TOPIC 5

ACCOUNTING FOR LEGAL FIRMS

Presented by: Group A5

NO. NAME MATRIC NO.

1. AISYATUL RASYIDAH BINTI ABD RAHMAN 272253
2. CHEE MEI JEE 272815
3. JAIYAGANESH A/L ASOKUMAR 273127
4. MAIMUNAH BINTI MEHAMMED MASRI 273280
5. IQBAL SHAUQI BIN MOHD SHUKRI 273717
 INTRODUCTION
Legal firms are known as:
Normally form as a partnership

Advocates and Subject to Malaysian Bar Council

Advocates Solicitors
solicitors to practice

Prepare a valid legal document

As a witness in agreement/contract
Offered service Accounting issues:
As a solicitor/advocate on behalf of client
Separation between
the client’s money and
MANAGEMENT
As a trustee or an intermediary firm’s money
 DEFINITION OF TERMINOLOGIES
Means an advocate and solicitor of the High Court and includes a firm
Solicitors
of solicitors

Client Any person on whose account a solicitor hold or receives

Current/deposit account at bank in the name of the solicitor in the title

Client Account
of which the word “client” appears

Client's money Money held or received by a solicitor on behalf of a person

Money held or received by a solicitor which is not client’s money, and

Trust money
which is subject to a trust
 NATURE OF BUSINESS
Basically, legal firm offered a service related with legal advices and 
they deal with the trust funds and client's money

Form of Legal Firm

Private Law Attorney in private law firms represent individuals or companies, who paid either on hourly or
Firms flat rate basis.

The Sole
A professional who practices individually.
Practitioner

The Boutique 
A collection of attorneys specializing in a niche area of law practice.
Firm

The Small Law 

Law firms, which generally employ from two to ten attorneys
Firm

The Large Law  Law firms that can range in size from several dozens of lawyers and employees, to several thousands of
Firm employees including lawyers, paralegals, administrative staff, human resource specialists etc.
RELATED LAW AND GOVERNING BODIES
There is no specific accounting standard for legal firms
• They maintained their accounts using the same accounting procedures as other firms
using the GAAP. 

The related law that govern the legal firm are; 

• The Legal Profession Act ,1976 (LPA). 
• The Solicitor’s Accounts Rules, 1990 (SAR).   Both SAR 1990 and ARR 1990
• The Accountants’ Report Rules 1990 (ARR).       were prepared by the Bar Council
 SRO 1991 was prepared by the
• The Solicitors’ Remuneration Order 1991 (SRO).
     Solicitors Cost Committee.

There three laws were prepared in exercising the powers

conferred by The Legal Profession Act 1976.
Main purposes of both SAR and ARR were to ensure: 

• proper and complete records are maintained for all receipts and payments.
• proper and complete records are maintained for each client’s account.
• each client’s money are distinguished from other clients’ money. 
• the firm applies for the certificate to accept clients’ money annually. 
• the firm sends the accountants’ report if it had received clients’ money during the
accounting period.
• all clients’ accounts do not have a debit balance (a debit balance indicate an error
has occurred, or other client’s money has been used). 
 MANAGEMENT OF TRUST ACCOUNT 
LF must keep separate accounts for; 
◦ each person, firm or company with whom the solicitor has business dealings. 
◦ each source of income (eg: service fee revenue, rent revenue) 
◦ each type of business expenditure (eg: salaries expense and utilities expense) 
◦ each type of asset. 
◦ each client on whose behalf money is handled. 

Whenever a solicitor receives or pays money for a client, the solicitor must decide whether it
is the client’s money OR firm’s money and when holds client's money, the solicitor must pay
it into a client account without delay.

MANAGEMENT
MANAGEMENT OF TRUST ACCOUNT (con’t) 
Rules Regarding Clients’ Money

 LF must deposit money received from clients or on behalf of the clients to the client’s accounts.
  (Rule 3) 
 The money belonging to clients (client’s money) must keep separate from the firm’s own money.
 LF must at all time maintain proper accounts or other records that can show how the firm handles 
the clients’ money and they must keep the records for at least six years. (Rule 11)
MANAGEMENT OF TRUST ACCOUNT (con’t) 
Withdrawals From a Client Account

 Clients’ money can be used to make payment only if enough money is held in client account for 
the particular client. 
 Therefore, before any payment from client’s money is made, LF must make sure that there is 
enough money in the client’s account. 
 If the money held in the particular client’s account is not sufficient, the solicitor may use the
firm’s money and claimed from the client later.
 The legal firm should also make sure that the payment is allowed under SAR 1990.
MANAGEMENT OF TRUST ACCOUNT (con’t) 
Money can be withdrawn from a client account in the following circumstances
(Para 7, SAR, 1990): 
a. for payment to or on behalf of the client. 
b. for a payment in the execution of a particular trust money drawn with on the client’s authority. 
c. for payment of the solicitor’s cost where a bill of costs or other written intimation of the amount
of the costs incurred has been delivered to the client and the client has been notified. 
d. money to be transferred to a client account in the execution of a particular trust money to be
transferred to a separate bank account kept solely for the money of a particular trust. 
e. money belonging to the solicitor as may be necessary for the purpose of opening or maintaining
the account.
f. a cheque or draft received by the solicitor which he is entitled to split money which may be by
mistake or accident have been paid into the account.
MANAGEMENT OF TRUST ACCOUNT (con’t) 
Recording Transaction (Receipt and payment of:)
Receipts Payment
Firm's Money Dr. Cash-Office                          RMxxx Dr. Utilities Expenses-Office     RMxxx
    Cr. Service Revenue-Office         RMxxx     Cr. Cash-Office                              RMxxx
Client's Money (on behalf Dr. Cash-Trust                      RMxxx Dr. Client Name-Trust          RMxxx
of client)     Cr. Client Name-Trust             RMxxx     Cr. Cash-Trust                          RMxxx

 Revenue Recognition (performed services to client)

I) when billed (only when billed)
        Dr. Client A-Office                          RMxxx
             Cr. Service fee Revenue-Office         RMxxx
II) when received money billed (only when settled)
        Dr. Cash- Office                               RMxxx
             Cr. Client A-Office                             RMxxx
MANAGEMENT OF TRUST ACCOUNT (con’t) 
Recording Transaction (Bank Charge)
 LF will be charged by bank for services rendered. Theoretically, bank charge should be separated,
i.e. Bank charge for trust should be charged on trust account and BC to the firm’s account should
be charged to the firm’s account.
 BC for trust account should be allocated to all clients using that account according to certain ratio
or percentage.
 In practiced, LF instruct the bank to charge the amount to the firm’s account to avoided a tedious
computation.

Recording Transaction (Bank Interests Income)

 The same treatment also applied for bank interest for the same reason as bank charge above.
MANAGEMENT OF TRUST ACCOUNT (con’t) 
Recording Transfers Transaction

 If permissible within the SAR ,1990 money can be transferred between accounts :

Client’s account to office account

Money can be
transferred Office account to client’s account

Between clients accounts

MANAGEMENT OF TRUST ACCOUNT (con’t) 
Work-in Progress (WIP)

 WIP represents work done by the firm on behalf of clients during the financial year but the related bills
have not been delivered to clients at the end of the financial year.
 The value of the ending WIP (work in progress at the end of the financial year) will be added to the service
revenue in the income statement.
 Beginning work-in-progress will then be subtracted from the amount.
 In the balance sheet, ending work-in-progress will be reported as current asset.
REPORT NEED TO BE PREPARED
 Generally, Acts, Laws and Regulation do not require legal firms to prepare a complete set of
financial statements.
 The ARR and SRR require the solicitors to prepare the following report:

Audit report Accountant’s report

To be submitted to CCM To be submitted to Bar
Council
REPORT NEED TO BE PREPARED (con’t)
Contents of the Accountant’s report:
a. State whether inspection has been done to the books, accounts and documents of the legal firm
for a specified accounting period based on specified rules or regulation.
b. State whether or not the accountant is satisfied, from his examination of the books, accounts
and documents produced to him and from the information and explanations given to him. If
the accountant is not satisfied, the reason must also be revealed.
c. State, if the accountant is not satisfied, the matters in respect of which he is not so satisfied;
d. Contain such information as may be prescribed by rules made by Bar Council under this sec-
tion; and
e. Be delivered to The Secretary of the Malaysian bar not more than 12 months after the end of
the accounting period specified in the report.
REPORT NEED TO BE PREPARED (con’t)

 Financial Statement
 Reasons for preparing the FS:
- to control the unbilled work-in-progress.
- to control the accounts receivable.
- to control the administrative operations and cash flow.
 Types of statement
- Balance sheet
- Income statement
- Profit sharing statement
FINANCIAL STATEMENT [BS FORMAT]
FINANCIAL STATEMENT [IS FORMAT]
 DISCUSSION QUESTIONS
QUESTION:
EI, Mei & Co is a solicitor firm. Its accounting period ended 31 August every year. The firm’s
work-in-progress account shows an opening debit balance on 1st September 2016 of RM56,000.
During the current year ended 31 August 2017, bill that have been delivered to clients totaled
RM125,000. The firm estimates that value of work done during the current year in respect of bills
which have not yet been delivered is RM23,000.

REQUIRED:
Prepared an IS and partial BS at 31 August 2017.
 DISCUSSION QUESTIONS
SUGGESTED ANSWER:

Income statement for the year ended 31 August 2017

RM
Revenue 125,000
(-) Opening WIP (56,000)
(+) Ending WIP 23,000
Value of the work during the year 92,000

Balance sheet as at 31 August 2017 (partial)

RM
Current Assets
Ending WIP 23,000
 CONCLUSION

 The main purpose of accounting for legal firms are:

     - the separation of trust assets and liabilities with the firm’s assets and liabilities. 
Thanks for
the
attention !