CREDITS.
• The DEBIT amounts will always equal the CREDIT amounts.

5.3 Legal accounting

When it comes to legal accounting (e.g. accounting records of an attorney’s practice) there are
subsidiary journals and general ledger accounts that are specific to legal accounting. Examples
of the subsidiary journals required specific for legal accounting are the business cash payments
journal (BCPJ) and the trust cash receipts journal (TCRJ). In addition, examples of general
ledger accounts are the trust creditors control and clients control accounts. The Legal Practice
Act, 28 of 2014 (LPA) regulates legal accounting and one of the aims is to protect and promote
the interests of the clients of the legal practice who hold trust money with the attorney. The LPA
contains rules relating to the handling of trust money that have to be applied to the accounting
records of an attorney’s practice.

5.4 Summary of subsidiary journals (books of first entry)

In Learning unit 4 we saw that the details of each transaction that takes place in a business
should be recorded in a journal, also known as a book of first entry.

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 Learning unit 5/2022
QUICK
NOTE A journal entry is like a set of instructions. The carrying out of these instructions
is known as posting.

The following table summarises the purpose of the books of first entry:
Acro- Subsidiary
Used for Types of entries
nym journals
BCRJ Business cash Recording business – Receipts from clients for services rendered
receipts journal receipts – Receipts from clients for payment of costs
(reimbursing of costs paid by law firm)
– Fee charged to a correspondent
– Interest received
BCPJ Business cash Recording business – Bank charges (Service fees)
payments payments – Interest paid (Finance costs)
journal – Printing costs
– Rent
– Telephone
– Entertainment costs
– Water and electricity
TCRJ Trust cash Recording trust – Amounts received on behalf of a
receipts journal receipts correspondent
– Cash received in trust
– Receipt of money that has to be paid over
to a nominated person
TCPJ Trust cash Recording trust – Investments of clients’ funds
payments payments – Payments to third parties on instruction of
journal the client
– Payment of expenses as determined by
the client for a specific purpose
– Transfer of money from the trust bank
account to the business bank account
FJ Fees journal Recording fees – Fees charged for services rendered
charged to clients
SJ Sheriffs journal Recording of costs – Sheriff costs
incurred on behalf of – If the law practitioner does not make
clients for using the significant use of the services of the sheriff
services of a sheriff. then the costs can be recorded in the GJ
AJ Advocates Recording of costs – Advocates costs
journal incurred on behalf of – If the law practitioner does not make
clients for using the significant use of the services of an
services of an attorney. attorney then the costs can be recorded in
the GJ
GJ General journal Recording unique – Depreciation
journal entries that – Interest charged on client accounts
cannot be processed in – Correction of errors
any other journal.

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5.5 Discussion of general ledger accounts

A ledger account is a summary of all the transactions that relate to a specific item, for example
Office Furniture, Fees, Telephone etc. All these individual accounts are kept in a ledger. The
general ledger consists of all the accounts of the business in the form of a T-account. The T-
account is a visual representation of individual accounts in all of the different ledgers. The
format used looks like a “T” thereby making it easy to show the effect of additions and
subtractions (debits and credits) to the account.
The following T-account shows the aforementioned discussion (The red lines indicate the T-
format):

Acc
Dr Account name no. Cr
Date Details Fol. R Date Fol. R
01/02 Assets – increase Assets – decrease
Liabilities – decrease Liabilities – increase
Capital – decreases Capital – increase
[Account totalled] [Account totalled]

5.6 Posting to the general ledger

The next step after drawing up the subsidiary journals is to post the transactions to the general
ledger. To “post” means to copy the entries listed in the journals into their respective ledger
accounts. In other words, the debits and credits in the journal are accumulated and transferred
to the appropriate debit and credit columns of the ledger account.

In reviewing the ledger accounts below, notice that the “description” column includes a cross-
reference back to the journal page in which the transaction was initially recorded. This reduces
the amount of detailed information that must be recorded in the ledger, and provides an audit
trail back to the original transaction in the journal. The check marks in the journal indicate that
a particular transaction has been posted to the ledger. Without these marks (in a manual
system), it would be very easy to fail to post a transaction, or even post the same transaction
twice.

At month-end all journals should be totalled, and these totals should be posted to the general
ledger. The rules of double-entry and cross-referencing (In the example above you can see a
column for folio numbers. These numbers are only inserted as references once the completed
journal is posted to the general ledger) will now come into full use and should be applied
throughout as we complete the general ledger.

The general ledger is where posting to the accounts occurs. Posting is the process of recording
amounts as credits (right side), and amounts as debits (left side) in the pages of the general
ledger.

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5.7 Balancing of a ledger account

According to Rule 54.10 of the LPA, the accounting records of the practice are to be updated
and balanced monthly. The requirements for this Rule are deemed to be complied with, if the
accounting records have been written up by the end of the last day of the following month (i.e.
the transactions for January should be written up by the last day of February).
As accounts have entries on both sides of the T-account, i.e. debits and credits, it is necessary
to perform a calculation to determine the balance on the account. If there is, only one entry is
entered in the account, that entry is the balance. If the amount on the debit side of the account
and the amount on the credit side of the account are equal, the balance on the account is a nil
(0) balance.

RECAP When the debit side is greater than the credit side
― the balance is a debit balance.
When the credit side is greater than the debit side
― the balance is a credit balance.

All ledger accounts have to be balanced at the end of each month.

STEPS To calculate the balance of an account, the following steps must be taken:
Step 1 ― Calculate the totals of the debit entries (left side of the account) and
credit entries (right side of the account) separately.
Step 2 ― The bigger total is then used as the total on both sides of the account.
Step 3 ― The difference between the total amounts as calculated in the
previous step and the smallest total will be the balance of the account.
Step 4 ― This balance is written on the side of the smallest total. The smallest
total plus the balance inserted will then add up to the bigger total. The
balance must be dated the last day of the month and referenced “c/d”,
the abbreviation for carried down or “c/f” for carried forward.
Step 5 ― The same balance (words and amount) is written on the opposite side
below the total with “b/d” for brought down as reference. This balance
is dated the first day of the following month.

Notes

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 Learning unit 5/2022
The balancing can be illustrated as follows:

Step 1 Step 1
Dr Business bank account Cr
Date Details Fol Amount Date Details Fol Amount
2020 R 2020 R
01/02 Capital 130 000 06/02 Equipment 100 000
28/02 Clients control Add # 28 000 16/02 Wages Add § 20 000
28/02 Bank interest received 2 000 28/02 Balance c/d 40 000
Step 4
160 000 160 000
Step 2
01/03 Balance b/d 40 000
Step 5 # (130 000 + 28 000 + 2 000) = 160 000 > § (100 000 + 20 000) = 120 000 
160 000 – 120 000 = 40 000 is the balancing amount
Step 3

LBL
Balancing a ledger account

EXAMPLE 5.1

The following transactions are used to illustrate the balancing of general ledger accounts:
1. A computer server was purchased and installed on credit by a supplier (SA Computers) on
1 January 2020 for R150 000.
2. SA Attorneys purchased three printers for cash on 1 February 2020 for R15 000.

REQUIRED:
Prepare the computer equipment account for the month ending 28 February 2020.

Notes

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EXPLANATION
5.1

Date of transaction Amounts debited to Credit side of account – always on the

asset account right of the T-account
amount

Dr Computer equipment Cr
Date Fol. R Date Fol. R
01/01 Creditors control GJ1 150 000 29/02 Closing balance 165 000
01/02 Cash payments BCPJ1 15 000
165 000 Closing balance for the month is 165 000
R165 000 and it is carried down to
Opening balance 165 000 be the opening balance for the next
month.
00
Accounts
credited
Insert a line between the R15 000 Insert R165 000 on both sides of the
and the R165 000. account. The R165 000 is a total and
there is a double line below R165 000.

Add up the left side of the account = R165 000

5.8 Clients ledger, business creditors ledger and trust creditors ledger
Apart from the general ledger, we need to keep a separate clients ledger, business creditors
ledger as well as a trust creditors ledger. The clients ledger keeps a record of transactions with
each individual client. The business creditors ledger and the trust creditors ledger keep records
of transactions with each individual business creditor and trust creditor respectively.
The total of individual client’s balances in the clients ledger must be equal to the balance of the
clients control account in the general ledger. Likewise, the total of the individual business
creditors balances in the business creditors ledger must be equal to the balance of the business
creditors control account in the general ledger.
The Rules require that a list of the individual trust creditors balances be compiled on a regular
basis of not more than three months. The balance must then be equal to the balances of the
trust creditors control account and trust bank account.

5.9 Trust creditors control account and clients control account

➢ The total balances of individual clients’ accounts (referred to as the list of clients) should
agree with the balance of the clients control account in the general ledger.

➢ The total balances of the individual trust creditors accounts in the trust creditors ledger
(referred to as the list of trust creditors) should agree with the balance of the trust creditors
control account in the general ledger.

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 Learning unit 5/2022
Because of the removal of the client and trust creditor accounts from the general ledger, the
general ledger will not balance. Therefore, two accounts are opened in the general ledger,
called the clients control account (containing all transactions with clients) and a trust
creditors control account (containing all transactions with trust creditors). The two subsidiary
ledgers are therefore included in the general ledger by means of these control accounts and
the general ledger will balance.

The trust creditors accounts in the trust creditors ledger do not decrease when
the investments are made on behalf of clients.

QUICK
NOTE A law practice delivers a service to its clients. Therefore, the business does
not buy and sell goods.

EXAMPLE
5.2

The following is a list of balances per the general ledger of Africa Attorneys at 31 January 2020:

Credits Fol. R
Capital B1 223 920
Accumulated depreciation – Law library B4 3 000
Accumulated depreciation – Computer equipment B5 6 480
Trust creditors control B9 2 520
Debits Note: The balance of the
The folio number of Trust bank account = the
Law library at cost each account B2 15 000 balance of the Trust
Computer equipment at cost providing a folio no. is B3 32 400 creditors control account
a form of referencing. = R2 520
Business bank account B6 184 296
Trust bank account B7 2 520
Clients control B8 1 704

2. The following balances on 31 January 2020 appeared in the clients ledger:

CL1 G. Gau R648 Debit

CL2 N. Natal R792 Debit (Re. matter: court case filed by ABC Venture Capital.)
CL3 D. West R264 Debit Law practitioners perform services for
clients and charge fees for work done.

3. The following balances on 31 January 2020 appeared in the clients ledger:

There is only one trust creditor. Therefore the list of Trust

Trust creditors ledger creditors = Trust creditors control account (per TB)

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 Learning unit 5/2022
TCL1 E North R2 520 Credit (Re. matter: transfer of property Erf 66, Arkasia.)

QUICK In the trial balance above, there is a folio no. referring to B1 – The Capital Account
NOTE
is the first account in the General Ledger. The B refers to the term Balance Sheet,
the previous name for the Statement of Financial Position (This statement presents
the financial position of the business at the end of the reporting period.)
N stands for Nominal account (The nominal accounts are the statement of profit and
loss accounts such as the accounts for recording revenues, expenses, gains, and
losses. These accounts are closed off at the end of the reporting period and the
balance transferred to a Statement of Financial Position equity account such as the
proprietor's capital account or the entity's retained earnings account.
TCL is for Trust creditor in the Trust Creditors Ledger
CL is for Client in the Clients Ledger

4. Transactions entered into by Africa Attorneys during February 2020:

Date Detail
1 Pays office rent for February 2020, R14 440.
[An expense – Cost to operate business on the premises]
1 Purchases by EFT, government gazettes amounting to R1 200 for the library. The
carrying amount of the law library before the aforementioned purchase was R12 000.
[Purchase of an asset]
1 Purchases computer equipment for R45 500 from SA Computing on credit.
1 A partner in Africa Attorneys, S. Africa takes one of the new laptops home for his son
to use. The laptop costs R9 500.
2 Receives payment of R648 from G. Gau in settlement of his account.
5 G. Gau is invoiced with fees in respect of the drafting of a will, R2 376.
[This transaction is fees charged for services rendered to a client]
8 Z. Zulu instructs the attorney’s practice to issue a summons against his wife for a
divorce. He pays a deposit of R1 620 to cover preliminary costs.
9 N. Natal is invoiced with fees of R75 600 for defence in the court case filed by ABC
Venture Capital and Africa Attorneys receives payment in cash, for the full amount.
[This transaction is fees charged for services rendered to a client]
10 Receives a deposit of R3 432 from C. Cape for the preparation of contracts regarding
the registration of a company. [Client – Money paid into trust bank account]
11 Receives an account from P & C Stationers for stationery purchased on credit,
R846.
12 N. Natal instructs the attorney’s practice to act on his behalf in a third-party case and
pays a deposit of R720. The attorney’s practice pays R60 for a police report from
these funds. [Client – Money paid into trust bank account. Expenses on behalf of the client will be

NB: Take note from which account the transaction was paid
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 Learning unit 5/2022
paid from the trust bank account if sufficient trust funds were received from the client at an earlier
stage.]

17 Pays municipal taxes on behalf of E. North in respect of the transfer of the property,
R1 440. [E. North is a client and previously paid money into the trust account. This transaction will
be paid from the trust bank account]
NB: Take note from which account the transaction was paid

18 The conveyancing transaction between trust creditor E North and the buyer, F. East
is concluded. The balance on the trust account of E. North is paid out to him.
[The amount for this transaction is not given. It must be calculated. See balance on trust creditors
account – E. North]
20 N. Natal is invoiced with fees in respect of the third party case, R1 728
20 Pays advocate G. Langa in respect of the third party case of N. Natal, R3 960.
[The payment to advocate G. Langa is made from the business bank account as there were
insufficient funds in the trust account of N. Natal to cover the payment. (Refer to Learning unit 4)].
22 Pays sheriff fees from trust monies for issuing of summons for Z. Zulu, R148.
22 Pays registration expenses from trust monies in respect of the company registration
for C. Cape, R2 360.
28 Receives office rent of R1 400 from A. South for sub-letting a section of the
premises.
28 Processed EFT payments for: [These are expenses incurred to operate the practice]
Wages, R6 388.
Water and electricity, R2 040.
Telephone, R636.
28 At 28 February, Africa Attorneys calculates and accounts for depreciation on the
computer equipment and the law library at 20% per annum on the straight-line method.

Additional information
1. All payments are made by electronic fund transfers (EFTs).
2. The legal practice does not make use of advocates and sheriffs journals as their services
are not frequently used.
3. Africa Attorneys does not make use of a business creditors control account as the majority
of business expenses are cash transactions.
4. Africa Attorneys is not a registered VAT vendor.

Notes

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REQUIRED:

Prepare the following in the books of Africa Attorneys for February 2020:
1. Books of first entry
• Business cash journals
• Trust cash journals
• Fees journal
• General journal
2. Ledgers
• General ledger
• Clients ledger
• Trust creditors ledger

EXPLANATION
5.2

Payments received from clients as payments for services

1. Books of first entry rendered are deposited into the Business bank account.

Business cash receipts journal of Africa Attorneys for February 2020 BCRJ
Clients
Sundries control Bank
Date Receipts Fol. R R R
02/02 G. Gau CL1 648 648
20/02 N. Natal (Re. matter: ABC Venture Capital) CL2 75 600 75 600
28/02 Rent received N2 1 400 1 400
1 400 76 248 77 648
Rent received from a lessee sub-
leasing a part of the premises. B8 B6

RECAP The Cash Book of a business is divided into a Cash Receipts Journal and a Cash
Payments Journal. In the case of a lawyer’s practice, there is also a Trust Cash
Receipts Journal and Trust Cash Payments Journal.

Notes

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 Learning unit 5/2022

EXPLANATION 5.2 (continued) Acronym of Business Cash Payments Journal = BCPJ

Business cash payments journal of Africa Attorneys for February 2020 BCPJ

Clients Business
Sundries control bank
Date Payments Fol. R R R
1 Office rent N7 14 440 14 440
2 Law library B2 1 200 1 200
20 N. Natal (advocate) [see note at transaction] CL2 3 960 3 960
28 Wages N6 6 388 6 388
28 Water and electricity N5 2 040 2 040
28 Telephone N4 636 636
24 704 3 960 28 664
B8 B6
Trust cash receipts journal of Africa Attorneys for February 2020
Acronym for Trust Cash Receipts Journal = TCRJ

Deposits received from clients that are to be held in trust are deposited into the trust bank account.
TCRJ
Trust
creditors Trust
Sundries control bank
Date Receipts Fol. R R R
8 Z. Zulu (divorce) TCL2 1 620 1 620
10 C. Cape (company) TCL3 3 432 3 432
12 N. Natal (Re. matter: third-party case) TCL4 720 720
5 772 5 772`
B9 B7

Acronym for Trust Cash Payments Journal = TCPJ

Trust cash payments journal of Africa Attorneys for February 2020 TCPJ
Trust
creditors Trust
Sundries control bank
Date Payments Fol. R R R
16 N. Natal (police report) TCL4 60 60

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 Learning unit 5/2022
17 E. North (taxes – Akasia property) TCL1 1 440 1 440
18 E. North (Akasia property) [Calculation] TCL1 1 080 1 080
22 Z. Zulu (sheriff) TCL2 148 148
22 C. Cape (company registration) TCL3 2 360 2 360
5 088 5 088
B9 B7
[Calculation – 2 520 (opening balance) – 1 440 (payment - taxes) = 1 080 Payment of balance on trust account to E.
North]
EXPLANATION 5.2 (continued)
Fees journal of Africa Attorneys for February 2020 Fees journal
FJ
Clients
control Fees
Date Details Fol. R R
5 G. Gau – (Re. matter: drafting of will) CL1 2 376 2 376
9 N. Natal – (Re. matter: court case) CL2 75 600 75 600
20 N. Natal – (Re. matter: third-party case) CL4 1 728 1 728
79 704 79 704
B8 N1

General journal of Africa Attorneys for February 2020

GL
These transactions are credit Debit Credit
Day Details purchase transactions. Fol. R R
01/02 Computer equipment B3 45 500
Accounts payable B3 45 500
Computer equipment purchased on credit
01/02 Drawings 9 500
Computer equipment 9 500
Computer equipment taken by partner, S. Africa for
son’s use
11/02 Stationery N3 846
Accounts payable B9 846
Stationery purchased on credit
28/02 Depreciation – Law library N8 270
Accumulated depreciation – Law library B5 270
Provision for depreciation on the law library
(16 200 x 20% x 1/12)
28/02 Depreciation – Computer equipment N8 1 140
Accumulated depreciation – Computer equipment B4 1 140
Provision for depreciation on the computer equipment
(68 400 x 20% x 1/12)

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 Learning unit 5/2022
RECAP Nominal accounts in the General Ledger record expenses, profits, losses and gains
and is indicated by an N. The chart of accounts is a list of all the accounts in the
ledger. The accounts usually appear in the following order: assets, liabilities, equity,
dividends, revenues, and expenses and they are numbered in that order. The
computerised accounting packages also use Bs and Ns.

EXPLANATION 5.2 (continued)

2. Ledgers
General ledger of Africa Attorneys Equity

Dr Capital B1 Cr
R 2020 R
01/02 Balance b/d 223 920

See glossary for definition

of Historical cost.
Asset

Dr Law library at cost B2 Cr

2020 R 2020 R
01/02 Balance b/d 15 000 28/02 Balance c/d 16 200
01/02 Business bank BCPJ 1 200
16 200 16 200
01/03 Balance b/d 16 200
Asset

Dr Computer equipment at cost B3 Cr

2020 R 2020 R
01/02 Balance b/d 32 400 01/02 Drawings GJ 9 500
01/02 Purchase on credit GJ 45 500 28/02 Balance c/d 68 400
77 900 77 900
01/03 Balance b/d 68 400

Part of asset category in BAE (reduction

of asset value to carrying amount)

Dr Accumulated depreciation – Law library B4 Cr

2020 R 2020 R
01/02 Balance c/d 3 270 01/02 Balance b/d 3 000
28/02 Depreciation GJ 270
3 270 3 270
01/03 Balance b/d 3 270

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Notes

Part of asset category in BAE (reduction of asset

EXPLANATION 5.2 (continued) value to carrying amount)

Dr Accumulated depreciation – Computer equipment B5 Cr

2020 R 2020 R
01/02 Balance c/d 7 620 01/02 Balance b/d 6 480
28/02 Depreciation GJ 1 140
7 620 7 620
01/03 Balance b/d 7 620

Asset
Dr Business bank account B6 Cr
2020 R 2020 R
01/02 Balance b/d 184 296 28/02 Payments BCPJ 28 664
28/02 Receipts BCRJ 77 648 28/02 Balance c/d 233 280
261 944 261 944
01/03 Balance b/d 233 280
Asset
Dr Trust bank account B7 Cr
2020 R 2020 R
01/02 Balance b/d 2 520 28/02 Payments TCPJ 5 088
28/02 Receipts TCRJ 5 772 28/02 Balance c/d 3 204
8 292 8 292
01/03 Balance b/d 3 204

The general ledger of an attorney’s practice has BOTH a Trust creditors control account
(Cr) and a Clients control account (Dr).
Asset

Dr Clients control account B8 Cr

2020 R 2020 R
01/02 Balance b/d 1 704 28/02 Business bank BCRJ 76 248
28/02 Fees earned FJ 79 704 28/02 Balance c/d 9 120
28/02 Business bank BCPJ 3 960
85 368 85 368
01/02 Balance b/d 9 120

The general ledger of a lawyer’s practice has BOTH a Trust creditors’ control Liability – Practice owes money to
account (Cr) and a Clients’ control account (Dr). the clients of the practice

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 Learning unit 5/2022
Dr Trust creditors control account B9 Cr
2020 R 2020 R
28/02 Trust bank TCPJ 5 088 01/02 Balance b/d 2 520
28/02 Balance c/d 3 204 28/02 Trust bank TCRJ 5 772
8 292 8 292
01/03 Balance b/d 3 204
EXPLANATION 5.2 (continued)
Liability – Trade creditor
Dr Accounts payable B10 Cr
2020 R 2020 R
28/02 Balance c/d 46 346 01/02 Computer equipment GJ 45 500
11/02 Stationery GJ 846
46 346 46 346
28/02 Balance b/d 46 346

Part of equity

Dr Drawings B11 Cr
2020 R R
01/02 Computer equipment GL 9 500

Income
Dr Fees earned N1 Cr
R 2020 R
28/02 Clients control FJ 79 704

Dr Rental received N2 Cr
R 2020 R
28/02 Business bank BCRJ 1 400

Expense
Dr Stationery N3 Cr
2020 R R
11/02 Accounts payable GJ 846

Expense
Dr Telephone N4 Cr
2020 R R
28/02 Business bank BCPJ 636

Expense

Dr Water and electricity N5 Cr

2020 R R
28/02 Business bank BCPJ 2 040

Expense
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 Learning unit 5/2022
Dr Wages N6 Cr
2020 R R
28/02 Business bank BCPJ 6 388

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 Learning unit 5/2022
EXPLANATION 5.2 (continued) Expense

Dr Office rent paid N7 Cr

2020 R 2020 R
01/02 Business bank BCPJ 14 440

Dr Depreciation N8 Cr
2020 R 2020 R
28/02 AD – Law library GL 270 28/02 Balance c/d 1 410
28/02 AD – Computer
equipment GL 1 140
1 410 1 410
01/03 Balance b/d 1 410

AD = Accumulated depreciation

Clients ledger of Africa Attorneys

QUICK
NOTE – If the attorney’s firm receives instructions from a client on different matters,
each matter should be separately accounted for. (Refer to Mr N. Natal below.)
– As Africa Attorneys only used the sheriff once on 22 February 2020 the legal firm
did not make use of a sheriffs journal. On receipt of the invoice and account
statement from the sheriff, Africa Attorneys immediately paid the account from
the business bank account. (Also refer to Learning unit 4)

Dr G. Gau CL1 Cr
2020 R 2020 R
01/02 Balance b/d 648 02/02 Business bank BCRJ 648
05/02 Fees earned FJ 2 376 28/02 Balance c/d 2 376
3 024 3 024
01/03 Balance b/d 2 376

Dr N. Natal (Re. matter: ABC Venture Capital) CL2 Cr

2020 R 2020 R
01/02 Balance b/d 792 09/02 Business bank BCRJ 75 600
09/02 Fees earned FJ 75 600 28/02 Balance c/d 792
76 392 76 392
01/03 Balance b/d 792

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 Learning unit 5/2022
EXPLANATION 5.2 (continued)

Dr D. West CL3 Cr
2020 R R
01/02 Balance b/d 264

Dr N. Natal (Re. matter: Third-party case) CL4 Cr

2020 R 2020 R
20/02 Fees FJ 1 728 28/02 Balance c/d 5 688
Business bank
(Advocate) BCPJ 3 960
5 688 5 688
01/03 Balance b/d 5 688

Trust creditors ledger of Africa Attorneys

Dr E. North TCL1 Cr
2020 R 2020 R
17/02 Trust bank (taxes) TCPJ 1 440 01/02 Balance b/d 2 520
18/02 Trust bank (E. North) TCPJ 1 080
2 520 2 520

Dr Z. Zulu TCL2 Cr
2020 R 2020 R
22/02 Trust bank (Sheriff) TCPJ 148 08/02 Trust bank (Divorce) TCRJ 1 620
28/02 Balance c/d 1 472
1 620 1 620
01/03 Balance b/d 1 472

Dr C. Cape TCL3 Cr
2020 R 2020 R
22/02 Trust bank (Company 10/02 Trust bank (Company
registration) TCPJ 2 360 registration) TCRJ 3 432
28/02 Balance c/d 1 072
3 432 3 432
01/03 Balance b/d 1 072

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 Learning unit 5/2022
EXPLANATION 5.2 (continued)

Dr N. Natal (Re. matter: Third-party case) TCL4 Cr

2020 R 2020 R
12/02 Trust bank (Police report) TCPJ 60 12/02 Trust bank (Deposit) TCRJ 720
28/02 Balance c/d 660
720 720
01/03 Balance b/d 660

EXAMPLE 5.3

The following information relates to the practice of Cape Attorneys. The business is registered
as a VAT vendor. VAT is included at 15% where applicable:

Transactions during August 2020:

Date Details R
1 Pays office rent for August 2020 to N. Nem per EFT 527 4 025
Pays the increase in the deposit for office rent to N. Nem per EFT 528 4 000
Levies fees for services rendered to L. Lee (C1) and receives payment in
cash (Receipt 45 is issued) 19 320
2 Purchases postage stamps from petty cash (voucher A10) 402
Debits R. Rote (C3) with fees in respect of a third-party case 1 265
7 Pays for advertisements of the firm by EFT 529 230
10 M. Mpuma (T4) instructs Cape Attorneys to issue a summons against his
wife for divorce, and pays a deposit in this regard (trust receipt 34) 456
11 Purchases milk and sugar from petty cash (voucher A11) 57
15 Debits G. Geo (C4) in respect of fees charged for collection from L. Mope 747
20 Pays a deposit for purchasing property on behalf of L. Langa (T3) – issue
Trust EFT 40 45 600
Pays the following from petty cash:
Tea and coffee (voucher A12) 114
Pens and pencils (voucher A12) 276
23 Receives an EFT from L. Lee as a payment on his account 1 265
25 Pays costs regarding the divorce case of M. Mpuma 456
Pays registration of a letter to L. Lee from petty cash (voucher A13) 18
Pays short-term insurance for August 2020 per EFT 530 1 725

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27 Pays the following:
Water and electricity (EFT 531) 977
Telephone (EFT 532) 1 840
Salaries and wages (EFT 533) 5 130
28 Charges the overdue account of client, B. Ben (C3) with interest @ 20%
p.a. for 9 months. She owes the firm R4 000. ?
29 Purchases stationery on credit from SA Suppliers 805
31 Issues EFT 534 to make up the petty cash imprest amount ?

Additional information

The following list of balances was taken from the records of Cape Attorneys on 31 July 2020:

List of balances on 31 July 2020

Account details # Account
Debits no. R
Drawings B2 13 050
Deposit – Office rent B3 1 800
Clients control B4 22 970
Trust bank account B5 75 000
Business bank account B7 80 000 Note: The balance of the Trust bank
account = the balance of the Trust
Petty cash B8 1 000 creditors control account = R75 000
Land and buildings B9 200 000
Equipment B10 47 800
Furniture B11 14 000
Postage N1 500
Advertisements N2 2 000
Entertainment N3 480
Water and electricity N4 13 400
Telephone N5 1 560
Stationery N6 900
Office rent N9 24 500
Insurance N10 10 500
Salaries and wages N11 18 800
Credits
Capital B1 246 782
Trust creditors control B6 75 000
VAT control account B12 22 778
Fees N8 183 700

# B = Statement of financial position accounts (previously known as balance sheet)

# N = Statement of profit or loss accounts (previously known as income statement)

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List of trust creditors on 31 July 2020:

Details Ac no. R
S. Africa TCL1 2 500
A. South TCL2 21 000
L. Langa TCL3 51 500
75 000

List of clients on 31 July 2020:

Details Ac no. R
L. Lee C1 14 500
B. Ben C2 4 000
R. Rote C3 820
G. Geo C4 3 650
22 970

REQUIRED:

1. Record the above transactions in the undermentioned books of first entry for the month
of August 2020.
• Business cash journals
• Trust cash journals
• Fees journal
• Petty cash journal
• General journal
2. Post the completed journals to the general ledger of Cape Attorneys.
3. Update the clients ledger and trust creditors ledger for August 2020.

EXPLANATION
5.3

Business cash receipts journal of Cape Attorneys for August 2020 BCRJ
Clients
Doc Sundries VAT control Bank
Date no. Receipts **Fol R R R R
1 45 L. Lee C1 19 320 19 320
23 46 L. Lee C1 1 265 1 265
20 585 20 585
31 Cr – Clients control account in general ledger B4
31 Dr – Business bank account in general ledger B7

** Credit individual client accounts in clients ledger

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EXPLANATION 5.3 (continued)

Business cash payments journal of Cape Attorneys for August 2020
BCPJ
Doc Sundries VAT Bank
Date no. Payments **Fol R R R
1 527 Office rent N8 3 500 525 4 025
528 Deposit: Office rent B3 4 000 4 000
7 529 Advertisements N2 200 30 230
25 530 Insurance N9 1 500 225 1 725
27 531 Water and electricity N4 850 127 977
532 Telephone N5 1 600 240 1 840
533 Salaries and wages N10 5 130 5 130
31 534 Petty cash B8 867 867
17 647 1 147 18 794
31 Dr – VAT control account in general ledger B12
31 Cr – Business bank account in general ledger B7

** Dr – Individual accounts in general ledger

Trust cash receipts journal of Cape Attorneys for August 2020
TCRJ
Trust
creditors
Doc ** Sundries control Bank
Date no. Receipts Fol. R R R
10 34 M. Mpuma – divorce T4 456 456
456 456
31 Cr – Trust creditors control account in general ledger B6
31 Dr – Trust bank account in general ledger B5

** Credit individual trust creditors accounts in trust creditors ledger

Trust cash payments journal of Cape Attorneys for August 2020
TCRJ
Trust
creditors
Doc Sundries control Bank
Date no. Payments **Fol R R R
20 40 L. Langa – property T3 45 600 45 600
25 41 M. Mpuma – divorce T4 456 456
46 056 46 056
31 Dr – Trust creditors control account in general ledger B6

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31 Cr – Trust bank account in general ledger B5
** Debit individual trust creditors accounts in trust creditors ledger
EXPLANATION 5.3 (continued)

Fees journal of Cape Attorneys for August 2020

FJ
Clients
control VAT Fees
Date Details **Fol R R R
1 L. Lee – services rendered C1 19 320 2 520 16 800
2 R. Rote – third-party case C3 1 265 165 1 100
15 G. Geo – collection C4 747 97 650
21 332 2 782 18 550
31 Dr – Clients control account in general ledger B4
31 Cr – VAT control account in general ledger B12
31 Cr – Fees account in general ledger N7
** Debit individual client accounts in clients ledger

Petty cash journal of Cape Attorneys for August 2020

PCJ
Doc Rec- Doc Sta- Entertain
Date no. eipts Fol. Total Date no. Payments Fol. Total tionery Postage VAT -ment Clients
31 534 Bank BCPJ 867 2 A10 Postage N6
stamps 402 350 52
11 A11 Milk and N3
sugar 57 57
20 A12 Tea and N3
coffee 114 114
Pens and N6
pencils 276 240 36
25 A13 L. Lee C1** 18 18
867 867 240 350 88 171 18
31 Credit petty cash account in general ledger B8
31 Debit individual accounts in general ledger N6 N1 B12 N3 B4
31 ** Debit individual client accounts in clients ledger

General journal of Cape Attorneys for August 2020

Debit Credit
Day Details Fol. R R
28 B. Ben (Clients control) C2/(B4) 600
Interest received N11 600
(Account charged with interest – R4 000 x 20% x 9/12)
29 Stationery N6 700
VAT control (Input VAT) B12 105

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SA Suppliers (Business creditors control) BC1/(B13) 805
(Stationery purchased on credit)
EXPLANATION 5.3 (continued)
General ledger
Brought down
Dr Capital B1 Cr
R 2020 R
01/08 Balance b/d 246 782

Opening balance
Dr Drawings from the trial balance B2 Cr
2020 R R
01/08 Balance b/d 13 050

Dr Deposit: Office rent B3 Cr

2020 R R
01/08 Balance b/d 1 800
31/08 Bank BCPJ 4 000
5 800

Dr Clients control B4 Cr
Carried down
2020 R 2020 R
01/08 Balance b/d 22 970 31/08 Bank CB 20 585
28/08 Interest received GJ 600 31/08 Balance c/d 24 335
31/08 Fees and VAT FJ 21 332
31/08 Petty cash PCJ 18
44 920 44 920
01/09 Balance b/d 24 335

Dr Trust bank account B5 Cr

2020 R 2020 R
01/08 Balance b/d 75 000 31/08 Payments TCPJ 46 056
31/08 Receipts TCRJ 456 31/08 Balance c/d 29 400
75 456 75 456
01/09 Balance b/d 29 400

Dr Trust creditors control B6 Cr

2020 R 2020 R
01/08 Trust bank TCPJ 46 056 01/08 Balance b/d 75 000
31/08 Balance c/d 29 400 31/08 Trust bank TCRJ 456
75 456 75 456
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01/09 Balance b/d 29 400

EXPLANATION 5.3 (continued)

Dr Business bank account B7 Cr

2020 R 2020 R
01/08 Balance b/d 80 000 31/08 Payments BCPJ 18 794
31/08 Receipts BCRJ 20 585 31/08 Balance c/d
100 585 100 585
01/09 Balance b/d 81 791

Dr Petty cash B8 Cr
2020 R 2020 R
01/08 Balance b/d 1 000 31/08 Payments PCJ 867
31/08 Receipts PCJ 867 31/08 Balance c/d 1 000
1 867 1 867
01/09 Balance b/d 1 000

Asset (Debit
Dr Land and buildings balance) B9 Cr
2020 R R
01/08 Balance b/d 200 000
Asset (Debit
balance)
Dr Equipment B10 Cr
2020 R R
01/08 Balance b/d 47 800
Asset (Debit
balance)
Dr Furniture B11 Cr
2020 R R
01/08 Balance b/d 14 000
Opening balance is a credit.
The amount is owed to SARS.
Dr VAT control B12 Cr
2020 R 2020 R
29/08 Creditors GJ 105 01/08 Balance b/d 22 778
31/08 Bank BCPJ 1 147 31/08 Clients control FJ 2 782
31/08 Petty cash PCJ 88
31/08 Balance b/d 24 220
25 560 25 560
01/09 Balance b/d 24 220

Dr Business creditors control B13 Cr

R 2020 R

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29/08 Stationery and VAT GJ 805

This is an amount owing to a supplier. Therefore,

EXPLANATION
it is a 5.3
credit(continued)
balance and it includes VAT.

Dr Postage N1 Cr
2020 R R
01/08 Balance b/d 500
31/08 Petty cash PCJ 350
850

Dr Advertisements N2 Cr
2020 R R
01/08 Balance b/d 2 000
07/08 Business Bank BCPJ 200
2 200

Dr Entertainment N3 Cr
2020 R R
01/08 Balance b/d 480
31/08 Petty cash PCJ 171
651

Dr Water and electricity N4 Cr

2020 R R
01/08 Balance b/d 13 400
27/08 Business Bank BCPJ 850
14 250

Dr Telephone N5 Cr
2020 R R
01/08 Balance b/d 1 560
27/08 Business Bank BCPJ 1 600
3 160

Dr Stationery N6 Cr
2020 R R
01/08 Balance b/d 900
29/08 Business creditors GJ 700
31/08 Petty cash PCJ 240
1 840

This is the opposite account to the Business creditors control account (above).
Stationary is an expense and the account is debited. The amount debited excludes VAT.
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EXPLANATION 5.3 (continued)

Dr Fees N7 Cr
R 2020 R
01/08 Balance b/d 183 700
31/08 Clients control FJ 18 550
202 250

Dr Office rent N8 Cr
2020 R R
01/08 Balance b/d 24 500
Business payments BCPJ 3 500
28 000

Dr Insurance N9 Cr
2020 R R
01/08 Balance b/d 10 500
25/08 Business payments BCPJ 1 500
12 000

Dr Salaries and wages N10 Cr

2020 R R
01/08 Balance b/d 18 800
27/08 Business payments BCPJ 5 130
23 930

Dr Interest received N11 Cr

R 2020 R
28/08 Clients control GJ 600

Clients ledger

Dr L. Lee C1 Cr
2020 R 2020 R
01/08 Balance b/d 14 500 01/08 Business receipts BCRJ 19 320
Fees and VAT FJ 19 320 23/08 Business receipts BCRJ 1 265
Petty cash PCJ 18 31/08 Balance c/d 13 253
33 838 33 838

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01/09 Balance b/d 13 253

EXPLANATION 5.3 (continued)

Dr B. Ben C2 Cr
2020 R R
01/08 Balance b/d 4 000
28/08 Interest received GJ 600
4 600

Dr R. Rote C3 Cr
2020 R R
01/08 Balance b/d 820
02/08 Fees and VAT FJ 1 265
2 085

Dr G. Geo C4 Cr
2020 R R
01/08 Balance b/d 3 650
15/08 Fees and VAT FJ 747
4 397

Trust creditors’ ledger

Dr S. Africa T1 Cr
R 2020 R
01/08 Balance b/d 2 500

Dr A. South T2 Cr
R 2020 R
01/08 Balance b/d 21 000

Dr L. Langa T3 Cr
2020 R 2020 R
20/08 Trust cash book TCPJ 45 600 01/08 Balance b/d 51 500
(Deposit on property)
31/08 Balance c/d 5 900
51 500 51 500
01/09 Balance b/d 5 900

Dr M. Mpuma T4 Cr
2020 R 2020 R
25/08 TCPJ 456 10/08 TCRJ 456
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Trust cash book Trust cash book
(Divorce) (Divorce)

EXPLANATION 5.3 (continued)

Business creditors ledger

Dr SA Suppliers BC1 Cr
R 2020 R
29/08 Stationery and VAT GJ 805

5.10 Preparation of a trial balance

The trial balance (TB) is an accounting report showing a list of balances. It reflects the balances
of the various accounts in the general ledger and must be updated on a monthly or a shorter
basis. Every account will either reflect a debit balance or a credit balance. Due to the fact that
double-entries were made with each transaction, the total of the debit balances must be equal
to the total of the credit balances in the trial balance.

A TB shows all the closing balances of the general ledger accounts prepared at a specific time
in the financial year. A TB is prepared after posting all financial transactions from the different
journals to the general ledger accounts.

In addition, a TB will indicate whether all the debits and all the credits had been posted to the
general ledger. Since the TB the sum of the debit balances should equal the sum of the credit
balances, the trial balance should balance as per the “mantra” – for every debit there must be
a corresponding and equal credit.
The trial balance ensures that total debits equal the total credits in the financial records. In a
digital system, this balancing is done automatically.

Trial balance process:

➢ The trial balance is a list of all the accounts in the general ledger.
➢ The trial balance is prepared at a specific period in time.
➢ Rule 54.10 of the LPA requires that the trial balance of a legal practice be prepared on a
monthly basis.

EXAMPLE
5.4

See the information in Explanation 5.2.

REQUIRED:

Use the general ledgers prepared in Explanation 5.2 to prepare the trial balance, list of clients
and list of trust creditors for Africa Attorneys at 28 February 2020.

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EXPLANATION
5.4
Column of debit account Column of credit
balances account balances
Trial balance at 28 February 2020
Fol. Dr Cr
►R R ◄
Capital B1 223 920
Law library at cost B2 16 200 -
Computer equipment at cost B3 68 400 -
Accumulated depreciation – Law library B4 - 3 270
Accumulated depreciation – Computer equipment B5 - 7 620
Business bank account Statement of financial position items B6 233 280 -
Trust bank account B7 3 204 -
Clients control B8 9 120 -
Trust creditors control B9 - 3 204
Accounts payable B10 - 46 346
Drawings B11 9 500
Fees earned N1 - 79 704
Rental received N2 - 1 400
Stationery N3 846 -
Telephone Statement of profit or loss items N4 636 -
Water and electricity N5 2 040 -
Wages N6 6 388 -
Office rent paid N7 14 440 -
Depreciation N8 1 410 -
364 064 364 064

List of client balances at 28 February 2020

Details R
G. Gau 2 376
N. Natal (Re. matter: ABC Venture Capital Ltd) 792
D. West 264
N. Natal (Re. matter: Third-party case) 5 688
Balance per clients control 9 120

List of trust creditors balances at 28 February 2020

Details R
E. North -

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Z. Zulu 1 472
C. Cape 1 072
N. Natal (Re. matter: Third-party case) 660
Balance per trust creditors control 3 204
EXAMPLE
5.5

See the information in Explanation 5.3.

REQUIRED:

Use the general ledgers prepared in Explanation 5.3 to prepare the trial balance, list of clients
and list of trust creditors for Cape Attorneys at 28 February 2020.

EXPLANATION
5.5

CAPE ATTORNEYS
Trial balance on 31 August 2020

Debit Credit
Details Ac no. R R
Capital B1 246 782
Drawings B2 13 050
Deposit: Office rent B3 5 800
Clients control B4 24 335
Trust bank account B5 29 400
Trust creditors control B6 29 400
Business bank account B7 81 791
Petty cash B8 1 000
Land and buildings B9 200 000
Equipment B10 47 800
Furniture B11 14 000
VAT control account B12 24 220
Business creditors control B13 805
Postage N1 850
Advertisements N2 2 200
Entertainment N3 651
Water and electricity N4 14 250
Telephone N5 3 160
Stationery N6 1 850
Fees N7 202 250
Office rent N8 28 000
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Insurance N9 12 000
Salaries and wages N10 23 930
Interest received N11 600
504 057 504 057

EXPLANATION 5.5 (continued)

List of client balances: R

L. Lee 13 253
B. Ben 4 600
R. Rote 2 085
G. Geo 4 397

Balance of clients control account 24 335

List of trust creditors balances:

31 August 2020 R
S. Africa 2 500
A. South 21 000
L. Langa 5 900
Balance of trust creditors control account 29 400

5.11 Preparation of adjusting and closing accounting entries

An adjusting journal entry is an entry in an entity’s general ledger that occurs at the end of
an accounting period to record any unrecognised income or expenses for the period (Refer to
Learning unit 4). When a transaction is started in one accounting period and ended in a later
period, an adjusting journal entry is required to properly account for the transaction.
The financial statements are prepared from the information contained in the general ledger. In
the general ledger, there are nominal accounts (temporary accounts) and there are permanent
accounts. The nominal accounts are for income and expense items. The permanent accounts
are for assets and liabilities.
Temporary accounts (nominal accounts) are general ledger accounts that accumulate income
and expense transactions over a single accounting period. The accumulated income and
expenses accounts are used to prepare the statement of profit or loss at the end of the financial
year. These accounts are closed off at the end of the accounting period (financial year) by
means of closing journal entries and the balances are transferred to the profit and loss account
(permanent account). A closing journal entry is a journal entry that is made at the end of an
accounting period to transfer balances from a temporary to a permanent account.
Businesses use closing entries to reset the balances of temporary accounts (accounts that
show balances over a single accounting period) to zero. By doing so, the business moves these
balances into permanent accounts on the statement of financial position.

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The following accounts extracted from the general ledger are used to illustrate the closing off
entries and the preparation of the profit or loss account:

Dr Fee income N1 Cr
2020 R 2020 R
30/06 Clients control FJ 80 000
Dr Salaries N2 Cr
2020 R 2020 R
30/06 Bank BCPJ 6 000

Dr Telephone N3 Cr
2020 R 2020 R
30/06 Bank BCPJ 1 200

The first step is to prepare the journal entry that will be required to process the closing off
entries:
General journal of ……..

Debit Credit
Day Details Fol. R R
30 Profit and loss account (new GL account) C3/(B4) 72 800
Fee income N1 80 000
Salaries N2 6 000
Telephone N3 1 200
(Account charged with interest – R4 000 x 20% x 9/12)

The second step is to post the general journal to the general ledger accounts:
The fees account is debited and
therefore the account is closed off.

Dr Fees N1 Cr
2020 R 2020 R
30/06 Profit or loss account GJ 80 000 30/06 Clients control FJ 80 000
80 000 80 000

The salaries account is credited and

therefore the account is closed off.

Dr Salaries N2 Cr
2020 R 2020 R
30/06 Bank BCPJ 6 000 30/06 Profit or loss account GJ 6 000
6 000 6 000

The telephone account is credited and

therefore the account is closed off.
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Dr Telephone N3 Cr
2020 R 2020 R
30/06 Bank BCPJ 1 200 30/06 Profit or loss account GJ 1 200
1 200 1 200
The profit or loss account is as follows:

Dr Profit or loss account N10 Cr

2020 R 2020 R
30/06 Telephone expenses GJ 1 200 30/06 Fees GJ 80 000
30/06 Salaries GJ 6 000
30/06 Profit for the year 72 800
80 000 80 000

A business makes a profit when the income the business has earned is more than the
expenditure it has incurred in generating or producing the income. SA Attorneys has made a
profit for the month because the income earned, R80 000, is more than the expenses incurred
in generating the income (R1 200 + R6 000 = R7 200). The profit is R80 000 – R7 200 =
R72 800.

STEPS To calculate the profit or loss (P/L) for the month (the same as calculating the balance
c/d):
Step 1: Add the debit side of the P/L account and write down the total in pencil ►
R1 200 + R6 000 = R7 200
Step 2: Add the credit side of the P/L account and write down the total in pencil ►
R80 000
Step 3: The total of the credit side of the P/L account is more than the total of the
debit side. To equalise the two sides the debit side needs an amount of ►
R72 800 (R80 000 – R7 200).
This is the balancing amount. It is a profit because the income is greater
than the expenses.
Step 4: Total the account (Which column adds up to the greater total? The greater
amount is ► R80 000 (credit side)). R80 000 is entered on both sides of the
GL account and a single line is drawn above the amount and a double line below
the amount.
Step 5: Resulting from the entry calculated in Step 3 this account is debited and the
account to be credited is the capital account. Therefore, the reference on
the debit side of the P/L account will be capital account (This reflects the
profit made by the business for the year).

The profit or loss account is a final account in the general ledger and the statement of profit or
loss and other comprehensive income is one of the financial statements an entity has to

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prepare. It uses the same information, but the one is an account while the other is a statement.
§ See below (no debit side or credit side).

5.12 Preparation of financial statements

After the finalisation of the adjusted trial balance, the financial statements (Refer to Learning
unit 1 for a detailed discussion of the financial statements) will be prepared. The financial
statements are how a business communicates its financial results and financial position with
the users of its financial statements. The financial statements consist of the following five
components (shown for completeness sake):

1. Statement of profit or loss and other comprehensive income (§):

Calculates the net income or loss of a company by showing revenues – expenses. If
revenues are greater than expenses, you have net income. If revenues are less than
expenses, there will be a net loss.

2. Statement of changes in equity (#):

Calculates the closing balance in the retained earnings account using the net income or loss
calculated on the statement of profit or loss. This statement takes the opening balance in
retained earnings plus (+) net income (or minus (–) net loss) minus (–) dividends to arrive
at the closing retained earnings balance. The closing retained earnings balance is reported
on the statement of financial position. Included in the equity of a business includes a record
of any funds that have been invested into the business/entity by the owners/stakeholders
plus the accumulated profits or losses (referred to as retained earnings) of the
business/entity.

3. Statement of financial position (β):

The statement of financial position reports on the assets, liabilities and equity of the
business/entity. The assets and liabilities are divided into two categories being non-current
and current. (This is a reflection of the accounting equation → Assets = Liabilities + Equity).

4. Statement of cash flows:

The statement of cash flows reflects how cash moves in and out of the business. The
statement begins with the closing cash balance as per the statement of financial position for
the end of the previous year (i.e. opening balance for the current year) and ends with the
cash balance as per the statement of financial position for the end of the current year. The
cash flows are divided into three categories cash for operations, investing, and financing
activities.

5. Notes to the financial statements:

The notes to the financial statements provide additional information concerning the items
reflected in the financial statements. The notes provide information about the basis of
preparation of the financial statements and the accounting policies that were applied in the

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preparation. It is not possible to provide detailed information in the financial statements
(Refer to 1 to 3 above) so additional information is provided in the notes. The notes are
referenced to the prepared financial statements.

The preparation of the statement of cash flows and the notes to the financial
statements fall outside the scope of this module.

The following table illustrates how the first three financial statements relate to each other:
R
Revenue/Income 250 000
§Statement of profit or loss and Expenses (80 000)
other comprehensive income Profit for the year 170 000
Taxation (45 000)
Profit after taxation 125 000
Retained earnings at the beginning of the
#Statement of changes in equity year (Accumulated profits at beginning of year) 100 000
Retained earnings at the end of the year 225 000
(Accumulated profits at end of year)
Capital 150 000
Drawings current period (30 000)
345 000
Liabilities
Long-term loan 60 000
βStatement of financial position Trust creditors (Accounts payable) 40 000
445 000
Assets
Property, plant and equipment 246 000
Trust receivables (Accounts receivable) 85 000
Trust bank account 40 000
Business bank account 74 000
445 000

The statement of profit or loss and other comprehensive income will now be prepared using the
information included in the profit or loss account. The aim of the statement of profit or loss and
other comprehensive income is to reflect the financial performance (profit/loss) for a financial
period.

Notes

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The statement of profit or loss and other comprehensive income is as follows:

SA ATTORNEYS

§ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 30 JUNE 2020

Notes R
Services rendered 250 000
Distribution, administrative and other expenses (80 000)
Profit for the month 170 000
Taxation (45 000)
Profit after taxation 125 000
Other comprehensive income for the year* –
Total comprehensive income for the year 125 000

* Other comprehensive income for the year falls outside the scope of the FAC1503 syllabus.

The last transfer is the entry for the profit for the period that must be credited to the capital
account (profit or loss account is debited) because SA Attorneys owes the profit to the owner
(attorney). The profit for the month is the owner’s reward for the capital he has invested and the
entrepreneurial spirit he has shown. It therefore increases the equity.

Dr Capital B10 Cr
2020 R 2020 R
30/06 Drawings 30 000 30/06 Opening balance 250 000
Closing balance c/d 345 000 30/06 Profit for the period 125 000
375 000 375 000

Notes

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To complete the set of financial statements the statement of changes in equity and statement
of financial position will also be compiled.

The statement of changes in equity is as follows:

SA ATTORNEYS

#STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2020

Retained Total
Capital earnings Drawings capital
R R R R
Balance at beginning of year 150 000 100 000 – 250 000
Profit for the period – 125 000 – 125 000
Drawings for the period – – (30 000) (30 000)
150 000 225 000 (30 000) 345 000

The statement of financial position is as follows:

SA ATTORNEYS

β STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2020

Notes R
ASSETS
Non-current assets 246 000
Computer equipment 246 000
Current assets 199 000
Accounts receivable 85 000
Cash and cash equivalents (40 000 + 74 000) 114 000

Total assets 445 000

EQUITY AND LIABILITIES
Equity 345 000
Capital 345 000
Total liabilities 100 000
Non-current liabilities 60 000
Long-term loan: Africa Bank 60 000
Current liabilities 40 000
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Accounts payable 40 000

Total equity and liabilities 445 000

5.13 Self-assessment exercises

Question Answer
Explain the reasons for using a
ledger.

List the various ledgers.

What is a trial balance?

How is the financial result

calculated in financial
accounting terms?

Which financial report reflects

the financial result?

Which financial report reflects

the financial position?

Give as many examples of

income as you can.

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Give as many examples of

expenditure as you can.

Does a loss increase or

decrease the equity of the
owner?

The financial position of T.

Pay, an attorney, at 30 May
2019 is as follows:
A = E + L
50 000 = 30 000 + 20 000
For the year ended 30 May
2020 he had the following
income and expenditure:
R
Fees earned 180 000
Salaries 100 000
Administrative
expenses 20 000
Insurance expenses 10 000
Calculate the profit for the
year ended 30 May 2020.
The financial position of T.
Pay, an attorney, at 30 May
2019 is as follows:
A = E + L
50 000 = 30 000 + 20 000

Income and expenditure for

the year ended 30 May 2020:
R
Fees earned 180 000
Salaries 100 000
Administrative

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expenses 20 000
Insurance expenses 10 000
Calculate T. Pay’s equity as at
30 May 2020.

5.14 Self-evaluation of processes

The following processes are important for a thorough understanding of this learning unit.
Evaluate for yourself whether you are able to implement the following processes:

YES NO

1. Understand the procedure of posting to the trust and business ledgers.

2. Do the recording of a transaction from books of prime entry to the ledger

accounts.

3. Prepare listings of trust creditors, clients and business creditors.

4. Balance a ledger account.

5. Prepare a trial balance.

If your answer to any of the above questions is “NO” it is necessary to return to the learning unit
and work through the learning unit again to ensure that you can apply the required process.

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 Learning unit 6/2022

FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

6 TRANSFERS OF TRUST MONEY

Contents
Learning outcomes ......................................................................................................................... 2
Key concepts .................................................................................................................................. 2
Acronyms ....................................................................................................................................... 2
6.1 Introduction............................................................................................................................ 3
6.2 The transfer procedure .......................................................................................................... 3
6.3 Transfer requirements ........................................................................................................... 6
6.4 Calculation of the amount to be transferred from the trust bank account to the business bank
account.................................................................................................................................. 7
6.5 Learning activities and feedback............................................................................................ 9
6.6 The recording process in the transfer journal ........................................................................23
6.7 Summary of trust fund management .....................................................................................24
6.8 Self-assessment questions ...................................................................................................25

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Learning outcomes
After studying this learning unit, you should be able to:
• explain the function of the transfer journal
• know and comply with the transfer rules and requirements in terms of the Legal Practice
Act, 28 of 2014 and the Rules for the Attorneys’ Profession
• define the objectives of transfer procedures
• follow the transfer procedures
• calculate the amounts that must be transferred from the trust creditors ledger to the client
ledger for each client, and
• calculate the total amount that must be transferred from the trust bank account to the
business bank account.

Key concepts

• Transfer journal
• Transfer rules
• Transfer procedures
• Amount to be transferred
• Payments from business bank account on behalf of trust creditor
• Funds earmarked
• Trust creditor

Acronyms
B Balance sheet account (Statement of financial position)
BCRJ Business cash receipts journal
BCPJ Business cash payments journal
CL Clients ledger
FJ Fees journal
GJ General journal
LPA Legal Practice Act, 28 of 2014
N Nominal account (Statement of profit and loss)
TB Trial balance
TJ Transfer journal
TCL Trust creditors ledger
TCRJ Trust cash receipts journal
TCPJ Trust cash payments journal

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6.1 Introduction

A legal practice differs from other businesses in that the legal practitioner receives money from
clients, which must be kept in trust. Section 86(2) of the LPA requires that a separate bank
account be opened for trust monies. Trust money may never be deposited into the business
bank account except for the payment of fees levied by the practitioner for services rendered
and the refund of expenses paid on behalf of the client out of the business bank account. The
legal practitioner can only levy fees once his obligation to the client is met in full. Interim fees
may therefore not be transferred from the trust bank account to the business bank account. For
ensuring that the legal fees will be paid, the attorney and his client can, however, enter into an
agreement that interim fees be deposited into the trust account to be transferred to the business
account as soon as the fees are levied. Please note that a pro forma invoice issued by an
attorney is to give a client an estimate of the fees that will be rendered. Once his obligation to
the client is met in full, a proper invoice will be issued.

Two separate sets of accounting records are kept, one for the business and one for trust money.
The two sets are not linked and therefore the transfer procedures discussed under 6.2 below
should be followed.

In terms of the Rules for the Attorneys’ Profession with regard to the transfer of trust funds from
the trust bank account to the business bank account, a legal practice shall ensure that the debit
balance on its trust bank account shall at any date be equal to or exceed the total credit
balances of the trust creditors in its accounting records.

Law practices mostly require that clients deposit money into the trust bank account in advance
before any services are rendered or payments are made to third parties, e.g. transfer duties,
rates and taxes, deposits payable by property buyers etc. In simple terms, this means that a
transfer to the business bank account can only be done if there are sufficient funds in the trust
bank account to the credit of the client.

The amount of the transfer must thus not create a debit balance in the trust creditor account.
The trust bank account is debited when the funds are received from the client and the trust
creditor account of the client is credited. When the funds are transferred to the business bank
account, the trust creditor account of the client is debited (via the trust transfer journal) and the
trust bank account is credited via the trust cash payments journal.

6.2 The transfer procedure

The transfer procedure is as follows:

➢ As soon as the attorney levies his fees or pay third parties on behalf of a client through his
business bank account, the trust creditors account and the clients account of the client are
cleared or are set off against each other.

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 Learning unit 6/2022
➢ By comparing the balance on a client’s account with the balance on his or her corresponding
trust creditors account, one can determine whether there are any funds available in the trust
bank account to transfer to the business bank account.
➢ If there are trust funds available, an entry is made in the transfer journal. The trust creditor
account is debited and the client account is credited. (The calculation of the amount to be
transferred is discussed in 6.4 below.)
➢ An electronic fund transfer (EFT) is made in respect of the amount to be transferred. A
business receipt is issued and the money is transferred from the trust bank account to the
business bank account.
➢ If the client account still reflects a debit balance after the transfer and the attorney’s
responsibilities towards the client have been fulfilled, the client should settle his account as
a business client.
➢ If a credit balance on the trust creditor account exists after the transfer and the attorney’s
responsibilities towards the client have been fulfilled, a refund of funds is made to the trust
creditor.
➢ When an irregular trust debit balance is corrected, the opposite procedure is followed. The
effect of this is that an amount is transferred from the business bank account to the trust
bank account. In this case, a reverse transfer entry is recorded in the transfer journal,
cashbooks and various ledgers.

Transfer of funds from trust account to business account

Legal practitioners receive trust monies from clients and these funds must be kept in a trust as
per Section 86(2) of the LPA. A separate bank account must be opened for the trust monies
received.

The rules of the trust bank account

⮚ Funds may be transferred from the trust bank account to the business
bank account if:
– A client has instructed the attorney to transfer funds from the trust
account to the business account for fees that are due. Fees are only
due and payable to the attorney when the attorney has rendered a
service to the client.
Trust
– The attorney has paid expenses on behalf of the client from the
Bank business account and the client owes the attorney for the payment.
Account – The client has instructed the attorney to make a payment to a third
party.
– A payment is due to the instructing attorney in respect of
correspondent transactions.
⮚ Surplus clients trust funds may be transferred from the trust bank
account to a separate trust savings account or other interest-bearing
account (i.e. an investment in terms of section 86(4) of the LPA made
under the written instruction of the client.)

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 Learning unit 6/2022

⮚ The amount drawn from the trust bank account may not exceed the
Trust amount kept in trust on behalf of the client.
Bank
Account ⮚ The trust bank account should always reflect a debit balance (i.e. the
trust bank balance may never be a credit balance since an irregularity
may occur).

Who are the trust creditors?

⮚ Trust creditors are the clients of the attorney practice. A trust creditors
account is opened for each client, as we owe the funds of the client
Trust
creditors when they become due therefore, they are known as trust creditors.
⮚ The total of the trust creditors account must be equal to or greater than
the total credits balance of the trust creditors.

What is the journal entry when a customer transfers funds into a trust bank account?

Dr Cr
Date Details R R
Trust bank account (Funds received from client) XXX
Trust creditors account XXX

What is the journal entry when we transfer funds to the business bank account?

Dr Cr
Date Details R R
Business bank account XXX
Trust bank account XXX

Notes

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 Learning unit 6/2022
6.3 Transfer requirements
To comply with the Rules mentioned above, the following requirements should be met before
the transfer is made:

Clients business Clients trust creditors

account (a) account (b)
Requirement 1 The client should owe an Funds should be available
amount to the practice on on the clients trust creditors
the clients business account in order to do the
account. Transfer from (b) transfer.
(Dr balance on the clients to (a) (Cr balance on the clients
business account). trust creditors account).

Requirement 2 Amount owing on his/her Amount available on his/her

clients business account clients trust creditors account
Amount
transferred to (a)
is limited to the
amount available on
(b).
Requirement 3 Amount owing on his/her Amount available on his/her
clients business account clients trust creditors account
Amount
transferred from
(b) is limited to the
amount owing on
(a).
Requirement 4 Although a client may have a There is no transfer if the funds
debit balance on the client available as a credit on (b) have been
account and a credit balance on earmarked for another purpose.*
the trust creditors account

* i.e. a guarantee could have been issued against the credit balance available or the funds could have
been earmarked for the purchase of a certain property.

By adhering to the Rules and requirements, it ensures that there is no deficit in the trust bank
account, which prevents the obligations towards the remaining trust creditors from being met.
The contrary is also true – that is, that there will be no surplus funds in the trust bank account
that should have been transferred to the business bank account.

It is advisable to determine the overall trust position at least once a month (i.e. when the
accounts are balanced at the end of the month) to ensure that no deficit exists. All trust cash
available (i.e. the trust bank account balance and any trust investments) must be compared

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with the total trust liability (total of the trust creditors balances). If the trust funds exceed the
trust liabilities, a trust excess exists and is referred to as a trust surplus. The opposite indicates
a trust deficit, which may never occur.

6.4 Calculation of the amount to be transferred from the trust bank account to the
business bank account

Information for calculating the transfer of funds:

Disburse-
Fees ments obo Deposited
Opening levied per clients per amounts Earmarked
balance FJ BCPJ per TCRJ funds
Client accounts R R R R R
S. Africa 20 000 – –
(Fees levied)
A. South 4 500 – –
(Disbursement)
C. Cape – 16 000 –
D. West – 13 500 3 000
Trust creditor accounts
S. Africa – 20 000
A. South – 2 000
C. Cape 15 000 5 000 15 000*
D. West 10 000 10 000

* Funds earmarked for payment of transfer fees (Re. matter: purchase of property)

Notes

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 Learning unit 6/2022
The following table can be used to calculate the amount to be transferred:
Total
Step S. Africa A. South C. Cape D. West transfer
1 Does the client account have an
opening balance? Yes Yes No No
Opening balance 20 000 4 500 – –
2 Does the client owe an amount (a)? Yes Yes Yes No
Amount owed 20 000 4 500 16 000 16 500
Fees levied 20 000 – 16 000 13 500
Disbursements on behalf of client – 4 500 – 3 000
3 Are there funds available in (b)? Yes Yes Yes Yes
Amounts deposited 20 000 2 000 20 000 20 000
4 Does the amount owing by the client
(a) equal the amount available in (b)? Yes No No No
Transfer to (a) is equal to amount
available on (b).
Transfer is equal to ► 20 000 – – – 20 000
5 Does the amount owing by the client
(a) exceed the amount available in (b)? – Yes No No
Transfer is limited to amount available
on (b). Transfer is equal to ► – 2 000 – – 2 000
6 Are there funds in the trust account
that are earmarked for specific
purpose? No No Yes No
Transfer is equal to ► – – 5 000 – 5 000
Funds available to transfer 20 000
Less: Earmarked funds* (15 000)
7 Does the amount available (b) exceed
the amount owed by the client (a)? – – – Yes
Transfer is limited to amount owing on
(a). Transfer is equal to ► – – – 16 500 16 500
20 000 2 000 5 000 16 500 43 500
(a) = clients business account. A client only owes amount for fees if the fee note has been
issued (i.e. services have been rendered to the client).
(b) = clients trust creditors account

Notes

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 Learning unit 6/2022
QUICK
NOTE
1. The trust banking account may only be used for money held by the law
practitioner’s practice on behalf of a client.
2. The client should give consent for their funds to be transferred from their
trust creditors account to their business account. The trust funds may not
be transferred if they are earmarked for a specific purpose.
3. The Rules (Rule 54.14.14.2) make provision for withdrawals (transfers) to be
made from the law practitioner’s trust banking account to the law
practitioner’s business account, only if the transfers are made in respect of
money due to the practice.
4. Transfers are not allowed in respect of disbursements (e.g. counsel’s fees) or
fees of the firm unless:
– the disbursements were incurred and the client has been charged; or
– there is a contractual obligation on the part of the practice to pay the
disbursement; or
– fees and disbursements have been debited to the client’s accounts in the
accounting records.
5. The Rules (Rule 54.11) state that money, other than trust money, in the trust
banking account shall be transferred to the business banking account without
undue delay.

6.5 Learning activities and feedback

EXAMPLE 6.1

The following information for the month ended 30 April 2020 relates to SA Attorneys:
TRIAL BALANCE OF SA ATTORNEYS ON 31 MARCH 2020

Debit Credit
Folio R R
Business bank B1 9 150
Trust bank B2 9 450
Trust creditors control: Assets B3 9 450*
G. Langa – R5 700
F. Cape – R3 750 9 450
Clients control: B4 6 345
H. Mpuma – R1 770 (for fees)
G. Langa – R2 550 (for fees) 6 345
F. Cape – R2 025 (for fees)
Capital B8 129 360#
Equipment B5 82 500
Law library Assets B6 27 000
Stationery on hand B7 4 365
138 810 138 810

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# Capital (the capital account shows the net worth of a business at a specific point in time)
* Liabilities (amounts owed by the legal practice)

Additional information

1. The following totals appeared in the subsidiary journals of SA Attorneys on 30 April 2020:

Trust cash receipts journal R Trust cash payments journal R

Trust creditors 18 315 Trust creditors 7 305
J. East 15 000 G. Langa 5 805
G. Langa 3 315 F. Cape 1 500
Bank 18 315 Bank 7 305
Fees journal
Business cash payments journal Clients control 4 390
Sundries 8 475 G. Langa 1 890
Bank 8 475 F. Cape 2 500
Fees 4 390
NB: The information from four different journals has been provided above.

2. The following entry was made in the general journal of SA Attorneys on 30 April 2020:

General journal
GJ
Dr Cr
R R
H. Mpuma (client) 225
Interest received 225
Interest levied on account in arrears

REQUIRED:
PART A
Open the following ledger T-accounts in the general ledger of SA Attorneys as at
30 April 2020 and post the subsidiary journals in additional information 1 and 2 above, to
these ledger accounts.
(i) Business bank
(ii) Trust bank
(iii) Trust creditors control
(iv) Clients control
(v) Fees
NB: All accounts must be properly balanced on 30 April 2020 up until the month end transfer
of trust funds (Rule 54.11.1).
Commence the general ledger accounts with the opening balances as given in the trial
balance above.

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 Learning unit 6/2022

PART B
1. Calculate, for each trust creditor, the amount that should be transferred from the trust
account to the business account on 30 April 2020, after all the information given in the
question has been taken into account. The calculation can be done in tabular format as
laid out in 6.4.
2. Prepare the relevant books of first entry recording the transfer of trust funds
– Transfer journal
– Trust cash payments journal
– Business cash receipts journal
3. Prepare the relevant general ledger accounts recording the transfer of trust funds
– Business bank account
– Trust bank account
– Clients control account
– Trust creditors control account
4. Prepare the clients ledger and the trust creditors ledger recording the transfer of trust
funds.
Please note: Show all calculations.

EXPLANATION 6.1

STEPS
Step 1 – As per the question, the trial balance is presented for the month
ended 31 March 2020  The trial balance contains the opening
balances for the month ending 30 April 2020 (i.e. 1 April 2020).
Step 2 – Open the following ledger T-accounts, Trust bank, Business bank,
Clients control, Trust creditors control and Fees.
Step 3 – Insert the opening balances for the ledger accounts. The b/d as a
folio reference signifies that the amount has been brought down
(b/d) from the month before.
Step 4 – Insert the information from point 1 of Additional information.
Step 5 – Insert the information from point 2 of Additional information.

Amount per TB in bank at beginning of April.

PART A An asset with a favourable balance  a Debit
(i)
Dr Business bank B1 Cr
2020 R 2020 R
01/04 Balance b/d 9 150 30/04 Payments BCPJ 8 475
30/04 Balance c/d 675
9 150 9 150
30/04 Balance b/d 675
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 Learning unit 6/2022

EXPLANATION 6.1 (continued) Amount per TB in bank at beginning of April.

An asset with a favourable balance  a Debit
(ii)
Dr Trust bank B2 Cr
2020 R 2020 R
01/04 Balance b/d 9 450 30/04 Trust payments TCPJ 7 305
30/04 Trust receipts TCRJ 18 315 30/04 Balance c/d 20 460
27 765 27 765
30/04 Balance b/d 20 460

(iii)
Dr Clients control B3 Cr
2020 R 2020 R
01/04 Balance b/d 6 345 30/04 Balance c/d 10 960
30/04 Fees FJ 4 390
30/04 Sundry journal GJ 225
10 960 10 960
30/04 Balance b/d 10 960

The trust creditors control amount per the TB at the beginning

(iv) of April is a liability (an amount owing)  a Credit

Dr Trust creditors control B4 Cr

2020 R 2020 R
30/04 Trust bank TCPJ 7 305 01/04 Balance b/d 9 450
30/04 Balance c/d 20 460 30/04 Trust bank TCRJ 18 315
27 765 27 765
30/04 Balance b/d 20 460

(v)
Dr Fees N1 Cr
2020 R 2020 R
30/04 Balance c/d 4 390 30/04 Fees journal 4 390
4 390 4 390
30/04 Balance b/d 4 390

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EXPLANATION 6.1 (continued)

PART B
1. Calculation of the amount to be transferred from the trust bank account to the
business bank account:
Total
Step G. Langa F. Cape H. Mpuma transfer
1 Does the client owe an amount (a)? Yes Yes Yes
Total amount owed (a) 4 440 4 525 1 995
Opening balance 2 550 2 025 1 770
Fees earned (FJ) 1 890 2 500 –
Interest charged (GJ) – – 225
2 Are there trust funds available in trust account (b)? Yes Yes No
Total trust funds available (b) 3 210 2 250 –
Opening balance 5 700 3 750 –
Deposits per TCRJ 3 315 – –
Payments per TCPJ (5 805) (1 500)
3 Are there trust funds?
3 Does the amount owing by the client (a) equal the
amount available in (b)? No No No
4 Does the amount owing by the client (a) exceed the
amount available in (b)? Yes Yes Yes
Transfer is limited to amount available on (b).
Transfer is equal to ► 3 210 2 250 – 5 460
5 Does the amount available (b) exceed the amount
owed by the client (a)? Yes Yes No
Transfer is limited to amount owing on (a). Transfer
is equal to ► – – – –
3 210 2 250 – 5 460
(a) = clients business account
(b) = clients trust creditors account

Reconciliations

Trust bank account [20 460 – 5 460 (transfer to business bank account)] = R15 000
Trust creditors [J. East] = R15 000
Clients control account [10 960 – 5 460 (transfer from trust creditors control)] = R5 500
Clients accounts = R5 500
[G. Langa 1 230 (4 440 – 3 210) + F. Cape 2 275 (4 525 – 2 250) + H. Mpuma 1 995]

Notes

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EXPLANATION 6.1 (continued)

2. Books of first entry

Transfer journal
TJ
Dr Cr
R R
G. Langa (Trust creditors control) 3 210
F. Cape (Clients control) 2 250
G. Langa (Trust creditors control) 3 210
F. Cape (Clients control) 2 250
Transfer of trust funds to clients business account

Trust cash payments journal of SA Attorneys for April 2020 TCPJ

Trust
creditors Trust
Sundries control bank
Date Payments Fol. R R R
30 Business bank B1 5 460 5 460
5 460 5 460
B2

Business cash receipts journal of SA Attorneys for April 2020 BCPJ

Clients Business
Sundries control bank
Date Receipts Fol. R R R
30 Trust bank B2 5 460 5 460
5 460 5 460
B1

3. General ledger

Dr Trust bank B2 Cr
2020 R 2020 R
30/04 Balance b/d 20 460 30/04 Trust transfer TCPJ 5 460
30/04 Balance c/d 15 000
20 460 20 460
01/05 Balance b/d 15 000

Dr Business bank B1 Cr
2020 R 2020 R
01/04 Balance b/d 675 30/04 Balance c/d 6 135
30/04 Trust transfer TCRJ 5 460
6 135 6 135
01/05 Balance b/d 6 135
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EXPLANATION 6.1 (continued)

Dr Clients control B7 Cr
2020 R 2020 R
30/04 Balance b/d 10 960 30/04 Trust transfer TJ 5 460
30/04 Balance c/d 5 500
10 960 10 960
01/05 Balance b/d 5 500

The trust creditors control amount per the TB at the beginning of April is a liability (an amount owing)  a Credit

Dr Trust creditors control B6 Cr

2020 R 2020 R
30/04 Trust transfer TJ 5 460 30/04 Balance b/d 20 460
30/04 Balance c/d 15 000
20 460 20 460
01/05 Balance b/d 15 000

Clients ledger

Dr G. Langa Cr
2020 R 2020 R
01/04 Balance b/d 2 550 30/04 Trust transfer TJ 3 210
30/04 Fees FJ 1 890 30/04 Balance b/d 1 230
4 440 4 440
01/05 Balance b/d 1 230

Dr F. Cape Cr
2020 R 2020 R
01/04 Balance b/d 2 025 30/04 Trust transfer TJ 2 250
30/04 Fees FJ 2 500 30/04 Balance c/d 2 275
4 525 4 525
01/05 Balance b/d 2 275

Dr H. Mpuma Cr
2020 R 2020 R
30/04 Balance b/d 1 995 30/04 Balance c/d 1 995
1 995 1 995
01/05 Balance b/d 1 995

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EXPLANATION 6.1 (continued)

Trust creditors ledger

Dr G. Langa Cr
2020 R 2020 R
30/04 Trust bank TCPJ 5 805 01/04 Balance b/d 5 700
30/04 Trust transfer TJ 3 210 30/04 Trust bank TCRJ 3 315
9 015 9 015

Dr F. Cape Cr
2020 R 2020 R
30/04 Trust bank TCPJ 1 500 01/04 Balance b/d 3 750
30/04 Trust transfer TJ 2 250 `
3 750 3 750

Dr J. East Cr
2020 R 2020 R
30/04 Balance c/d 15 000 30/04 Trust bank TCRJ 15 000
15 000 15 000
01/05 Balance b/d 15 000

Notes

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EXAMPLE 6.2

Use the same information as in example 6.1 but add the following:
1. Assume that the information in example 6.1 was before the bank reconciliation of the trust
bank account was done. The only differences between the trust bank statement and the
trust bank account in the accounting records of SA Attorneys were the following:
➢ An electronic funds transfer on 29 April 2020 of R2 000 on behalf of J. East to the City
Council for rates and taxes; and
➢ The reversal by the bank of the R15 000 paid into the trust bank account by J. East due
to insufficient funds in the private bank account of J. East.
These two transactions must still be accounted for in the trust bank account of SA
Attorneys.

2. R1 600 of the R3 750 opening balance on the account of F. Cape in the trust creditors
ledger is specifically for transfer duties payable once the property is transferred to F. Cape.
Mr Naidoo expects that the property will be transferred during the second week of May
2020.

REQUIRED:

PART A
Open the following ledger accounts in the general ledger of SA Attorneys as at 30 April 2020
and post the subsidiary journals in additional information 1 and 2 above, to these ledger
accounts.
(i) Business bank
(ii) Trust bank
(iii) Clients control
(iv) Trust creditors control
(v) Fees
NB: Properly balance all accounts as at 30 April 2020. Commence the general ledger
accounts with the opening balances as given in the trial balance above and close off
before the transfer entries.
PART B
Calculate, for each trust creditor, the amount that should be transferred from the trust bank
account to the business bank account on 30 April 2020, after all the information given in the
question have been taken into account.
NB: Show all calculations.

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EXPLANATION 6.2

PART A
(i)
Dr Business bank B1 Cr
2020 R 2020 R
01/04 Balance b/d 9 150 30/04 Payments BCPJ 8 475
30/04 Balance c/d 675
9 150 9 150
01/05 Balance b/d 675

(ii)
Dr Trust bank B2 Cr
2020 R 2020 R
01/04 Balance b/d 9 450 30/04 Trust payments TCPJ *24 305
30/04 Trust receipts TCRJ 18 315 30/04 Balance c/d 3 460
27 765 27 765
01/05 Balance b/d 3 460
* 7 305 + 2 000 + 15 000 = 24 305

(iii)
Dr Clients control B3 Cr
2020 R 2020 R
01/04 Balance b/d 6 345 30/04 Balance c/d 10 960
30/04 Fees FJ 4 390
30/04 Sundry journal GJ 225
10 960 10 960
01/05 Balance b/d 10 960

(iv)
Dr Trust creditors control B4 Cr
2020 R 2020 R
30/04 Trust bank TCPJ 24 305 01/04 Balance b/d 9 450
30/04 Balance c/d 3 460 30/04 Trust bank TCRJ 18 315
27 765 27 765
01/05 Balance b/d 3 460

(v)
Dr Fees N1 Cr
2020 R 2020 R
30/04 Balance c/d 4 390 30/04 Fees journal 4 390
4 390 4 390
30/04 Balance b/d 4 390
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EXPLANATION 6.2 (continued)

PART B
The following table can be used to calculate the amount that must be transferred from the trust
bank account to the business bank account:
H. Total
G. Langa F. Cape Mpuma J. East transfer
1 Does the client owe an amount (a)? Yes Yes Yes No
Total amount owed (a) 4 440 4 525 1 995 –
Opening balance * 2 550 2 025 1 770
Interest levied on account in arrears (GJ) – – 225 –
Fees earned (FJ) 1 890 2 500 – –
2 Are there funds available in trust account? Yes Yes No No
Trust funds available 3 210 2 250 – (2 000)
Opening balance # 5 700 3 750 – –
Receipts for month (TCRJ) 3 315 – – 15 000
Disbursements (TCPJ) (5 805) (1 500) – 2 000
Reversal of funds received – – – (15 000)
3 Are the trust funds earmarked for a specific
purpose? No Yes No No
Trust funds earmarked – 1 600 – –
Total trust funds available (b) (2 plus 3) 3 210 650 –
4 Does the amount owing by the client (a) equal
the amount available on (b)? No No No No
Transfer is equal to amount available on (b).
Transfer is equal to ► – – – – –
5 Does the amount owing by the client (a)
exceed the amount available on (b)? Yes Yes Yes Yes
Transfer is limited to amount available on (b).
Transfer is equal to ► 3 210 650 – (2 000) 1 860
6 Does the amount available (b) exceed the
amount owed by the client (a)? No No No No
Transfer is limited to amount owing on (a).
Transfer is equal to ► – – – – –
3 210 650 – (2 000) 1 860
(a) = clients business account
(b) = clients trust creditors account
* 2 550 + 2 025 + 1 770 = 6 345 (amount per opening TB)
# 5 700 + 3 750 = 9 450 (amount per opening TB)

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EXPLANATION 6.2 (continued)

The trust creditors ledger and clients ledger are shown below for completeness only and need not be
included in your answer.
Trust creditors ledger

Dr J. East Cr
2020 R 2020 R
30/04 Trust bank TCPJ *17 000 30/04 Trust bank TCRJ 15 000
30/04 Balance before transfer c/d 2 000
17 000 17 000
30/04 Balance b/d 2 000 30/04 J. East (transfer) 2 000
* R2 000 + R15 000 = R17 000

Dr G. Langa Cr
2020 R 2020 R
30/04 Trust bank TCPJ 5 805 01/04 Balance b/d 5 700
Balance before transfer c/d 3 210 30/04 Trust bank TCRJ 3 315
9 015 9 015
30/04 G. Langa (transfer) 3 210 30/04 Balance b/d 3 210

Dr F. Cape Cr
2020 R 2020 R
30/04 Trust bank TCPJ 1 500 30/04 Balance b/d 3 750
30/04 Balance before transfer c/d 2 250
3 750 3 750
30/04 F. Cape (transfer) 650 30/04 Balance b/d 2 250
30/04 Balance c/d 1 600
2 250 2 250
01/05 Balance b/d 1 600

Clients ledger

Dr J. East Cr
2020 R 2020 R
30/04 J. East (trust creditor) 2 000

Dr G. Langa Cr
2020 R 2020 R
01/04 Balance b/d 2 550 30/04 G. Langa (trust creditor) 3 210
30/04 Fees FJ 1 890 30/04 Balance c/d 1 230
4 440 4 440
01/05 Balance b/d 1 230

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EXPLANATION 6.2 (continued)

Dr F. Cape Cr
2020 R 2020 R
01/04 Balance b/d 2 025 30/04 F. Cape (trust creditor) 650
30/04 Fees FJ 2 500 Balance c/d 3 875
Balance before transfer c/d 4 525 4 525
01/05 Balance 3 875

Dr H. Mpuma Cr
2020 R 2020 R
01/04 Balance b/d 1 770 30/04 Balance c/d 1 995
30/04 Interest received 225
1 995 1 995
01/05 Balance 1 995

Reconciliations
Trust bank account [R3 460 – R1 860 (transfer to business bank account)] = R1 600
Trust creditors [F. Cape] = R1 600
Clients control account [R10 960 – R1 860 (transfer from trust creditors control)] = R9 100
Clients accounts [J. East R2 000 + G. Langa R1 230 + F. Cape R3 875 +
H. Mpuma R1 995] = R9 100

EXAMPLE
6.3

The bookkeeper of SA Attorneys presented the following list of balances as at 31 March 2021
to you. The balances already include all transactions, including fees raised.

Client/Trust creditor Trust creditors ledger Clients ledger

A. Africa R22 000 (credit) Rnil
S. South R29 800 (credit) R36 800 (debit)
N. North Rnil R8 400 (debit)
W. West R3 200 (debit) R10 000 (debit)

REQUIRED:

1. What will the maximum amount be that can be transferred from the trust bank account to
the business bank account to ensure that no trust deficit (shortage) will arise? The balance
of the trust bank account before the transfer is R48 600.

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2. Calculate the balances of each account after the transfer journals are posted to the ledger
accounts and the funds transferred from the trust bank account to the business bank
account.
3. Reconcile the trust creditors control account with the trust bank account.

EXPLANATION 6.3

1. The following table can be used to calculate the amount that must be transferred from the
trust bank account to the business bank account:
S. Total
A. Africa South N. North W. West transfer
1 Does the client owe an amount (a)? No Yes Yes Yes
Total amount owed (a) – 36 800 8 400 10 000
2 Are there funds available in trust account? Yes Yes No No
Trust funds available 22 000 29 800 – (3 200)
3 Are the trust funds earmarked for a specific
purpose? No No No No
Trust funds earmarked – – – –
Total trust funds available (b) (2 plus 3) 22 000 29 800 – –
4 Does the amount owing by the client (a) equal
the amount available on (b)? No No No No
Transfer is equal to amount available on (b).
Transfer is equal to ► – – – – –
5 Does the amount owing by the client (a)
exceed the amount available on (b)? No Yes Yes Yes
Transfer is limited to amount available on (b).
Transfer is equal to ► – 29 800 – (3 200) 26 600
6 Does the amount available (b) exceed the
amount owed by the client (a)? No No No No
Transfer is limited to amount owing on (a).
Transfer is equal to ► – – – – –
– 29 800 – (3 200) 26 600
(a) = clients business account
(b) = clients trust creditors account

2. Trust creditors ledger

Balance Balance
before transfer Transfer after transfer
Client R R R
A. Africa 22 000 – 22 000
S. South 29 800 (29 800) –
N. North – – –
W. West (3 200) 3 200 –
48 600 26 600 22 000
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EXPLANATION 6.3 (continued)

Clients ledger
Balance before Balance after
transfer Transfer transfer
Client R R R
A. Africa – – –
S. South 36 800 (29 800) 7 000
N. North 8 400 – 8 400
W. West 10 000 3 200 13 200
55 200 (26 600) 28 600

3. Trust bank account

Balance before Balance after
transfer Transfer transfer
Client R R R
Trust bank account 48 600 (26 600) 22 000

R
Balance per trust creditors control (above) 22 000

6.6 The recording process in the transfer journal

A transfer of funds must be made from the trust bank account to the business bank account.
The following source documents are of relevance: EFT documentation, business receipts and
clients files.

The transfer of the trust funds to the business bank account can take place on the same day
as the date on which the attorney levies the fees. It is recommended that the transfer is made
as soon as possible, as the accumulation of the attorney’s own money in the trust bank account
may be seen as a failure to separate business and trust money properly and is a transgression
of section 54.8 of Legal Practice Act, 28 of 2014. The trust funds may not be used until the legal
practice has earned them.

An attorney’s trust account is essentially a business bank account, established by the attorneys’
firm to hold client funds. Funds that are deposited into a trust account are neither the property
of the individual attorney nor the property of the attorneys’ firm.

Notes

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6.7 Summary of trust fund management
The following comments are extremely important to take note of when an attorney is dealing
with trust funds:

1. Keep trust funds separate from business funds. Rule 54.8 of the LPA rules states that
trust transactions must be kept separate from business transactions.

2. Keep individual trust accounts so that the money of one client does not mix with the
money of another client.

3. Trust funds may not be used until the attorneys’ firm has earned it.

4. Funds received in advance from clients are deposited into the trust account. Fees can
only be transferred from the trust account to the business account after the legal work
has been done and the fees have been levied.

5. Trust money shall in no circumstances be deposited in or credited to the business

banking account. Money other than trust money in the trust bank account at any time
shall be transferred to the business bank account without undue delay.

6. The exact amount owing on the business account of the client should be transferred.
The practice of transferring rounded amounts is not acceptable.

7. A law firm shall be deemed to have complied sufficiently with this rule if the law firm:
o makes transfers from its trust banking account to its business banking account at
least once a month; and ensures that, when making a transfer from its trust banking
account to its business banking account:
o the amount transferred is identifiable with, and does not exceed, the amount due to
the firm;
o the trust creditor from whose account the transfer is made is identified; and
o the balance of any amount due to the firm remaining in its trust banking account is
capable of identification with corresponding entries appearing in its trust ledger.

8. If the law firm utilises electronic banking (EFTs) in respect of payments from the trust
account to the business account the law firm shall keep a proper audit trail, which shall
include verification of the payee’s banking account details. The law firm must ensure that
adequate internal controls are implemented in order to ensure compliance with the rules
as well as to ensure that trust funds are safeguarded.

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9. When transfers are made for more than one client on a specific day, only one EFT,
representing the total of individual transfers for the day, is recorded in the business cash
receipts journal for the transfer to the business bank account.

10. All transfers to the clients ledger and the trust creditors ledger should be done via the
transfer journal.

6.8 Self-assessment questions

After having worked through this learning unit, are you now able to do the following?

Questions Answers
Define the objectives of trust
accounts.

Explain the function of the

transfer journal.

Describe the objectives of

transfer procedures.

Explain four requirements that

must be complied with before
money may be transferred from
the trust creditors account of a
client to his or her account in
the clients ledger.

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Questions Answers
Describe the transfer
procedures.

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FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

7 TRUST INVESTMENTS

Contents
Learning outcomes ............................................................................................................................. 2
Key concepts ...................................................................................................................................... 2
Acronyms ........................................................................................................................................... 2
7.1 Introduction ................................................................................................................................ 3
7.2 Section 86(3) of the Legal Practice Act, 28 of 2014 ................................................................... 6
7.3 Section 86(4) of the Legal Practice Act, 28 of 2014 ................................................................. 12
7.4 Schematic summary of the process of investing trust money ................................................... 13
7.5 The LPC Rules for the Attorneys’ Profession in respect of trust monies................................... 22
7.5.1 Introduction ................................................................................................................. 22
7.5.2 Appointment of an auditor/public accountant............................................................... 22
7.5.3 Accounting to clients ................................................................................................... 23
7.5.4 Consequences of non-compliance with prescriptions .................................................. 23
7.6 Self-assessment exercises ...................................................................................................... 37

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After studying this learning unit, you should be able to: 1

• demonstrate knowledge of the Legal Practice Act, 28 of 2014 (LPA) and the Legal
Practice Council (LPC) Rules for the Attorneys’ Profession (and rulings where
applicable)
• know the important subsections of section 86 of the LPA (subsections 86(2), 86(3), 86(4)
and 86(5)(a))
• apply section 86 of the LPA to a given set of facts
• distinguish between a section 86(3) and 86(4) trust investment
• explain how the interest received is dealt with in each case
• identify the beneficiaries of investment interest
• record trust investment transactions in the accounting records

• Section 86(3) trust investment

• Section 86(4) trust investment
• Trust creditor
• Trust creditors ledger
• Trust creditors control account
• Trust investments
• Trust money
• Legal Practitioners Fidelity Fund (LPFF)

LPA Legal Practice Act, 28 of 2014

LPFF Legal Practitioners Fidelity Fund
LPC Legal Practice Council

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7.1 Introduction

In an attorney’s practice, clients in most instances are required to deposit money into the trust
bank account of the attorney for safekeeping, until the matter or court case has been
concluded or has lapsed. Examples of these are:
• deposits in property transactions
• provisions for advocates’ fees
• other expenses in court cases, and
• the provision for attorneys’ fees especially where the amount of fees are material.

QUICK
NOTE • Section 86(1) ― Every legal practitioner referred to in section 84(1) must
operate a trust account.
• Section 86(2) ― Every trust account practice must keep a trust account
at a bank with which the Fund has made an arrangement as provided for
in section 63(1)(g) and must deposit therein, as soon as possible after
receipt thereof, money held by such practice on behalf of any person.

Section 88(1) of the Legal Practice Act, 28 of 2014 states that trust money does not form part
of the assets of the law practitioner’s practice. Thus, the creditors of the legal practice cannot
claim against this money.

This means that if there are trust monies in the trust bank account which are not immediately
needed for specific purposes and are not earning any interest it may be invested. In terms of
section 86 of the LPA, attorneys are authorised to invest the trust monies in trust investment
accounts. The trust investments remain as part of the overall trust monies that must, together
with the trust bank account, be equal to or more than the total of the trust creditors accounts.

Trust investments Trust bank account ≥ Trust creditors control

The trust creditors ledger keeps records of transactions with each individual trust creditor.

The “trust creditors control account” is one account in the general ledger which represents
the total amount owed to all the individual trust creditors in the trust creditors ledger. The
balance of the trust creditors control account must equal the total of the trust creditors list.
The trust creditors list is a list of the individual trust creditors and the amount owed to them
obtained from the individual balances in the trust creditors ledger (subsidiary ledger) accounts
for each trust creditor.

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Explanations of the terms discussed above:

In the trust creditors ledger (a subsidiary ledger) –

Dr A. South TCL1 Cr
2020 R 2020 R
30/06 Trust bank TCPJ6 XXX 01/06 Opening balance b/d XXX
30/06 Closing balance c/d AAA 30/06 Trust bank TCRJ6 XXX
XXX XXX
01/06 Opening balance b/d AAA

Dr S. Africa TCL2 Cr
2020 R 2020 R
30/06 Trust bank TCPJ6 XXX 30/06 Trust bank TCRJ6 XXX
30/06 Closing balance c/d AAA
XXX XXX
01/06 Opening balance b/d AAA

Opening balance
From the cash payments From the cash receipts which was the closing
journal – payments for month journal – receipts for the balance for the
month previous month/year
In the general ledger –
Dr Trust creditors control GL4 Cr
2020 R 2020 R
30/06 Trust bank account TCPJ6 XXX 01/06 Opening balance b/d XXX
30/06 Closing balance c/d AAA 30/06 Trust bank account TCRJ6 XXX
XXX XXX
01/06 Opening balance b/d AAA

This control account represents the subsidiary ledger – Trust creditors ledger
in the general ledger. The total of the trust creditors list must EQUAL the
balance at the end of the month of the trust creditors control account.

The trust creditors list –

Account
Name of client reference R
Creditor 1 TCL1 XXX
Creditor 2 TCL2 XXX
Creditor 3 TCL3 XXX
Total XXX

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Law practices investing in terms of the LPC Rules should pay attention to the requirements of
the LPC Rules as follows:

A firm shall for the purpose of this rule be deemed to be carrying on the
business of an investment practice if it invests funds on behalf of a client
Rule 55.1
or clients and it controls or manages such investments, whether directly or
indirectly.

A client shall for the purpose of this investment practice rule include any
person on whose behalf a firm invests funds or manages or controls
Rule 55.2
investments, whether or not such person is otherwise a client of the firm
concerned.

A legal practitioner carrying on an investment practice shall obtain an

investment mandate from each client before or as soon as possible after
Rule 55.4 investing funds on behalf of the client. The investment mandate must
contain a statement that the client acknowledges that monies so invested
DO NOT enjoy the protection of the LPFF.

The trust banking of legal practitioners is regulated by Sections 84 and 86 of the Legal Practice
Act, 28 of 2014.

Section 84(1) Every attorney or any advocate referred to in section 34(2)(b) of the LPA,
who practises or is deemed to practise –
► for his or her own account either alone or in partnership; or
► as a director of a practice which is a juristic entity, must be in possession of a Legal
Practitioners Fidelity Fund certificate.

Section 84(3) The provisions of subsections (1) and (2) above apply to a deposit taken
on account of fees or disbursements in respect of legal services to be rendered. (i.e.
Trust money)

Section 84(2) No legal practitioner referred to in subsection (1) or person employed or

supervised by that legal practitioner may receive or hold funds or property belonging to
any person unless the legal practitioner concerned is in possession of a Legal
Practitioners Fidelity Fund (LPFF) certificate.

Section 86(1) Every legal practitioner referred to in section 84(1) must operate a trust
account. [A trust account is a separate bank account]

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Section 86(2) Every trust account practice must keep a trust account at a bank with
which the LPFF has made an arrangement as provided for in section 63(1)(g) and must
deposit therein, as soon as possible after receipt thereof, money held by such practice
on behalf of any person. This is interest earned on the practice trust account.

(a) Interest accrued must, in the case of money deposited in terms of this subsection,
be paid over to the LPFF and vests in the LPFF,
NB! (b) 100% of trust interest earned, will be paid monthly to the LPFF as provided for by
Rule 54.14.16.1 made under the authority of Section 95(1) of the Legal Practice
Act, 28 of 2014.

The legal practitioner can claim approved recoverable bank charges and audit fees on
the trust accounts back from the LBF Fund, subject to certain formulas and
requirements.

There are two types of trust investments, namely:

• Investments in terms of section 86(3) of the LPA; and
• Investments in terms of section 86(4) of the LPA.

QUICK
NOTE
➢ There is no limit to the number of trust investment accounts a law
practice may open.
➢ The two trust investment accounts in terms of sections 86(3) and 86(4)
of the LPA are trust creditors accounts and are not included in the
general ledger but in the trust creditors ledger.
➢ The trust creditors control account forms part of the general ledger.
➢ These two accounts are the only trust creditors accounts that may have
debit balances.

It is this point that differentiates

7.2 Section 86(3) of the Legal Practice Act, 28 of 2014 the type of investments.

In terms of section 86(3) of the LPA, a legal practitioner may transfer trust money which is
not immediately needed to a trust savings or other interest-bearing investment account at a
South African banking institution. It may, however, not be invested on the security exchange
or in unit trusts. This money is taken from the pool of funds and not from specific trust creditors.
The decision to invest the surplus money is made by the legal practitioner and the following
applies.

(a) The investments should be made with banks with which the LPFF has entered into an
arrangement.
(b) These investments remain part of the entrusted monies and are recorded as such in the
trust accounting records of the legal practice. These investments enjoy protection from
the LPFF.
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(c) The LPA requires that the bank statements be endorsed with a reference to section 86(3)
of the LPA. The legislation also stipulates that the name of the trust investment account
in the trust creditors ledger includes a reference to the specific section of the legislation
applicable, for example S. Africa sec 86(3) trust investment: ABC Bank.
(d) Interest accrued must, in the case of money deposited in terms of this subsection, be paid
over to the LPFF and vests in the LPFF. NB!

(e) 100% of trust interest earned will be paid on an annual basis to the LPFF as provided
for by Rule 54.14.16.3 made under the authority of Section 95(1) of the LPA.
(f) When the invested money is withdrawn from the trust investment account it is deposited
back into the trust bank account. The trust creditors can then be paid from the trust bank
account.
(g) Interest earned on Section 86(3) trust investments must be paid over to the LPFF and
therefore is not the property of the legal practitioner or the trust creditors.

LBL Trust money may not be deposited directly into a trust

See Lessons
investment account.
Trust money
All trust monies must flow through the trust bank account to the
trust investment account.

LBL Interest earned on section 86(3) trust investments must be paid

See Lessons
over to the Legal Practitioners Fidelity Fund (LPFF) or its nominee. Trust
It is therefore not the property of the legal practitioner or the interest
trust creditors.

Notes

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EXAMPLE
7.1

SA Attorneys received R50 000 from a client, S. Africa (client reference no. TCL1) and R10
000 from client, A. South (client reference no. TCL2) for future services.

EXPLANATION
7.1

The trust cash receipts journal will be prepared as follows:

TCRJ6
Trust
creditors
control Bank
Date Details Fol. R R
30/06 S. Africa TCL1 50 000 50 000
30/06 A. South TCL2 10 000 10 000
60 000 60 000
30/06 Dr – Trust bank account GL1
30/06 Cr – Trust creditors control GL2

The trust cash receipts journal will be posted to the general ledger and trust creditors ledger
as follows:
General ledger

Dr Trust creditors control GL2 Cr

2020 R 2020 R
01/06 Trust cash receipts TCRJ 60 000
Dr Trust bank GL1 Cr
2020 R 2020 R
01/06 Trust cash receipts TCRJ 60 000

Trust creditors ledger

Dr A. South TCL1 Cr
2020 R 2020 R
01/06 TCRJ 50 000

Dr S. Africa TCL2 Cr

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2020 R 2020 R
01/06 TCRJ 10 000
EXAMPLE
7.2

The accounting treatment of Section 86(2) and Section 86(3) trust investments

The following information was obtained from the accounting records of SA Attorneys for June
2020:

2020
June
1 The balance of the trust bank account of SA Attorneys with South Bank amounted
to R250 000. E. North decided to invest funds of R80 000, which were not
immediately required, in a special interest-bearing savings account with Africa Bank.

30 SA Attorneys withdrew R80 800 from the savings account with Africa Bank and
deposited it in the trust bank account.

30 Interest of R700 was earned during the month on the trust bank account held in
South Bank.

REQUIRED:

Prepare the following in the accounting records of SA Attorneys for June 2020:

1. Subsidiary journals, properly totalled:

1.1. Trust cash receipts journal
1.2. Trust cash payments journal
1.3. Trust journal

2. Ledgers, properly balanced:

2.1. General ledger
2.2. Trust creditors ledger
2.3. Trust creditors list

Notes

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EXPLANATION
7.2

SA ATTORNEYS

1. Subsidiary journals
1.1 Trust cash receipts journal for June 2020
TCRJ6
Trust
creditors Trust
control bank
Date Details Fol. R R
30/06 Sec 86(3) trust investment – Africa Bank [trust creditor] TCL1 80 800 80 800
30/06 Interest received on trust bank account TCL2 700 700
81 500 81 500
30/06 Dr – Trust bank account B1
30/06 Cr – Trust creditors control account B2

1.2 Trust cash payments journal for June 2020

TCPJ6
Trust
creditors Trust
control bank
Date Details Fol. R R
30/06 Sec 86(3) trust investment – Africa Bank (trust creditor) TCL1 80 000 80 000
30/06 Dr – Trust creditors control account B2
30/06 Cr – Trust bank account B1

1.3 General journal for June 2020

GJ6
Debit Credit
Date Details Fol. R R
30/06 Sec 86(3) trust investment – Africa Bank (trust creditor) TCL1 800
Legal Practitioners Fidelity Fund (LPFF) (trust creditor) TCL2 800
Transfer of interest to the LPFF
800 800
30/06 Dr – Trust creditors control account B2
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30/06 Cr – Trust creditors control account B2

The LPFF is a trust creditor of the attorney’s practice because the interest
earned does not belong to the attorney’s practice. The interest accrues to the
LPFF and is held in trust by the practice until it is paid over to the LPFF.

2. Ledgers
2.1 General ledger

Dr Trust bank B1 Cr
2020 R 2020 R
01/06 Balance b/d 250 000 01/06 Trust payments TCPJ6 80 000
30/06 Trust receipts TCRJ6 81 500 30/06 Balance c/d 251 500
331 500 331 500
Jun 30 Balance b/d 251 500
The balance of the Trust bank account must equal
the Trust creditors control account at month end.

Dr Trust creditors control B2 Cr

2020 R 2020 R
30/06 Trust bank TCPJ6 80 000 01/06 Balance [Per question] b/d 250 000
30/06 Journal debits GJ6 800 30/06 Trust bank TCRJ6 81 500
30/06 Balance c/d 251 500 30/06 Journal credits GJ6 800
332 300 332 300
30/06 Balance b/d # 251 500

2.2 Trust creditors ledger 100% of the interest earned on the Sec 86(3) Folio – Trust
investment (R80 000) is owed to the LPFF. Creditors Ledger

Dr Sec 86(3) trust investment – Africa Bank TCL1 Cr

2020 R 2020 R
01/06 Trust bank TCPJ6 80 000 30/06 Trust bank TCRJ6 80 800
30/06 LPFF GJ6 800
80 800 80 800

Payment from trust bank account Withdrawal of investment and payment into trust
into an investment account bank account R80 000 (capital invested + R800
interest received on investment)

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Dr Legal Practitioners Fidelity Fund TCL2 Cr

R 2020 R

The credit is from the Trust Cash Receipts Journal. 30/06 Trust bank TCRJ6 700
The reference to 6 indicates the page no. of the 30/06 Trust investment –
TCRJ on which the transaction is recorded.
South Bank GJ6 800
1 500

From P6 of the General Journal

The interest earned on the section 86(2) trust bank account and section
86(3) trust investment accrues to the LPFF but has not been paid to the
LPFF. Therefore, the R1 500 is still owed to the LPFF on 30 June.

Check the balance of the trust creditors control general ledger account –

2.3 Trust creditors list

Account
Name of client reference R
Opening balance [No detail of the composition of this amount given in question] TCL1 250 000
Legal Practitioners Fidelity Fund TCL2 1 500
Total # 251 500

It is this point that differentiates

7.3 Section 86(4) of the Legal Practice Act, 28 of 2014 the type of investments.

A trust account practice may, on the instructions of any person (i.e. client), open a
separate trust savings account or another interest-bearing account for the purpose of
investing therein any money deposited in the trust account of that practice, on behalf of
such person over which the practice exercises exclusive control as trustee, agent
or stakeholder or in any other fiduciary capacity. Therefore the requirements differ from section
86(3) as the decision to invest surplus trust money is made by the client and the following
applies.

(a) The LPA requires that the bank statements be endorsed with a reference to section 86(4)
of the LPA. The name of the trust investment account in the trust creditors ledger must
also include a reference to the specific section of the legislation, for example S. Africa
sec 86(4) trust investment – ABC Bank.
(b) As is the case with section 86(3) the trust money may not be deposited directly into a
trust investment account but must flow through the trust bank account. The same rule is
applicable to the withdrawal of the money invested.

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(c) Interest accrued on money deposited in terms of this section must be paid as follows:
► 5% of the interest accrued on money in terms of this paragraph must be paid over
to the LPFF and vests in the LPFF.
► 95% of the interest accrued on the above money must be paid over to the person
who gave instructions for the investment to be made.
(d) With effect from 1 March 2019, 5% of the trust interest earned will be paid monthly to the
LPFF in terms of section 86(5), as provided for by Rule 54.14.16.4 made under the
authority of Section 95(1) of the LPA.
(e) Only 5% of the interest earned on Section 86(4) trust investments vests with the LPFF
and therefore is not the property of the legal practitioner or the trust creditors.

7.4 Schematic summary of the process of investing trust money:

Client deposits money into the practice’s trust bank account

A legal practitioner of his/her Every trust account The client instructs legal
own accord decides to invest practice must keep a practitioner to invest the
the money, currently not trust account at a bank money in LPFF approved
required for a specific purpose with which the LPFF has bank until it is needed for
in LPFF approved bank until it entered into an fees and costs.
is needed for fees and costs. arrangement.

Paid into a trust investment Paid into a trust investment

account. Either a savings account. Either a savings
account or other interest- account or other interest-
bearing account. bearing account.

Section 86(3) investment Section 86(2) investment Section 86(4) investment

Interest earned on the investment to be Interest earned on the investment to be

paid over annually to the LPFF (100%) paid over monthly to the client (95%)
and LPFF (5%)

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EXAMPLE
7.3

The accounting treatment of Section 86(4) trust investments

The following information was obtained from the accounting records of SA Attorneys for May
2020:

2020
30/04 The balance of the trust bank account after the deposit into the trust bank account
but before the transfer to the trust investment account was R440 000.
01/05 Client E. North deposited R280 000 into the trust bank account of SA Attorneys.
The R280 000 was the deposit payable by E. North on a property purchased from
the City Council.
01/05 E. North instructed SA Attorneys to invest the total amount of R280 000 in an
interest-bearing investment account at Africa Bank in terms of section 86(4) of the
LPA, until the transfer of property is affected.
30/05 The property was registered in the name of E. North.
31/05 SA Attorneys withdrew the investment of E. North and received R282 400, which
was deposited into the trust bank account.

REQUIRED:

Prepare the following in the accounting records of SA Attorneys for May 2020:

1. Subsidiary journals, properly totalled:

1.1. Trust cash receipts journal
1.2. Trust cash payments journal
1.3. Trust journal

2. Ledgers, properly balanced:

2.1. General ledger
2.2. Trust creditors ledger

Notes

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EXPLANATION

7.3

SA ATTORNEYS

1. Subsidiary journals
1.1 Trust cash receipts journal for May 2020
TCRJ5
Trust
creditors
control Bank
Date Details Fol. R R
31/05 E. North sec 86(4) investment – Africa Bank TCL1 282 400 282 400
31/05 Cr – Trust creditors control account GL2
31/05 Dr – Trust bank account GL2

1.2 Trust cash payments journal for May 2020

TCPJ5
Trust
creditors
control Bank
Date Details Fol. R R
01/05 E. North sec 86(4) investment – Africa Bank TCL1 280 000 280 000
31/05 Dr – Trust creditors control account GL2
31/05 Cr – Trust bank account GL1

1.3 Trust journal for May 2020

GJ5
Debit Credit
Date Details Fol. R R
31/05 E. North sec 86(4) investment – Africa Bank TCL1 2 400
E. North (95% of interest received) TCL2 2 280
LPFF (5% of interest received) TCL3 120
Transfer of interest received to trust creditor and LPFF
2 400 2 400
31/05 Dr – Trust creditors control account GL2
31/05 Cr – Trust creditors control account GL2

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2. Ledgers
2.1 General ledger
Dr Trust bank account GL1 Cr
2020 R 2020 R
01/05 Opening balance b/d 720 000 01/05 Trust payments TCPJ5 280 000
31/05 Trust receipts TCRJ5 282 400 Closing balance c/d 722 400
1 002 400 1 002 400
31/05 Opening balance b/d 722 400

Dr Trust creditors control GL4 Cr

2020 R 2020 R
31/05 Trust bank account TCPJ5 280 000 01/05 Opening balance b/d 720 000
Journal debits GJ5 2 400 31/05 Trust bank account TCRJ5 282 400
Closing balance c/d 722 400 Journal credits GJ5 2 400
1 004 800 1 004 800
31/05 Opening balance b/d 722 400

2.2 Trust creditors ledger

Dr E. North sec 86(4) investment – Africa Bank TCL1 Cr
2020 R 2020 R
01/05 Trust bank account TCPJ5 280 000 31/05 Trust bank account TCRJ5 282 400
31/05 E. North/LPFF GJ5 2 400
282 400 282 400

Dr E. North TCL2 Cr
R 2020 R
01/05 Balance b/d 280 000
E. North sec 86(4)
investment - Africa
31/05 Bank TJ5 2 280
282 280

Dr Legal Practitioners Fidelity Fund (LPFF) TCL3 Cr

R 2020 R
30/05 E. North sec 86(4)
investment – Africa
Bank TJ5 120

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120

The interest earned on the section 86(4) trust investment accrues to the LPFF but has not yet
been paid to the fund. The R120 is therefore still owed to the LPFF on 30 May.

The trust creditor’s account does not decrease when the investment is made. The trust bank
account (trust asset) decreases while the client’s investment account (trust asset) increases.

EXAMPLE
7.4

The accounting treatment of Section 86(3) and Section 86(4) trust investments.

The following information was obtained from the accounting records of SA Attorneys for
August 2020:

Balances at 1 August 2020:

R
Trust bank 337 500
Trust creditors 337 500

The trust creditors consist of:

R
A. South 112 500
B. Mpuma 93 750
C. Kwazulu 56 250
D. Western 75 000
The following transactions took place during August 2020:

Aug
2020
1 SA Attorneys invested R150 000 of the trust funds not immediately required, in a
special savings account at Africa Bank until 31 August 2020.
3 B. Mpuma requested SA Attorneys to invest the amount in his trust account in a
special savings account to his benefit. SA Attorneys invested the amount in West
Bank.
5 A. South requested SA Attorneys to invest R58 000 of his trust funds in a savings
account at Africa Bank. SA Attorneys acted accordingly.
22 SA Attorneys withdrew the investment made on 3 August 2020 and received
R95 625. On request of B. Mpuma, SA Attorneys paid R48 750 to F. Cape, his
daughter, and the rest of the amount in the trust account of B. Mpuma to him.
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31 SA Attorneys redeemed half the trust investment made on 1 August 2020 and
received R76 825 which was paid into the trust bank account.
REQUIRED:

Prepare the following in the accounting records of SA Attorneys for August 2020:

1. Subsidiary journals, properly totalled:

1.1 Trust cash receipts journal
1.2 Trust cash payments journal
1.3 Trust journal

2. Ledgers, properly balanced:

2.1 General ledger
2.2 Trust creditors ledger

SA ATTORNEYS

1. Subsidiary journals

1.1 Trust cash receipts journal for August 2020

TCRJ8
Trust
creditors
control Bank
Date Details Fol. R R
22/08 B. Mpuma sec 86(4) investment – West Bank TCL6 95 625 95 625
(trust creditor)
31/08 Sec 86(3) trust investment – Africa Bank (trust creditor) TCL5 76 825 76 825
172 450 172 450
31/08 Dr – Trust bank account GL1
31/08 Cr – Trust creditors control account GL2

1.2 Trust cash payments journal for August 2020

TCPJ5
Trust
creditors
control Bank
Date Details Fol. R R
01/08 Sec 86(3) trust investment – Africa Bank (trust creditor) TCL5 150 000 150 000
03/08 B. Mpuma sec 86(4) investment – West Bank (trust
creditor) TCL6 93 750 93 750
05/08 A. South sec 86(4) investment – Africa Bank (trust TCL7 58 000 58 000
creditor) TCL2 48 750 48 750
22/08 B. Mpuma (trust creditor) – F. Cape TCL2 46 875 46 875
22/08 B. Mpuma (trust creditor)
397 375 397 375
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31/08 Dr – Trust creditors control account GL2

31/08 Cr – Trust bank account GL1

1.3 Trust journal for August 2020

GJ8
Debit Credit
Date Details Fol. R R
31/08 Sec 86(3) trust investment – Africa Bank (trust creditor) TCL5 1 825
LPFF (trust creditor) TCL7 1 825
Transfer of interest received to the LPFF
31/08 B. Mpuma sec 86(4) investment – West Bank
(trust creditor) TCL6 1 875
B. Mpuma (trust creditor) TCL2 1 875
Transfer of interest received to client
3 700 3 700
31/08 Dr – Trust creditors control account GL2
31/08 Cr – Trust creditors control account GL2

2. Ledgers
2.1 General ledger

Dr Trust bank account GL1 Cr

2020 R 2020 R
01/08 Balance b/d 337 500 31/08 Trust payments TCPJ8 397 375
31/08 Trust receipts TCRJ8 172 450 Balance c/d 112 575
509 950 509 950
31/08 Balance b/d 112 575

Dr Trust creditors control GL4 Cr

2020 R 2020 R
31/08 Balance TCPJ8 397 375 01/08 Balance b/d 337 500
Journal debits GJ8 3 700 31/08 Trust receipts TCRJ8 172 450
Balance c/d 112 575 Journal credits GJ8 3 700
c/d 513 650 513 650
31/08 Balance b/d 112 575

2.2 Trust creditors ledger

Dr A. South TCL1 Cr
R 2020 R
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01/08 Balance b/d 112 500

Dr B. Mpuma TCL2 Cr
2020 R 2020 R
22/08 Trust payments TCPJ8 48 750 01/08 Balance b/d 93 750
Trust payments TCPJ8 46 875 31/08 B. Mpuma Sec 86(4)
investment – West
Bank GJ8 1 875
95 625 95 625

Dr C. Kwazulu TCL3 Cr
R 2020 R
01/08 Balance b/d 56 250

Dr D. Western TCL4 Cr
R 2020 R
01/08 Balance b/d 75 000

Dr Sec 86(3) trust investment – Africa Bank TCL5 Cr

2020 R 2020 R
01/08 Trust payments TCPJ8 150 000 31/08 Trust receipts TCRJ8 76 825
31/08 LPFF GJ8 1 825 31/08 Balance c/d 75 000
151 825 151 825
31/08 Balance b/d 75 000

Dr B. Mpuma sec 86(4) investment – West Bank TCL6 Cr

2020 R 2020 R
03/08 Trust payments TCPJ8 93 750 31/08 Trust receipts TCRJ8 95 625
31/08 B. Mpuma (trust
creditor) GJ8 1 875
95 625 95 625

Dr W. Wyers sec 86(4) investment – West Bank TCL7 Cr

2020 R R
05/08 Trust payments TCPJ8 58 000

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Dr Legal Practitioners Fidelity Fund TCL8 Cr

R 2020 R
31/08 Sec 86(3) trust
investment –
Africa Bank GJ8 1 825

QUICK • The interest earned on the section 86(3) trust investment accrues to the
NOTE
LPFF but has not yet been paid to the fund. The R1 825 is therefore still
owed to the LPFF on 31 August.
• A trust investment is made from the trust bank account and not the trust
creditors account.
• Investments made in accordance with section 86 are the only trust
creditors accounts that may reflect debit balances.
• The balance of the trust creditors control account and the total of the
list of trust creditors balances should be the same.

Trust reconciliation

Trust creditors: R
A. South 112 500 Cr
C. Kwazulu 56 250 Cr
D. Western 75 000 Cr
Legal Practitioners Fidelity Fund 1 825 Cr
Sec 78(2)(a) trust investment – Africa Bank (75 000) Dr
A. South sec 78(2A) investment – Africa Bank (58 000) Dr
112 575
Trust assets – Trust bank account 112 575 Dr

Notes

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7.5 The LPC Rules for the Attorneys’ Profession in respect of trust monies

7.5.1 Introduction

A practising attorney is a member of the Law Society of South Africa (LSSA) and must abide
by the Legal Practice Council (LPC) Rules (hereafter referred to as the LPC Rules). The LPC
Rules may by no means supersede the provisions made in section 86 of the Legal Practice
Act, 28 of 2014 regarding the trust bank account or trust investments.

The LPC Rules furthermore prescribe that proper accounting records be kept in an official
language of South Africa that comply with generally accepted accounting practice and these
records are to be kept for at least five years. The accounting records should clearly differentiate
between monies received for, or on account of any person or monies paid for, or on account
of any person.

LPC Rules 54.14.16.1 to 54.14.16.5 determine the payment of interest to the LPFF.

7.5.2 Appointment of an auditor/public accountant

The attorney’s practice has a legal obligation to appoint an auditor/public accountant who has
to report to the Law Society. The auditor has to perform the duties and responsibilities imposed
by the LPA, the Companies Act, 61 of 2008 (as amended), as well as the Public Accountants
and Auditors Act, 51 of 1951 (as amended).

The LPA, as well as the LPC Rules require an annual audit report to be rendered by the
auditor. The report must be issued on the prescribed form of the LSSA and submitted to the
LSSA within six months after the reporting period, usually the year end of the legal practice.
Although it is the auditor’s responsibility to issue and submit the report, the legal practice is
obliged to ensure that the report is issued and submitted to the LSSA in time. The report must
be submitted to the Law Society by the auditor and not the legal practice. In the report, the
auditor must state whether the accounting records and specifically the trust records complied
with the LPA and the LPC Rules.

The auditor has an obligation to report on the following:

• A trust deficit as soon as it is detected. A trust deficit will arise when the total of the trust
creditors balances exceeds the trust monies.
• The result of queries by the auditor on any material issue regarding the accounting records
of the attorney’s practice that was not dealt with to his satisfaction.
• Restricted access to the accounting records of the legal practice after reasonable requests
by the auditor.

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Notes

7.5.3 Accounting to clients

The attorney’s practice should, within a reasonable time after the performance or earlier
termination of any mandate, account to his client in writing and retain a copy of each such
account for not less than five years. The following information must be included in the account
statement:

– All amounts, appropriately explained, received in connection with the matter concerned.
– All expenses incurred and other payments regarding the matter.
– Fees and other charges levied or raised against the client and in instances where a fee
has been agreed upon, the fact that it was agreed upon and the amount.
– The amount owing to or by the client.

7.5.4 Consequences of non-compliance with prescriptions

The consequences of non-compliance with section 86 of the LPA and the LPC Rules for the
Attorneys’ Profession can be:
– the removal from the roll;
– suspension from practice; and
– other kinds of instruction, for example, more frequent audit reports that state that the
attorney’s records were in order.

EXAMPLE 7.5

The recording of trust, business and transfer transactions in an attorney’s practice

On 1 May 2020 the following information was obtained from the accounting records of SA
Attorneys:
R
Business bank 4 300
Note - the opening balance of the Trust bank account is
Trust bank equal to the opening balance of the Trust creditors control.
37 000

Client control [Opening balance] 1 350

A. South 250
S. Africa 1 100

Trust creditors control [Opening balance] 37 000

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E. North 24 800
F. Cape 11 710
B. Mpuma 500

The following transactions occurred in the attorney’s practice of SA Attorneys during May
2020:

2020
May
1 B. Mpuma is divorcing his wife and deposited a bank guaranteed cheque of R15 000
with SA Attorneys to cover fees and charges, including advocate fees.
2 B. Mpuma gave a written instruction that R7 000 be invested in an interest-bearing
account at SA Bank. SA Attorneys executed the instruction. [Section 86(4) investment]
5 SA Attorneys instructed advocate G. Natal to handle B. Mpuma’s divorce and paid his
account to the amount of R6 000. [Payment is made from the trust bank account, as B.
Mpuma has sufficient funds in his trust creditors account]
6 SA Attorneys decided to invest R10 000 of the trust monies in the trust bank account
not needed for immediate use, in a special savings account at West Bank. [Section
86(3) investment, there was no instruction from the client to invest, but the practice may do so
of its own accord]
14 SA Attorneys received a combined cheque from D. Western, a client, to the amount of
R700 for:
• Settlement of his account for services rendered in a collection matter (fees have
been charged during the previous month) – R250.
• A deposit for fees still to be levied for the preparation of a purchase contract – R450.
24 The divorce case of B. Mpuma was settled, and SA Attorneys levied a fee of R4 000.
SA Attorneys withdrew the investment made on 2 May 2020 and received R7 100. The
attorney’s practice paid the amount due to B. Mpuma after all transfers were made. [If
the practice levies a fee for services rendered the transaction is recorded in the Fees Journal]
28 SA Attorneys withdrew R5 000 (excluding interest) of the trust investment made on
6 May 2020. Interest on the investment amounted to R100.
30 SA Attorneys received written instruction from E. North to invest R12 000 of his funds
held in trust, in an interest-bearing savings account at SA Bank. SA Attorneys obliged.
[Section 86(4) investment – client instructed investment]

REQUIRED:

Prepare the following in the accounting records of SA Attorneys for May 2020:
1. Subsidiary journals, property totalled:
1.1 Business cash receipts journal
1.2 Trust cash receipts journal
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1.3 Trust cash payments journal

1.4 Trust journal
1.5 Fees journal
1.6 Transfer journal
2. Ledgers, properly balanced:
2.1 General ledger
2.2 Trust creditors ledger
2.3 Clients ledger

EXPLANATION
7.5

SA ATTORNEYS

1. Subsidiary journals

1.1 Business cash receipts journal for May 2020 BCRJ5

Business
Sundries bank
Date Details Fol. R R
14 Trust bank (transfer D. Western) TCPJ5 250 250
24 Trust bank (transfer B. Mpuma) TCPJ5 4 000 4 000
4 250 4 250
31/05 Dr – Business bank B2

Account number
Investment in SA Bank withdrawn from investment account and
deposited in Trust bank account. The amount is the original investment
of R7 000 plus the interest earned on investment of R100.

1.2 Trust cash receipts journal for May 2020 TCRJ5

Trust
creditors Trust
control bank
Date Details Fol. R R
01/05 B. Mpuma (trust creditor) TCL3 15 000 15 000
14/05 D. Western (trust creditor) TCL4 700 700
24/05 B. Mpuma sec 86(4) investment – SA Bank (trust creditor) TCL6 7 100 7 100
28/05 Sec 86(3) trust investment – West Bank (trust creditor) TCL5 5 100 5 100
27 900 27 900
31/05 Dr – Trust bank B1

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31/05 Cr – Trust creditors control B4

The amount is the original investment of R5 000

Debit trust bank
plus the interest earned on investment of R100. Credit trust creditors control account
account

1.3 Trust cash payments journal for May 2020

TCPJ5
Trust
Trust creditors – All the entries are to the Trust creditors Trust
creditors ledger (TCL) control bank
Date Details Fol. R R
02/05 B. Mpuma sec 86(4) investment – SA Bank TCL6 7 000 7 000
05/05 B. Mpuma (trust creditor) – Adv F. Cape TCL3 6 000 6 000
06/05 Sec 86(3) trust investment) – West Bank TCL5 10 000 10 000
14/05 Business bank (transfer D. Western) BCRJ5 250
24/05 B. Mpuma TCL3 5 595 5 595
24/05 Business bank (transfer B. Mpuma) BCRJ5 4 000
30/05 E. North sec 86(4) investment – SA Bank TCL7 12 000 12 000
40 595 44 845
31/05 Dr – Trust creditors control B4
31/05 Cr – Trust bank B1

Debit trust creditors control Credit trust bank account

account ccountaccount
1.4 Trust journal for May 2020 TJ5

Trust creditors
Dr Cr
Date Details Fol. R R
24/05 B. Mpuma sec 86(4) investment – SA Bank TCL6 100
B. Mpuma (100 x 95%) TCL3 95
LPFF (100 x 5%) TCL8 5
Transfer of interest to client and LPFF
28/05 Sec 86(3) trust investment – West Bank TCL5 100
LPFF (100%) TCL8 100
Transfer of interest to the LPFF
200 200
31/05 Dr – Trust creditors control account GL4
31/05 Cr – Trust creditors control account GL4

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RECAP Both of the journal entries above are for trust creditors. The interest
earned on the trust investment in SA Bank (Section 86(4) investment) of
R100 is allocated between the client B. Mpuma (R95) and the LPFF (R5). The
interest earned on the trust investment in West Bank (Section 86(3)
investment) of R100 is only allocated to the LPFF.

1.5 Fees journal for May 2020

FJ5
Clients
control Fees
Date Details Fol. R R
24/05 B. Mpuma (client) CL3 4 000
Fees GL5 4 000
Fees charged for divorce
4 000 4 000
31/05 Dr – Clients control account GL3
31/05 Cr – Trust creditors control account GL4

1.6 Transfer journal for May 2020

TJ5
Debit Credit
Date Details Fol. R R
14/05 D. Western (trust creditor) TCL4 250
D. Western (client) CL1 250
Transfer of fees from combined payment
24/05 B. Mpuma (trust creditor) TCL3 4 000
B. Mpuma (client) CL3 4 000
Transfer of account
4 250 4 250
31/05 Dr – Trust creditors control account GL4
31/05 Cr – Clients control account GL3

2. Ledgers

2.1 General ledger

Dr Trust bank account GL1 Cr

2020 R 2020 R
01/05 Opening balance b/d 37 000 31/05 Trust payments TCPJ5 44 845
31/05 Trust receipts TCRJ5 27 900 Closing balance c/d 20 055

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64 900 64 900
01/06 Opening balance b/d 20 055

Dr Business bank account GL2 Cr

2020 R R
01/05 Opening balance b/d 4 300
31/05 Receipts BCRJ5 4 250
8 550

Dr Clients control account GL3 Cr

2020 R 2020 R
01/05 Opening balance b/d 1 350 31/05 Journal credits GJ5 4 250
31/05 Fees FJ5 4 000 31/05 Closing balance c/d 1 100
5 350 5 350
01/06 Opening balance b/d 1 100

Dr Trust creditors control account GL4 Cr

2020 R 2020 R
31/05 Trust payments TCPJ5 40 595 01/05 Opening balance b/d 37 000
31/05 Journal debits GJ5 200 31/05 Trust receipts TCRJ5 27 900
31/05 Journal debits TJ5 4 250 31/05 Journal credits GJ5 200
31/05 Closing balance c/d 20 055
65 100 65 100
01/06 Opening balance b/d 20 055

Dr Fees GL5 Cr
R 2020 R
31/05 Clients control FJ5 4 000

2.2 Trust creditors ledger

Dr E. North TCL1 Cr
R 2020 R
01/05 Opening balance b/d 24 800

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The interest earned on the section 86(2) trust bank account and section 86(3)
trust investment accrues to the LPFF but has not been paid to the LPFF.
Therefore, the R1 500 is still owed to the LPFF on 30 June.

Dr F. Cape TCL2 Cr
R 2020 R
01/05 Opening balance b/d 11 700

Dr B. Mpuma TCL3 Cr
2020 R 2020 R
05/05 Trust bank – advocate TCPJ5 6 000 01/05 Opening balance b/d 500
24/05 B. Mpuma (client) TJ5 4 000 31/05 Trust receipts TCRJ5 15 000
31/05 Trust payments TCPJ5 5 595 31/05 B. Mpuma sec 86(4)
investment: SA Bank GJ5 95
15 600 15 600

Dr D. Western TCL4 Cr
2020 R 2020 R
14/05 D. Western (client) TJ5 250 14/05 Trust receipts TCRJ5 700
31/05 Closing balance c/d 450
700 700
01/06 Opening balance b/d 450

Dr Sec 86(3) trust investment: West Bank TCL5 Cr

2020 R 2020 R
06/05 Trust payments TCPJ5 10 000 28/05 Trust receipts TCRJ5 5 100
31/05 LPFF GJ5 100 31/05 Closing balance c/d 5 000
10 100 10 100
01/06 Opening balance b/d 5 000

Dr B. Mpuma sec 86(4) investment: SA Bank TCL6 Cr

2020 R 2020 R
02/05 Trust payments TCPJ5 7 000 24/05 Trust receipts TCRJ5 7 100
24/05 B. Mpuma (trust creditor) GJ5 100
7 100 7 100

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Dr E. North sec 86(4) investment: SA Bank TCL7 Cr

2020 R R
30/05 Trust payments TCPJ5 12 000

Dr Legal Practitioners Fidelity Fund TCL8 Cr

R 2020 R
31/05 B. Mpuma sec 86(4) GJ5 5
investment: SA Bank GJ5 100
Sec 86(3) trust
investment: West
Bank
105

The interest earned on the section 86(4) trust investment accrues to the
LPFF, but the R5 has not yet been paid over to the fund per the question.
Therefore, the R100 is still owed to the LPFF on 31 May. Interest earned
on a section 86(4) trust investment must be paid over monthly to the LPFF.

List of trust creditors balances on 31 May 2020

R
E. North 24 800
F. Cape 11 700
B. Mpuma –
D. Western 450
Sec 86(3) trust investment – West Bank (5 000)
B. Mpuma sec 86(4) investment – SA Bank –
E. North sec 86(4) investment – SA Bank (12 000)
LPFF 105
Balance of trust bank account on 31 May 2020 20 055

2.3 Clients ledger

Dr D. Western CL1 Cr
2020 R 2020 R
01/05 Opening balance b/d 250 14/05 D. Western (trust TJ5 250
creditor)
250 250

Dr S. Africa CL2 Cr
2020 R R
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01/05 Opening balance b/d 1 100

Dr B. Mpuma CL3 Cr
2020 R 2020 R
24/05 Fees FJ5 4 000 24/05 B. Mpuma (trust TJ5 4 000
creditor)
4 000 4 000

EXAMPLE 7.6

The recording of trust investments and transfer transactions in the books of prime entry
and ledgers of an attorney’s practice

On 30 June 2020 the following information was obtained from the accounting records of South
Attorneys:

1. The balance of the trust creditors control account and the trust bank accounts amounted
to R800 000 each. [This is the opening balance of the trust creditors control account in the general
ledger]

2. After South Attorneys investigated their trust creditors, the following was found:
(a) On 1 June 2020, F. Cape, a client of South Attorneys gave the instruction that
R100 000 kept in trust on her behalf, be invested in an interest-bearing savings
account until registration of the unmovable property. On the same day, South
Attorneys invested R100 000 at African Bank on behalf of F. Cape. On 30 June 2020
when closing the account, South Attorneys received an EFT transfer for R101 000
and paid the interest earned on the investment to the beneficiaries. [There is therefore
no provision for the interest as in examples 8.1, 8.2 and 8.3 and learning activity 1]

(b) On 1 June 2020 a client of South Attorneys, G. Natal, gave written instruction for
R200 000 held in trust on his behalf, to be invested in interest bearing accounts.
South Attorneys immediately executed the instruction and invested the money in SA
Bank.
(c) On 1 June 2020 South Attorneys decided to invest R150 000 of the surplus funds
not immediately needed, in an interest-bearing savings account with West Bank.
When closing the account on 30 June 2020 South Attorneys received R152 000 and
issued a cheque for R1 950 regarding the payment of interest earned on the
investment, after bank charges were deducted.

REQUIRED:

Prepare the following in the accounting records of South Attorneys for June 2020:

1. Subsidiary journals, property totalled:

1.1 Trust cash receipts journal
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1.2 Trust cash payments journal

1.3 Trust journal

2. Ledgers, properly balanced:

2.1 General ledger
2.2 Trust creditors ledger
EXPLANATION

7.6

SOUTH ATTORNEYS

1. Subsidiary journals

1.1 Trust cash receipts journal for June 2020

TCRJ6
Trust
creditors
control Bank
Date Details Fol. R R
30/06 F. Cape sec 86(4) investment (African Bank) (trust TCL3 101 000 101 000
creditor)
30/06 Sec 86(3) trust investment (West Bank) (trust creditor) TCL5 152 000 152 000
253 000 253 000
30/06 Cr – Trust creditors control account GL2
30/06 Dr – Trust bank account GL1

1.2 Trust cash payments journal for June 2020

TCPJ6
Trust
creditors
control Bank
Date Details Fol. R R
01/06 F. Cape sec 86(4) investment (African Bank) (trust creditor) TCL3 100 000 100 000
01/06 G. Natal sec 86(4) investment (trust creditor) TCL1 200 000 200 000
01/06 Sec 86(3) trust investment (trust creditor) TCL4 150 000 150 000
30/06 LPFF TCL6 1 950 1 950
30/06 F. Cape (trust creditor) TCL5 950 950
30/06 LPFF TCL6 50 50
452 950 452 950
30/06 Dr – Trust creditors control account GL4
30/06 Cr – Trust bank account GL1

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1.3 Trust journal for June 2020

TJ6
Debit Credit
Date Details Fol. R R
30/06 F. Cape sec 86(4) investment (African Bank) (trust TCL3 1 000
creditor)
F. Cape (trust creditor) TCL1 950
LPFF TCL6 50
Transfer of interest to client and LPFF
30/06 Sec 86(3) trust investment (West Bank) (trust creditor) TCL5 2 000
LPFF (trust creditor) TCL6 2 000
Transfer of interest to LPFF
3 000 3 000
30/06 Dr – Trust creditors control account GL4
30/06 Cr – Trust creditors control account GL4

The following journal was not required but is shown for illustrative purposes:

Business general journal for June 2020

Debit Credit
Date Details Fol. R R
30/06 LPFF (client) 50
Bank charges 50
Trust bank charges claimed back from LPFF by deducting
it from trust interest earned

The R50 balance of the LPFF trust creditor account will be transferred to the business bank
account in the same way as for the transfer of the attorney’s fees.

2. Ledgers

2.1 General ledger

Dr Trust bank account GL1 Cr

2020 R 2020 R
01/06 Balance b/d 800 000 30/06 Trust payments TCPJ6 452 950
30/06 Trust receipts TCRJ6 253 000 Balance c/d 600 050
1 053 000 1 053 000
01/07 Balance b/d 600 050

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Dr Trust creditors control GL2 Cr

2020 R 2020 R
30/06 Trust payments TCPJ6 452 950 01/06 Balance b/d 800 000
Journal debits GJ6 3 000 30/06 Trust receipts TCRJ6 253 000
Balance c/d 600 050 30/06 Journal credits GJ6 3 000
1 056 000 1 056 000
01/07 Balance b/d 600 050

2.2 Trust creditors ledger

Dr F. Cape TCL1 Cr
2020 R 2020 R
30/06 Trust payments TCPJ6 950 01/06 Balance b/d 100 000
30/06 Balance c/d 100 000 30/06 F. Cape sec 86(4)
investment –
African Bank TJ6 950
100 950 100 950
01/07 Balance b/d 100 000

Dr G. Natal TCL2 Cr
R 2020 R
01/06 Balance b/d 200 000

Dr F. Cape sec 86(4) investment (African Bank) TCL3 Cr

2020 R 2020 R
30/06 Trust payments 01/06 Trust receipts TCRJ6 101 000
F. Cape (trust
creditor) TCPJ6 100 000
30/06 F. Cape/LPFF TJ6 1 000
101 000 101 000

Dr G. Natal sec 86(4) investment (SA Bank) TCL4 Cr

2020 R R
30/06 Trust payments TCPJ6 200 000

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Dr Sec 86(3) trust investment (West Bank) TCL5 Cr

2020 R 2020 R
30/06 Trust payments TCPJ6 150 000 30/06 Trust receipts TCRJ6 152 000
30/06 LPFF TJ6 2 000
152 000 152 000

Dr Legal Practitioners Fidelity Fund TCL6 Cr

2020 R 2020 R
30/06 Trust payments TCPJ6 1 950 30/06 Sec 86(3) trust
30/06 Trust payments TCPJ6 50 investment (West TJ6 2 000
30/06 Balance c/d 50 Bank)
30/06 F. Cape – sec 86(4)
trust investment
(African Bank) TJ6 50
2 050 2 050
01/07 Balance b/d 50

2.3 List of trust creditors balances on 30 June 2020

R
F. Cape 100 000
G. Natal 200 000
Other trust creditors 500 000
F. Cape sec 86(4) trust investment (African Bank) -
G. Natal sec 86(4) trust investment (Debit balance) (200 000)
Surplus funds Sec 86(3) trust investment (West Bank) -
LPFF 50
Balance of trust bank account on 30 June 2020 600 050

2.4 List of trust creditors balances on 1 June 2020 (Check opening balance)

R
F. Cape 100 000
G. Natal 200 000
Other trust creditors [balancing amount] 500 000
Balance of trust bank account on 1 June 2020 800 0001

1 Opening balance of the trust creditors control account in the general ledger (per question)

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7.6 Self-assessment exercises

Questions Answers

What is the acronym for

Legal Practice Act, 28 of
2014?
What is the acronym LPFF?
State the requirements of
section 86(2) of the Legal
Practice Act, 28 of 2014.

State the requirements of

section 86(3) of the Legal
Practice Act, 28 of 2014.

State the requirements of

section 86(4) of the Legal
Practice Act, 28 of 2014.

State the requirements of

section 86(5)(a)) of the
Legal Practice Act, 28 of
2014.

What is a section 86(3) trust

investment?

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What is a section 86(4) trust

investment?

Who are the beneficiaries of

the investment interest on a
section 86(3) trust
investment?

Who are the beneficiaries of

the investment interest on a
section 86(4) trust
investment?

How do you treat the

interest received on a
section 86(3) trust
investment?

How do you treat the

interest received on a
section 86(4) trust
investment?

If the interest received on a

section 86(3) trust
investment amounted to
R1 200, indicate who is
entitled to the interest.

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If the interest received on a

section 86(4) trust
investment amounted to
R5 000, indicate who is
entitled to the interest.

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 Learning unit 8/2022

FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

8 CORRESPONDENTS

Contents
Learning outcomes ............................................................................................................................... 2
Key concepts ........................................................................................................................................ 2
Acronyms ............................................................................................................................................. 2
8.1 Introduction.................................................................................................................................. 3
8.2 Categories of instructions ............................................................................................................ 3
8.3 Types of costs incurred by clients from a legal practice ............................................................... 4
8.4 Flow of activities .......................................................................................................................... 6
8.5 General format of a correspondent account statement ................................................................ 7
8.6 Summary of steps in process..................................................................................................... 10
8.7 Recording of the correspondent account statement in the accounting records of the instructed
attorney ..................................................................................................................................... 11
8.8 Recording of the correspondent account statement in the accounting records of the instructed
attorney (including VAT) ............................................................................................................ 23
8.9 Recording of the correspondent account statement in the accounting records of the instructing
attorney ..................................................................................................................................... 28
8.10 Recording of the correspondent account statement in the accounting records of the instructing
attorney (including VAT) ............................................................................................................ 41
8.11 Self-assessment questions ........................................................................................................ 47

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Learning outcomes

After studying this learning unit, you should be able to:

• define the term “correspondent”
• distinguish between the instructing and instructed correspondent
• prepare the instructed attorney’s correspondent account statement
• demonstrate an understanding of the correspondent allowance
• calculate the correspondent allowance
• calculate collection commission
• record all correspondent transactions in the accounting records of the instructing and
instructed correspondent

Key concepts
 correspondents
 instructing attorney
 instructed attorney
 collection costs
 collection fees

Acronyms
BCRJ Business cash receipts journal
BCPJ Business cash payments journal
CL Clients ledger
FJ Fees journal
GJ General journal
GL General ledger
LPA Legal Practice Act, 28 of 2014
TB Trial balance
TJ Transfer journal
TCL Trust creditors ledger
TCRJ Trust cash receipts journal
TCPJ Trust cash payments journal

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8.1 Introduction

Every attorney’s practice has to make use of the services of a correspondent at some time. The
reason being that in some instances the instruction from the client to the attorney can only be
executed in a jurisdiction where the attorney does not have an office. A law firm must be within
a 15km radius of the office of the registrar of the Court.

For example a client, E. North who resides in Mbombela, requests Mr Langa, an attorney, to
collect child maintenance money from her ex-husband in Midrand and to register a trust for her
children. As Mr Langa only has an office in Mbombela, he has to instruct SA Attorneys, an
attorneys firm in Midrand, to collect the money and register the trust. The attorney who gives
the instruction is known as the instructing attorney (the attorney, Mr Langa, in Mbombela in
the above example) and the attorney who receives the instruction and renders the service, is
known as the instructed attorney (the attorneys firm, SA Attorneys, in Midrand in the above
example).

8.2 Categories of instructions

The instructions given to the instructed attorney can be divided into two categories, namely:

• Instructions where no trust monies are involved

Examples of this category are inter alia the registration of patents and companies, the
settlement of divorce cases, the settlement of disputes and third-party claims.

• Instructions where trust monies are involved

Examples of this category are inter alia the collection of debts and child maintenance.

It is important to distinguish between the two categories, as the entries in the accounting records
of both the instructed and the instructing attorneys differ for each category.

Notes

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8.3 Types of costs incurred by clients from a legal practice

Some legal documents such as hire purchase agreements, loan agreements and other trade
debts usually have clauses protecting creditors against defaulting debtors. As part of their
terms, a provision is included that binds the debtor to pay any legal costs or collection
commission that the creditor may incur when attempting to sue for the debt.

The collection commission fee is agreed on beforehand with the client. When an account is
handed over for collections, the client must provide information as to what he/she requires from
the legal team. Collection commission is earned when an instruction was given to collect debt.
The legal practitioner is entitled to collect 10% of the capital amount (VAT excluded) for each
payment.

Soft collections:

1. Include phone calls, messages and e-mail correspondence to set up an arrangement.

2. This could be billed as a retainer or per-item-billing. (* see descriptions below.)

Hard collections:

1. Include letter of demand, acknowledgement of debt, summons.

2. These items are billed as per company rates and are based on time spent on the items,
as well as the amount of information that is required.

General costs (examples) of above-mentioned items:

1. Letter of demand (LOD): from R250 to R600.

2. Acknowledgement of debt (AOD): from R300 to R800
3. Summons: from R2 000 to R3 500.
4. Receiving instruction – R328 per 1/4 hour
5. Collection fee – 10% of the amount collected up to a maximum amount of R1 000.
6. Tracing costs – ±R450
7. Sheriff costs R600 to R1 500 for normal service, and between R1 000 and R35 000 for
urgent service.

* Legal practitioners make use of per-item-billing whereby the client is billed per item, e.g.
phone calls with the debtor are calculated per minute. An amount for collection commission
will be added to every item.

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RECAP Collection commission is also added when the debtor pays directly into the
company’s trust account. A percentage thereof is kept for costs. It may be up
to 10% of the amount collected, but the calculated amount may not exceed
R1 000.

A correspondent allowance may be granted by the instructed attorney to the instructing

attorney. A maximum of 1/3 of the fees (professional and collection commission) charged may
be granted. This allowance may be less than 1/3 of the fees charged, but not more. The
correspondent allowance may only be granted between practitioners.

The 1/3 allowance is only payable on the fees of the attorney. It is not calculated on any
expenses that are paid directly to third parties, such as advocate costs and sheriff costs. These
are seen as costs, disbursements or expenses, and not as fees of the attorneys.
Calculation of the 1/3 correspondent allowance:
R
Information:
The amount collected by the instructed attorney 8 000
Professional fees charged by the instructed attorney (excluding VAT) 1 300
Tracing costs 450
Sheriff costs 600

Calculation of the 1/3 correspondent allowance:

Professional fees charged 1 300
Collection commission (10% x R8 000) 800
Tracing costs (Not part of professional fees and collection commission, are costs) –
Sheriff costs (Not part of professional fees and collection commission, are costs) –
2 100
Correspondent allowance:
= 1/3 x (Professional fees + Collection commission)
= 1/3 x 2 100
= R700

If the instructed attorney is a VAT vendor, then the calculation of the 1/3 correspondent
allowance based on an amount collected of R8 000 will be as follows:
R
Fees levied 1 300
Collection commission levied (R8 000 x 10%) 800
2 100

The correspondent allowance = 1/3 x (R1 300 + R800)

= R700 × 115/100 (VAT on the 1/3 allowance)
= R805
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8.4 Flow of activities

The flow of activities when an attorney makes use of the services of a correspondent is
described with reference to the example below:
Correspondent account statement Instructed attorney

Accounting statement
SA Attorneys
PO Box 1234
Instructing attorney
Langa Attorneys MIDRAND
MBOMBELA 30 April 2020
R R
Collection – E. North vs Z. North 7 500
Fees for receiving instruction 330
Fees for issuing summons – Z. North 66
Tracing costs paid – Z. North Fees charged and costs incurred 450
Sheriff costs – Z. North 600
Collection commission 750
Your ⅓ share of fees (allowance) 382*
Electronic fund transfer to yourself 5 686
7 882 7 882

1) Mr Langa from Langa Attorneys receives a mandate from E. North (client) to act on her
behalf in the registration of the trust and to collect the child maintenance money.

2) As Mr Langa only has an office in Mbombela, he instructs SA Attorneys, the attorney in

Midrand, to act on his behalf in the two matters.

3) SA Attorneys then executes his instructions and records the transactions entered into by
him, in his accounting records on a day-to-day basis.

4) The instructing attorney, Mr Langa, will be SA Attorneys’ client and a trust creditor account
and a client account will be opened for Mr Langa in SA Attorneys ledgers.

5) SA Attorneys then draws up its account statement from its accounting records and issues
Mr Langa with a payment for the money collected, after deducting the fees it is entitled to
and the refunds of expenses incurred on behalf of Mr Langa.

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6) Mr Langa then records the information in the account statement which was received from
SA Attorneys in his own accounting records.
– Both SA Attorneys and E. North will be accounted for as clients of Mr Langa.
– As trust money is involved in the collection matter, trust creditor accounts will be
opened for SA Attorneys and E. North.

QUICK
NOTE
SA Attorneys acts on behalf of Mr Langa and not on behalf of E. North.
Therefore, there will not be a trust creditor account or a client account for
E. North in SA Attorneys’ accounting records.

8.5 General format of a correspondent account statement

There are various formats of correspondent account statements, but for the purpose of this
module, we shall deal only with the most common form.

For a better understanding of the above, it is necessary to provide a simplified correspondent

account statement to explain what each entry entails, and to indicate how the instructed
attorney compiles such a statement.

Correspondent account statement

The instructed
The instructing attorney
attorney Accounting statement
SA Attorneys
PO Box 1234
Langa Attorneys MIDRAND
MBOMBELA 30 April 2020
R R
Collection – E. North vs Z. North (1) 7 500
Fees for receiving instruction (2) 330
Fees for issuing summons – Z. North (3) 66
Tracing fees paid – Z. North (4) 450
Sheriff costs – Z. North (5) 600
Collection commission [7 500 x 10% = 750] (6) 750
Your ⅓ share of fees (allowance) (7) 382*
Electronic fund transfer to yourself (8) 5 686
7 882 7 882

* ⅓ ofR330 (Fees for receiving instruction) + R66 (Fees for issuing summons) + R750 (collection
commission) = R382 (1 146 x ⅓)

The collection commission is 10% of the amount collected up to a maximum

amount of R1 000.

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 Learning unit 8/2022
To understand the instructed attorney’s account statement, it is essential that you realise
that the statement is prepared from the accounting records of the instructed attorney, SA
Attorneys.

Neither E. North nor Z. North are clients of SA Attorneys. SA Attorneys acts on behalf of Langa
Attorneys and therefore sends the account statement to Langa Attorneys with details on what
took place with regards to the instructions received.

The figures which are shown in brackets in the above correspondent account statement have
been included for discussion purposes only and the discussion follows below:

(a) Money collected by the instructed attorney (1)

According to the account statement, SA Attorneys collected R7 500 in the matter of E. North v
Z. North. Langa Attorneys is the beneficiary and the money cannot be paid out to another party.
SA Attorneys acts on behalf of Langa Attorneys, its trust creditor, and not on behalf of E. North.
The collection of funds is made on behalf of a third party, E. North, therefore there are trust
funds involved and a trust creditors account needs to be opened in the accounting records of
the instructed attorney.

(b) Fees charged (2, 3 and 6)

Fees for receiving instruction – The instructed attorney charges a fee for receiving an instruction
spending his/her time on the instruction. (Refer to point (d)).
Fees for issuing summons – The instructed attorney charges a fee for issuing a summons which
involved spending his/her time on the issue of the summons. (Refer to point (d)).
Collection commission – The instructed attorney charges a fee based on the amount collected
(10%) (Refer to point (e)).

(c) Expenses incurred (4 and 5)

SA Attorneys incurred expenses in collecting the money from Z. North, e.g. tracing costs and
sheriff costs. It can be assumed that these types of expenses were incurred before the money
was collected. SA Attorneys will therefore pay fees from its business bank account on behalf
of Langa Attorneys, with the result that Langa Attorneys becomes an ordinary client regarding
these expenses.

If money is collected from Z. North on behalf of Langa Attorneys, SA Attorneys will have to set
off the client account and trust creditor account of Langa Attorneys against each other to
determine the net amount of the trust EFT payable to Langa Attorneys.

If SA Attorneys could not collect any money from Z. North, Langa Attorneys will have to
compensate SA Attorneys for the expenses incurred.

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(d) Professional fees (2 and 3)

SA Attorneys devoted time to collect the money from Z. North, for example time was spent on
receiving instructions and on issuing the summons. Langa Attorneys is responsible for the
payment of the fees levied by SA Attorneys. If SA Attorneys is unable to collect money from
Z. North, Langa Attorneys will still be responsible for payment of the fees.

(e) Collection commission (6)

In terms of the rules of the LPA, an attorney is entitled to 10% of all money collected by the
attorney, with a limit of R1 000 per collection. This amount is adjusted from time to time, but for
the purpose of this module, the R1 000 limit must be used. For collections of more than R15 000
per client, the attorney can only levy collection commission to the amount of R1 000.

If an attorney has to collect R30 000 and the collection is done in instalments of R10 000 each,
the attorney is entitled to 10% of each instalment, which means that the collection commission
will eventually amount to R3 000.

When SA Attorneys collects the R7 500, the firm is entitled to R750 in collection commission.

(f) Distribution of fees (7)

In terms of rules of the LPA, the instructing attorney is entitled to one-third of all fees
(professional and collection) levied by the instructed attorney.

The instructing attorney, Langa Attorneys, is not entitled to one-third of any advocate fees,
sheriff costs or tracing costs. These are expenses incurred on behalf of third parties and are
not fees charged by the instructed attorney.

At this stage

– SA Attorneys debits the client account of Langa Attorneys with R1 146 (R330 + R66 +
R750) in respect of fees.
– Langa Attorneys is therefore entitled to R382 (⅓ of R1 146) of these fees.
– A reverse entry for this amount must be made against the client account of Langa
Attorneys, via the fees journal.

(g) Making an EFT to the instructing attorney (8)

To determine the amount of the net debits on the client account of Langa Attorneys, the fees
received minus the expenses incurred by SA Attorneys must be set off against the trust creditor
account of Langa Attorneys, via the transfer journal. This will be the amount of the EFT to be
sent to Langa Attorneys (R5 686).

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8.6 Summary of steps in process

Has there been a collection of funds?

YES NO
R R
Step 1 Amount collected 20 000 –
§ 1 000
Step 2 Calculate the commission
earned from the collection –
•10% of the amount collected
(10% x R20 000 = R2 000);
•Limited to R1 000. 1 000 –
[Collection commission]
§ 380 β380
Step 3 What is the fee levied for What is the fee levied for receiving
receiving the instruction? 380 380 the instruction?
[Professional fee] [Professional fee]
§ 2 535 β 2 500
Step 4 What is the fee levied for 2 535 2 500 What is the fee levied for performing
preparing and issuing the the instruction? (i.e. fees levied for
summons? [Professional fee] registering of a company)
[Professional fee]

Step 5 What is the fee levied for – – What is the fee levied for performing
performing any additional any additional instructions? (i.e.
instructions? (i.e. preparing and time spent in attendance at court)
collecting an acknowledgement [Professional fee]
of debt) [Professional fee]
1 800 –
Step 6 What is the amount for costs: – There are no Sheriff costs or tracing
•Sheriff costs 600 costs incurred for this type of
•Tracing costs 450 instruction
•Advocates fees 750
Has there been a collection of funds? YES NO
R R
Amount collected 20 000 –
Deduct: Professional fees earned:
•Debt collection (§1 000 + §380 + §2 535) (3 915)
(2 880)
•Other services (β380 + β2 500)
Deduct: Costs to be paid (1 800) –
Add: Fee to be shared with the instructing attorney.
[⅓ x (Professional fees + Collection commission)]
(⅓ x 3 915 = 1 305) (⅓ x 2 880 = 960) 1 305 960
Amount payable to / (receivable from) the instructing attorney 15 590 (1 920)

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 Learning unit 8/2022
The right-hand side of the diagram reflects the process where there is no collection of funds,
which means there is no trust money involved and therefore no transfer of trust funds. The
instructing attorney is responsible for settling the account with the instructed attorney.

➢ The collection of funds (trust money) is made on behalf of a third party,

E. North, therefore there are trust funds involved and a trust creditors
account needs to be opened in the accounting records of the instructed
attorney.
➢ If there are no collection of trust money involved then the instructing
attorney is responsible for settling the full amount of the instructed
attorney’s account.
➢ Although the process for collection of trust money and the process for
other instructions has been explained, you will only be tested on the
process for the collection of debt.

8.7 Recording of the correspondent account statement in the accounting records of the
instructed attorney

In this section of the learning unit, the steps to be followed by the instructed attorney to account
for the transactions entered into by the instructed attorney will be discussed.

QUICK
NOTE
In the accounting records of the instructed attorney there will only be
transactions recorded in respect of the instructing attorney.
When the accounting records of the instructing attorney are prepared there
will be accounts for BOTH the client and the instructed attorney.

Notes

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 Learning unit 8/2022

EXAMPLE 8.1

The accounting entries in the accounting records of the instructed attorney

The following information was obtained from the accounting records of SA Attorneys:

1. On the 15 April 2020 SA Attorneys received instruction from Langa Attorneys to collect debt
owing by Z. North to E. North.

2. The instruction was completed by 30 April and SA Attorneys invoiced Langa Attorneys.

There is no account for either E. North or Z. North opened

in the books of the instructed attorney, SA Attorneys.

Accounting statement Instructed attorney

Instructing attorney
SA Attorneys
PO Box 1234
Langa Attorneys MIDRAND
Clients of Langa Attorneys
MBOMBELA 30 April 2020
R R
Collection – E. North vs Z. North (1) 7 500
Fees for receiving instruction (2) 330
Fees for issuing summons – Z. North (3) 66
Tracing costs paid – Z. North (4) 450
Sheriff costs – Z. North (5) 600
Collection commission (6) 750
Your ⅓ share of fees (allowance) (330 + 66 + 750) x ⅓ (7) 382
Electronic fund transfer to yourself (8) 5 686
7 882 7 882

REQUIRED:
Part A
Explain the debt collection process of a law practitioner.

Part B
Record the information as contained in the correspondent account statement of SA Attorneys
in the following accounting records of Langa Attorneys (instructing attorney):
1. Subsidiary journals
2. Ledgers
3. Trial balance

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EXPLANATION
8.1

Part A
The debt collection is the process of pursuing payments of debts owed by individuals or
businesses. An organisation that specialises in debt collection is known as a collection agency
or debt collector. An attorney can also collect amounts owed to clients of their law practice as
a result of legal matters (e.g. collection of amounts from debtors, award of maintenance,
alimony). The process involves consultations with the attorney (for advice on case), telephone
calls to the debtor, drafting and delivery of a letter of demand by registered post and the
institution of summons proceedings and service by a Sheriff. Each of these services involves a
cost to the client of the law practitioner.

Part B
The instructing attorney (SA Attorneys) are clients in the books of the instructed attorney
Langa Attorneys. A business account, i.e. clients account, is opened in the accounting records
of both SA Attorneys and Langa Attorneys. A trust creditors account will also be opened as
there is a receipt of trust money.
Account numbering used in explanation:
B1 Business bank account
B2 Trust bank account
B3 Trust creditors control account
B4 Clients control account
N1 Fees account
TC1 Trust creditor – Langa Attorneys
C1 Client – Langa Attorneys

Accounting records of SA Attorneys

1. Subsidiary journals
1.1 Fees journal (FJ) for April 2020
Fees charged by the FJ4
instructed attorney to
the instructing attorney.
Clients Fees
Date Details Fol. R R
30 Langa Attorneys (client) (2)(3)(6) C1 1 146
Fees N1 1 146
Being acceptance of instruction: R330; Issuing of summons:
R66; and collection commission: R750 (E. North v Z. North)
Fees (7) N1 382
Langa Attorneys (client) C1 382
⅓ share of fees
764 764
30 Dr – Clients control account (R1 146 – R382) B3
30 Cr – Fees account R764 N1
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The instructed attorney shares ⅓ of the fees with the instructing attorney. This reduces
EXPLANATION 8.1 (continued)
the fees receivable by Langa Attorneys (instructing attorney) R1 146 x 1/3 = R382.

1.2 Transfer journal (TJ) for April 2020

TJ4
Dr Cr
Date Details Fol. R R
30 Langa Attorneys (trust creditor) TC1 1 814*
Langa Attorneys (client) C1 1 814
EFT amount to be paid into business bank account
1 814 1 814
30 Dr – Trust creditors control account B3
30 Cr – Clients control B4

* 330 + 66 + 750 – 382 + 450 + 600 = 1 814 (As shown in the clients account of Langa Attorneys)

1.3 Trust cash receipts journal for April 2020

TCRJ4
Trust
Client of Langa Attorneys
creditors Bank
Date Details Fol. R R
30 Langa Attorneys (Z. North) (1) TC1 7 500 7 500
7 500 7 500
30 Dr – Trust bank account (general ledger) B2
30 Cr – Trust creditors control account B3

1.4 Trust cash payments journal for April 2020

TCPJ4
Trust
creditors Bank
Date Details Fol. R R
30 Langa Attorneys (payment of collection i.r.o. E. North v
Z. North) (8) TC1 5 686 5 686
Business bank account – transfer B1 1 814
5 686 7 500
30 Cr – Trust bank account (general ledger) B2
30 Dr – Trust creditors control account B3

1.5 Business cash receipts journal for April 2020

BCRJ4
Bank
Date Details Fol. R
30 Trust bank account – transfer B2 1 814
1 814

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 Learning unit 8/2022
30 Dr – business bank account (general ledger) B1
EXPLANATION 8.1 (continued)

1.6 Business cash payments journal (BCPJ) for April 2020

BCPJ4
Clients Bank
Date Details Fol. R R
30 Langa Attorneys (Tracing costs Z. North) (4) C1 450 450
Langa Attorneys (Sheriff costs Z. North) (5) C1 600 600
1 050 1 050
30 Cr – Business bank account (general ledger) B1
30 Dr – Clients control account B4

2. Ledgers
2.1 General ledger

Dr Fees account N1 Cr
R 2020 R
30/04 Fees journal FJ4 382 30/04 Fees journal FJ4 1 146
30/04 Balance c/d 764
1 146 1 146
30/04 Balance b/d 764

Dr Trust creditors control account B3 Cr

2020 R 2020 R
30/04 Trust bank TCPJ4 5 686 30/04 Trust bank TCRJ4 7 500
30/04 Clients control TJ4 1 814
7 500 7 500

Dr Clients control account B4 Cr

2020 R 2020 R
30/04 Business bank BCPJ4 1 050 30/04 Trust creditors control TJ4 1 814
30/04 Fees FJ4 764*
1 814 1 814
* R1 146 – R382 = R764 (see fees journal)

Dr Trust bank account B2 Cr

2020 R 2020 R
30/04 Receipts TCRJ4 7 500 30/04 Payments TCPJ4 7 500

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 Learning unit 8/2022
EXPLANATION 8.1 (continued)

Dr Business bank account B1 Cr

2020 R 2020 R
30/04 Receipts BCRJ4 1 814 30/04 Payments BCPJ4 1 050
30/04 Balance c/d 764
1 814 1 814
01/05 Balance b/d 764

2.2 Clients ledger

Dr Langa Attorneys C1 Cr
2020 R 2020 R
30/04 Fees (2)(3)(6) FJ4 1 146* 30/04 Fees (7) FJ4 382
30/04 Business bank (4) BCPJ4 450 30/04 Langa Attorneys (trust
30/04 Business bank (5) BCPJ4 600 creditor) TJ4 1 814
2 196 2 196

R
* Instruction 330
In the books of SA Attorneys (the instructed
Summons 66 attorney), a client account (business account)
Collection commission 750 and a trust creditors account are opened for
the instructing attorney, Langa Attorneys.
1 146

2.3 Trust creditors ledger

Dr Langa Attorneys TC1 Cr

2020 R 2020 R
30/04 Langa Attorneys 30/04 Trust bank (1) TCRJ4 7 500
(client) TJ4 1 814
30/04 Trust bank (8) TCPJ4 5 686
7 500 7 500

3. Trial balance
The following will be the trial balance compiled from the general ledger accounts:

Dr Cr
Fol. R R
Business bank account B1 764
Fees account N1 764
764 764

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Notes on the trial balance of SA Attorneys at 30 April 2020

The trial balance indicates that the accounting procedures have been implemented correctly.
SA Attorneys did in fact receive R68 in fees for services rendered and this amount is included
in the business bank account balance. If more than one collection is made on behalf of an
instructing attorney, then more than one collection may appear on the account statement. This
can now be illustrated by way of example 8.2.

EXAMPLE 8.2

The accounting entries in the accounting records of the instructed attorney as prepared
from the correspondent account statement.

Natal Attorneys sent the following account statement to the instructing attorneys, SA
Attorneys.

Account statement
Natal Attorneys PO Box 10
SA Attorneys BELA BELA
25 Pretoria Avenue 16 February 2020
PRETVILLE
(350 + 540 + 1 000) x 1/3 = 630 R R
Collection – A. South v F. Cape 11 000
Fees for receiving instruction 350
Fees for issuing summons 11 000 x 10% = 1 100 (Limited to R1 000) 540
Sheriff costs (cash) 900
Collection commission 1 000
Your ⅓ share of fees 630
Collection – G. Langa v D. West 2 800 x 10% = 280 (Limited to R1 000) 2 800
Fees for receiving instruction 335
Collection commission 280
Your ⅓ share of fees 205
Electronic fund transfer to yourself 11 230
14 635 14 635

(335 + 280) x 1/3 = 205

REQUIRED:

Record the information as contained in the account statement in the following accounting
records of Natal Attorneys (instructed attorneys):
1. Subsidiary journals
2. Ledgers
3. Trial balance

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STEPS
Steps in answering the question:
Step 1 – Prepare the subsidiary journals (books of first entry).
TCPJ, TCRJ, BCPJ, FJ and TJ.
Step 2 – Prepare the general ledger accounts
Fees account, Trust creditors control account, Clients control
account, Trust bank account, Business bank account.
Step 3 – Prepare the clients ledger with SA Attorneys account
(Client of Natal Attorneys)
Step 4 – Prepare the Trust creditors ledger with SA Attorneys account.
Step 5 – Prepare the trial balance. The trial balance will balance if you have
processed the transactions correctly.

EXPLANATION
8.2

Accounting records of Natal Attorneys

Account numbering used in explanation:

B1 Business bank account

B2 Trust bank account
B3 Trust creditors control account
B4 Clients control account
N1 Fees account
TC1 Trust creditor – SA Attorneys
C1 Client – SA Attorneys

1. Subsidiary journals

1.1 Trust cash payments journal for February 2020

TCPJ2
Trust
creditors Bank
Date Details Fol. R R
16/02 SA Attorneys (A. South v F. Cape and G. Langa v D. West) TC1 11 230 11 230
Business bank account – transfer B1 2 570
11 230 13 800
28/02 Cr – Trust bank account (general ledger) B2
28/02 Dr – Trust creditors control account B3

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EXPLANATION 8.2 (continued)

1.2 Trust cash receipts journal for February 2020

TCRJ2
Trust
creditors Bank
Date Details Fol. R R
16/02 SA Attorneys (A. South v F. Cape) TC1 11 000 11 000
SA Attorneys (G. Langa v D. West) TC1 2 800 2 800
13 800 13 800
28/02 Dr – Trust bank account (general ledger) B2
28/02 Cr – Trust creditors control account B3

1.3 Business cash payment journal for February 2020

BCPJ2
Clients Bank
Date Details Fol. R R
16/02 SA Attorneys (Sheriff costs: F. Cape) C1 900 900
900 900
28/02 Cr – Business bank account (general ledger) B1
28/02 Dr – Clients control account B4

1.4 Business cash receipts journal for February 2020

BCRJ2
Bank
Collection commission
Date Details Fol. R
16/02 Trust bank account – transfer (1 000 + 280) B2 2 570
2 570
28/02 Dr – Business bank account (general ledger) B1

Notes

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EXPLANATION 8.2 (continued)

Note – the 1st journal is a debit to SA Attorneys and the 2nd journal is a credit to SA Attorneys. The journals
have been combined and a net posting of R1 670 has been made to SA Attorneys in the GL.

1.5 Fees journal for February 2020

FJ2
Clients Fees
Date Details Fol. R R
16 SA Attorneys (client) C1 2 505
Fees N1 2 505
Fees for receiving instructions, issuing summons, and
collection commission (350 + 540 + 1 000 + 335 + 280)
Fees N1 835
SA Attorneys (client) C1 835
⅓ share of fees (630 + 205)
1 670 1 670
28 Dr – Clients control account (2 505 – 835 = 1 670) B3
28 Cr – Fees account N1

1.6 Transfer journal for February 2020

TJ2
Dr Cr
Date Details Fol. R R
16 SA Attorneys (trust creditor) (see NB below) TC1 2 570
SA Attorneys (client) C1 2 570
EFT amount to be transferred to business bank account
2 570 2 570
30 Dr – Trust creditors control account B3
30 Cr – Clients control account B4
 350 + 540 + 900 + 1 000 – 630 + 335 + 280 – 205 = 2 570 (As shown in the clients account of SA
Attorneys)

A debit entry in a journal entry is indicated by making it the first entry; the
credit entry will be the second entry and the entry is indented.

2. Ledgers
2.1 General ledger
Dr Fees account N1 Cr
R 2020 R
28/02 Fees journal FJ2 835 28/02 Fees journal FJ2 2 505
28/02 Balance c/d 1 670
2 505 2 505
28/02 Balance b/d 1 670
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EXPLANATION 8.2 (continued)

Dr Trust creditors control account A10 Cr

2020 R 2020 R
28/02 Trust bank TCPJ2 11 230 28/02 Trust bank TCRJ2 13 800
28/02 Clients control TJ2 2 570
13 800 13 800

Dr Clients control account B4 Cr

2020 R 2020 R
28/02 Business bank BCPJ2 900 28/02 Trust creditors control TJ2 2 570
28/02 Fees FJ2 1 670
2 570 2 570

Dr Trust bank account B2 Cr

2020 R 2020 R
28/02 Receipts TCRJ2 13 800 28/02 Payments TCPJ2 13 800
13 800 13 800

Dr Business bank account B1 Cr

2020 R 2020 R
28/02 Receipts TCPJ2 2 570 28/02 Payments BCPJ2 900
28/02 Balance c/d 1 670
2 570 2 570
01/03 Balance b/d 1 670

Sheriff costs
2.2 Clients ledger

Dr SA Attorneys C1 Cr
2020 R 2020 R
16/02 Business bank BCPJ 900 16/02 Fees FJ2 835
28/02 Fees FJ 2 505 28/02 SA Attorneys (trust
creditor) TJ2 2 570
3 405 3 405

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EXPLANATION 8.2 (continued)

2.3 Trust creditors ledger

Dr SA Attorneys TC1 Cr
2020 R 2020 R
16/02 Trust bank TCPJ2 11 230 16/02 Trust bank TCRJ2 11 000
28/02 SA Attorneys (client) TJ2 2 570 28/02 Trust bank TCRJ2 2 800
13 800 13 800

3. Trial balance

Trial balance of Natal Attorneys at 28 February 2020

Fol. Dr Cr
R R
Business bank account B1 1 670
Fees account N1 1 670
1 670 1 670

Notes

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8.8 Recording of the correspondent account statement in the accounting records of the
instructed attorney (including VAT)

In this section of the learning unit, the steps to be followed by the instructed attorney, to
account for the transactions entered into by the instructed attorney, will be illustrated by
Question 8.3. The question deals with the impact of VAT on the accounting transactions.

EXAMPLE 8.3

The accounting entries in the accounting records of the instructed attorney as prepared
from the account statement.

North Attorneys sent the following account statement to the instructing attorneys, Africa
Attorneys.

Account statement
North Attorneys PO Box 555
Africa Attorneys Stanger
PO Box 12124 31 May 2020
Tshwane
R R
Collection – W. West v N. Nam 15 000
Sheriff costs 217
Fee for receiving instruction 430
Fee for preparation of summons 150
Correspondence fee 26
Fee for drafting of admission of guilt 60
Collection commission 1 000
Your ⅓ share of fees 555
VAT @ 15% (R1 666 x 15%); (R555 x 15%) 250 83
Electronic fund transfer to yourself 13 505
W. West v F. West – divorce case
Fee for receiving instruction 300
Advocate for divorce case 330
Sheriff costs 21
Your ⅓ allowance of fees 100
VAT @ 15% (R300 x 15%); (R100 x 15%) 45 15
Amount owing 581
16 334 16 334

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REQUIRED:

Record the information as contained in the corresponding account statement, in the following
accounting records of North Attorneys:
1. Subsidiary journals
2. Ledgers
2.1 General ledger
2.2 Clients ledger
2.3 Trust creditors ledger
3. Prepare the trial balance

EXPLANATION
8.3

Accounting records of North Attorneys

1. Subsidiary journals

1.1 Trust cash receipts journal for May 2020

TCRJ5
Trust
creditors Bank
Date Details Fol. R R
31/05 Africa Attorneys (W. West v N. Nam) T5 15 000 15 000
15 000 15 000
31/05 Dr – Trust bank account G4
31/05 Cr – Trust creditors control account G10

1.2 Trust cash payments journal for May 2020

TCPJ5
Trust
creditors Bank
Date Details Fol. R R
31/05 Africa Attorneys (W. West v N. Nam) T5 13 505 13 505
31/05 Business bank account – transfer C 1 495
13 505 15 000
31/05 Dr – Trust creditors control account G10
31/05 Cr – Trust bank account G4

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EXPLANATION 8.3 (continued)

1.3 Business cash receipts journal for May 2020

BCRJ5
Clients Bank
Date Details Fol. R R
31/05 Trust bank account C 1 495
1 495
31/05 Dr – Business bank account G5

1.4 Business cash payments journal for May 2020

BCPJ5
Clients Bank
Date Details Fol. R R
31/05 Africa Attorneys (Sheriff costs – W. West: 217 + 21) D9 238 238
Africa Attorneys (Advocate – W. West) D9 330 330
568 568
31/05 Cr – Business bank account G5
31/05 Dr – Clients control account G11

1.5 Fees journal for May 2020

FJ5
Clients Fees
Date Details Fol. R R
31/05 Africa Attorneys (client) D9 2 261
Fees 1 966
VAT 295
Fees for receiving instructions: (430 + 300);
issuing of summons: R150; correspondence R26;
admission of guilt: R60; collection commission: R1 000
31/05 Fees 655
VAT 98
Africa Attorneys (client) D9 753
⅓ share of fees

Combined journal entry:

31/05 Dr – Clients control account (2 261 – 753) G11 1 508
31/05 Cr – Fees account (1 966 – 655) G14 1 311
31/05 Cr – VAT control account (250 – 83 + 45 – 15) G17 197

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EXPLANATION 8.3 (continued)

1.6 Transfer journal for May 2020

TJ5
Dr Cr
Date Details Fol. R R
31/05 Africa Attorneys (trust creditor) (W. West v N. Nam) T5 1 495
Africa Attorneys (client) D9 1 495
EFT amount to be transferred to business bank
account
1 495 1 495
31/05 Dr – Trust creditors control account G10
31/05 Cr – Clients control account G11

2. Ledgers
2.1 General ledger

Dr Trust bank account G4 Cr

2020 R 2020 R
31/05 Receipts TCRJ5 15 000 31/05 Payments TCPJ5 15 000
15 000 15 000

Dr Business bank account G5 Cr

2020 R 2020 R
31/05 Receipts BCRJ5 1 495 31/05 Payments BCPJ5 568
31/05 Balance c/d 927
1 495 1 495
01/06 Balance b/d 927

Dr Trust creditors control account G10 Cr

2020 R 2020 R
31/05 Trust bank TCPJ5 13 505 31/05 Trust bank TCRJ5 15 000
31/05 Clients control TJ5 1 495
15 000 15 000

Dr Clients’ control account G11 Cr

2020 R 2020 R
31/05 Fees and VAT FJ5 1 508 31/05 Trust creditors
Business bank BCPJ5 568 control TJ5 1 495
31/05 Balance c/d 581
2 076 2 062
01/06 Balance b/d 581
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 Learning unit 8/2022
EXPLANATION 8.3 (continued)

Dr Fees account G14 Cr

R 2020 R
31/05 Fees journal credits FJ5 1 311

Dr VAT control account G17 Cr

R 2020 R
31/05 Journal credits FJ5 197

2.2 Clients ledger

Dr Africa Attorneys D9 Cr
2020 R 2020 R
31/05 Business bank BCPJ5 238 31/05 Fees and VAT FJ5 753
Business bank BCPJ5 330 31/05 Africa Attorneys (trust
Fees and VAT FJ5 2 261 creditor) (W. West v N. Nam) TJ5 1 495
31/05 Balance c/d 581
2 829 2 829
01/06 Balance b/d 581

2.3 Trust creditors ledger

Dr Africa Attorneys (i.r.o. W. West v N. Nam) T5 Cr

2020 R 2020 R
31/05 Trust bank TCPJ5 13 505 31/05 Trust bank TCRJ5 15 000
31/05 Africa Attorneys
(client) TJ5 1 495
15 000 15 000

3. Trial balance

Trial balance of North Attorneys at 31 May 2020

Dr Cr
R R
Business bank account 927
Clients control account 581
Fees account 1 311
VAT control account 197
1 508 1 508

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8.9 Recording of the correspondent account statement in the accounting records of the
instructing attorney
In this section of the learning unit, the steps to be followed by the instructing attorney, to
account for the transactions entered into by the instructed attorney will be discussed.

QUICK
NOTE
In the accounting records of the instructed attorney there will only be
transactions recorded in respect of the instructing attorney.
When the accounting records of the instructing attorney are prepared there
will be accounts for BOTH the client and the instructed attorney.

The discussion refers to the correspondent account statement of SA Attorneys at the start of
this learning unit.

EXAMPLE 8.4

For ease of reference the correspondent account statement of SA Attorneys follows:

Correspondent account statement

Accounting statement
SA Attorneys $
PO Box 1234
Langa Attorneys × MIDRAND
MBOMBELA 30 April 2020
R R
Collection – E. North v Z. North 7 500
Fees for receiving instruction 330
Fees for issuing summons – Z. North 66
Tracing fees paid – Z. North 450
Sheriff costs – Z. North 600
Collection commission Ω 750
Your ⅓ share of fees (allowance) β 382
Electronic fund transfer to yourself 5 686
7 882 7 882

× The instructing attorney

$ The instructed attorney
Ω Collection commission: 7 500 x 10% = 750
β R330 + R66 + R750 = 1 146 x ⅓ = 382

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Discussion:
Langa Attorneys (instructing attorney) should apply the following steps to account for the
transactions:
STEPS
Step 1 – Receipt of correspondent account statement and electronic fund
transfer

Where an account statement to which an EFT is attached, is received from an instructed

attorney, the most important duty of the instructing attorney (Langa Attorneys) is to immediately
issue a trust receipt on receipt of the deposit in the trust bank account. It follows that the
instructing attorney must credit a trust creditor’s account, namely SA Attorneys (the instructed
attorney), with the amount.
(T-accounts are used to facilitate the explanation – the journal entries are shown in a separate
section).
The following entry is made.
Trust bank
R
SA Attorneys (trust creditor) 5 686

SA Attorneys (trust creditor)

R
Trust bank 5 686

STEPS

Step 2 – Distribution of the original collection

The next step is to record all the entries appearing on the account statement. Every entry made
by the instructed attorney on the account statement is the result of such attorney acting on the
instructions of the instructing attorneys, Langa Attorneys (to collect money from Z. North on
behalf of E. North). Each entry must be analysed and recorded in the relevant journal, after
distinguishing clearly between business transactions and trust transactions. The following
entries are made

➢ To transfer the R7 500 to the trust creditors account of E. North:

SA Attorneys (trust creditor)
R
E. North 7 500

E. North (trust creditor)

R
SA Attorneys 7 500
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 Learning unit 8/2022
This entry is made to transfer the cash collected by SA Attorneys to the trust creditors account
of E. North. E. North is the client (trust creditor) of Langa Attorneys and is accountable to him.

➢ To debit the total expenses incurred and fees levied by SA Attorneys in respect of E.
North, to the latter’s account:
SA Attorneys (trust creditor)
R
E. North (330 + 66 + 450 + 600 + 750) 2 196

E. North (trust creditor)

R
SA Attorneys 2 196

This entry is made because E. North is liable for the expenses incurred by SA Attorneys in
respect of the collection.

➢ To record the fees earned by Langa Attorneys:

SA Attorneys (client)
R
Fees (1 146 x 1/3) 382

Fees
R
SA Attorneys 382

The purpose of this entry is to record one-third of the fees to which Langa Attorneys is entitled.
Because this is fees, it amounts to a business transaction and a client account is therefore
opened for SA Attorneys. A direct debit entry cannot be made to the trust creditor account of
SA Attorneys.

➢ When all the entries appearing on the account statement have been recorded, the
ledger accounts must be examined to ensure that they reflect the true state of
affairs:

Trust creditors ledger of Langa Attorneys

SA Attorneys
R R
E. North 7 500 Trust bank 5 686
E. North 2 196

E. North
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 Learning unit 8/2022
R R
SA Attorneys 2 196 SA Attorneys 7 500

Clients ledger of Langa Attorneys

SA Attorneys
R R
Fees (1/3 share of fees) 382

➢ The trust creditor account of SA Attorneys has a credit balance of R382, and the
client account has a debit balance of R382. A transfer is made from the trust creditor
account to the client account of SA Attorneys via the transfer journal, and an EFT is
made to deposit R382 into the business bank account.

SA Attorneys (trust creditor)

R R
SA Attorneys (client) 382

SA Attorneys (client)
R R
SA Attorneys (trust creditor) 382

Trust bank
R R
Business bank 382

Business bank
R
Trust bank 382

When this entry has been completed, the client account and the trust creditor account of SA
Attorneys will be closed off as shown in the next section.
The account of E. North has a credit balance of R5 304, which represents the amount owing to
him and will be settled via an EFT.

STEPS
Step 3 – Recording in subsidiary journals

To gain an overall idea of the accounting process, study the recording of the various
transactions in the different subsidiary journals and ledger accounts in the accounting records
of Langa Attorneys.

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EXPLANATION
8.4

Account numbering used in explanation:

B1 Business bank account
B2 Trust bank account
B3 Trust creditors control account
B4 Clients control account
N1 Fees account
TC1 Trust creditor – SA Attorneys
TC2 Trust creditor – E. North
C1 Client – SA Attorneys

Accounting records of Langa Attorneys

Subsidiary books
1.1 Trust cash receipts journal for April 2020
TCRJ4
Trust
creditors Bank
Date Details Fol. R R
30/04 SA Attorneys (amount received – E. North v Z. North) TC1 5 686 5 686
30/04 Dr – Trust bank account (general ledger) B2 5 686
30/04 Cr – Trust creditors control account B3 5 686

1.2 Trust cash payments journal for April 2020

TCPJ4
Bank
Date Details Fol. R
30/04 Business bank account (EFT – transfer to business bank account) B1 382
30/04 Cr – Trust bank account (general ledger) B2

1.3 Business cash receipts journal for April 2020

BCRJ4
Bank
Date Details Fol. R
30/04 Trust bank account (transfer from trust bank account as per transfer journal) B2 382
30/04 Dr – Business bank account (general ledger) B1

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EXPLANATION 8.4 (continued)

1.4 General journal for April 2020

GJ4
Dr Cr
Date Details Fol. R R
30/04 SA Attorneys (trust creditor) TC1 7 500
E. North (trust creditor) TC2 7 500
Amount recovered from Z. North
30/04 E. North (trust creditor) TC2 2 196
SA Attorneys (trust creditor) TC1 2 196
Expenses incurred by SA Attorneys on behalf of E. North
9 696 9 696
30/04 Dr – Trust creditors control account* B3
30/04 Cr – Trust creditors control account* B3

*In this instance, these two entries happen to have the same totals, but in
practice, this will not necessarily be the case.

Fees of the instructed attorney R330 + R66 + R750 = R1 146 plus tracing
fees R450, and Sheriff costs, R600 = R2 196

1.5 Fees journal for April 2020

FJ4
Clients Fees
Date Details Fol. R R
30/04 SA Attorneys (client) C1 382
Fees N1 382
⅓ share of fees
382 382
30/04 Dr – Clients control account B4
30/04 Cr – Fees account N1

1.6 Transfer journal for April 2020

TJ14
Dr Cr
Date Details Fol. R R
34 SA Attorneys (trust creditor) TC1 382
SA Attorneys (client) C1 382
Amount to be transferred to business bank account
382 382
30 Dr – Trust creditors control account B3
30 Cr – Clients control account B4

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EXPLANATION 8.4 (continued)

General ledger From general journal.

See folio.
Langa Attorneys

Dr Trust creditors control account B3 Cr

2020 Fol. R 2020 Fol. R
30/04 Clients control TJ4 382 30/04 Trust Bank TCRJ4 5 686
30/04 Journal debits GJ4 9 696 30/04 Journal credits GJ4 9 696
30/04 Balance c/d 5 304
15 382 15 382
01/05 Balance b/d 5 304

Dr Clients control account B4 Cr

2020 Fol. R 2020 Fol. R
30/04 Journal debits FJ4 382 30/04 Trust creditors control TJ4 382
382 382

The balance is therefore “NIL”

Dr Fees account N1 Cr
2020 Fol. R
30/04 SA Attorneys FJ4 382

Dr Business bank account A4 Cr

2020 Fol. R
30/04 Receipts BCRJ4 382

Dr Trust bank account A5 Cr

2020 Fol. R 2020 Fol. R
30/04 Receipts TCRJ4 5 686 30/04 Payments TCPJ4 382
30/04 Balance c/d 5 304
5 686 5 686
01/05 Balance b/d 5 304

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EXPLANATION 8.4 (continued)

Clients ledger
Langa Attorneys

Dr SA Attorneys D1 Cr
2020 Fol. R 2020 Fol. R
30/04 Fees FJ4 382 30/04 SA Attorneys (trust creditor) TJ4 382

Trust creditors ledger

Langa Attorneys
Dr SA Attorneys TC1 Cr
2020 Fol. R 2020 Fol. R
30/04 E. North (trust creditor) GJ4 7 500 30/04 Trust bank TCRJ4 5 686
30/04 SA Attorneys (client) TJ4 382 30/04 E. North (trust creditor) GJ4 2 196
7 882 7 882

The balance is therefore “NIL”

Dr E. North TC2 Cr
2020 Fol. R 2020 Fol. R
30/04 SA Attorneys (trust creditor) GJ4 2 196 30/04 SA Attorneys (trust
30/04 Balance c/d 5 304 creditor) GJ4 7 500
7 500 7 500
01/05 Balance b/d 5 304

Trial balance
Trial balance of Langa Attorneys at 30 April 2020
Dr Cr
R R
Fees 382
Business bank 382
Trust bank 5 304
Trust creditors control (E. North) 5 304
5 686 5 686

Langa Attorneys’ one-third (⅓) share of the fees, as claimed by SA Attorneys, is not recorded
in the account of Langa Attorneys’ client (E. North), as this is a matter between the two firms of
attorneys. When Langa Attorneys (the instructing attorney) therefore sends their client (E.
North) a final statement, mention will be made in it of:
(a) the amount collected; and
(b) the fees and expenses claimed by SA Attorneys (the instructed attorneys).
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EXAMPLE 8.5

The accounting entries in the accounting records of the instructing attorney as prepared
from the correspondent account statement

The firm of Nam Attorneys receives the following account statement from its correspondent,
Kwa Attorneys:

Account statement
Kwa Attorneys
Nam Attorneys PO Box 10
Instructing attorney
25 Pretoria Avenue Bela Bela
Pretville 16 February 2020
R R
Collection – S. Africa v C. Cape 9 000
Fees for receiving instruction 500
Fees for issuing summons 440
Sheriff costs (cash) 390
Collection commission 900
Your ⅓ share of fees ((500 + 400 + 900) x ⅓) 600
2 230 9 600
Claim – A. South v W. West 7 000
Fees for receiving instruction 800
Collection commission 700
Your ⅓ share of fees ((800 + 700) x ⅓) 500
3 730 17 100
Electronic fund transfer to yourself 13 370
17 100 17 100

REQUIRED:

Record the information as contained in the account statement from Kwa Attorneys in the
following accounting records of Nam Attorneys (the instructing attorneys):
1. Subsidiary journals
2. Ledgers
2.1 General ledger
2.2 Clients ledger
2.3 Trust creditors ledger
3. Trial balance

Notes

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EXPLANATION
8.5

Accounting records of Nam Attorneys

Account numbering used in explanation:

B1 Business bank account
B2 Trust bank account
B3 Trust creditors control account
B4 Clients control account
N1 Fees account
TC1 Trust creditor – Kwa Attorneys
TC2 Trust creditor – S Africa
TC3 Trust creditor – A South
C1 Client – Nam Attorneys

1. Subsidiary journals

1.1 Trust cash receipts journal for February 2020

TCRJ2
Trust
creditors Bank
Date Details Fol. R R
28/02 Kwa Attorneys (trust creditor) TC1 13 370 13 370
28/02 Dr – Trust bank account B2
28/02 Cr – Trust creditors control account B3

1.2 Trust cash payments journal for February 2020

TCPJ2
Trust
creditors Bank
Date Details Fol. R R
28/02 Business bank account (transfer) B1 1 100
S. Africa (9 000 – 500 – 440 – 390 – 900) TC2 6 770 6 770
A. South (7 000 – 800 – 700) TC3 5 500 5 500
12 270 13 370
28/02 Cr – Trust bank account B2
28/02 Dr – Trust creditors control account B3

Notes

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EXPLANATION 8.5 (continued)

1.3 Business cash receipts journal for February 2020

BCRJ2
Bank
Date Details Fol. R
28/02 Trust bank account (transfer) B2 1 100
28/02 Dr – Business bank account B1

1.4 Transfer journal for February 2020

TJ2
Dr Cr
Date Details Fol. R R
28/02 Kwa Attorneys (trust creditor) TC1 1 100
Kwa Attorneys (client) C1 1 100
EFT transferred to the business bank
1 100 1 100
28/02 Dr – Trust creditors control account B3
28/02 Cr – Clients control account B4

1.5 General journal for February 2020

GJ2
Dr Cr
Date Details Fol. R R
28/02 Kwa Attorneys (trust creditor) TC1 9 000
S. Africa (trust creditor) TC2 9 000
Money collected by Kwa Attorneys (S. Africa v C. Cape)
28/02 S. Africa (trust creditor) TC2 2 230
Kwa Attorneys (trust creditor) TC1 2 230
Fees charged and expenses incurred by Kwa Attorneys to
collect money from C. Cape (500 + 440 + 390 + 900)
28/02 Kwa Attorneys (trust creditor) TC1 7 000
A. South (trust creditor) TC3 7 000
Money collected by Kwa Attorneys (A. South v W. West)
28/02 A. South (trust creditor) TC3 1 500
Kwa Attorneys (trust creditor) TC1 1 500
Fees charged and expenses incurred by Kwa Attorneys to
collect money from W. West (800 + 700)
12 270 12 270

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28/02 Dr – Trust creditors control account B3
28/02 Cr – Trust creditors control account B3

EXPLANATION 8.5 (continued)

1.6 Fees journal for February 2020

FJ2
Clients Fees
Date Details Fol. R R
28/02 Kwa Attorneys (client) C1 1 100
Fees N1 1 100
⅓ share of fees charged by Kwa Attorneys paid to SA
Attorneys. S. Africa v C. Cape R70; A. South v W. West R40
1 100 1 100
28/02 Dr – Clients control account B4
28/02 Cr – Fees account N1

2. Ledgers
2.1 General ledger From the fees journal

Dr Fees account N1 Cr
2020 Fol. R
28/02 Kwa Attorneys (client) FJ2 1 100

From the general journal. Take note of Folio.

Dr Trust creditors control account B3 Cr

2020 Fol. R 2020 Fol. R
28/02 Client control TJ2 1 100 28/02 Trust bank TCRJ2 1 790
28/02 Journal debits GJ2 2 520 28/02 Journal credits GJ2 2 520
28/02 Trust bank TCPJ2 1 680
4 310 4 310

Dr Clients control account B4 Cr

2020 Fol. R 2020 Fol. R
28/02 Journal debits (fees 28/02 Trust creditors control TJ2 1 100
journal) FJ2 1 100
1 100 1 100

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Dr Trust bank account B2 Cr

2020 Fol. R 2020 Fol. R
28/02 Receipts TCRJ2 1 790 28/02 Payments TCPJ2 1 790
1 790 1 790

EXPLANATION 8.5 (continued)

Dr Business bank account B1 Cr

2020 Fol. R
28/02 Receipts BCRJ2 1 100

2.2 Clients ledger

Dr Kwa Attorneys C1 Cr
2020 Fol. R 2020 Fol. R
28/02 Fees FJ2 1 100 28/02 Kwa Attorneys (trust
creditor) TJ2 1 100

2.3 Trust creditors ledger

Dr Kwa Attorneys TC1 Cr

2020 Fol. R 2020 Fol. R
28/02 S. Africa (trust creditor) GJ2 1 200 28/02 Trust bank TCRJ2 1 790
28/02 A. South (trust creditor) GJ2 900 28/02 S. Africa (trust creditor) GJ2 300
28/02 Kwa Attorneys (client) TJ2 1 100 28/02 A. South (trust creditor) GJ2 120
2 210 2 210

Dr S. Africa TC2 Cr
2020 Fol. R 2020 Fol. R
28/02 Kwa Attorneys (trust 28/02 Kwa Attorneys (trust
creditor) GJ2 300 creditor) GJ2 1 200
28/02 Trust bank TCPJ2 900
1 200 1 200

Dr A. South TC3 Cr
2020 Fol. R 2020 Fol. R
28/02 Kwa Attorneys (trust 28/02 Kwa Attorneys (trust
creditor) GJ2 120 creditor) GJ2 900

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28/02 Trust bank TCPJ2 780
900 900

EXPLANATION 8.5 (continued)

3. Trial balance
Trial balance of Nam Attorneys at 28 February 2020
Dr Cr
R R
Business bank account 1 100
Fees account 1 100
1 100 1 100

8.10 Recording of the correspondent account statement in the accounting records of

the instructing attorney (including VAT)

EXAMPLE 8.6

The accounting entries of correspondent transactions in the accounting records of first

entry and ledgers of an instructing attorney (Including VAT).
The attorneys practice Africa Attorneys received the following account statement from its
correspondent, Cape Attorneys:
Account statement
Cape Attorneys PO Box 555
Africa Attorneys Stanger
PO Box 12124 31 May 2020
Pretoria
R R
Collection – C. Natal v D. Western 15 000
Sheriff costs 217
Fee for receiving instruction 430
Fee for preparation of summons 150
Fee for drafting letter of intent 160
Collection commission 1 000
Your ⅓ share of fees 580
VAT @ 15% 261 87
Collection – C. Natal v D. Natal (Maintenance) 8 500
Fee for receiving instruction 290
Advocate for court case 330
Sheriff costs 187
Collection commission 850
Your ⅓ share of fees 380
VAT @ 15% 171 57
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Electronic fund transfer to yourself 20 558
24 604 24 604

Additional information
1. Africa Attorneys paid C. Natal the amount collected.
2. Africa Attorneys do not have permission to settle the accounts of the different matters
against each other.

Proof of calculation of VAT:

Fee income for matter: C. Natal v D. Western
430 + 150 + 160 + 1 000 = 1 740
= 1 740 x 15%
VAT = 261
Fee income for matter: C. Natal v D. Natal
290 + 850 = 1 140
= 1 140 x 15%
VAT = 171

REQUIRED:

Record the information as contained in the correspondent account statement from Cape
Attorneys in the following accounting records of Africa Attorneys (the instructing attorney):
1. Subsidiary journals
2. Ledgers
2.1 General ledger
2.2 Clients ledger
2.3 Trust creditors ledger
3. Trial balance
(Round off all amounts to the nearest R1.)

EXPLANATION
8.6

Accounting records of Africa Attorneys (instructing)

Account numbering used in explanation:
B1 Business bank account
B2 Trust bank account
B3 Trust creditors control account
B4 Clients control account
B5 VAT control account

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N1 Fees account
TC1 Trust creditor – Cape Attorneys
TC2 Trust creditor – C. Natal (v D. Western)
TC3 Trust creditor – C. Natal (v D. Natal)
C1 Client – Cape Attorneys
C2 Client – C. Natal (v D. Western)

EXPLANATION 8.6 (continued)

1. Subsidiary journals
1.1 Trust cash receipts journal for May 2020
TCRJ5
Date Details Trust
creditors Bank
Fol. R R
31/05 Cape Attorneys (trust creditor) TC1 20 558 20 558
31/05 Dr – Trust bank account B2
31/05 Cr – Trust creditors control account B3

1.2 Trust cash payments journal for May 2020

TCPJ5
Trust
creditors Bank
Date Details Fol. R R
31/05 C Natal (trust creditor matter: C. Natal v D. Western) TC2 12 782 12 782
Business bank account – transfer (C. Natal v D. Western) B1 667
C Natal (trust creditor matter: C. Natal v D. Natal) TC3 6 672 6 672
Business bank account – transfer (C. Natal v D. Natal) B1 437
19 454 20 558
31/05 Cr – Trust bank account B2
31/05 Dr – Trust creditors control account B3

1.3 Business cash receipts journal for May 2020

BCRJ5
Clients Bank
Date Details Fol. R R
31/05 Trust bank account – transfer (C. Natal v D. Western) B2 – 667
31/05 Trust bank account – transfer (C. Natal v D. Natal) B2 – 437
– 1 104
31/05 Dr – Business bank account B1

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Notes

EXPLANATION 8.6 (continued)

1.4 Transfer journal for May 2020

TJ5
Dr Cr
Date Details Fol. R R
31/05 Cape Attorneys (trust creditor) (C. Natal v D. Western) TC2 667
Cape Attorneys (trust creditor) (C. Natal v D. Natal) TC3 437
Cape Attorneys (client) C1 1 104
Transfer to business bank account (C. Natal v D. Western
667 + C. Natal v D. Natal 437)
1 104 1 104
31/05 Dr – Trust creditors control account B3
31/05 Cr – Clients control account B4

1.5 General journal for May 2020

GJ5
Dr Cr
Date Details Fol. R R
31/05 Cape Attorneys (trust creditor) TC1 15 000
C. Natal (trust creditor C. Natal v D. Western) TC2 15 000
Money collected by Cape Attorneys (C. Natal v D.
Western)
31/05 C. Natal (trust creditor C. Natal v D. Western) TC2 2 218
Cape Attorneys (trust creditor) TC1 2 218
Fees charged and expenses incurred by Cape Attorneys to
regarding matter C. Natal v D. Western: Fees R1 740 (430
+ 150 + 160 + 1 000), Sheriff costs R217 and VAT R261.
31/05 Cape Attorneys (trust creditor) TC1 8 500
C. Natal (trust creditor C. Natal v D. Natal) TC3 8 500
Money collected by Cape Attorneys (C. Natal v D. Natal)
31/05 C. Natal (trust creditor C. Natal v D. Natal) TC3 1 828
Cape Attorneys (trust creditor) TC1 1 828

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Fees charged and expenses incurred by Cape Attorneys
regarding maintenance case C. Natal v D. Natal: Fees
R1 140 (R290 + 850), Advocate fee R330, Sheriff costs
R187 and VAT R171.
19 454 19 454
31/05 Dr – Trust creditors control account B3
31/05 Cr – Trust creditors control account B3

EXPLANATION 8.6 (continued)

1.6 Fees journal for May 2020

FJ5
Clients Fees
Date Detail Fol. R R
31/05 Cape Attorneys (client) C1 667
Fees N1 580
VAT B5 87
⅓ share of fees (including VAT) charged by Cape
Attorneys (C. Natal v D. Western)
Cape Attorneys (client) C1 437
Fees N1 380
VAT B5 57
⅓ share of fees (including VAT) charged by Cape
Attorneys (C. Natal v D. Natal)
31/05 Dr – Clients control account B4 1 104 1 104

2. Ledgers

2.1 General ledger

Dr Trust bank account B2 Cr

2020 R 2020 R
31/05 Receipts TCRJ5 20 558 31/05 Payments TCPJ5 20 558
20 558 20 558

Dr Business bank account B1 Cr

2020 R
31/05 Receipts BCRJ5 1 104

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Dr Trust creditors control account B3 Cr

2020 R 2020 R
31/05 Trust bank TCPJ5 19 454 31/05 Trust bank TCRJ5 20 558
31/05 Clients control TJ5 1 104 31/05 Journal credits GJ5 19 454
31/05 Journal debits GJ5 19 454
40 012 40 012

EXPLANATION 8.6 (continued)

Dr Clients control account B4 Cr

2020 R 2020 R
31/05 Journal debits FJ5 1 104 31/05 Trust creditors control TJ5 1 104
1 104 1 104

Dr Fees account N1 Cr
2020 R
31/05 Cape Attorneys (client) FJ5 580
31/05 Cape Attorneys (client) FJ5 380
960

Dr VAT control account B5 Cr

2020 R
31/05 Cape Attorneys (client) FJ5 87
31/05 Cape Attorneys (client) FJ5 57
144

2.2 Clients ledger

Dr Cape Attorneys C1 Cr
2020 R 2020 R
31/05 Fees & VAT (580 + 87) FJ5 667 31/05 Cape Attorneys (trust
31/05 Fees & VAT (380 + 57) FJ5 437 creditor) TJ5 1 104
1 104 1 104

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2.3 Trust creditors ledger

Dr Cape Attorneys TC1 Cr

2020 R 2020 R
31/05 Cape Attorneys (client) TJ5 1 104 31/05 Trust bank TCRJ5 20 558
31/05 C. Natal (trust creditor) GJ5 15 000 31/05 C. Natal (trust creditor) GJ5 2 218
31/05 C. Natal (trust creditor) GJ5 8 500 31/05 C. Natal (trust creditor) GJ5 1 828
24 604 24 604

EXPLANATION 8.6 (continued)

Dr C. Natal (in respect of C. Natal v D. Western) TC2 Cr

2020 R 2020 R
31/05 Trust bank TCPJ5 12 782 31/05 Cape Attorneys (trust
31/05 Cape Attorneys (trust creditor) GJ5 15 000
creditor) GJ5 2 218
15 000 15 000

Dr C. Natal (in respect of C. Natal v D. Natal) TC3 Cr

2020 R 2020 R
31/05 Trust bank TCPJ5 6 672 31/05 Cape Attorneys (trust
31/05 Cape Attorneys (trust creditor) GJ5 8 500
creditor) GJ5 1 828
8 500 8 500

3. Trial balance

Trial balance of Africa Attorneys at 31 May 2020

Dr Cr
R R
Business bank account 1 104
Fees account 960
VAT control account 144
1 104 1 104

Notes

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8.11 Self-assessment questions

Questions Answers
What is the legal definition
of correspondents?

Distinguish between the

instructing and instructed
attorney.

Which attorney compiles

the correspondent account
statement?

Explain the first

accounting step of an
instructing attorney if a
statement is received from
a correspondent.
Name the account in the
general ledger that will
indicate the amount which
must be available in the
trust bank account.
Explain why an instructing
attorney always has more
than one trust creditor.

The money collected by

an instructed attorney from
a third party constitutes
business money.
TRUE/FALSE
The expenses incurred by
an instructed attorney are
paid out of the business
bank account.
TRUE/FALSE
List the type of fees that
can be charged by the
instructed attorney.

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Questions Answers
What is a correspondent
allowance?

Calculate the
correspondent allowance if
the professional and
collection fees charged by
the instructed attorney
amount to R9 000.
The instructed attorney is
not a VAT vendor.
Calculate the
correspondent allowance if
the professional and
collection fees charged by
the instructed attorney
amount to R9 000.
The instructed attorney is
a VAT vendor.
What is a collection cost?

What is a collection
commission?

Calculate collection
commission if the attorney
was instructed to collect
debt of R34 000.

Calculate collection
commission if the attorney
was instructed to collect a
total debt of R33 000. The
debt will be collected in
three payments.

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Questions Answers
Provide detail of the
parties involved in a
correspondent transaction.

List the accounts that will

be opened in the
accounting records of the
instructed attorney if the
matter involves trust
monies and the following
parties:
Instructing attorney – SA
Attorneys
Client of instructing
attorney – S Africa
Instructed attorney –
South Attorneys
List the accounts that will
be opened in the
accounting records of the
instructing attorney if the
matter involves trust
monies and the following
parties:
Instructing attorney – West
Attorneys
Client of instructing
attorney – N. North
Instructed attorney –
Mpuma Attorneys

If you are able to adequately answer all of the above assessment criteria, you have completed
Learning unit 8. If you were unable to do so or were uncertain of the answers to any of the
questions, please revise the sections in the learning unit and ensure you have a thorough
knowledge of this learning unit and a clear understanding of the explained concepts.

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