ACCOUNTANCY FOR LAWYERS

Sasi K.G.

01. Introduction

Section 2(i) of the Advocates Act, 1961 defines a legal practitioner as an advocate or vakil of any High Court, a pleader, mukhtar or revenue agent. Thus an advocate or a Lawyer is a species of the genera of legal practitioners. An advocate is defined under Section 2(a) of the Advocates Act, 1961 as an advocate entered in any roll under the provisions of the Advocates Act, 1961. Thus the profession of the Advocates is regulated by this statute and hence the profession of the Advocates is more of a statutory nature than the professions mentioned in Article 19 (1) (g). Hence the accounting system of lawyers and law firms also is slightly different from other professionals, as provided in the concerned laws regarding the practice of advocates.

02. Accounting Systems

The earliest known accounting records were found in the Middle East and date back over 7,000 years. In the late 1400s, the Italian friar Luca Pacioli earned his accreditation as the 'Father of Accounting', for describing the structure of the double-entry bookkeeping system used by Venetian merchants during the Italian Renaissance. In the modern era computerized accounting has facilitated all financial recordings and evaluations. However the Accounting systems of modern world can be classified as Single Entry and Double Entry

01. Single Entry Accounting System

Single entry system is a system in which only one aspect of the transaction is recorded. Under single entry system, some transactions are recorded on both the sides like double entry system, some are recorded on one side only, while some others are not recorded. This system is apt for concerns whose profit/loss or assets/liabilities are undesirable to be published. Almost all Governments of all nations follow Single Entry system as they do not want their people to evaluate their financial performance.

According to Arthur Fieldhouse, "single entry is faulty, incomplete, inaccurate, unscientific and unsystematic style of account keeping". For this reason many persons call the single entry system as accounting from incomplete records. Single entry system is a misnomer. On the whole, "single entry is that which which is not double entry". It can be said that this system is nothing but a mixture of double entry, single entry and no entry.

02. Double Entry Accounting System

The oldest record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the Republic of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and include balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system. By the end of the 15th century, the bankers and merchants of Florence, Genoa, Venice and Lübeck used this system widely.

However, the double-entry accounting method was said to be developed independently earlier in Korea during the Goryeo dynasty (918-1392) when Kaesong was a center of trade and industry at that time.

Double-entry  system of bookkeeping is so named because every entry to an account requires a corresponding and opposite entry to a different account. For instance, recording earnings of Rs.1000/- as professional fees would require making two entries: a debit entry of Rs.1000/- to an account named "Cash" and a credit entry of Rs.1000/- to an account named "Professional fees received."

Deciding which account has to be debited and which account has to be credited is accomplished using the accounting equation which is expressed as “{\displaystyle {\text{Assets}}={\text{Capital}}+{\text{Liabilities}}}Assets = Capital + Liabilities”. This equation serves as an error detection tool; if at any point the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, an error has occurred. It follows that the sum of debits and the sum of the credits must be equal in value.

The accounting system recommended for lawyers to fulfill their legal requirements as well as personal necessities is Double Entry.

03. Aspects of transactions

Double Entry System maintains that every financial transaction has two aspects, namely the giving and receiving aspects. The Giving aspect or Expenditure is named Credit and the receiving aspect or Receipt is named Debit. However it should be borne in mind that when salaries are said to be paid, what is paid is not salaries but Cash and salaries are really services received in lieu of Cash paid.

01. Debit

The receiving aspect of a financial transaction is called Debit.

02. Credit

The giving aspect of a financial transaction is called Credit.

04. Types of Accounts

Accounts may be generally classified into three wide groups, namely Real, Personal and Nominal Accounts. Any element or account head used in an organisational accounting system would belong to one of these types. It should be either a personal account or a real account or a nominal account. No element can fall under two types.

01. Real Accounts

Real accounts comprise of debits and credits in relation to all tangible assets of the concern and also include certain intangible assets such as goodwill, patent, etc.

02. Personal Accounts

Personal accounts comprise of debits and credits in relation to all assets and liabilities of the concern in relation to individuals, firms, organizations and Governments.

03. Nominal Accounts

Nominal accounts comprise of debits and credits in relation to income and expenditure relating to the firm or concern.

05. Five Accounting Elements

There are five fundamental elements within accounting. These elements are as follows: Assets, Liabilities, Equity (or Capital), Income (or Revenue) and Expenditure. The five accounting elements are all affected in either a positive or negative way. A credit transaction does not always dictate a positive value or increase in a transaction and similarly, a debit does not always indicate a negative value or decrease in a transaction. An asset account is often referred to as a "debit account" due to the account's standard increasing attribute on the debit side.

01. Assets

Asset accounts are economic resources which benefit the business/entity and will continue to do so. Cash, bank, accounts receivable, inventory, land, buildings/plant, machinery, furniture, equipment, supplies, vehicles, trademarks and patents, goodwill, prepaid expenses, prepaid insurance, debtors (people who owe us money, due within one year), VAT input etc.

Assets generally mean the accumulation of all objects of real accounts and also include loss formed part of net result. Thus the increase in Asset is booked as debit and the decrease in Assets is hence credit.

Thus we get the postulates, debit the increase in assets and credit the decrease in assets.

The following equations give us a clear picture of what assets are.

Assets = Equity + Liabilities

When loss/profit is considered separately this equation becomes

Assets + Expenses = Equity + Liabilities + Income              or

Assets = Equity + Liabilities + (Income – Expenditure)

02. Liabilities

Liability accounts record debts or future obligations the business/entity owes to others. Accounts payable, salaries and wages payable, income taxes, bank overdrafts, trust accounts, accrued expenses, sales taxes, advance payments (unearned revenue), debt and accrued interest on debt, customer deposits, VAT output etc.

Liabilities generally mean the indebtedness of a concern in respect of any personal or other account and also include the profit formed part of net result. Thus the increase in Liabilities is booked as credit and the decrease in Liabilities is hence debit.

Thus we get the postulates, debit the decrease in Liabilities and credit the increase in Liabilities.

As a corollary of the above mentioned equations

Liabilities = Assets – Equity

When loss/profit is considered separately this equation becomes

Liabilities = Assets – Equity - (Income – Expenditure)

03. Equity/Capital

Equity accounts record the claims of the owners of the business/entity to the assets of that business/entity. Capital, retained earnings, drawings, common stock, accumulated funds, etc. are examples.

Equity / Capital means the investment of the owners of the concern in the business. Even though Equity / Capital are liabilities in nature, they are considered separate from Liabilities. The net result profit/ loss affects the Equity / Capital as the owner has to accept profit/ loss as his responsibility. The increase in Equity / Capital is booked as credit and the decrease in Equity / Capital is hence debit.

Thus we get the postulates, debit the decrease in Equity/Capital and credit the increase in Equity/Capital.

As a corollary of the above mentioned equations

Equity = Assets – Liabilities

When loss/profit is considered separately this equation becomes

Equity = Assets – Liabilities - (Income – Expenditure)

04. Income/Revenue

Income accounts record all increases in Equity other than that contributed by the owner/s of the business/entity. Services rendered, sales, interest income, membership fees, rent income, interest from investment, recurring receivables, donation etc. are examples.

As a corollary of the above mentioned equations

Income = Assets – Liabilities - Equity + Expenditure

05. Expenditure

Expense accounts record all decreases in the owners' equity which occur from using the assets or increasing liabilities in delivering goods or services to a customer - the costs of doing business. Telephone, water, electricity, repairs, salaries, wages, depreciation, bad debts, stationery, entertainment, honorarium, rent, fuel, utility, interest etc. are examples.

As a corollary of the above mentioned equations

Expenditure = Income + Liabilities + Equity - Assets

06. General Principles of Accounting

There are 12 Generally Accepted Accounting Principles (GAAP). They are

1.                   Accounting Entity – is the business unit for which the financial statements are being prepared.  The accounting entity recognizes that there is a business entity that is separate from its owner(s).

2.                   Going Concern – Accounts assume that the life of the business entity is infinitely long and will never dissipate.

3.                   Measurement – Accounting only deals with things that can be measured, quantifiable.

4.                   Units of Measure – The Rupee is the standard value used in financial statements for companies in India.

5.                   Historical Cost – The transactions that results in what a business owns and owes are recorded at their original cost.

6.                   Materiality – The concept of materiality allows one to violate another accounting principle if the value is so tiny that the financial reports will not have an impact. Materiality is a judgment call by the accountant.

7.                   Estimates and Judgments – Often times, it is okay to guess due to the nature that businesses are complex. It is legal, if the accounting is the best you can do, the expected error would not affect the financial reports and the “guesses” are consistent for each period.

8.                   Consistency – Each individual enterprise must choose a single method of accounting and reporting consistently over time.

9.                   Conservatism – Accountants must agree more with an understatement than an overvaluation. This accounting guideline states that if doubt exists between two alternatives, the accountant should choose the result with a lesser asset amount and/or a lesser profit.

10.               Periodicity – Is the activity within the scope of an accounting period that must be recorded within the time period on a financial statement.  Normally the life of a business can be divided into periods of time (month, quarter or year).

11.               Substance Over Form – This is a concept where the entity is accounting for items according to their substance and economic reality and not just its form.

12.               Accrual Basis of Presentation – In accrual accounting, if a business transaction makes money in a period then all of its associated costs and business expenses should also be reported in that particular period. All businesses with inventory must use the accrual basis. The alternative for business that don’t carry inventory is “cash basis” accounting in which transactions are recorded as they are physically received or paid out.

07. Divisions of Accounting Systems

Accounting Systems consists of three distinct stages or divisions, namely book keeping, accountancy and auditing.

01. Book keeping

Book-keeping is the systematic recording of the transactions in a manner enabling the financial relationship of a business with other persons to be clearly disclosed and the cumulative effect of the transactions on the financial position of the business itself can be correctly ascertained.

02. Accountancy

Accountancy refers to the entire body of the theory and process of accounting. It is an act of recording, classifying and summarizing the business transactions, balancing of accounts, drawing conclusions and integrating the results thereof.

03. Auditing

Auditing is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. 

08. Legal Requirements of keeping accounts

It is necessary to maintain proper accounts to calculate the following (i) Annual Income (ii) Income Tax (iii) Professional Tax (iv)  Amount due to the client or amount due by the client.

1.   To calculate the annual income : To calculate the annual income of the Advocate from the legal profession, it is necessary to maintain  proper accounts of his income from the profession. Maintaining this account is useful for Advocates also. By knowing his Annual Income , he can take steps to improve his profession.

2.   To Calculate income Tax :  Advocates are liable to Pay Income tax for the income derived from the profession. In order to calculate the amount payable as income tax, he has to maintain proper accounts relating to his income and expenditure.

To calculate the taxable income he is entitled to deduct certain expenditure like rent, salary, telephone bill and other administrative expenditure. For this purpose also he has to maintain proper accounts.

3.   To calculate professional tax: Every six months the advocates are liable to pay professional tax to the Government. The amount of professional tax varies depending on the income. In order to calculate the amount of professional tax he has to maintain the proper accounts.

4.   To Ascertain the amount due from the client or due to the client: The account relating to the amount received from the client and the amount received on behalf of the client  from others or from the court should be properly maintained. Then only the amount due from the client can be calculated. This will help not only the client but also the Advocate.

01. Place of keeping accounts

The accounts books and documents relating to the accounts should be kept and maintained by the advocate,

(i)     At his office.

(ii)   Where he is carrying on the profession more than one office, then at his head office. But accounts can also be maintained separately for each branch at the respective branch office.

02. Penalty for not keeping Account Books: A Lawyer who is legally liable to maintain account books, fails to maintain it or fails to retain it for the prescribed period (cash book and ledger-16 years, other books-8 years) is liable to pay penalty ranging from Rs.2000/- to 1,00,000/- (S.271 A ).

03. Bar council Rules relating to accounting

Rule 25 to 32, of Section II – Duty to the Client, under Chapter II Standards of Professional Conduct and Etiquette of Part VI Rules Governing Advocates of Bar Council of India Rules, 1975 provides for the maintenance of the accounts of the clients by the Advocate. The said Rules run as follows

Rule 25: An advocate should keep the accounts of the client’s money entrusted to him. The accounts should show the amounts received from the client, the expenses incurred for him and the debits made on the account of Advocate fees with the respective dates and all other necessary particulars.

Rule 26 : Where moneys are received from the client, it should be entered whether the amount have been received for the advocates fees or expenses. Amount received for the expenses shall not be diverted towards Advocates fees without the consent of the client in writing.

Rule 27: Where any amount is received on behalf of his client the fact of such receipt must be intimated to the client as early as possible.

Rule 28 : After the completion of the proceeding, the advocate shall be at the liberty to take the settled fee due to hi to the unspent money in his hand.

Rule 29: Where the fee has been left unsettled, the advocate shall take the fees which he is legally entitled from the moneys of the client remaining in his hands, after the completion of the proceeding. The balance shall be returned to the client.

Rule 30: A copy of the client account shall be furnished to him after getting the necessary copying charges from him.

Rule 31: An advocate shall not make any agreements whereby client’s funds in his hands are converted into loans to the advocate.

Rule 32: An Advocate shall not lend money to his client for the purpose of conducting the case.

04. Rules Relating to Accounting Under Income Tax Act.

Under the Income Tax Act, every lawyer is required to maintain the following books of accounts and other documents to enable the Assessing Officer to calculate his total income  (i) cash book (ii) Receipt Voucher (iii) payment voucher (iv) journal (v) ledger. The accounting year is 1^st April to 31^st March next year.

1. Cash book :  It is the book in which the amount received by the Advocates from the clients and others and the amount spent for the clients are written. This book is useful for the Advocate to know the amount in his hand on each day.

2. Receipt Voucher :  It is the document prepared for recording the receipt of money by cash or cheque. When an Advocate received money from the client, the Advocate has to issue a receipt to the client. Advocate shall maintain receipt books with serially numbered receipt forms in duplicate. The original receipt should be given to the client and the duplicate shall be retained by the Advocate.

3. Payment Voucher :  Payment vouchers are used to record such payments for which receipts are not obtainable from the person to whom such payments are made. For example bus fare, auto fare, court fees, stamps, refreshment expenses etc. In such cases the Advocate signature in the payment voucher and the signature of the person to whom payment is made may be obtained.

4. Journal : Journal is the book of first entry or original entry. In the journal the transactions are recorded in the order of their occurrence. It should contain the following details (i) Date of Transactions (ii) Account to which the transaction relates (iii) Amount to be debited, (iv)  Amount to be credited (v) Explanation of the transaction.

5. Ledger :  The transactions recorded in the journal are to be posted to the separate  heads of account in other book called as Ledger. In the ledger different pages are allotted to the different heads of accounts. When the journal entries are posted to the concerned heads of account in the ledger, the page number of the ledger should be noted in the journal for easy reference.

The ledger account of an advocate shall contain the following heads.

5. Clients Account

For each and every client separate pages shall be allotted in this ledger and separate account shall be maintained for them.

09. Advantages of Advocates who maintain proper accounting system

Accounting is the language of business, and advocates are advisors to businesses as well as being business persons themselves. Lawyers face accounting issues in a number of contexts, including:

(1) determining taxable income and deductions

(2) “forensic” accounting in an embezzlement, financial fraud, or bankruptcy matter;

(3) enforcement of criminal sanctions against financial crimes such as embezzlement and financial fraud (i.e., prosecutors and defense counsel need to know a little about these concepts);

(4) requirements under lending contracts and security agreements;

(5) business buy-sell agreements, particularly clauses that set the price;

(6) dissolution of marriage, particularly where business assets are involved;

(7) corporate distributions (legality under state corporate law);

(8) interpreting limited liability company and partnership agreements;

(9) securities law litigation involving misstatements of financial results;

(10) commercial leases where a tenant must prove gross sales or maintain a certain level of net worth;

(11) representations and warranties in purchases and sales of businesses;

(12) cost amounts in construction contracts;

(13) the application of financial ratio analysis in investment and lending assessments of businesses;

(14) business reports, such as for corporate franchise taxes, that impose taxes on assets, on capital, or other measures; and

(15) acquainting with accounting so that, you can keep your law firm’s books properly.

However, the main advantage of proper accounting is scientific ascertainment with adequate precision of

1) The particulars of money, goods and services received or rendered.

2) The amount of profit or loss made in the business or profession; and

3) The state of its assets and liabilities.

A businessman if fails in his business or profession and has to take the shelter of and insolvency Court, his regular keeping of accounts will help him to show and prove his insolvency. If in a partnership firm, some disputes arise between them, then their accountants dealt with fairly may easily solve the dispute mutually and save them from unnecessary harassment in Courts. 

 Law is related to both Civil and criminal crimes. Mostly the crimes are related to the property and money of Industrial and Commerce sectors. Many laws are made relating to the trade and industry. They are mostly presented in accounts.  Law of this sectors are Indian companies Act, the hire purchase act, The sale of goods Act, The Partnership Act, The Indian Contract Act, The Indian banking Act, The insolvency Act, Negotiable Instruments Act, The Income Tax Act, The sales tax Act, The wealth tax Act, Wages Act, and gratuity and Bonus Act, all this Acts are related with the matter of money dealing and the money dealings have their accounting system. Besides these Acts, there are Acts relating to international trade Related  Acts such as the Copyright Act, 9757, The trademark Act,1999. The Geographical Indications of Goods (Registration and Protection) Act, 1999. Designs Act 2000.The Patent Act, 1970 Semiconductor integrated circuits layout-design Act 2000. Biological diversity Act, The protection of plant varieties and farmers rights Act, to understand and deal with this entire Acts one should have the primary knowledge of finance and accounting.

10. Necessity of a simple system of Accountancy for lawyers

On an overall assessment of legal profession, what is required for the great majority of advocates is a simple accounting system fit for Individuals, Sole Proprietorship Firms and Partnership Firms with minimum set of books and less human effort. For the above purpose generation of account heads, maintenance of Journal / Cashbook, Posting in General Ledger, Preparation of a Trial Balance, making of proper adjustment entries, and the preparation of Profit and Loss Account and Balance Sheet are sufficient. In case it is necessary, Stock, Inventory, and Reconciliation Registers may also be resorted to. From the above results, necessary Statements can easily be prepared and legal requirements fulfilled.

01. Generation of Account heads

For the purpose of generation of account heads the above said five elements of Assets, Liabilities, Equity (or Capital), Income (or Revenue) and Expenditure may be depended upon. Under each of these elements heads may be generated. Some examples are given below.

01. Assets

1. Land 2. Building 3. Furniture 4. Office Equipments 5. Computers and Accessories 6. Books and Periodicals 7. Loans Receivable 8. Investments 9. Sundry Debtors 10. Goodwill 11. Patents 12. Trade Marks 13. Copy Rights 14. Motor Vehicles 15. Stock of stamps etc. 16. Advances to Clients 17. Cash in Hand 18. Cash in Bank

02. Liabilities

1. Loans Payable 2. Sundry Creditors 3. Reserves 4. Advances by Clients

03. Equity (or Capital)

1. Capital 2. Drawings 3. Accumulated funds

04. Income (or Revenue)

1. Fee for legal advice 2. Fee from clients 3. Fee for Notary Attestation 4. Fee on Commissions 5. Interest Received on Investments 6.  Other Income

05. Expenditure

1. Salaries 2. Wages 3. Rent Rates and Taxes 4. Postage 5. Telephone charge 6. Electricity Charge 7. Water Charge 8. LPG 9. Food and Accommodation 10. Travelling Expenses 11. Refreshments 12. Printing 13. Stationary 14. Advertisements 15. Maintenance and Repairs 16. Petrol Oil and Lubricants 17. Donations 18. Subscriptions 19. Insurance Premium 20. Interest Paid 21. Bank Charges 22. Audit fee 23. Other Professional fee 24. DTP Charges 25. Other Expenditure

06. Some important accounts to be maintained

(i)           Fees Account : In this account the fees received from each and every client shall be entered separately. From this account the total amount of fees received from all the clients in a financial year can be ascertained.

(ii)         Rent Account.

(iii)       Salary Account.

(iv)       Library Account.

(v)         Printing and Stationary Account.

(vi)       Postage and Telegram Account.

(vii)     Electricity Charges.

(viii)   Conveyance Charges.

(ix)       Repair and Maintenance.

(x)         Office Miscellaneous Expenses Account.

At the beginning of the ledger book the index may be given with the name of the different heads of account and their respective pages for easy reference.

02. Journal

Every transaction must consist of an equal and opposite set of debit and credit entries. These entries are recorded in the Journal or Cashbook every day. For example if a Client named Jiby remits on 01.05.2017 an amount of Rs.50000/- as an advance for the expenses of the case wherein he is the plaintiff, the journal entry shall be as follows.

Date                      Particulars                                          Debit (Rs.)          Credit (Rs.)

01.05. 2017          Cash Account Dr.                              50000

                                To Advances by Clients (Jiby)                                      50000

At the close of the day the journal shall be closed by an attestation so that manipulation of accounts should not take place.

03. Ledger

At the close of the day or the very next day, ledger postings should be done to each corresponding individual accounts. The Ledger is commonly known as General Ledger. However there are instances where Ledgers for specific purposes are kept separately such as Sundry Debtors Ledger, Fee Collection Ledger, Ledger for Advances by Clients etc.

The posting in the Ledger accounts for the example shown above are as follows.

Cash Account

Date                      Particulars                                          Debit (Rs.)          Credit (Rs.)

01.05. 2017      To Advances by Clients (Jiby)         50000

Advances by Clients (Jiby) Account

Date                      Particulars                                          Debit (Rs.)          Credit (Rs.)

01.05. 2017      By Cash                                                                                    50000

At the close of every month total debits of the account and the total credits of the account are summed up and the difference is carried forward as the opening balance of next month.

04. Trial Balance

At the close of every month all account balances are written down in a trial balance and it is ensured that the total of all debit balances are equal to the total credit account balances. If they do not tally, then it is evident that some error has crept up into the account postings. The error is found out and rectified either by direct correction, if possible or through a rectification entry. At the close of the financial year a well-balanced trial balance shall reveal the state of financial position when combined with the Balance Sheet of the previous year and a list of adjustments to be made in the accounts for the year.

05. Adjustments

Adjustments take care of the part or full entries that may be included not pertaining to the financial year in consideration. It also considers the fluctuation in the value of assets and liabilities according to the accounting principles. Some most common adjustments are provisions for Depreciation, Bad Debts, Reserves for possible losses, entries regarding Expenditure paid in Advance, Expenditure pending Payment, Income received in Advance, Income pending Receipt and Closing Stock.

06. Depreciation

Depreciation denotes the loss of assets due to wear and tear due to the passage of time or otherwise. There are many methods of depreciation, the selection of which is according to the normal nature and life of the asset. The value of depreciation is either deducted from the value of the asset or a separate depreciation fund is created as liability.

07. Bad Debts

Bad debts are the personal assets not fully or partly recoverable. Provision is made in the liability side to cover the possible loss of these assets mostly in the form of loans or sundry debtors. 

08. Expenditure paid in Advance

Expenditure paid in advance does not pertain to the financial year under consideration and hence shall be treated as an asset. Thus expenditure paid in advance pertaining to the next year is deducted and the expenditure paid in advance found in the balance sheet of the previous year is added to the concerned expenditure found in the trial balance for the year.

09. Expenditure pending Payment

Expenditure pending payment pertains to the financial year under consideration and hence shall be treated as a liability. Thus expenditure pending payment pertaining to the year is added and the expenditure pending payment found in the balance sheet of the previous year is deducted to the concerned expenditure found in the trial balance for the year.

10. Income received in Advance

Income received in advance does not pertain to the financial year under consideration and hence shall be treated as a liability. Thus income received in advance pertaining to the next year is deducted and the income received in advance found in the balance sheet of the previous year is added to the concerned income received found in the trial balance for the year.

11. Income pending Receipt

Income pending receipt pertains to the financial year under consideration and hence shall be treated as an asset. Thus income pending receipt pertaining to the year is added and the income pending receipt found in the balance sheet of the previous year is deducted to the concerned income received found in the trial balance for the year.

12. Closing Stock

A closing stock on the close of the financial year is an asset at the close of the year, but this should be deducted from the total purchased stock for considering trading operations. However as advocates are not permitted under the Advocates Act 1961 normally, trading accounts do not form part of the financial statements of a lawyer firm. However, postage stamps, revenue stamps, court fee stamps, advocates welfare fund stamps, stamp papers etc. may have some closing balances. In certain cases they are considered equivalent to cash such as in the case of cheques, or demand drafts. But these closing balances are never taken to Trading Accounts, but form part of Balance Sheet only. If there is any income in this regard, they are considered only as commission is received.

13. Profit and Loss Account

The Profit and Loss Account or Income Statement compares income (revenue) with expenditure over a certain period of time, mostly during a financial year. The difference between Income and Expenditure is the net profit or loss for the period.

In other words, Profit/Loss = Income – Expenditure.

Profit and Loss Account has two sides the Left side is Expenditure and the Right side is Income. If there is Trading account, its balance shall also be carried over to the Profit and Loss Account.

14. Balance Sheet

The Balance Sheet provides a summary of the financial position at a single point in time, ie on the closing day of the financial year. It does this using the balances in the first three primary sections; Assets, Liabilities, and Equity. The ‘balance’ part of Balance Sheet comes from comparing Assets to comparing the difference between Assets and Liabilities. These two amounts should always be in balance.

In other words, Equity = Assets – Liabilities. Here equity includes capital and profit or loss.

15. Inventory Accounts

In certain cases, the list and value of inventories have also to be prepared. They are arrived from a comparison of original entries and ledger balances. In most cases, depreciation shall also be considered in the valuation of inventories.

16. Personal Account Balances

Personal Account Balances in the case of Sundry Debtors and Sundry Creditors are prepared in certain instances. Rule 25 and 30 of Section II – Duty to the Client, under Chapter II Standards of Professional Conduct and Etiquette of Part VI Rules Governing Advocates of Bar Council of India Rules, 1975 provides for the maintenance of the accounts of the clients by the Advocate. Hence keeping the account balances of the Clients in mandatory for an advocate. The total of the balances of the schedule prepared in this regard should invariably tally with the balance sheet figure. The adjustment for bad debts unless written off is not recommended in such a legal constraint and thus it is always recommendable to maintain Reserves for Bad Debts and allow the ledger balances unaffected.

17. Settlement of Clients Accounts

As stated in the previous paragraph and elsewhere, the settlement of clients’ accounts is the most important legal necessity in the maintenance of the accounts by a lawyer advocate.

18. Reconciliation

Reconciliation of account balances, bank statements, tax collected and payable etc. have to be done in a time frame. For these purpose reconciliation statements such as Bank Reconciliation Statement may be maintained.

11. Conclusion

For all reasonable reasons, an advocate must maintain accounts to satisfy himself, his profession, his concern and the statutory authorities. Proper auditing by Chartered Accountants may also be fruitful in case of large legal concerns. In the modern times of aadhar, cashless economy, restrictions on cash dealings etc, non- maintenance of accounts may even prove fatal.

Every advocate must follow what the old saying says, “Even if you through it into the river, ensure its measure before you through it away.” Of course, an advocate must have proper accounts for all of his financial transactions.