MIDLANDS STATE UNIVERSITY

FACULTY OF LAW
LLB
Accounting for Legal Practitioners
(LB302)

INTRODUCTION
March 2023

Contents
PART 1: INTRODUCTION TO ACCOUNTING.....................................................................................3
1.1 WHAT IS ACCOUNTING?........................................................................................................................3

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1.2 DISTINCTION BETWEEN ACCOUNTING AND BOOKKEEPING..................................................................4
1.3 USERS OF ACCOUNTING INFORMATION................................................................................................4
1.4 THE ACCOUNTING EQUATION.............................................................................................................5
1.5 ASSETS, LIABILITIES AND CAPITAL........................................................................................................6
1.6 THE DOUBLE ENTRY SYSTEM................................................................................................................7
1.7 THE GOLDEN RULE OF ACCOUNTING.....................................................................................................9
1.8 DOUBLE ENTRY FOR INVENTORY.........................................................................................................10
1.9 RETURNS..............................................................................................................................................11
1.10 DOUBLE ENTRY FOR REVENUES AND EXPENSES................................................................................12
1.11 DRAWINGS.........................................................................................................................................13
1.12 BALANCING OFF ACCOUNTS..............................................................................................................13
1.13 THE TRIAL BALANCE...........................................................................................................................14

PART 1: INTRODUCTION TO ACCOUNTING

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1.1 WHAT IS ACCOUNTING?

Accounting is concerned with:

1. Recording data
No one can remember all the financial transactions of a business so there is need to
keep records. This is not only limited to recording cash received and paid out. Goods
bought and sold, items bought to use rather than to sell and so on are also recorded.
This part of accounting is referred to as the recording of data.

2. Classifying and summarising data

When the data is recorded, it has to be organised so as to be most useful to the
business. This is known as classifying and summarising data. Following such
classifications and summaries it will be possible to work out how much profit or loss has
been made by the business during a particular period. It will also be possible to show
what resources are owned by the business and what is owed by it, on the closing date of
the period.

3. Communicating what has been learned from the data.

Using the data, people with accounting skills should be able to tell whether or not the
business is performing well financially. They should be able to ascertain the strengths
and weaknesses of the business. As a result, they should be able to tell or communicate
their results to the owners of the business, or to other people who are allowed to
receive the information.

1.2 DISTINCTION BETWEEN ACCOUNTING AND

BOOKKEEPING

Bookkeeping is the process of recording data relating to accounting transactions in the

books of accounting. It is the part of accounting that is concerned with recording data.
About one hundred years ago, all accounting data was recorded manually in books,

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hence the term ‘bookkeeping’. Nowadays, although hand-written, books may be used
(particularly by smaller organisations), most accounting data is recorded electronically
and stored electronically using computers.

1.3 USERS OF ACCOUNTING INFORMATION

 Managers.
These are the day-to-day decision-makers. They need to know how well the business
will be progressing financially and its financial status.

 Owner(s) of the business.

They want to be able to see whether or not the business is profitable. In addition, they
want to know the financial position of the business.

 A prospective buyer.
When the owner wants to sell a business, the prospective buyer might want to see the
business’s financial information.

 The bank/Financial institution.

If the owner of the business wants to borrow money for use in the business, then the
bank or financial institution will need to see its financial information.

 Tax inspectors.
They need it to be able to calculate the taxes payable.

 A prospective partner.
If the owner wants to share ownership with someone else, then the would-be partner
will want such information.

 Investors, either existing ones or potential ones.

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They want to know whether or not to invest their money in the business.

 There are many other users of accounting information

Stakeholders such as suppliers and employees.

1.4 THE ACCOUNTING EQUATION

Resources supplied by the owner = Resources in the business

The amount of the resources supplied by the owner is called capital. The actual
resources that are then in the business are called assets. Hence, if the owner supplied all
of the resources, the accounting equation can be shown as:

Capital = Assets

Usually, however, people other than the owner have supplied some of the assets.
Liabilities is the name given to the amounts owing to these people for these assets.
The accounting equation has now changed to:

Capital = Assets - Liabilities

This is the most common way in which the accounting equation is presented. It can be
seen that the two sides of the equation will have equal totals. This is because we are
dealing with the same thing from two different points of view – the value of the owners’
investment in the business and the value of what is owned by the owners.

Unfortunately, with this form of the accounting equation, we can no longer see at a
glance what value is represented by the resources in the business. You can see this more
clearly if you switch assets and capital around to produce the alternate form of the
accounting equation:

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Assets = Capital + Liabilities

This can then be replaced with words describing the resources of the business:
Resources: what they are = Resources: who supplied them
(Assets) (Capital + Liabilities)

It is a fact that no matter how you present the accounting equation, the totals of both
sides will always equal each other, and that this will always be true no matter how many
transactions there may be. The actual assets, capital and liabilities may change, but the
total of the assets will always equal the total of capital + liabilities. Or, reverting to the
more common form of the accounting equation, the capital will always equal the assets
of the business minus the liabilities.

1.5 ASSETS, LIABILITIES AND CAPITAL

 Assets consist of property/resources of all kind which are owned by the business
such as buildings, machinery, stocks of goods and motor vehicles. Other assets
include debts owed by customers and the amount of money in the business’
bank account.

 Liabilities include amounts owed by the business for goods and services
supplied to the business and for expenses incurred by the business that has not
yet been paid for. They also include funds borrowed by the business.

 Capital is often called the owner’s equity or net worth. It comprises the funds
invested in the business by the owner plus any profits retained for use in the
business less any share of profits paid out of the business to the owner.

1.6 THE DOUBLE ENTRY SYSTEM

Every transaction therefore affects two items. We need to show these effects when we
first record each transaction. That is, when we enter the data relating to the transaction

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in the accounting books we need to ensure that the items that were affected by the
transaction, and only those items, are shown as having changed. This is the
bookkeeping stage of accounting and the process we use is called double entry also
referred to as double entry bookkeeping.

If we want to show the double effect of every transaction when we are doing our
bookkeeping, we have to show the effect of each transaction on each of the two items it
affects. For each transaction this means that a bookkeeping entry will have to be made
to show an increase or decrease of one item, and another entry to show the increase or
decrease of the other item. From this description, you will probably see that the term
‘double entry bookkeeping’ is a good one, as each entry is made twice (double entry).

 What is an account?
The basis of this system is that the transactions which occur are entered in a set of
accounts within the accounting books. An account is a place where all the information
referring to a particular asset or liability, or to capital, is recorded. Thus, there will be an
account where for example all the information concerning office equipment will be
entered. Similarly, there will be an account for buildings, where all the information
concerned with buildings will be shown. This will be extended so that every asset, every
liability and capital will each have its own account for transactions involving that item.

 The accounts for double entry

Each account should be shown on a separate page in the accounting books. The double
entry system divides each page into two halves. The left-hand side of each page is
called the debit side, while the right-hand side is called the credit side. The title of each
account is written across the top of the account at the centre.

This is the layout of a page of an accounts book:

Title of account written here

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Left-hand side of the page Right-hand side of the page
This is the ‘debit’ side. This is the ‘credit’ side.

As can be seen the shape resembles a ‘T’, hence, the accounts are commonly referred to
as T-accounts:
Account title here – the top stroke of the T

NB: The line that divides the two sides is the down stroke of the T account

Many students find it very difficult to make correct entries in the accounts because they
forget that debit and credit have special accounting meanings. Don’t fall into that trap.
You must not confuse any other meanings you know for these two terms with the
accounting ones.

1.7 THE GOLDEN RULE OF ACCOUNTING

Debit the receiver and credit the giver.

NB: You describe the entries in the accounts by saying something like ‘debit account “x”
with £z and credit account “y” with £z’, inserting the names of the accounts and the
actual amount in place of x, y, and z.

Steps for completing double entry when given a transaction

1. Identify the accounts involved.
2. Determine which account is receiving and which one is giving.
3. Determine which account is to be debited and which one is to be credited.
4. Then apply the ‘golden rule’ which says debit the receiver and credit the giver.

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5. Then you can complete double entry.
Example
Let’s say you get a transaction which says, “Paid $200 cash for electricity”.
1. The 2 accounts involved will be i) electricity account and ii) cash account.
2. Electricity account is receiving and cash account is giving.
3. To determine which account is to be debited and which one is to be credited
apply the golden rule.
4. Debit electricity account and credit cash account.
5. You would have completed double entry.

Practice
You are required to do the following exercises from B:
i) 2.3
ii) 2.4
iii) 2.5A

1.8 DOUBLE ENTRY FOR INVENTORY

What is inventory?
These are goods available in a business for resale.
They are obviously bought for resale. When goods are bought for resale one of the 2
accounts will be “purchases”.
Inventory can be bought or sold.
Special meaning of ‘sales’ and ‘purchases’

Sales means the sale of those goods in which the business normally deals and which
were bought with the prime intention of resale.

Purchases in accounting means the purchase of those goods which the business buys
with the prime intention of selling.

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NB: when there is the word goods it means it inventory but when the transaction says
bought machinery or computer its not inventory but it’s the purchases of an asset.

3 Ways in which the goods can be bought are:

1. Cash
2. Bank
3. Credit
For example, Bought goods on credit for $5 000 from J.Jones.
Steps for completing double entry:
1. The 2 accounts involved are purchases account and J Jones account.
2. Purchases account is receiving and J Jones account is giving.
3. Debit purchases account and credit J Jones account.

Purchases account
Jan
12 J Jones 5 000
J Jones account
Jan
12 Purchases account 5 000

When goods are bought for cash the 2 accounts would be:
i) Purchases
ii) Cash

When goods are bought for by cheque the 2 accounts would be:
i) Purchases
ii) Bank

When goods are bought on credit the 2 accounts would be:

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i) Purchases
ii) The name of the supplier account.

1.9 RETURNS

These are goods which are either bought or sold but are returned back either by
customers or by the business.

Types of returns
i) Returns inwards
These are goods which were previously bought by customers which are returned back
to the business.
ii) Returns outwards
These are goods which were previously bought by the business which are returned back
to the supplier.
Various reasons for returning goods
1. Goods received were of the wrong size, the wrong colour or the wrong model;
2. The goods may have been damaged in transit;
3. The goods maybe of poor quality.
Example
On 5 January 2021, goods which had been previously sold to Mr Hove for $2 000 are
now returned to the business.
Follow the steps for completing double entry.
1. The 2 accounts involved are Returns inwards account and Mr Hove account.
2. Debit returns inwards account and credit Mr Hove account.

Returns inwards account

Jan
5 Mr Hove 2 000

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Mr Hove account
Jan
5 Returns inwards account 2 000

Practice
Exercises: 3.3
3.4A
3.5

1.10 DOUBLE ENTRY FOR REVENUES AND EXPENSES

Revenues means the sales value of goods and services that have been supplied to
customers. Eg rent received, commission received etc.

Expenses means the cost value of all the assets that have been used up to obtain those
revenues. Eg postage stamps, rent and telephone, insurance, sundry expenses or a
general expenses.

1.11 DRAWINGS

Money taken by the owner(s) of a business for their private use.

Eg On 10 January, the owner took $5 000 from the bank for private use.
1. 2 accounts involved are bank account and drawings account.
2. Drawings account is receiving and bank account giving.
3. Debit drawings account and credit bank account.

Drawings account
Jan
10 Bank 5 000

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Bank account

Jan
10 Drawings 5 000
Practice
Exercises 4.1
4.2
4.4A

1.12 BALANCING OFF ACCOUNTS

At the end of each accounting period the figures in each account are examined in order
to summarise the situation they present. This will often, but not always, be a year if you
are calculating profit. It will be at least once a month if you want to see what is
happening with respect to particular accounts. Probably the most obvious reason for
this is to find out how much our customers owe for goods sold to them. In most
businesses this is done at the end of each month.

How to balance off an account?

1. Add the 2 sides separately.
2. Find the difference between the 2 sides.
3. Add the difference to the smaller side.
4. The narration for the difference is Balance c/d meaning balance carried down.
5. Add the two sides separately and the totals should be the same.
6. Then take the balance c/d to the opposite side and narrate it balance b/d
meaning balance brought down.
7. Then you would have balanced the account.

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1.13 THE TRIAL BALANCE

A trial balance is a list of debit and credit entries.

Total debit entries = Total credit entries

Under the double entry system you have learnt that:
1. for each debit entry there is a credit entry
2. for each credit entry there is a debit entry.

Hence, all the items recorded in all the accounts on the debit side should equal in total
all the items recorded on the credit side of the accounts. So in order to check that there
is a matching credit entry for every debit entry, a trial balance is prepared.

A trial balance is drawn up by listing all the accounts depending on whether they have a
debit or credit balance. The total of all the debit entries in each account are listed in one
column (Debit column) and the total of all the credit entries in each account into
another column (Credit column). Finally, the two columns of figures are added up and
they should be automatically equal if the double entry was done correctly.
See example:

Trial Balance as at 31 December 2020

Date Details Amount Dr Amount Cr
Purchases xx xxx
Sales xx xxx
Returns outwards xxx xxx
Returns inwards xxx xxx

D Small xxx

A Lyon & Son x xxx

D Hughes x xxx

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M Spencer x xxx
Bank xx xxx
Cash x xxx
xx xxx xx xxx

Practice:
Chapter 6 Business Accounting by Frank Wood 10th Edition

Exercises
6.1
6.2
6.3A
6.4A

End of section

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