Legal Accounting

Legal Accounting
Second Edition
Jacqueline Asselin & Keri Nisbet

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CHART OF ACCOUNTS
BALANCE SHEET ACCOUNTS INCOME STATEMENT ACCOUNTS
NO. NAME TYPE NO. NAME TYPE
100 CURRENT ASSETS 400 INCOME (REVENUE)
100 General Bank Account Current Asset 400 Fees Earned Income
105 Petty Cash Current Asset 410 Expense Recovery Income
115 Trust Bank Account Current Asset 430 Interest Income Income
120 Accounts Receivable Current Asset 499 Miscellaneous Income Income
121 General Disbursement Recovery Current Asset 500 EXPENSES
125 Prepaid Insurance Current Asset 502 Accounting and Bookkeeping Expense
128 Prepaid Expense Current Asset 503 Advertising Expense
130 Office Supplies Current Asset 505 Motor Vehicle Expense Expense
150 FIXED ASSETS 506 Bad Debts Expense Expense
150 Building Fixed Asset 507 Bank Charges and Credit Card Expense Expense
151 Depreciation—Building Fixed Asset 511 Salaries Expense Expense
155 Computer Equipment (Hardware) Fixed Asset 517 Employment Insurance (EI) Expense Expense
156 Depreciation—Computer Equipment Fixed Asset 518 Canada Pension Plan (CPP) Expense Expense
158 Office Furniture and Equipment Fixed Asset 520 Employer Health Tax (EHT) Expense Expense
159 Depreciation—Office Furniture and Equipment Fixed Asset 522 Depreciation Expense Expense
160 Intangible Assets Fixed Asset 523 Donations Expense
161 Depreciation—Intangible Assets Fixed Asset 524 Equipment Lease Expense
200 LIABILITIES 525 General Disbursement Expense Expense
200 Accounts Payable/General Liabilities Liability 526 General Disbursement Recovery Expense
205 Personal Loan Liability 527 Insurance—Professional Liability Expense
210 Credit Card Debt Liability 528 Insurance—Other Expense
215 Trust Funds Owed Liability 529 Interest Expense Expense
217 Income Taxes Payable Liability 530 Library and Subscriptions Expense
218 Canada Pension Plan (CPP) Payable Liability 531 Legal Research Expense Expense
219 Employment Insurance (EI) Payable Liability 532 Maintenance and Repairs Expense
220 Accrued Salaries Payable Liability 533 Meals and Entertainment Expense Expense
221 Employee Tax Deductions Payable Liability 534 Membership/Professional Dues Expense
222 Employee Health Tax Payable Liability 535 Office Supplies/General Expense Expense
227 Vacation Accrual Payable Liability 538 Rent Expense Expense
240 HST/GST Payable Liability 540 Stationery/Supplies Expense
250 Bank Line of Credit Liability 541 Travel Expense
300 OWNER’S EQUITY 542 Utilities Expense
300 Owner, Capital Equity 550 Delivery Expense Expense
350 Owner, Drawings Equity 551 Delivery Recovery Expense
355 Income Summary Equity 553 Fax Expense Expense
554 Fax Recovery Expense
555 Photocopy Expense Expense
558 Parking Expense Expense
560 Photocopy Recovery Expense
561 Searches Expense
563 Postage Expense Expense
564 Postage Recovery Expense
565 Telephone Expense Expense
566 Telephone Recovery Expense
Legal Accounting
SECOND EDITION
Jacqueline Asselin
Keri Nisbet
Toronto, Canada 2019
© 2019 Emond Montgomery Publications. All Rights Reserved.

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Library and Archives Canada Cataloguing in Publication

Asselin, Jacqueline, author
Legal accounting / Jacqueline Asselin, Keri Nisbet. — Second edition.
(Working with the law)
Includes bibliographical references and index.
ISBN 978-1-77255-404-5 (softcover)
1. Lawyers—Ontario—Accounting—Textbooks. 2. Textbooks. I. Nisbet, Keri,
author II. Title. III. Series: Working with the law
HF5686.L35A77 2019 657’.834 C2018-905679-7

To Allan
—JA
To my family and my dad, David MacPhee

—KLMN

Brief Contents
Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii
1 Role of the Law Society of Ontario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 Introduction to Bookkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3 Keeping Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4 Posting and Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
5 Preparing Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
6 Special Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

7 Trust Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
8 Adjusting Accounts for Financial Statements . . . . . . . . . . . . . . . . . . . . 197
9 Final Steps in the Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
10 Banking Procedures and Accounting for Cash . . . . . . . . . . . . . . . . . . . 255
11 Accounting for GST/HST, Payroll, and Income Tax . . . . . . . . . . . . . . . 283
12 Computerized Time and Money Management . . . . . . . . . . . . . . . . . . . 305
Appendix: By-Law 9, Financial Transactions and Records . . . . . . . . . . . . . . . . . . . 321
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349
v
Contents
Brief Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv
Chapter Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvi
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvi
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii
1 Role of the Law Society of Ontario . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Requirement for Books and Records in Legal Firms . . . . . . . . . . . . . . . . . . . . . . 2
Forms of Business Organization in Legal Services Firms . . . . . . . . . . . . . . . . . . 3
Sole Proprietorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Limited Liability Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Multi-Discipline Practice or Affiliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Professional Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Insurance Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Importance of Maintaining Proper Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Retainers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Bank Accounts in a Legal Services Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
General Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Mixed or Pooled Trust Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Separate Interest-Bearing Trust Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Financial Institutions for Mixed Trust Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Interest on Trust Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Review Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
vii
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2 Introduction to Bookkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
What Is Accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Accounting Standards for Private Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Categories of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The Accounting Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Preparing an Opening Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Expanded Accounting Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Classifying Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Practice Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3 Keeping Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Accounting Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
The Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Journal Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Posting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Adjusting Journal Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Closing the Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Basic Rules of Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Debits and Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Business Transaction Source Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Analyzing the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Recording Transactions Using the Basic Accounting Equation . . . . . . . . . . . . . . 48
Other Types of Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Examples of Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
The General Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Post Reference Column . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Recording the Opening Balance Sheet in the Firm’s Records . . . . . . . . . . . . . . . 59
viii
Contents
4 Posting and Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
General Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Posting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Preparing the Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Finding Errors in the Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Common Mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
5 Preparing Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Preparing the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Steps in Preparing the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Interpreting Information from the Income Statement . . . . . . . . . . . . . . . . . 102
Preparing the Statement of Owner’s Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Interpreting Information on the Statement of Owner’s Equity . . . . . . . . . . . 106
Preparing the Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Interpreting Information from the Balance Sheet . . . . . . . . . . . . . . . . . . . . . 108
6 Special Journals ............................................ 117
Why Use Special Journals? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Client Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Billing Out Time on a Client File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Docketing Time and Preparing Invoices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Expense Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Client Trust Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Fees Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Posting from the Fees Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Recording Payment of an Invoice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Accounts Receivable Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Other Specialized Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Recording Transactions in Specialized Journals . . . . . . . . . . . . . . . . . . . . . . . . . . 125
General Receipts Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
General Disbursements Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
General Journal Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
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Posting from Special Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

Analysis of Each Transaction in November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Completed Journal and Ledgers to November 30 . . . . . . . . . . . . . . . . . . . . . . . . 134
7 Trust Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Difference Between a General Account and a Trust Account . . . . . . . . . . . . . . . 158

Deposits and Withdrawals from Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Cash Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Trust Bank Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Book of Original Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Steps in Using the Trust Bank Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Recording Debits and Credits in the Trust Bank Journal . . . . . . . . . . . . . . . . 162
Posting from the Trust Bank Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Proving That Debits Equal Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
Possible Error . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Matter-to-Matter Trust Transfer Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Valuable Property Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Practice Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
8 Adjusting Accounts for Financial Statements . . . . . . . . . . . . 197
Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Preparing a Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Types of Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Amortization or Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Work in Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Accrued Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Preparing Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Adjusting Entries for Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Adjustment (A): Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Adjustment (B): Office Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
Adjustment (C): Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
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Adjustment (D): Personal Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

Adjustment (E): Accrued Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Checking the Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
Adjusted Trial Balance Column . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
Looking for Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
Income Statement and Balance Sheet Columns . . . . . . . . . . . . . . . . . . . . . . . . . 210
Completing the Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Calculating Net Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Completing the Balance Sheet Portion of the Worksheet . . . . . . . . . . . . . . . 211
9 Final Steps in the Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . 221
The Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

The Statement of Owner’s Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
The Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
Recording the Year-End Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Preparing Closing Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
Step 1: Closing the Income (Revenue) Accounts . . . . . . . . . . . . . . . . . . . . . 226
Step 2: Closing the Expense Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Step 3: Closing the Income Summary Account . . . . . . . . . . . . . . . . . . . . . . . 227
Step 4: Closing the Drawings Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
Preparing the Post-Closing Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
General Ledger Accounts at the End of the Fiscal Year . . . . . . . . . . . . . . . . . . . . 230
10 Banking Procedures and Accounting for Cash . . . . . . . . . . . 255

Petty Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
Establishing a Petty Cash Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
Recording Petty Cash Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Replenishing a Petty Cash Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Cash Short and Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
Banking Procedures and Handling of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Cheque Endorsement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Cheques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
Reconciling a Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
How to Reconcile the General and Trust Bank Balances . . . . . . . . . . . . . . . 260
xi
Contents
Reconciling the Mixed Trust Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

Reviewing the Trust Bank Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
Maintenance and Retention of General and Trust Records . . . . . . . . . . . . . . . . . 271
General Bank Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
Trust Bank Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
Dormant Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
11 Accounting for GST/HST, Payroll, and Income Tax . . . . . . 283
Goods and Services Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

Remitting GST/HST to the Receiver General . . . . . . . . . . . . . . . . . . . . . . . . 284
Maintenance of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Methods for Calculating GST/HST Remittance . . . . . . . . . . . . . . . . . . . . . . 285
Remitting GST/HST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
The Payroll Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
TD1 Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Payroll Calculator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Vacation Pay and Vacation Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
Taxable Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
T4 Information Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
Legal Requirements for Keeping Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
The Six-Year Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
Types of Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
Deductions and Remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
12 Computerized Time and Money Management . . . . . . . . . . . 305
Getting Started with Legal Accounting Software . . . . . . . . . . . . . . . . . . . . . . . . . 307

Setting Up the Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
Creating Opening Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
Managing Client Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
Type of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
Conflict of Interest Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
Closing Client Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
xii
Contents
Time Entries and Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308

Recording Time Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Trust Receipts and Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310
Recording Receipts and Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311
Recovering Client Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
Billing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
End-of-Period Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
Maintaining Electronic Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
Appendix: By-Law 9, Financial Transactions and Records . . . . . . . . . . . . . . . . . . 321

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349
xiii
Preface
The idea of learning legal accounting can be intimidating—all that math! As instructors, we
often tell our students that we are not doing math, just some simple arithmetic.
Legal Accounting introduces students and legal professionals to basic accounting concepts so
that they will gain an understanding of what bookkeeping and record-keeping are all about. It is
important for licensed paralegals to understand the by-laws and requirements of the Law Society
of Ontario (LSO) as they relate to record-keeping in a law firm. An understanding of these
requirements is also useful for law clerks, who often see the financial dimensions of client files.
The primary goals of this text are:
• to explain the LSO’s bookkeeping and record-keeping requirements as found in the
Law Society Act, LSO by-laws, and the Paralegal Rules of Conduct;
• to explore the common bookkeeping issues that arise in a legal services firm;
• to demonstrate how to analyze and record transactions, prepare various adjusting
entries, identify and complete the steps in the financial cycle;
• to explain the basics of financial accounting so that students can create, read, and
understand simple financial statements;
• to provide insight into the financial, banking, and tax reporting aspects of a legal ser-
vices firm; and
• to demonstrate how stakeholders use financial statements in decision-making.
The text uses the example of Justin Case, a paralegal who opens his own firm, to show
how to create records at the start of the business and maintain them through the accounting
cycle. The firm’s books are opened with Justin’s initial investment in the firm and continue
through the accounting cycle to the preparation of financial reports and closing accounts to
start the new year. The examples demonstrate how to comply with LSO by-laws, especially
those with respect to accounting for trust funds received from clients.
The text explains the process of double-entry bookkeeping, and how to record debits and
credits, so that students will be able to summarize business transactions in a manner accept-
able to the Law Society and meet requirements under the Income Tax Act.
The text also explores legal accounting software and shows how it can be used to manage
client files, record transactions, and prepare reports.
The skills taught in this text are transferable, so students who start their own business,
in any area, will know how to record and interpret financial information.
The text provides general advice regarding common bookkeeping issues; it does not cover
every possible situation that can arise in a firm. If you have questions about the by-laws, you
can call the Law Society Practice Management Helpline at 416-947-3315 or toll-free in Ontario
at 1-800-668-7380, ext. 3315. You can also check the Law Society’s website at <https://lso.ca/>.
If you have specific bookkeeping, accounting, or tax questions, we suggest that you consult
an accountant, financial adviser, or lawyer who practises in these areas.
xv
Preface
Chapter Features
Learning Outcomes
To guide the learning process, the learning outcomes at the beginning of each chapter iden-
tify the concepts being covered in the chapter.
Potential Paralegal Pitfalls

Each chapter highlights potential pitfalls and the consequences if proper procedures are not
followed, along with recommendations for resolving issues.
Chapter Summary
The chapter summary explains why the information presented in the chapter is important.
It provides examples of how the information can be applied and how pitfalls can be avoided.
Key Terms
Key terms are boldfaced throughout the chapter. Detailed definitions of all key terms are
included in the glossary at the end of the text.
PRACTICE
EXCEL
Practice Exercises
True-or-false questions allow students to test their knowledge of what has been covered in
the chapter and help them focus on important concepts. Short-answer questions require stu-
dents to apply what they have learned. Accounting is best learned by doing; the longer exer-
cises at the end of the chapter give students an opportunity to put theory into practice.
Put It into Practice

Case examples featuring Ann Litigate’s paralegal practice are used to demonstrate chapter
concepts. Through these examples, instructors can generate discussion and ensure that stu-
dents have grasped the material presented in the chapter.
Acknowledgments
We wish to thank the reviewers of the text for their valuable feedback:
Kent Peel, Seneca College
Amy Maycock, Fleming College
Trudie Robertson, Loyalist College
We would also like to thank the Emond Publishing team—Lindsay Sutherland, Kelly
Dickson, Laura Bast, and the team members behind the scenes—for their full support at all
stages of the project.
Jacqueline Asselin, B Admin, LLB, thanks her husband, Allan, for his patience and sup-
port, and her co-author, for the practical experience she brought to the project. Jacqueline
also thanks Barb Asselin who has taught the course for a number of years and who offered
suggestions for improvement.
Keri Nisbet, CPA, thanks her husband, Ryan, and her sons, Cole, Jake, and Troy, for their
encouragement and enthusiasm while she wears her many hats each day. Keri also appreci-
ates her co-author and Emond Publishing for inviting her into this amazing opportunity.
xvi
About the Authors
Jacqueline Asselin was called to the Ontario Bar in 1979 after completing her LLB and Bach-
elor of Administration degrees at the University of Ottawa. She opened her own law firm in
Ottawa in 1979 and was initially engaged in a sole private practice. She later expanded her
firm under the name J. Asselin & Associates. She remained with her firm until 2009, prac-
tising in the areas of residential real estate, family law, and wills and estates. She was a full-
time faculty member at Algonquin College of Applied Arts and Technology in Ottawa from
2003 until 2017 in the Law Clerk and Paralegal programs. She taught legal accounting, res-
idential real estate, and estates administration and procedures, as well as property relation-
ships, introduction to law, and landlord and tenant law. In 2013, Jacqueline was appointed by
the Council for the Township of McNab/Braeside to the sit on the Property Standards Com-
mittee which deals with by-law infractions and the Committee of Adjustments which hears
severance and minor variation applications. Jacqueline retired from Algonquin College in
June 2017 and devotes her time to travelling and to managing Tallyho Inc., a foundation that
helps students meet their educational goals. She is vice-chair of the Arnprior Regional
Health Foundation and Pension Concerns representative for district 21 of the Retired Teach-
ers of Ontario.
Keri Nisbet graduated from Wilfrid Laurier University in 2000 and continued on to obtain
her Chartered Accountant designation in 2003, while working in assurance at KPMG LLP in
Hamilton. She has since earned experience in manufacturing within Canada and the United
States and in health care. Keri is now a CPA and has been a professor at the McKeil School
of Business, Mohawk College, since 2008.
xvii
1 Role of the Law
Society of Ontario
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Requirement for Books and Records in Legal Firms . . . . . . . . . . . . . . . . . .
2
2
Forms of Business Organization in Legal Services Firms . . . . . . . . . . . . . . 3
Insurance Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Importance of Maintaining Proper Records . . . . . . . . . . . . . . . . . . . . . . . . . 6
Retainers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Bank Accounts in a Legal Services Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Financial Institutions for Mixed Trust Accounts . . . . . . . . . . . . . . . . . . . . . 10
Interest on Trust Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Review Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Put It into Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1
LEGAL ACCOUNTING
After reading this chapter, you should be able to:
OUTCOMES
LEARNING LO1 Describe the Law Society of Ontario’s rules of conduct for lawyers and paralegals.
LO2 Explain the requirements in by-law 9 of the Law Society dealing with financial
transactions and records.
LO3 Define various forms of business organization.
LO4 Describe the ethical and professional responsibilities of paralegals as they pertain
to maintenance of books and records in the management of a legal services firm.
LO5 Compare bank accounts in a Legal Services Firm in PCLaw®.
LO1 Introduction
The Law Society of Ontario (LSO) regulates the Ontario legal profession to ensure that legal
professionals conduct themselves in a competent and ethical manner pursuant to the Law
Society Act1 and regulations made under the Act. A licensee—any paralegal or lawyer who is
licensed to practise by the LSO—must meet the professional and ethical obligations imposed
by the LSO. Infractions can result in disciplinary action, including but not limited to suspen-
sion of the licensee’s privileges.
LO2 Requirement for Books and

Records in Legal Firms
The LSO requires licensees to keep books and records that reflect the financial activities car-
ried out by them. Licensees have the added duty to maintain accurate records of all their
financial activities because of the duty owed by them to their clients.
The record-keeping requirements of the LSO are set out in part V of its by-law 9.2 Every li-
censee is required to maintain financial records to track all money and other property received
and disbursed in connection with the licensee’s professional business. The goal of this book is
to assist paralegals in understanding the type of financial records required to meet their obliga-
tions and to learn how to keep the necessary records. The focus is on a small practice; examples
of transactions a licensee is likely to encounter will be used for demonstration purposes. Law
clerks who perform their duties under the supervision of a lawyer should also be aware of record-
keeping requirements to assist the lawyer or law firm in meeting the LSO’s obligations.
A paralegal who is not confident of being able to do his or her own accounting will want to
hire a bookkeeper to maintain the firm’s books and records. Bookkeepers record day-to-day
transactions in the appropriate accounting journals. Samples of these tasks include entering
bills from vendors, paying vendors, processing employee payroll, issuing invoices to clients,
recording receipts from clients, and reconciling bank accounts. The bookkeeper records finan-
cial transactions and summarizes the transactions using general and trust ledgers. A book-
keeper will usually bring the books to the trial balance stage of the accounting process.
A chartered professional accountant (CPA), who has a university degree and completes a
professional education program, takes over where the bookkeeper leaves off. Chartered profes-
sional accountants prepare adjusting entries to correct the balances in accounts to reflect items
1 RSO 1990, c L.8.
2 Made under s 62(0.1), para 6 of the Law Society Act.
2
CHAPTER 1 Role of the Law Society of Ontario
such as prepaid expenses and depreciation. Once the adjusting entries are completed, the ac-
countant prepares the firm’s financial statements, which include the income statement, state-
ment of owner’s equity, and balance sheet. These statements are required for income tax
purposes, and the accountant can complete the tax returns for the firm. An accountant will
ensure that the firm’s financial records reflect relevant professional accounting standards.
Why do paralegals need to learn bookkeeping if bookkeepers and accountants are able to
do the job for them? Ultimately, it’s the paralegal who is responsible to ensure that the per-
sons hired maintain the records in an acceptable manner. This book introduces paralegals to
the essentials of legal accounting and explains why and how books and records need to be
kept so that they conform to the requirements of the LSO.
Other reasons to know basic bookkeeping and accounting principles:
• As a business owner, it is in the paralegal’s best interest to be able to analyze financial
information for the purpose of making financial decisions in their own practice.
• Paralegals might have to understand a client’s financial records in the course of litiga-
tion when financial statements are relevant to the case.
• As a community volunteer, paralegals may become a member of a board of directors
and be presented with financial statements for review and approval by the board.
The following organizations require that proper records are maintained:
• The Canada Revenue Agency (CRA) requires the filing of income tax, payroll, and
GST/HST remittances. The CRA is the agency responsible for administering the tax
laws for the Government of Canada and most of Canada’s provinces and territories.
• The LSO requires the filing of annual reports and performs audits to ensure that rec-
ords are correct and, in particular, that all trust funds are properly accounted for.
Licensed paralegals who fail to file their Paralegal Annual Report with the LSO on
time are subject to a $100 late fee, as well as potential administrative suspension.
• The Law Foundation of Ontario (LFO) requires the filing of an annual report with the
LSO. First created in 1974, the LFO is a non-profit organization that aims to help people
understand the law and use it to improve their lives.
LO3 Forms of Business Organization

in Legal Services Firms
By-law 7 of the LSO sets out several ways lawyers and paralegals in Ontario may carry on the
practice of law and the provision of legal services, respectively. The form of business organ-
ization used is often determined by income tax implications as well as bookkeeping issues.
Basic forms of business organization include sole proprietorships, partnerships, limited
liability partnerships, multi-discipline practices or affiliations, and professional corporations.
The various modes of practice are set out in more detail on the LSO website3 and should be
referred to as needed.
Sole Proprietorship
A sole proprietorship is a business carried on by one individual who is the owner. The sole
proprietor usually makes all management decisions and is personally responsible for all the
3 Law Society of Ontario, Business Structures, online: <https://lso.ca/lawyers/practice-supports-and-resources/
business-structures>.
3
LEGAL ACCOUNTING
debts of the business. Many small firms are sole proprietorships. The owner pays personal
income taxes on the profit made by the firm. When net profits reach higher levels, there may
be tax advantages in switching to a corporate form of ownership.
Partnership
A partnership is a business carried on by two or more individuals as owners. Two or more
persons may find it worthwhile to combine their talents and money to form a partnership.
They may own the business in equal or unequal shares, and their shares of the profits or
losses in the business are usually proportionate to their capital investment in the business,
as documented in the partnership agreement. All the partners are equally liable for all
the debts of the business. General partnerships have unlimited personal liability for business
debts. The net income or loss of the business is allocated to the members of the partnership,
who then pay personal income taxes on their share of the profits.
Limited Liability Partnership

A limited liability partnership is one in which partners have limited personal liability for the
debts of the business, and no partner is responsible or liable for other partners’ misconduct
or negligence. The name of the limited liability partnership must be registered under the
Business Names Act,4 and the name must include the words “limited liability partnership” or
“société à responsabilité limitée,” or the abbreviations “LLP,” “L.L.P.,” or “s.r.l.” as the last
words or letters of the firm’s name.
Multi-Discipline Practice or Affiliation

In a multi-discipline practice (MDP) or affiliation, lawyers and licensed paralegals work with
other professionals—such as accountants, tax consultants, trademark and patent agents, or
others—who support or supplement their practice of law or provision of legal services. When
a licensee and another professional enter into a formal partnership agreement, it is consid-
ered a multi-discipline partnership, which must be approved by the LSO by way of applica-
tion. Licensees are responsible for the actions of professional partners and must maintain
professional liability insurance for all professional partners.
Professional Corporation
In a professional corporation, lawyers or licensed paralegals carry on the practice of law or the
provision of legal services through an incorporated entity. Corporations operate under a govern-
ment charter and are owned by shareholders. All the shareholders of a professional corporation
must be lawyers or licensed paralegals who are entitled to practise law in Ontario. Incorpora-
tion does not affect the professional liability of the shareholders, and they are jointly and sever-
ally liable with the corporation for all professional liability claims against the company.
Lawyers and licensed paralegals may not practise law or provide legal services through a
professional corporation until the company has received a certificate of authorization from
the LSO. Certain tax advantages can be gained by incorporating because the corporation is
taxed separately on its profits at corporate taxation rates, which are lower than the personal
tax rate after a certain level of income is achieved.
4 RSO 1990, c B.17.
4
Taxation Legislation partner. Each partner must file a copy of the financial
TA X TIP Canada first collected federal income tax in

statements of the partnership with his or her return. The
partnership may also be required to register for and col-
1917, at which time it was intended to be a tem- lect GST/HST on behalf of the CRA.
porary tax to fund the First World War. This Expenses, capital cost allowance, and other deduc-
temporary measure evolved into the Canada tions are subtracted from the income of the partnership
Revenue Agency in 1927 and has become the to determine whether the business has a net income or
largest form of income available to the Canad- loss. The resulting income or loss is divided among the
ian government. The CRA administers the tax partners, prorated to each partner’s contribution or as
laws for the government of Canada, including otherwise stipulated in the partnership agreement. Each
the administration and enforcement of the Income Tax partner’s share of the income or loss is then included in
Act,5 and for most provinces and territories. Income tax is the calculation of that partner’s individual income from
collected from individuals and businesses by the CRA for all sources for tax purposes.
the federal government and the provinces and territories. Each partner is taxed at the rate applicable to individ-
The Canadian tax system is also based on self-assessment, uals under the Income Tax Act, as is a sole proprietor.
which places the responsibility on Canadian residents to Like the sole proprietor, a partner must aggregate his or
ensure they have paid their taxes according to the require- her share of net income or loss with income or losses
ments of the Income Tax Act. from all other sources.
Unincorporated Practices Incorporated Practices

Sole Proprietorships A professional corporation is a separate legal entity that is
The income or loss of a sole proprietorship must be separately taxed on its profits at corporate taxation rates.
included on the personal tax return of the sole propri- A corporation may have some of the following features:
etor for the year in which the income was earned. The • It has a perpetual existence, since ownership
net profit is taxed at the same rates that apply to individ- shares can be sold to new shareholders.
uals. These rates are progressive and increase with • It can generally raise larger amounts of capital
income. Sole proprietors are also required to make more easily than a sole proprietorship or
Canada Pension Plan (CPP) payments on self-employed partnership.
earnings when their personal income tax return is filed • The shareholders cannot personally claim any loss
each year. Any person claiming an income tax refund, an the corporation sustains.
HST credit, or the Canada child tax benefit must file a
return. Provincial tax credits may also be available. A When forming a corporation, the business owners
sole proprietor may be required by the CRA to pay can transfer money, assets, or services to the corpora-
income tax by installments. Financial statements for the tion in exchange for shares. The owners are referred to
licensee’s practice must be included with the personal as shareholders. The owners may also transfer liabilities
tax return. to the corporation that relate to the assets contributed.
For instance, if the owner contributes a photocopier
Partnerships that has a loan outstanding, both the asset (photo-
The income or loss of the business carried on in partner- copier) and the liability (associated loan) become the re-
ship is determined at the partnership level and then allo- sponsibility of the corporation. Shares can be bought
cated to the partners in accordance with their share, and sold without affecting the corporation’s existence. A
usually based on the terms of a partnership agreement. corporation continues to exist unless it winds up, amal-
A partnership by itself does not pay income tax on its gamates, or surrenders its charter for reasons such as
operating results and does not file an annual income tax bankruptcy. Because a corporation has a separate legal
return. Instead, each partner includes a share of the existence, it must pay tax on its income, and therefore
partnership income (or loss) on his or her personal tax must file its own income tax return. The corporation
return. The share of the income earned is taxed whether may also be required to register for, collect, and remit
or not it has actually been received personally by the GST/HST on behalf of the CRA.
5 RSC 1985, c 1 (5th Supp), as amended.
5
LEGAL ACCOUNTING
A corporation must file a corporation income tax A licensee who incorporates will receive a salary or take
return (T2) within six months of the end of every tax dividends from the corporation as payment for his or her
year, even if it does not owe taxes. It also has to attach services. These payments will be included on the licensee’s
complete financial statements and the necessary sched- individual tax return. An accountant should be consulted to
ules to the T2 return. A corporation usually pays its taxes determine whether there is a benefit to incorporating to
in monthly or quarterly installments. take advantage of the lower corporate tax rates.
LO4 Insurance Requirements

Licensees who provide legal services to the public must carry professional liability insurance
in accordance with by-law 6, part II, section 12 of the LSO. A policy limit for each single claim
of not less than $1 million and an aggregate policy limit for all claims of not less than $2 mil-
lion per year are required. In the case of a limited liability partnership, coverage must be
maintained for each partner in the amount required for individual licensees. Some exemp-
tions are allowed, such as when a paralegal is working under the supervision of a lawyer who
has professional liability insurance through the LSO and the paralegal is covered under the
lawyer’s policy. Licensees must provide written proof of compliance with their insurance
requirements before they begin providing legal services and annually thereafter.
Importance of Maintaining Proper Records

In addition to keeping books and records that reflect their financial activities, lawyers and
paralegals have an added obligation to maintain accurate records because they hold funds in
trust for their clients. The LSO regulates the Ontario legal profession to ensure that para-
legals and lawyers conduct themselves in a competent and ethical manner pursuant to the
Law Society Act and regulations made under the Act. The LSO has the role of protecting the
public, and one way it fulfills this responsibility is by auditing the records kept by law firms.
An audit is an inspection of the books and records of a company, usually by an independent
third party. Licensees who fail to meet the professional and ethical obligations imposed by
the LSO are subject to its complaints process, which can result in disciplinary action, includ-
ing suspension of their privileges.
Failure to maintain proper records can result in errors and an inability to meet financial
obligations as they come due. For example:
• Failure to record accounts payable as bills are received results in an overstatement of
income and may result in an inability to pay bills when they are due.
• Failure to stay on top of accounts receivable may result in insufficient funds in the gen-
eral bank account, resulting in an inability to pay operating expenses.
• Failure to track trust receipts and disbursements in the correct client ledger could
result in errors, with a trust account getting overdrawn for a particular client.
• Failure to maintain trust records can result in an inability to meet obligations incurred
on a client’s behalf and to account to clients for any funds received on their behalf.
• Failure to track income and expenses and properly report to the CRA may result in
assessments and/or audits, with severe penalties and interest being charged if taxes
were not properly remitted.
6
• Inability to know where the firm stands financially impairs good management decision-
making regarding day-to-day operations, expansion, addition of staff, and other such
matters.
• Failure to maintain financial statements may result in lenders refusing applications for
loans or lines of credit because lenders require financial statements in order to assess
interest rates imposed on loans and qualification for loans.
• The LSO conducts regular audits of licensees. Failure to maintain up-to-date trust rec-
ords can result in suspension or other action by the LSO.
Retainers
A retainer is an agreement between a client and a legal services provider for the engagement
of legal services. The form of retainer can vary and be customized for each situation. Because
clients can believe that they have retained the legal services provider based on an oral
conversation, it is important to observe client identification protocols and to document
any conversation in writing.
It is a good practice to get monetary retainers from clients to ensure that there will not be
any difficulty getting paid once work has started or a task is completed. The cash flow in an
office is important, and having to worry about paying bills can interfere with a legal services
provider’s ability to focus on providing excellent service to clients.
Firms usually require that clients provide a monetary retainer when the paralegal – client
relationship is entered into. This is usually obtained when the client signs a retainer agree-
ment, with the firm setting out the scope of the work to be performed and the hourly rate that
will be charged by the paralegal primarily responsible for the file, as well as the rate charged
by other persons who will work on it. The retainer agreement should also set out the firm’s
billing policies.
The money received from the client must be deposited into the firm’s mixed trust account
(described below) by the end of the next banking day after funds are received. Money
includes, by definition, cash, cheques, bank drafts, credit card sales slips, post office orders,
and express and bank money orders.
A general monetary retainer, which is described in by-law 9, section 8(2)1 of the LSO, does
not need to be deposited into the trust account. This is money received for which the para-
legal is not required either to account to the client or to provide services. A general retainer
should be evidenced by a written agreement with the client. As an example, it might be used
when a paralegal is asked to do all collections for a client at a fixed monthly rate and to which
the firm agrees to do all the collections and will be paid whether or not the client submits any
claims in a particular period. This type of retainer is not common in small practices and is
carefully scrutinized by the LSO.
Bank Accounts in a Legal Services Firm

At the very least, most law firms have one general bank account and one mixed trust account.
It is important to understand which transactions require use of the general bank account and
which require the use of the trust bank account. Mixing trust funds, which are funds that
belong to the client, with general firm funds, which are funds that belong to the firm, is
not allowed.
7
LEGAL ACCOUNTING
General Bank Account

Just as individuals have a bank account that they use for their day-to-day deposits and dis-
bursements, a business must have a general bank account for making deposits and for pay-
ment of bills. The general bank account will be opened in the name of the firm. If the firm
is a sole proprietorship, the bank account will be in the name of the owner. Corporations will
open such accounts in the name of the corporation. The types of funds that will be deposited
into the general bank account include:
• funds that belong to the firm;
• funds invested into the firm by the owner;
• funds received by the firm for payment on bills sent to the client; and
• other receipts, such as interest income earned on the general bank account and mis-
cellaneous income.
Regardless of the accounting system being used, care must be taken to ensure that the cor-
rect bank account is used when making deposits and disbursements. Firms often use differ-
ent coloured cheques for their general and trust bank accounts so there is a visual cue for the
person writing a cheque, to be sure disbursements are made from the appropriate account.
Mixed or Pooled Trust Bank Account

A mixed or pooled trust bank account is a bank account into which money received from cli-
ents for certain purposes is deposited. This account is called “mixed” or “pooled” because the
firm opens one bank account into which money for many clients will be deposited. The funds
must be deposited into the mixed trust account because the money does not belong to the
firm. It belongs to the client and is to be used for specific purposes (for example, to pay court
fees on behalf of the client or to be applied to a bill sent to the client). How will one know
what amount belongs to which client? A separate client summary called a ledger must be
kept for each client, so that firms always know how much money is in the trust account for
each one. It is important to note that only firms who hold client money need a trust account.
EX AMPLE
The table in Figure 1.1 illustrates a list of funds in the account to pay for a disbursement on behalf of Client
trust account that are pooled. Why a record is required A, the trust ledger account for Client A would be over-
for the amount held for each client is explained below. drawn by $50 ($250 less $300). However, the cheque
Justin Case is a paralegal who has three clients. He has would still go through the bank because there was
received a retainer from each client and has made pay- $5,950 in the pooled account before the $300 cheque
ments out of the mixed trust account for some clients. The was written. Errors like this must be reported to the
bank balance for the mixed trust account is $5,950. Justin LSO when submitting the annual report, with an ex-
needs to know that he has $250 left in trust for Client A, planation as to why the error occurred.
$700 for Client B, and $5,000 for Client C. The best way to The financial records required to be maintained for
track this information is to have a separate client trust led- trust accounts must be entered in the account journal
ger sheet for each individual client that shows all the trans- and posted (recorded) in each client’s ledger so as to be
actions for each client with a running balance at all times.6 current at all times.
If Justin did not have proper records and wrote an- The LSO’s Rules of Professional Conduct7 dictate that
other cheque in the amount of $300 from the trust trust accounts are to be used only for clients’ money.
67
6 By-law 9, s 22(1).
7 Law Society of Ontario, Rules of Professional Conduct (1 October 2014; amendments current to 25
January 2018), online: <https://lso.ca/about-lso/legislation-rules/rules-of-professional-conduct>.
8
If a legal service provider does not receive retainers

from clients, it may not be necessary to open a trust Client Receipts Payments Balance
account. Trust accounts can never be used for the per- Client A 300 50 250
sonal or office use of the business owner.
Justin knew he would have to send a cheque to the Client B 800 100 700
CRA every quarter to remit the HST he collected. So he Client C 5,000 0 5,000
deposited money in the trust account to cover the poten-
tial HST he would have to pay. However, LSO rules dic- Totals 6,100 150 5,950
tate that this action is not allowed for the purpose of
remitting HST at the end of each quarter. HST funds FIGURE 1.1 Summary of clients and balance held in trust
must be accumulated in the firm’s general bank account.
Overdraft in Trust Account

It is a good practice to place a hold on trust funds received from clients (unless paid in cash,
money order, or certified cheque) to make sure there are sufficient funds in the client’s bank
account to cover the cheque. Firms should confirm with their financial institution how many
days it takes a cheque to clear. If a cheque from a client is returned by the bank for insuffi-
cient funds (NSF), and the licensee has written a cheque against that amount, the trust led-
ger for that client will be overdrawn. In addition, bank charges may be taken out of the trust
account because of the NSF transaction. The bank should be directed to charge any service
fees against the trust account to the firm’s general account instead.
Paralegals are personally responsible to ensure that any overdraft in a client’s trust account
is corrected as soon as an error is discovered. This can be done by having the client bring in
funds to deposit into the account, or by the paralegal depositing their personal funds into the
trust bank account to make up for the deficiency.
With experience, paralegals develop an instinct for knowing which funds should go into
the mixed trust account and which funds should go into the general bank account. If ever
unsure, paralegals should refer to by-law 9 to determine whether or not the funds belong in
the trust account. The table in Figure 1.2 shows which bank account must be used for differ-
ent types of deposits.
Mixed Trust Account General Account

Funds that must be deposited to the trust Funds that must be deposited to the general
account: account:
• money received on behalf of the client • money paid on account of a bill previously
• money received for future client disbursements sent to the client
• money received for future or unbilled legal • reimbursement for expenses paid on behalf of
services the client
• an overpayment of billed services—the excess • lawyer/paralegal’s or firm’s money
payment must be either returned to the client • general money retainer
or held in the trust account if the client
instructs you to do so
FIGURE 1.2 Accounts for depositing funds
9
LEGAL ACCOUNTING
Separate Interest-Bearing Trust Account

Another type of trust account can be set up to hold funds for only one client. This may be
done on the client’s written instructions when a large amount is to be held in trust for an
extended period of time. For example, if a client deposits $20,000 with a firm to hold until a
case settles, and it is anticipated that the case may go on for an extended period, the client
may want the interest on the account to accrue to herself. If a client wants interest on the
trust funds that a firm holds for her, her written instructions to deposit such funds into a
separate interest-bearing trust account must be obtained—for example, a guaranteed invest-
ment certificate (GIC), term deposit, or other savings account—in the firm’s name in trust
for that client.8
Opening a separate interest-bearing account for a client requires additional paperwork and
bookkeeping for the paralegal and is not usually done unless the return on investment is sig-
nificant. Bank charges on this account would be charged to the separate interest-bearing
trust account and noted as a disbursement to the client.
Separate interest-bearing trust accounts must be reconciled and included in the monthly
trust comparison.9 If a client instructs his legal service provider to put his funds in an interest-
bearing account, some additional information may be required from him, such as his social
insurance number or corporation number, if applicable, as well as how the interest is to be
allocated for income tax purposes. This is especially important when the funds being held
are in dispute.
Financial Institutions for

Mixed Trust Accounts
The following institutions are approved for opening a mixed trust account for all client funds,
or a separate account for one client:
• a chartered bank, such as RBC, TD, Scotiabank, BMO, or CIBC;
• a provincial savings office, a government-run banking institution;
• a credit union, a member-owned financial cooperative;
• a league to which the Credit Unions and Caisses Populaires Act, 199410 applies; and
• a registered trust corporation.
The institution in which the account is opened must have an agreement with the LFO for the
payment of interest on mixed trust accounts. The institution must also provide monthly bank
statements and the originals or copies of the front and back of returned cheques, including
certified cheques. Any time a mixed trust account is opened, the LFO must be notified by
sending a letter to the Foundation (Form 2: Report on Opening a Mixed Trust Account, avail-
able on the LFO’s website).
8 By-law 9, s 8(1).
9 By-law 9, s 18(8).
10 SO 1994, c 11.
10
• Potential pitfall: Not keeping accurate, complete, and up-to-date books and records.
PARALEGAL
POTENTIAL • Possible fallout: In 2017, a Canadian legal firm was fined $25,000 for failing to provide documents to
PITFALLS
the Law Society of Ontario in a timely manner. In 2013, the LSO made five attempts to obtain certain
documents from the firm, which the firm failed to do in a reasonable amount of time.
• Proposed recommendation: Set aside time to complete the bookkeeping of your firm. Make an
appointment in your calendar to remind you to get the work done. If you can’t keep up on your own,
consider hiring a bookkeeper on contract or a part-time basis.
Registering for GST/HST

TA X TIP
Paralegals just starting a business will probably begin as a small supplier, exempt from collecting GST/
HST. An individual is deemed to be a small supplier if their total annual revenues from taxable supplies
(before expenses) from all of their businesses are $30,000 or less in a fiscal year. Once their revenues
exceed the $30,000 threshold over a period of twelve consecutive months, they must register and start
collecting and remitting GST/HST.
Business owners can register for GST/HST voluntarily before they have reached the $30,000 threshold
and may want to do so in order to recover the GST/HST that they pay when starting up the business.
Once registered, they are required to charge, collect, and remit GST/HST on all invoices sent to clients
and to file GST/HST returns monthly, quarterly, or annually depending on the level of revenues. Business owners
must stay registered for at least one year before they can request to cancel their registration. If the business is small,
and the business owner chooses not to register for GST/HST voluntarily, the business owner cannot collect GST/
HST from clients and cannot claim back the income tax credits paid on business purchases.
Obtaining a Business Number

Before a business owner can register for GST/HST, a business number (BN) needs to be obtained from the CRA.
Registering for a business number can be done online at the CRA website. This number conveniently identifies busi-
ness owners to the government for all business purposes, including remittances of GST/HST, corporate income tax
remittances, and payroll remittances.
Informing Clients
Business owners must let clients know if GST/HST is being charged on fees. The invoice sent to the client should
show the total amount charged for fees and disbursements and the rate and amount charged for GST/HST. The
GST/HST registration number must also appear on the invoice. The amount collected from clients will be recorded
as GST/HST payable in accounting journals and ledgers, as the money collected for GST/HST from clients will be
owed to the CRA on the next GST/HST return.
Interest on Trust Accounts

Section 57 of the Law Society Act states that interest earned on a mixed trust account must be
remitted to the LFO by the financial institution in which the account is located.11 This is done
by signing a letter of direction regarding interest on a mixed trust account, which directs the
financial institution to forward interest on the account to the LFO (see Figure 1.3).
It is the paralegal’s responsibility to ensure that the financial institution where the mixed
trust account is to be opened pays interest at a rate approved by the trustees of the LFO. Most
financial institutions have an agreement with the LFO and are accustomed to remitting the
11 RSO 1990, c L.8, s 57(1).
11
LEGAL ACCOUNTING
interest as required. The LFO uses these funds to carry out its mandate, which is to promote
access to justice.
An annual report must be sent to the LSO and to the LFO by March 31 each year.
To: The Manager
Name of Bank: [Name of chartered bank, provincial savings office,

registered trust company, credit union, or caisse populaire]
Branch:
Address:
Re: The Law Foundation of Ontario and Account No.
The above account is in: my name

the name of the firm with which I am associated
In accordance with Section 57 of the Law Society Act, I direct you, until further notice, to compute the
amount earned by applying to the balance in the above account the rate of interest approved from time
to time by the Trustees of The Law Foundation of Ontario. Please pay into an account held in your main
office in Ontario in the name of The Law Foundation of Ontario amounts so calculated and give written
notice to me at the address shown on the above account and to The Law Foundation of Ontario, 20
Queen Street West, Suite 3002, Box #19, Toronto, Ontario, M5H 3R3, when each such payment is made.
This notice should show, as applicable as per the terms of the interest agreement between the LFO and
your financial institution, the amount of the payment, the amounts of the daily/monthly balances, and
the rates of interest used in computing the payment.
Dated: the day of , , 20
Signature
Firm Name:
Address:
FIGURE 1.3 Letter of direction

Source: Law Foundation of Ontario. Used with permission.
12
LO5 Bank Accounts in a Legal Services Firm

PCL AW® Legal software is useful in ensuring that the firm’s books comply with by-law 9, which requires a licensee to
maintain financial records. A good legal accounting system incorporates mandatory bank accounts and
other features required to facilitate compliance. Typically, the application will include at least one General
Bank Account and one Trust Account, as shown in Figure 1.4. When deposits and cheques are entered into a
bank account, the system shows the entry in the bank account as well as in a corresponding ledger account
that summarizes the entries. One big advantage of a legal accounting computer program is that the amount
held for each client in trust will be shown in the client’s trust ledger account; this way, the licensee always
knows exactly how much is held in the mixed trust account for each client.
Bank accounts included with PCLaw® include one General Bank Account, one Trust Bank Account, and one
Petty Cash Account (which is considered a General Bank Account).
Use this feature to add, change, or remove the pre-set accounts provided in PCLaw®.
FIGURE 1.4 Bank accounts included with PCLaw® legal accounting software
• Potential pitfall: Advertising your paralegal firm in a way that is not in accordance with the profes-
PARALEGAL
POTENTIAL
sional conduct of the LSO.

PITFALLS
• Possible fallout: You may be fined by the LSO and may need to spend more money remarketing
your business.
• Proposed recommendation: Be honest, professional, and accurate when marketing your business.
Do not oversell yourself or claim to be better than other paralegals or legal professionals.
13
LEGAL ACCOUNTING
CHAPTER SUMMARY
Whether you decide on a career as a paralegal working alone or in association with other licensees, you
need to have an understanding of record-keeping. Although you may not be directly involved in preparing
bookkeeping entries and financial statements, you will be accountable to clients and must protect their
interests. It is your responsibility to ensure that the firm you work with acts ethically and with integrity.
Even when working in association with other paralegals, a licensee often maintains his or her own trust
account and is required to account for funds received in trust.
You will be required to submit annual reports to the LSO, the LFO, and the CRA. Having proper sys-
tems in place makes it easier to comply with all these obligations.
KEY TERMS
bookkeeper, 2 mixed or pooled trust bank account, 8
bookkeeping, 3 monetary retainer, 7
business number (BN), 11 multi-discipline practice (MDP) or affiliation, 4
Canada Revenue Agency (CRA), 3 partnership, 4
chartered professional accountant (CPA), 2 posted, 8
general bank account, 8 professional corporation, 4
general monetary retainer, 7 retainer, 7
Law Foundation of Ontario (LFO), 3 separate interest-bearing trust account, 10
Law Society of Ontario (LSO), 2 small supplier, 11
licensee, 2 sole proprietorship, 3
limited liability partnership, 4
FURTHER READING
The Law Foundation of Ontario, “Reporting Mixed Trust Accounts,” online: <http://www.lawfoundation
.on.ca/our-revenue-sources/interest-on-mixed-trust-accounts/>.
Law Society of Ontario, The Bookkeeping Guide for Paralegals (Toronto: LSO, December 2015), online:
<https://lawsocietyontario.azureedge.net/media/lso/media/legacy/pdf/p/paralegal_bookkeeping_
guide_final-s.pdf>.
14
REVIEW QUESTIONS
True or False
1. A separate interest-bearing trust account should be opened for each client. (LO4)
2. A general monetary retainer does not need to be deposited into the trust account. (LO4)
3. It is a mandatory requirement for a legal professional (for example, a lawyer or paralegal) to
open and maintain a trust account. (LO4)
4. Lawyers and paralegals may operate a legal practice with unlicensed professionals who pro-
vide other non-legal services. (LO3)
5. By-law 9 of the LSO deals with the form of business organization. (LO3)
6. Income taxes payable to the CRA in a partnership are paid by the partnership itself. (LO3)
7. Understanding basic bookkeeping and accounting principles is useful only for the legal pro-
fessional’s reporting requirements to the LSO. (LO1)
8. Moneys received from a client for services not yet rendered should be deposited into the trust
bank account. (LO4)
9. A cheque received from a supplier as a refund for goods returned would be deposited in trust.
(LO4)
Fill in the Blanks

1. Refer to Law Society of Upper Canada v Sam, 2014 ONLSTH 140, and then fill in the blanks in the
following quotation from the case: “[T]he Respondent … b) failed to immediately deposit those
funds into a trust account, contrary to By-Law 9, section , or alternatively, con-
trary to By-Law 9, section .” (LO4)
2. Refer to by-law 9 of the LSO and fill in the blanks: Section of by-law 9 requires
licensees to maintain financial records to record all money and other property
and in connection with the licensee’s professional business and, at a minimum,
the described in sections to . (LO2)
3. A retainer is considered a retainer when it is deposited in a trust account and
when there is an agreement between the paralegal/lawyer and the client regarding legal services.
(LO4)
15
LEGAL ACCOUNTING
Short Answer
Give a full answer for each question.
1. What is the difference between the role played by a bookkeeper and that played by an accountant? (LO2)
2. What business structure is most likely to be used by a paralegal opening an office who plans to
work from home? (LO3)
3. Assume a firm has two bank accounts—a general bank account and a mixed trust account. Indi-
cate whether the following transactions would involve a deposit or cheque, and the bank account
that would be used. (LO4)
Transaction General Bank Account Trust Bank Account

Paralegal pays rent for the month (General) Cheque
Paralegal receives a retainer in the amount of $1,000

from a new client, Jane Phillips
Paralegal invests $5,000 into the firm
Paralegal pays court filing fees of $150 on the Jane

Phillips file
Paralegal pays telephone bill
Paralegal withdraws money for personal expenses
Paralegal prepares an invoice on the Jane Phillips file

and writes a cheque in payment of invoice
4. What happens to interest earned on a mixed trust account? (LO4)

5. In what circumstances should a paralegal maintain a separate interest-bearing trust for a
client? (LO4)
6. Look up the Law Foundation of Ontario online. What is its mandate? (LO1)
16
PUT IT INTO PRACTICE
Case Example: LSO Rules

Ann Litigate is currently operating her legal services firm under the business name “Ann Litigate
Paralegal Services.” If Ann is interested in transitioning her legal services practice from a sole pro-
prietorship to a corporation, what steps will she need to take? What are the advantages and dis-
advantages of Ann establishing her legal services practice as a corporation? Discuss.
17
2 Introduction to
Bookkeeping
What Is Accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Accounting Standards for Private Enterprises . . . . . . . . . . . . . . . . . . . . . . . 21
Categories of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The Accounting Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Preparing an Opening Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Expanded Accounting Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Practice Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
19
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Understand the basic terminology used in accounting.
LO2 Identify the generally accepted accounting principles (GAAP) and understand the
accounting standards for private enterprises.
LO3 Define the categories of accounts—assets, liabilities, owner’s equity, income, and
expenses—and classify accounts by category.
LO4 Create an opening balance sheet for a firm.
LO5 Demonstrate an understanding of the expanded accounting equation.
You probably have some experience with basic bookkeeping if you keep track of the balance
in your personal chequing account. However, using such a simple method in a business
would be inadequate because it does not provide the information needed for making daily
business decisions. Your business records must show where money came from and how it
was spent in much more detail. Throw into the mix a trust account with money that belongs
to your clients, and you will quickly see the importance of a good system of record-keeping.
With the increased popularity of electronic banking and the use of debit cards, it is easy to
lose track of funds received and funds paid out.
As a legal professional, you do not want to have cheques returned by your bank for insuf-
ficient funds. You always need to know what is going in to and coming out of your bank
accounts on a regular basis. Remember that the bank balance you view online might not ac-
curately reflect how much money you have in the bank, because some cheques may not yet
have cleared and some deposits may not yet be recorded. Keeping accurate records will not
only help track your actual bank balance, but it will also help you plan your spending over the
next period.
LO1 What Is Accounting?

Accounting is the language of business. Business owners may wish to communicate finan-
cial information about their business to various stakeholders, each of whom has a different
interest:
• Internal users are interested in managerial accounting. People working in the busi-
ness need to have financial information for making management decisions. Is the
business profitable? Can the business afford to expand? Can we hire another person
for the office? The user wants information that is as accurate as possible to help make
appropriate decisions.
• External users are interested in financial accounting. People who lend money to the
business will want to review its financial statements to assess the risks associated with
a loan. Usually, business owners have a natural bias to make the business appear that
it is doing very well and is profitable. The LSO uses the information generated by the
firm to complete audits and to ensure that its by-laws are being followed.
• Government users are interested in tax accounting, and businesses are required to
submit income tax returns annually. Usually, business owners have a natural bias to
present less profit on its financial statement in order to minimize its tax liability.
Business owners communicate information using financial statements prepared in ac-
cordance with generally accepted accounting principles, described in the next section.
20
CHAPTER 2 Introduction to Bookkeeping
LO2 Accounting Standards for

Private Enterprises
As of January 1, 2012, accounting was restructured to move away from a single financial
reporting framework, formerly known as generally accepted accounting principles, to imple-
ment a variety of rules for different types of organizations. For example, Canada adopted the
international financial reporting standards (IFRS), which is a set of international accounting
rules imposed on corporations whose shares are listed on a stock exchange. In the case of
not-for-profit organizations, the standards for these entities are set out in part III of the CPA
Canada Handbook: Accounting.
Given the nature of ownership in legal and paralegal firms, paralegals are concerned with
the standards set out in part II of the handbook regarding accounting standards for private
enterprises (ASPE). Financial statements must present fairly—and in accordance with Can-
adian generally accepted accounting principles (GAAP)—the financial position, results of
operations, and cash flows of an entity.
These standards apply to sole proprietorships and small private enterprises, with the aim
of ensuring that bookkeeping records and financial statements are prepared using acceptable
accounting practices. The standards ensure that everyone prepares and interprets financial
reports the same way. Such consistency enables users of the information—including para-
legals, lawyers, lenders, auditors, and regulators such as the CRA and the LSO—to rely on
the financial statements and information presented.
Some examples of common accounting standards that paralegals must adhere to include
the following principles:
• Business entity principle. Every business should be treated as a separate unit for the pur-
pose of keeping accounting records. Paralegals should not mix personal and business
transactions. Separate bank accounts should be used for personal activities and busi-
ness activities. Personal expenses should not be recorded as expenses of the business
and vice versa. It is good practice to have separate credit cards for the business and for
personal expenses, for record-keeping purposes. For example, it would be a breach of
this principle to take a spouse out to a movie and charge it to the business credit card
and claim it as a business expense.
• Conservatism principle. A business should report moderate and realistic financial infor-
mation to prevent overvaluation.
• Consistency principle. The same accounting methods must be used period after period,
unless a reason for a change in accounting methods is justifiable.
• Going concern principle. A business is presumed to continue its operations for the fore-
seeable future.
• Cost principle. Assets purchased are recorded at their actual cost. Take for example a
painting purchased at a yard sale: even though a painting that is believed to be worth
$1,000 was purchased at a yard sale for $10, the business records should show the
painting’s value at the amount that was actually paid.
• Revenue recognition principle. Revenue is recorded when it is earned, regardless of
whether or not payment has been received; expenses are recorded when incurred,
regardless of whether or not they have been paid. This method of accounting is referred
to as the accrual basis of accounting and is the one used by paralegals as required
21
LEGAL ACCOUNTING
under the Income Tax Act.1 The cash basis of accounting recognizes revenue only when
the cash is actually received, and expenses only when payment has actually been made.
In the event that a client does not pay for fees billed, the firm would have to write
the invoice off as a bad debt if it had already been included in income. Income recorded
in the firm’s records is taxed when it is earned, not when the client pays the bill, con-
sistent with the accrual basis of accounting.
• Matching principle. Expenses must be reported in the same period as the revenues that
were earned as a result of those expenses.
Work in Progress
TA X TIP
Lawyers and accountants receive special treatment when dealing with work in pro-
gress (WIP) under the Income Tax Act.2 When lawyers file their first tax return, they
can file an election with the CRA to report WIP only after it has been billed; then,
work that is in progress at the end of the fiscal period cannot be included in
income. When this election is made, revenue is considered to have been earned
when the bill is sent to the client and not before. The value of work done on a file is
not included for tax purposes.
At the time of this printing, the Income Tax Act had not been amended to per-
mit paralegals to file this election. The Act requires paralegals to include the value of WIP,
even if the time spent on a file has not yet been billed to the client at the end of the fiscal
period.
LO3 Categories of Accounts

The books of a business are set up using three main categories of accounts: assets, liabilities,
and owner’s equity. Two further categories are revenue (or income) and expenses. Each cat-
egory will have individual accounts listed under it.
In simple terms, transactions are recorded in a general journal and are then posted to each
individual account in a general ledger. (The general journal and the general ledger will be cov-
ered in more detail in Chapters 3 and 4.) Each account is listed in the general ledger, and the
totals from the individual general ledgers are used to prepare the financial statements. There
are separate accounts for each of the elements of the accounting equation (described in the
paragraphs that follow)—assets, liabilities, owner’s equity, income, and expenses. These
accounts are used to record increases and decreases in each category.
Assets are items of value that are owned by a business or a person. Assets are often broken
down into current assets and fixed or capital assets. Current assets are assets that will be con-
verted into cash or used up within one year. Examples of current assets are cash in bank
accounts, including trusts; accounts receivable; and prepaid expenses such as supplies, rent,
or insurance. Fixed or capital assets are assets that are expected to provide a benefit for longer
than one year. Examples of fixed or capital assets are land, buildings, equipment, and vehi-
cles. Assets are not always purchased with cash. They often are purchased using debt (for ex-
ample, by charging the purchase to a credit card).
1 RSC 1985, c 1 (5th Supp).

2 Made under s 34.
22
Liabilities are debts owed to others by a business or a person. Examples of liabilities are
personal or bank loans, accounts payable (if supplies or assets are purchased on account), and
taxes payable. In a firm, the money held in trust for clients is also shown as a liability. Should
the owner decide to close the business, liabilities must be paid off before the owner can
receive a return on investment from the firm. Companies that are owed money are referred
to as creditors.
Owner’s equity represents the value of assets remaining after all liabilities have been
deducted. The owner’s net worth is represented by owner’s equity. The amount of the invest-
ment by an owner in a firm is often referred to as capital. The equity account in an incorpor-
ated company is identified as shareholder’s equity. Capital does not always refer to cash; it
may refer to the value of assets other than cash that an owner has invested in the firm.
Income is a subcategory of owner’s equity and is revenue earned by the firm. Examples of
income accounts are legal fees earned, interest income on bank account balances and invest-
ments, and expense reimbursement. Income increases the firm’s owner’s equity.
Expenses are also a subcategory of owner’s equity and represent the costs of doing busi-
ness. The CRA allows the deduction of any reasonable current expense paid, or an expense
that will have to be paid, for the purpose of earning business income. Examples include
insurance, rent, supplies, wages, and administrative expenses. Expenses decrease the firm’s
owner’s equity.
The chart of accounts is a numbered list of all the business accounts used in a particular
firm. A sample chart of accounts is printed on the inside cover of this textbook and shows the
account names used in the book. Five categories of accounts are broken down into account
names and individual accounts are assigned an account name and an account number.
Note that the account categories each have an account number range. The table in Figure
2.1 shows how numbers might be assigned to each category and the normal balance for each.
(Debits and credits will be briefly discussed later in this chapter and will be more fully cov-
ered in Chapters 3 and 4.)
Account Name Account Number Begins with Normal Balance

Assets 1 Debit
Liabilities 2 Credit
Owner’s equity 3 Credit
Income (revenue) 4 Credit
Expenses 5 Debit
FIGURE 2.1 Categories of accounts
The accounts are numbered to make it easier to locate each account quickly. In other
words, when an account is numbered 300, the account is listed under owner’s equity. If the
account number is 500, it is clear that the account is an expense account. It should also be
noted that the list may skip over some numbers. This allows the insertion of additional
accounts if the bookkeeper decides that a new account is needed.
23
LEGAL ACCOUNTING
Accounts in PCLaw®
PCL AW®
PCLaw® software provides a list of accounts commonly used in legal firms. Users are able to add or delete
accounts as they require. In this system the numbering of asset accounts begins at 1000, liabilities accounts
start at 2000, equity accounts start at 3000, revenue accounts start at 4000, and expense accounts start at
5000 (see Figure 2.2). The account number in PCLaw® is called the account’s “nickname.”
FIGURE 2.2 Accounts commonly used by legal firms, shown in PCLaw® accounting software
The Accounting Equation

The financial position of a business is stated in the form of the accounting equation. All
transactions are analyzed using this fundamental accounting equation. The terms debit and
credit will be encountered as part of the accounting equation. Debit refers to the left side of
the equation; credit refers to the right side of the equation. More about the terms debit and
credit will be covered in Chapters 3 and 4. Debit and credit do not mean increase or decrease.
To keep things simple, a paralegal should get used to thinking of these terms as meaning
“left side” (debit) and “right side” (credit), and nothing more.
Assets = Liabilities + Owner’s Equity
In simple terms, the accounting equation tells us that everything we own (our assets) was
obtained by either borrowing for it (our liabilities) or by investing our own money (owner’s equity).
An essential component of the accounting system is double-entry bookkeeping. This
system of internal controls requires that there be a check and a balance of the debits and the
credits. There must be at least two accounts affected for every transaction—one entry must
be a debit entry and the other a credit entry.
24
The following example introduces the application of the accounting equation by using the
paralegal firm of Justin Case.
EX AMPLE
Justin Case has decided to open
Cash that he received as a graduation present $1,000
his own paralegal practice as a
Money borrowed from his father 4,000
sole proprietor. He plans to start
Total cash he has to deposit in the bank $5,000
the business by investing the
following: His credit card debt (used to purchase assets) $500
Computer and printer that he bought for school; now valued at $900
Desk and office chair valued at $150
STEP 1 Assets
To apply the accounting General Bank Account (cash) $5,000
equation to Justin’s situation, list Computer Equipment 900
his assets in the accounts for Office Furniture 150
cash, computer equipment, and Total Assets $6,050
office furniture.
STEP 2 Liabilities
Calculate Justin’s total liabilities James Case (father), Loan $4,000
by listing the accounts for the Credit Card Debt 500
personal loan and credit card Total Liabilities $4,500
debt.
Calculating Owner’s Equity
STEP 3 Assets Liabilities Owner’s Equity
– =
Calculate owner’s equity by deducting the total liabilities or 6,050 4,500 ?
debts owed to creditors from the total assets. As you can see,
the calculation yields an answer of $1,550 for owner’s equity.
STEP 4 Assets
–
Liabilities
=
Owner’s Equity
6,050 4,500 1,550
Check to ensure that the accounting equation is balanced.
Justin’s assets are worth $6,050 and are equal to his liabilities Assets Liabilities Owner’s Equity
plus owner’s equity, which also equal $6,050. = +
6,050 4,500 1,550
We have included the cash borrowed from Justin’s father in
the listing of cash assets. Realistically, Justin has the cash; he 6,050 = 6,050
also has a corresponding debt that is owed to his father and a
credit card debt. Because he has total debts of $4,500, his
equity in the firm is only $1,550.
In the event that Justin were to sell all his assets at the value Assets = Liabilities + Owner’s Equity
shown in his books and he were to pay off all his debts, he
would be left with $1,550. Assets – Liabilities = Owner’s Equity
Depending on which variable you are trying to calculate, the
accounting equation can be stated in three ways: Assets – Owner’s Equity = Liabilities
25
LEGAL ACCOUNTING
Accounting Software
TA X TIP
Accounting software also uses the double-entry system of bookkeeping. All the
principles that apply to manual record-keeping apply when using computer
software.
Even though most accounting software is designed to detect errors, this does
not mean that every transaction is always correct. Understanding accounting
basics will help to locate errors regardless of what system is used.
LO4 Preparing an Opening Balance Sheet

The opening balance is the balance for each account at the beginning of each accounting
period. The balance is taken from the ending or closing balance of that account from the
last period.
Justin Case, Paralegal

Opening Balance Sheet
Oct. 1, 20**
Assets Liabilities
General Bank Account (cash) $5,000 Personal Loan $4,000
Computer Equipment 900 Credit Card Debt 500
Office Furniture 150 Total Liabilities $4,500
Owner’s Equity
Justin Case, Capital 1,550
Total Assets $6,050 Total Liabilities and Owner’s Equity $6,050
FIGURE 2.3 Opening balance sheet

The capital account (here called Justin Case, Capital) refers to the investment by the owner
in the business. Capital is not always cash; it can be any assets that the owner chooses to
invest in the business. The capital account includes the owner’s beginning investment plus
the profits or minus the losses of the firm. Any withdrawals by the owner will also reduce the
amount in Justin Case’s capital account.
LO5 Expanded Accounting Equation

The expanded accounting equation takes into account three categories of accounts, in addi-
tion to assets, liabilities, and owner’s equity:
1. Withdrawals refers to amounts taken out of the business for the personal use of the
owner.
2. Income, as previously defined, refers to all earnings for the firm. In a paralegal firm, the
main source of income is fees billed to clients. When clients are billed for services ren-
dered, the amount of fees billed is entered immediately as income, regardless of whether
26
or not the client has actually paid the bill. A firm could have other sources of income,
such as interest income or expense recovery (such as charges to the client’s account for
photocopies).
3. Expenses, as previously defined, are costs incurred by the business for the purpose of
earning income. These include operating costs, such as advertising expenses, dues and
licences, interest, motor vehicle expenses, rent, telephone, utilities, and wages.
Net income is calculated by taking the total income of the firm minus total expenses.
When income exceeds expenses, this is usually referred to as profit. When expenses exceed
income (when revenues are lower than expenses), the firm will have a net loss, which causes
a decrease in equity. If there is net income or profit from operations, the amount is added to
the capital account, with a resulting increase in equity. If there is a loss, it will be deducted
from the capital account, with a resulting reduction in equity. Remember, the capital account
is the investment by the owner in the business.
The expanded accounting equation is stated as follows and is illustrated in Figure 2.4.
Assets = Liabilities + [Capital – Withdrawals + (Income – Expenses)]
+ Capital Investment
– Withdrawals
OWNER’S
ASSETS = LIABILITIES + + Net Income
EQUITY
OR
– Net Loss
FIGURE 2.4 The expanded accounting equation
Owner’s equity typically is increased or decreased depending on the following conditions:

• Investments made by the owner, such as cash, computer equipment, and office furniture,
increase owner’s equity (this is also referred to as capital contribution).
• Income from the operation of the business increases the owner’s equity. When profits are
earned, they can be retained (or reinvested) within the business to increase the own-
er’s investment in the firm.
• Expenses from the operation of the business will decrease the owner’s equity. When the
expenses are greater than revenues, a net loss results and the owner’s equity is
decreased.
• Withdrawals by the owner will decrease the owner’s equity. A sole proprietor does not
receive a salary from the business. Instead, when the owner writes a cheque to himself
for personal use, the amount withdrawn from the bank account results in a reduction
of the amount of money in the general bank account as well as a reduction in the
equity of the owner. If the proprietor removes an asset other than cash from the firm,
the transaction is recorded as a withdrawal and will reduce the owner’s equity in the
firm.
The first step in analyzing transactions is to identify which accounts are being affected.
Figure 2.5 shows how Justin’s transactions and the expanded equation work together.
27
28
ASSETS = LIABILITIES + OWNER’S EQUITY
General Bank Accounts Computer Office Personal Credit Accounts J. Case Fees
Transaction Account Receivable Equipment Furniture = Loan Card Debt Payable + Capital – Withdrawals + Earned – Expenses
1 5,000 900 150 4,000 500 1,550
BAL 5,000 900 150 = 4,000 500 + 1,550 – + –
LEGAL ACCOUNTING
2 –600 600
BAL 4,400 1,500 150 = 4,000 500 + 1,550 – + –
3 200 200
BAL 4,400 1,500 350 = 4,000 500 200 + 1,550 – + –
4 –1,000 1,000
BAL 3,400 1,500 350 = 4,000 500 200 + 1,550 – 1,000 + –
5 800 800
BAL 4,200 1,500 350 = 4,000 500 200 + 1,550 – 1,000 + 800 –
6 1,200 1,200
BAL 4,200 1,200 1,500 350 = 4,000 500 200 + 1,550 – 1,000 + 2,000 –
7 –300 300
END BAL 3,900 1,200 1,500 350 = 4,000 500 200 + 1,550 – 1,000 + 2,000 – 300
TOTAL ASSETS = TOTAL LIABILITIES + TOTAL OWNER’S EQUITY
CAPITAL + PROFIT
1,550 – 1,000 + 2,000 – 300
6,950 4,700 550 + 1,700
6,950 = 4,700 + 2,250
6,950 = 6,950
TRANSACTIONS
1 Balances from the opening balance sheet were entered. 4 Justin needed money to pay for personal expenses, so he withdrew $1,000 from the firm’s bank account. This

withdrawal results in a reduction in the General Bank Account and is shown in Owner’s Equity under Withdrawals.
2 A shift in assets occurred. Computer equipment costing $600 was
purchased and paid for using cash. Because cash was used to pay for the 5 Legal fees of $800 were invoiced to a client and the client paid the bill. The transaction provided an inward flow of
equipment, cash or the General Bank Account balance has been reduced, cash in the General Bank Account and an increase in income as a result of legal fees charged.
and there is an addition to the account for computer equipment.
6 Legal fees of $1,200 were invoiced to a client and the client has not paid the bill. These fees billed are an asset for
3 Justin purchased $200 worth of office furniture from a furniture store on the firm called Accounts Receivable and an increase in legal fees.
credit. Justin has not used cash to pay for the item, but he now owes the
store $200, which is recorded under Accounts Payable. Justin has 7 Justin paid one month’s rent in the amount of $300. This is an expense (rent expense), which reduces Owner’s
increased what he owes to creditors. Equity as well as the General Bank Account balance.
FIGURE 2.5 Demonstration of expanded accounting equation

Classifying Expenses
It can sometimes be difficult to decide whether something purchased is an asset or an
expense. For example, Justin may go out and purchase office supplies at a cost of $1,000,
including such items as pens, paper, and ink for printers. Should these items be recorded as
assets (something of value owned by the business), or should they be recorded as expenses
(something that will be used up within the fiscal period)?
There are different ways to handle such an entry. Justin may want to show the supplies as
an asset (which Justin has numbered Account 130) and at the end of the fiscal year conduct a
physical inventory to determine what supplies remain and record what supplies have been
used up. He would record as an expense only the number of supplies used, leaving the
remaining balance of total supplies purchased in the asset portion of the balance sheet. If the
total amount of supplies purchased is small in relation to the overall inventory value, it will
be easier for Justin to simply record the entire purchase as an office supplies expense (num-
bered as account 535).
• Potential pitfall: Mixing business finances with personal finances.

PARALEGAL
POTENTIAL
• Possible fallout: A CRA audit could reveal that you are claiming personal expenses
PITFALLS
in your business deductions and as a result may reassess your tax return. You
may owe interest and penalties on any balance reassessed by the CRA.
• Proposed recommendation: Keep separate personal accounts and business
accounts and separate personal credit cards and business credit cards.
29
LEGAL ACCOUNTING
CHAPTER SUMMARY
One of the first challenges a paralegal starting a firm might encounter is obtaining financing for the busi-
ness. This involves preparing a business plan that presents the investment being made and forecasts the
anticipated income and expenses. Knowing the language of accounting will help you to communicate your
plans and needs to an investor, whether a financial institution or an individual. You want to understand
the general principles applied in maintaining records and be able to present a financial plan in a profes-
sional manner when asked to do so. Many situations may require you to be conversant with the language
and principles that apply to record-keeping.
You have seen the categories of accounts and know why you need to have a chart of accounts. The rules
of debit and credit will be explored in detail in the chapters that follow.
KEY TERMS
accounting equation, 24 government users, 20
accounting standards for private enterprises income, 23
(ASPE), 21 internal controls, 24
accrual basis of accounting, 21 internal users, 20
assets, 22 international financial reporting standards
capital account, 26 (IFRS), 21
cash basis of accounting, 22 liabilities, 23
chart of accounts, 23 net income, 27
closing balance, 26 net loss, 27
current assets, 22 normal balance, 23
double-entry bookkeeping, 24 opening balance, 26
expanded accounting equation, 26 owner’s equity, 23
expenses, 23 profit, 27
external users, 20 shareholder’s equity, 23
fixed or capital assets, 22 stakeholders, 20
general journal, 22 withdrawals, 26
generally accepted accounting principles
(GAAP), 21
FURTHER READING
CPA Canada Handbook: Accounting (Toronto: Chartered Professional Accountants of Canada, 2017 with
annual updates).
30
REVIEW QUESTIONS
True or False
1. Cash and capital are equivalent terms that can be used interchangeably. (LO3)
2. Going concern is one of the principles of accounting. (LO2)
3. In accrual accounting, cash must be received before the transaction is recognized on the
financial statement. (LO2)
4. For every transaction reported on a financial statement, there are at least two entries. (LO5)
5. A chart of accounts is a standardized list of accounts that is only created using accounting
software. (LO3)
6. Businesses are concerned only about external stakeholders in their financial reporting. (LO1)
7. Paying down a bank loan or other forms of credit will decrease equity. (LO5)
8. Purchasing or selling assets will increase equity. (LO5)
9. The normal balance of a liability is a debit. (LO3)
10. Sole proprietors and partners take money out of their business by way of a salary. (LO5)
11. The equity account for a corporation is typically identified as shareholder’s equity. (LO3)
Short Answer
1. What does it mean to understand the financial position of your business (or even your personal
finances)? (LO1)
2. Which accounts have an impact on owner’s equity? (LO5)
31
LEGAL ACCOUNTING
PRACTICE EXERCISES
PRACTICE
EXCEL
Practice Exercise 2.1
Using the definitions explained in this chapter, determine the classification (assets, liabilities, owner’s
equity, income, and expenses) of each of the following account names. (LO3, LO5)
Account Name Category

1 Cash Asset
2 Motor Vehicle
3 Telephone Expense
4 Salaries and Wages
5 Professional Fees Earned
6 Capital
7 Computer Equipment
8 Accounts Receivable
9 Advertising Expense
10 Interest Earned
11 Prepaid Rent
12 General Bank Account
13 Office Equipment
14 Withdrawals
PRACTICE
EXCEL
Balance the accounting equation on each line by calculating the value of the missing number. (LO3)

35,000 = 15,000 + ?
Example:
Answer: 35,000 – 15,000 = 20,000
1 40,000 = 10,000 + ?
2 80,000 = ? + 60,000
3 ? = 24,000 + 10,000
4 ? = 5,000 + 10,000
5 20,000 = ? + 6,000
6 31,000 + ? = 24,000 + 10,000
7 58,500 = 2,500 + 80,000 – ?
8 1,700 + 5,000 = ? + 700
9 ? = 10,000 + 30,000
10 20,000 – 5,000 = 5,400 + ? + 8,000
32
PRACTICE
EXCEL
In the following list of accounts, complete the table to show the category of account: asset, liability, cap-
ital, withdrawal, income, or expense. (LO3, LO5)
Account Name Category

1 Accounting and Bookkeeping Expense Expense
2 Accounts Payable/General
3 Auto Expense
4 Credit Card Debt
5 Fees Earned
7 Insurance—Prof. Liability
8 Interest Income
9 Accounts Payable/General
10 Office Furniture
11 Owner, Capital
12 Owner, Drawings
13 Photocopy Expense
14 Prepaid Insurance
15 Prepaid Rent
16 Salaries
17 Utilities
18 Vacation Accrual Payable
33
LEGAL ACCOUNTING
PRACTICE
EXCEL
Using the worksheet provided, complete the expanded accounting equation by recording the following
transactions. (LO5)
1 Balances from the opening balance sheet were entered by Ann Litigate. She had invested $8,000
in her firm.
2 Office equipment costing $800 was purchased and paid for using cash.
3 Ann purchased $900 worth of office furniture from a furniture store on credit.
4 Ann paid for personal expenses from the firm’s bank account in the amount of $1,500.
5 Legal fees of $1,600 were invoiced to a client and the client paid the bill.
6 Legal fees of $800 were invoiced to a client and the client has not paid the bill.
7 Ann paid one month’s salaries expense in the amount of $2,000.
ASSETS = LIABILITIES + OWNER’S EQUITY

General Bank Accounts Office Furniture A. Litigate Fees
Transaction Account Receivable and Equipment = Accounts Payable + Capital – Withdrawals + Earned – Expenses
1 8,000 8,000
BAL 8,000 0 0 = 0 + 8,000 – 0 + 0 – 0
2
BAL = + – + –
3
BAL = + – + –
4
BAL = + – + –
5
BAL = + – + –
6
BAL = + – + –
7
END BAL = + – + –
TOTAL ASSETS = TOTAL LIABILITIES + TOTAL OWNER’S EQUITY
CAPITAL + PROFIT
– + –
+
= +
=
34
PRACTICE
EXCEL
For each of the following transactions, identify the account names and the account type using the chart
of accounts printed on the inside cover of this textbook. (LO5)
Transaction Account Name/Type

1. Paralegal contributed $10,000 to the legal
services firm from personal funds.
2. Paralegal took a draw ($1,200) against the

legal services firm’s equity for personal use.
3. Paralegal purchased a new all-in-one printer

for the office ($350) with cash.
4. Paralegal paid bookkeeper for bookkeeping

services ($1,000) with cash.
5. Paralegal paid office rent, which included

utilities and telephone ($1,500), with cash.
6. Paralegal billed a client for professional fees

and received payment from the client ($1,700).
7. Paralegal paid Law Society dues ($1,100).
8. Paralegal paid principal and interest on her

bank loan ($500 principal; $100 interest).
35
LEGAL ACCOUNTING
PRACTICE
EXCEL
Using the transactions from Practice Exercise 2.5, complete the following accounting equations.
Assume that the opening balances are as follows: Assets: $5,000; Liabilities: $2,500; and Owner’s
Equity: $2,500 (Capital). List each transaction entry under the appropriate heading of the expanded
accounting equation. (LO5)
Ann Litigate Paralegal Services

May 1 – May 31
TRANSACTION ASSETS LIABILITIES OWNER’S EQUITY
= + Capital – Withdrawals + Revenue – Expenses

Opening 5,000 = 2,500 + 2,500 – + –
1 = + – + –
2 = + – + –
3 = + – + –
4 = + – + –
5 = + – + –
6 = + – + –
7 = + – + –
8 = + – + –
Ending Balance = + – + –
PROOF =
36
Prepare Your Personal Balance Sheet

Using the table below, make a list of items you own on the left-hand side and
a list of debts you owe to creditors on the right-hand side, then calculate your
personal net worth.
Assets Liabilities
Total Liabilities
Owner’s Equity
Capital
Total Assets Total Liabilities and Owner’s Equity
37
3 Keeping Books
and Records
Accounting Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
41
Basic Rules of Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Business Transaction Source Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Analyzing the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Recording Transactions Using the Basic Accounting Equation . . . . . . . . . . 48
Examples of Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
The General Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Recording the Opening Balance Sheet in the Firm’s Records . . . . . . . . . . . 59
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
39
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Understand the concept of a fiscal year.
LO2 Understand the accounting cycle.
LO3 Demonstrate an understanding of debits and credits.
LO4 Complete an analysis of transactions using double-entry bookkeeping.
LO5 Record opening entries in PCLaw®.
LO6 Record transactions in a general journal.
LO1 Accounting Period

Accounting records are prepared, and procedures are performed, over the course of the
accounting period. The process that begins with analyzing and recording business trans-
actions into journals and ends with the completion of financial statements and a post-closing
trial balance is referred to as the accounting cycle. The steps in the accounting cycle are
described in the next section.
Accounting periods of equal length, called fiscal periods, are used to measure the finan-
cial progress of a business over time. Periods may be defined as monthly, quarterly, or
annual. The accounting or fiscal period refers to the period of time for which an income
statement is prepared. The length of each accounting period will vary depending on the type
and size of business being conducted. If the results are to be compared from one period to
the next, the results must be examined over consistent periods of time. It is not usually help-
ful to compare the results for a 6-month period with results for a 12-month period. When fil-
ing tax returns, the results reported to the CRA must cover a 12-month period. When the
period covers 12 months, it is called the fiscal year. The fiscal year-end is the date upon which
the financial year finishes. The fiscal year-end does not have to be December 31; it can be any
day of the year as long as it is consistent from one year to the next.
Selecting a year-end for a business depends on various concerns the owner may have, such
as the following:
• Are tax benefits available if the business does not use December 31 (the calendar year)
as the year-end?
• What additional records will be required if the business does not use the calendar year?
• Is the business seasonal, and does the owner prefer a fiscal period that corresponds to
a quiet time of the year?
• On what date did the firm originally begin business?
Once the fiscal year-end has been selected for tax purposes, the CRA will not allow
the selected date to be changed without its consent, as this would create inconsistencies in
the financial reports. Having a year-end that does not finish on December 31 complicates the
bookkeeping because many expenses—such as LSO dues, remittances of employees’ tax
deductions, and CPP and Employment Insurance (EI) premiums—must be calculated on a
calendar-year basis. T4 slips issued to employees must cover salary over the calendar year.
The additional record-keeping required when selecting a year-end other than December 31 is
often a deterrent.
40
CHAPTER 3 Keeping Books and Records
LO2 The Accounting Cycle

The accounting cycle is the process of analyzing and recording business transactions and produc-
ing financial statements from the information. This cycle takes place over a fiscal period covered
by the income statement. A business owner may wish to complete the cycle once every month,
every quarter, or once a year. Most businesses report on their financial activity monthly. Many
paralegals use a one-year accounting period but may produce interim reports each month.
The steps in the accounting cycle are completed in the following order:
1. After a business transaction occurs, journalize the transaction using a general journal,
trust journal, and/or specialized journal.
2. Post the journal entry to the general ledger and/or trust ledger.
3. Prepare the trial balance.
4. Prepare the worksheet.
5. Prepare the adjusted trial balance.
6. Prepare the financial statements.
7. Record adjusting and closing entries.
8. Calculate the post-closing trial balance.
Figure 3.1 illustrates the steps of the accounting cycle.
8 1
Calculate Journalize
post-closing transaction
trial balance
2
7 Post
entries
Record
adjusting and
closing entries
3
6 Prepare
trial balance
Prepare financial
statements
5 4
Complete
Prepare adjusted worksheet
trial balance
FIGURE 3.1 Steps of the accounting cycle

Note that the post-closing trial balance in step 8 is carried forward as the opening balance for the
next period.
41
LEGAL ACCOUNTING
Transactions
All financial activities involving the business are transactions. The process starts when the
business enters into a financial transaction. The transaction might be for cash (or cheque) or
for credit. As an example, the paralegal may purchase a piece of equipment, pay rent, or
charge fees to a client. An additional consideration for paralegals is that the transaction may
involve the trust account and trust records, instead of only the general bank account.
Journal Entries
As discussed in Chapter 2, the general journal is where journal entries are recorded. The gen-
eral journal is a chronological list of the transactions that occurred during an accounting
period. It is called the “book of original entry” because this is where transactions are first
recorded in chronological order. The basic general journal usually has two columns—a debit
column and a credit column. The journal entries involve a double-entry system in which
there is at least one debit entry and one credit entry for every transaction. The basic trust jour-
nals, which are also books of original entry, are used to record funds received in the trust
account and disbursements made from the trust account.
Posting
Once the entries have been recorded in the general journal, they are summarized using a
general ledger. The general ledger contains all the company accounts and is used to keep a
running total of the balance in each asset, liability, equity, income, and expense account. The
firm’s books will have one general ledger with a chart for each of the accounts used in the
business. Each general journal entry is posted to the account affected by the transaction. The
process of recording general journal entries to the general ledger is called posting. Posting
also will be done from the trust journal to the individual client trust ledgers so that the funds
held in the mixed trust account are properly accounted for.
Trial Balance
When the accounting period ends (month-end, quarter-end, or year-end), a list of the ending
balances in all the ledger accounts is prepared. This list is called a trial balance and it is per-
formed to ensure that the total debits are equal to the total credits. If they are not equal, this
indicates that an error occurred in one or more journal entries or in a general journal post-
ing. Errors must be corrected before proceeding to the completion of the financial state-
ments. It is important to note that a balanced trial balance does not necessarily mean that all
the transactions were recorded without error.
Worksheet
Sometimes period-end adjustments are needed for certain accounts. For example, a paralegal
may have paid motor vehicle insurance premiums and entered the amount as an asset under
the account called “prepaid insurance.” At the end of the period, part of the premium will
have been used up, and the amount used must be moved from the prepaid asset account on
the balance sheet to the expense account on the income statement. An adjusting entry would
be made to reduce the amount in the asset account (prepaid insurance) and increase the
insurance expense amount in the books to show how much insurance was expended.
42
If adjustments need to be made to the balances in any accounts after the trial balance is
prepared, a worksheet is used to make the changes required. The worksheet is an internal
document used to track the changes made to various accounts, usually after the period trans-
actions have been recorded in order to adjust accounts to their correct balances. Once the
adjustments for the period are done, an updated trial balance is prepared to ensure that the
debits and credits are still equal. This updated trial balance that occurs after the adjustments
have been made is called the adjusted trial balance.
Adjusting Journal Entries

Any adjustments made on the worksheet must be entered into the general journal and then
posted to the general ledger accounts in order to update and bring the entries from the work-
sheet into the closing balances of the firm.
Financial Statements
The financial statements—an income statement, a statement of owner’s equity, and a balance
sheet—are prepared once the adjusting entries have been entered in the general ledger, and
an adjusted trial balance has been prepared.
Closing the Books

The owner will want to start a new accounting cycle each fiscal year, so the revenue and
expense accounts in the ledgers (referred to as temporary accounts) must be closed. Revenue
and expense accounts are temporary because they are closed out each year-end and start the
next year at zero. Closing the books is the final step of the accounting cycle after adjusting a
entries are recorded, financial statements are prepared, and the closing entries are com-
pleted. The balance sheet accounts (the permanent accounts) are not closed at the end of the
cycle because the amounts in those accounts are carried forward from period to period.
LO3 Basic Rules of Debit and Credit

As a rule, the left side of the T-account is the debit side. The right side is the credit side. Do
not give any other meaning to the words debit and credit. Debit means left; credit means
right.
(T-account)
Debits (Dr.) = Credits (Cr.)
Left side = Right side
The double-entry method of accounting requires that at least two entries be made for each
transaction: a debit entry in one (or more) account(s) is always offset by an equal credit entry
in another account (or more than one account). In order for the books to be balanced, the total
value of the debits entered must always equal the total value of credits.
43
LEGAL ACCOUNTING
Debits and Credits

Points to keep in mind about the terms debit and credit:
• Assets are shown on the left side of the accounting equation and normally have a debit
balance (normal debit balance).
• Liabilities and owner’s equity are shown on the right side of the accounting equation
and normally have a credit balance (normal credit balance).
• Every transaction you record will have at least one debit and one credit. The total value
of the debits and credits must be equal when you are finished the entry.
• There may be a transaction, called a compound entry, that affects three or more
accounts. At the end of the entry, the total value of debits must still equal the total
value of credits. For instance, if a $10,000 vehicle is purchased with $4,000 cash and a
$6,000 loan, then there would be one debit entry (vehicle account) and two credit
entries (one for cash and one for the loan).
• A debit entry might increase the balance in some accounts (asset, withdrawal, and
expense accounts), but a debit entry might decrease the balance in other accounts (lia-
bility, capital, and revenue accounts).
• The ending account balance is the net amount of the debit entries and credit entries
posted to each specific account.
• A credit entry can increase the balance in some accounts (liability, capital, and revenue
accounts), and a credit entry can decrease the balance in some accounts (asset, with-
drawals, and expense accounts).
Loan Payable (Liability Account) General Bank Account (Asset Account)
Dr. Cr. Dr. Cr.
Entry on this side Entry on this side Entry on this side Entry on this side
decreases balance increases balance increases balance decreases balance
• What is known as a debit or credit on bank statements is actually the opposite of what
debits and credits mean in accounting. Although personal bank statements may show
deposits as a credit, a credit in a cash or general bank account in accounting records
does not result in an increase in the bank account balance; it actually represents a
decrease in the account balance. Bank statements are done from the perspective of the
bank and what it owes to its customers. When the bank issues an account statement,
it shows deposits made as a credit because the deposit is actually a liability for the
bank—the bank owes its customer the money they have deposited in their bank
account.
• Making an entry on the debit side (left side) or credit side (right side) is simply a system
used to increase or decrease the balance in an account—nothing more.
• All asset accounts, such as cash, equipment, or office furniture, normally have a
debit balance. Therefore, to increase the balance in an asset account, it is necessary
to debit the account. For example, if $1,000 in cash is deposited into the bank account,
the deposit will show in the books as a “general bank account” debit.
Dr. Cr.
Increase Decrease
1,000
44
• If a cheque for $50 is written from the general bank account, it is necessary to credit
the general bank account by that amount because the balance in the asset (general
bank account) is decreasing by $50 (credit), leaving a debit balance of $950.
Dr. Cr.
Increase Decrease
1,000
50
Bal. 950
• Liability accounts (such as loans payable or credit card debt) are shown on the right
side of the accounting equation and have a normal credit balance. To increase the bal-
ance in a liability account, the account is credited. For example, if a charge of $120 is
made to the credit card, it is necessary to credit the credit card debt account because
the debt is increasing.
Credit Card Debt
Dr. Cr.
Decrease Increase
120
• If a payment is made on the credit card debt, the amount of the debt decreases, which
is a liability, and an entry will need to be made on the debit side. If $100 was paid on
the credit card, it would show it as a debit, leaving a balance of $20 owing on the credit
card.
Credit Card Debt
Dr. Cr.
Decrease Increase
120
100
Bal. 20
• Owner’s equity is on the right side of the accounting equation. The capital account,
which shows the investment made by the owner in the business, has a normal credit
balance. If the owner invests $1,000 into the business, the capital account must be
credited to show an increase in the balance.
Justin Case, Capital
Dr. Cr.
Decrease Increase
1,000
• When a business owner takes $800 out of the business for personal use, it is called a
withdrawal. The drawings account (which has a normal debit balance) is debited when
a withdrawal is made because the owner’s capital (which has a normal credit balance)
is being decreased.
Justin Case, Withdrawal
Dr. Cr.
Increase Decrease
800
45
LEGAL ACCOUNTING
• Revenues are entered as a credit because when income is earned, this ultimately
results in an increase in the owner’s capital (which has a normal credit balance). Fees
earned of $2,000 would be shown on the credit side in the fees earned (revenue)
account (which has a normal credit balance).
Fees Earned
Dr. Cr.
Decrease Increase
2,000
• Expenses are entered as a debit because they ultimately reduce the owner’s capital. For
example, a telephone expense of $180 would be recorded as a debit.
Telephone Expense
Dr. Cr.
Increase Decrease
180
Business Transaction Source Documents

When a business transaction occurs, documented evidence of that transaction must be
retained. This may be an invoice sent online or in the mail, a receipt or voucher from a pur-
chase made at a store with cash or credit, or a deposit slip from the bank.
Receipts
TA X TIP
When reporting to the CRA, all receipts must be kept to prove the nature of all
business transactions. A charge shown on a credit card or bank statement, or even
a cancelled cheque, is not considered a valid receipt for tax purposes. The original
invoice from a vendor must be available for the purpose of auditing. The reason is
that although the charge shown on a bank statement or credit card indicates that
something was purchased at an office supply store, it does not specify what was
bought—were the purchases really office supplies for the business, or school sup-
plies for the owner’s children? The original receipt from the store explains what the
expense was for, not just the fact that money was spent at a particular place of business.
The receipt obtained must be entered into the firm’s books. A system for filing and main-
taining receipts must be established. Some people like to file bills by order of date. Others
prefer to have separate file folders by account. This enables a business owner to look at the
file and see all the bills charged to that account. For example, a business owner may wish to
have a file folder named Telephone Expense and place all bills related to telephone expenses
for the office in that file. If a question arises, the business owner needs to look through only
one folder rather than through the bills for all the items the firm may have purchased over a
particular period of time. Further, some choose to file their documents by clients and
vendors.
If a bill shows a charge for GST or HST, the registration number of the business must be
included on the bill. If the registration number is not shown, the tax department may refuse
to allow a credit for the tax paid.
46
LO4 Analyzing the Transaction

Business transactions must be recorded in the firm’s books. As previously mentioned, the
general journal is the book of original entry. When a general journal entry is made, the trans-
action must be analyzed to determine which accounts in the firm’s chart of accounts are
affected. The following five steps will help with the analysis:
• Which accounts are affected by the transaction? Think about what the firm is giving
and receiving in the transaction. Look at the chart of accounts and identify which
accounts will be used to record the transaction.
• Are the account balances increasing or decreasing?
• Which category does each affected account belong to? Is it an asset, liability, with-
drawal, capital, income, or expense account?
• Given the increase or decrease of each account and the rules of debit and credit, which
accounts will be debited and which accounts will be credited?
• Record the entry to the general journal or the T-accounts. Is the entry balanced? Are
debits and credits equal after the entry is made?
The biggest challenge for people learning double-entry bookkeeping is knowing which
account to use and when to debit or credit an account. One simple memory device to help dis-
tinguish debits from credits is the acronym DEAD CLIC (Figure 3.2).
Side of the account used to record an increase
Debit Credit
Accounts with a normal Expenses Liabilities Accounts with a normal
debit balance credit balance
Assets Income
+ = Dr. + = Cr.
Drawings Capital
DEAD CLIC
FIGURE 3.2 The acronym DEAD CLIC will help you distinguish debits from credits
DEAD stands for the categories of accounts that have a normal debit balance, that is,
expenses, assets, and drawings are debited to increase their balance. To decrease the balance
in any of these accounts, the account will need to be credited.
CLIC stands for the categories of accounts that have a normal credit balance, that is, liabil-
ities, income, and capital. To increase the balance in any of these accounts, the account must
be credited; to decrease the balance, the account will need to be debited.
The first step in using DEAD CLIC is to learn to recognize the category of account that is
being dealt with.
In a double-entry bookkeeping system, two or more accounts will be affected by any trans-
action. Remember that the total debits and credits must be equal after each entry is made in
the general journal.
47
LEGAL ACCOUNTING
Recording Transactions Using the

Basic Accounting Equation
Let’s go back to the original Justin Case opening balance sheet from Chapter 2, which is
shown again here in Figure 3.3.

Opening Balance Sheet
Oct. 1, 20**
Assets Liabilities
General Bank Account (cash) $5,000 Personal Loan $4,000
Computer Equipment 900 Credit Card Debt 500
Office Furniture 150 Total Liabilities $4,500
Owner’s Equity
FIGURE 3.3 Opening balance sheet
The T-accounts in Figure 3.4 illustrate how posting the opening entries affects the indi-
vidual ledger accounts. The total debits equal the total credits once all posting is completed.
When making the entries in the general journal, there are at least two entries for each trans-
action—an entry on the left side, debit (Dr.), and an entry on the right side, credit (Cr.). The
total debits are equal to the total credits.
Dr. Cr.
5,000
Computer Equipment
Dr. Cr.
900
Office Furn. & Equip.
Dr. Cr.
150
Personal Loan
Dr. Cr.
4,000
Credit Card Debt
Dr. Cr.
500
Justin Case, Capital
Dr. Cr.
1,550
Total Debits = 6,050 Total Credits = 6,050
FIGURE 3.4 T-accounts showing ledger balances after posting
48
Other Types of Entries

Sometimes you may run into an entry that involves more than two accounts or a shift in
assets.
Compound Entries
As previously mentioned, a compound entry requires more than one debit or more than one
credit. For example, if office furniture is purchased for $2,000, and $500 is paid by cheque and
$1,500 is purchased on credit, there will be three lines in the journal entry (see Figure 3.5).
Debit Credit
Office Furniture 2,000
General Bank Account 500
Accounts Payable/General Liabilities 1,500
To record purchase of office furniture
FIGURE 3.5 Recording a compound entry
Shift in Assets
A shift in assets occurs when two asset accounts are affected by the same transaction. For ex-
ample, suppose computer equipment that costs $1,000 is purchased, and it is paid for with
cash or cheque. There will be an increase in the computer equipment account, and the gen-
eral bank account will decrease. The total value of assets has not changed; however, the value
of the computer equipment account has increased and the value of the general bank account
has decreased, reflecting a shift in assets. This entry would be shown by debiting the com-
puter equipment account and crediting the general bank account (see Figure 3.6).
Debit Credit
Computer Equipment 1,000
General Bank Account 1,000
To record purchase of computer equipment
FIGURE 3.6 Recording a shift in assets
Examples of Transactions
The following examples illustrate the application of debits and credits in double-entry book-
keeping and recording transactions in a general journal.
49
LEGAL ACCOUNTING
EX AMPLE 1
On October 5, Justin Case wrote a cheque for $300 to Bell Canada to pay the telephone bill for his office.
Analysis of Transaction Result

Step 1: Which accounts are affected by • Telephone Expense is used to record telephone
the transaction? bills received.
• General Bank Account is used to record payment.
Step 2: Are the account balances • Telephone Expense will increase.
increasing or decreasing? • General Bank Account will decrease.
Step 3: Which category does each • Telephone Expense is an expense account.
affected account belong to? • General Bank Account is an asset account.
Step 4: Which accounts will be debited • Telephone Expense will be debited $300.
and which accounts will be • General Bank Account will be credited $300.
credited?
Step 5: Record the entry to the general • Yes, there is a debit of $300 and a credit of $300.
journal or the T-accounts. Is
the entry balanced?
General Journal GJ2

Date
20** Description PR Debit Credit
Oct. 5 Telephone Expense 300
General Bank Account (Cash) 300
Paid telephone expense for Oct.
50
EX AMPLE 2
Compound entry: On October 5, Justin Case purchased office furniture from IKEA for $2,000. He paid $500 by
cheque and $1,500 was put on his credit card. This compound entry will involve three different accounts.

Step 1: Which accounts are • Office Furniture and Equipment Fixtures is the
affected by the account used for furniture received.
transaction? • General Bank Account is used to record payment for
the furniture.
• Credit Card Debt is used to record the liability
incurred on the card.
Step 2: Are the account balances • Office Furniture and Equipment will increase.
• Credit Card Debt will increase.
Step 3: Which category does each • Office Furniture and Equipment is an asset account.
affected account belong • General Bank Account is an asset account.
to? • Credit Card Debt is a liability account.
Step 4: Which accounts will be • Office Furniture and Equipment will be debited $2,000.
debited and which • General Bank Account will be credited $500.
accounts will be credited? • Credit Card Debt will be credited $1,500.
Step 5: Record the entry to the • Yes, there is a debit of $2,000 and a credit of $500
general journal or the plus $1,500.
T-accounts. Is the entry
balanced?
General Journal GJ2

Date
5 Office Furniture and Equipment 2,000

Credit Card Debt 1,500
To record furniture purchased from IKEA
51
LEGAL ACCOUNTING
EX AMPLE 3
On October 8, Justin Case received $500 by way of a scholarship for having obtained the highest marks in his class.
Justin wishes to invest this amount in his firm.

Step 1: Which accounts are • General Bank Account is used to record cash
affected by the received.
transaction? • Justin Case, Capital is used to record an increase in
investment by the owner.
Step 2: Are the account balances • General Bank Account will increase.
increasing or decreasing? • Justin Case, Capital will increase.
Step 3: Which category does each • General Bank Account is an asset.

affected account belong • Justin Case, Capital is an owner’s equity account.
to?
Step 4: Which accounts will be • General Bank Account will be debited $500.
debited and which • Justin Case, Capital will be credited $500.
accounts will be credited?
Step 5: Record the entry to the • Yes, there is a debit of $500 and a credit of $500.
general journal or the
balanced?
General Journal GJ2

Date
– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –1
Oct. 5 Office Furniture and Equipment 2,000
8 General Bank Account 500

Justin Case, Capital 500
To record investment of scholarship
1 The broken lines here and in the tables that follow indicate that the page has been split, so that the whole general journal
need not be shown each time.
52
EX AMPLE 4
On October 10, Justin opened an account with a legal stationer, Legal Supplies Inc., and purchased office supplies
from them worth $580. Terms for payment on account are net 30 days, after which interest will be charged.

Step 1: Which accounts are • Office Supplies/General Expense is used because the
affected by the supplies will be used up within the year.
transaction? • Accounts Payable/General Liabilities is used to
record the promise to pay Legal Supplies Inc. for the
purchase on credit.
Step 2: Are the account balances • Office Supplies/General Expense will increase.
increasing or decreasing? • Accounts Payable/General Liabilities will increase.
Step 3: Which category does each • Office Supplies/General Expense is an expense

affected account belong account.
to? • Accounts Payable/General Liabilities is a liability
account.
Step 4: Which accounts will be • Office Supplies/General Expense will be debited
debited and which $580.
accounts will be credited? • Accounts Payable/General Liabilities will be credited
$580.
balanced?
General Journal GJ2

Date
––––––––––––––––––––––––––––––––––––––––––––––––––
Oct. 8 General Bank Account 500
10 Office Supplies/General Expense 580

Accounts Payable/General Liabilities 580
To record purchase from Legal Supplies Inc.
53
LEGAL ACCOUNTING
EX AMPLE 5
Shift in assets: On October 15, Justin purchased a second-hand filing cabinet at Office Equipment Inc., a used office
equipment store. He paid $100 by cheque.

Step 1: Which accounts are • Office Furniture and Equipment is used for the item
transaction? • General Bank Account is used for the item given.
Step 2: Are the account balances • Office Furniture and Equipment will increase.
Step 3: Which category does each • Office Furniture and Equipment is an asset account.
affected account belong • General Bank Account is also an asset account.
to?
Step 4: Which accounts will be • Office Furniture and Equipment will be debited $100.
balanced?
General Journal GJ2

Date
––––––––––––––––––––––––––––––––––––––––––––––––––
Oct. 10 Office Supplies/General Expense 580
15 Office Furniture and Equipment 100

Purchased filing cabinet from Office
Equipment Inc.
54
EX AMPLE 6
Payment for services rendered: On October 20, Justin gave a bill to his first client, Judith Sabourin, in the amount of
$3,000, and she paid him with a cheque.

Step 1: Which accounts are • General Bank Account is used to record the payment
transaction? • Fees Earned is used to record the bill given to the
client for the services rendered.
Step 2: Are the account balances • General Bank Account will increase.
increasing or decreasing? • Fees Earned will increase.
Step 3: Which category does each • General Bank Account is an asset account.
affected account belong • Fees Earned is an income account.
to?
Step 4: Which accounts will be • General Bank Account will be debited $3,000.
debited and which • Fees Earned will be credited $3,000.
Step 5: Record the entry to the • Yes, there is a debit of $3,000 and a credit of $3,000.
balanced?
General Journal GJ2

Date
––––––––––––––––––––––––––––––––––––––––––––––––––
Oct. 15 Office Furniture and Equipment 100
Purchased filing cabinet from Office
Equipment Inc.
20 General Bank Account 3,000

Fees Earned 3,000
To record fees billed to Sabourin and paid
55
LEGAL ACCOUNTING
EX AMPLE 7
Expenses: On October 30, Justin Case paid rent of $500 for one month. Use the same process to record this expense
as was used in example 1 to record an expense.

Step 1: What accounts are • Rent Expense is used to record rent charged.
affected by the • General Bank Account is used to record payment
transaction? given.
Step 2: Are the accounts • Rent Expense will increase.
Step 3: What category does each • Rent Expense is an expense account.

affected account belong • General Bank Account is an asset account.
to?
Step 4: Which account will be • Rent Expense will be debited $500.
account will be credited?
general journal or
balanced?
General Journal GJ2

Date
––––––––––––––––––––––––––––––––––––––––––––––––––
Oct. 20 General Bank Account 3,000
Fees Earned 3,000
30 Rent Expense 500

To record rent paid for one month
Figure 3.7 shows the general journal after all October transactions (Examples 1 through
7) have been entered and totalled.
56
General Journal GJ2

Date

8 General Bank Account 500


15 Office Furniture and Equipment 100

Purchased filing cabinet from Office Equipment Inc.

Fees Earned 3,000
30 Rent Expense 500

Totals 6,980 6,980
FIGURE 3.7 General journal after all October transactions have been entered and totalled
57
LEGAL ACCOUNTING
LO5 Recording Opening Entries in PCLaw®

PCL AW®
To get started, Justin Case must enter the account opening balances in the accounting system to create
an opening balance sheet. He has added any missing accounts using the set-up menu for the software.
He has also recorded the amounts for his investment in the firm in order to calculate his equity (or
investment) in the firm. Figure 3.8 shows the general ledger opening account balances as they appear
in PCLaw®.
FIGURE 3.8 General ledger opening balances for Justin Case, shown in PCLaw®
The amount to be entered on the line for Justin Case, Equity was shown at the bottom of the screen in the
Description column. Once the equity amount of $1,550 is entered, the Debits and Credits boxes at bottom of the
screen show debits of $6,050 and credits of $6,050 and the Balance box shows a zero balance, indicating that the
debits and credits are balanced. The system does not allow you to exit this screen if the total debits and total credits
are not equal so that the balance is zero.
Once the opening balances have been entered, Justin is able to print an opening balance sheet (Figure 3.9).
FIGURE 3.9 Opening balance sheet for Justin Case, Paralegal, shown in PCLaw®
58
LO6 The General Journal

As each transaction in Examples 1 through 7 was analyzed, it was recorded on page 2 (GJ2)
in the general journal. All the information regarding each transaction is captured in this
journal—the date the transaction occurred, the names of the accounts affected, the amounts
debited and credited, and an explanation of what the entry was for.
There are a number of conventions regarding journal entries that should be kept in mind:
• Enter the year on the first line at the top left of the first column.
• Enter the month on the first line of the journal entry. It is not necessary to enter the
month again until a new page is started or the month changes.
• Enter the date of the transaction in the second column on the first line of each entry.
Transactions are entered in chronological order (by order of date).
• Enter the name of the account to be debited on the first line of the entry. Note that deb-
its are always entered first. Use the name of the account as it is shown on the chart of
accounts being used by the firm. The description of the debit entry should be aligned
at the left margin. Enter the amount to be debited in the debit column on the same
line. Dollar signs are not used in journals and ledgers.
• Enter the name of the account to be credited on the next line of the entry, below the
debit line(s). Use the name of the account as it is shown on the chart of accounts being
used by the firm. The description of the credit entry should be indented by about three
spaces (or 1 cm). This provides a visual clue that the line is a credit entry. Enter the
credit amount in the credit column.
• Enter a brief explanation of what the entry is for. This entry is sometimes indented to
distinguish it from the credit entries. When providing the explanation for the trans-
action, indicate the name of who was paid or what month the bill was for.
• Leave one blank line between each new entry.
Post Reference Column

The post reference (PR) column in the general journal is left blank when a transaction is in-
itially recorded. Individual account numbers will be entered into the PR column when the
entry is posted to the general ledger accounts.
Recording the Opening Balance

Sheet in the Firm’s Records
The numbers from the opening balance sheet in Figure 3.3 are recorded in the firm’s general
journal when the firm’s books are first set up (see Figure 3.10). These entries are then posted
to the firm’s general ledger accounts as opening entries.
59
LEGAL ACCOUNTING
Justin Case, Paralegal GJ1

General Journal
Date
Oct. 1 General Bank Account 100 5,000
Computer Equipment 155 900
Office Furniture and Equipment 158 150
Personal Loan 205 4,000
Credit Card Debt 210 500
Justin Case, Capital 300 1,550
To record opening balance sheet
FIGURE 3.10 Opening entries
The balances from the opening balance sheet are recorded in the general journal. The
heading indicates that the page number is 1 (GJ1), which is the first page of the general jour-
nal. In addition:
1. The month and year are placed in the first column for the first entry. The month does
not repeat for entries that follow because the date did not change.
2. The descriptions of the debit entries (in the Description column) are aligned at the left
margin and the descriptions of the credit entries are indented by about three spaces (or
1 cm).
3. The PR column shows the general ledger account to which the amount was posted. The
account number is entered only after the amount has been recorded in the firm’s gen-
eral ledger.
4. “To record opening balance sheet” is the description of the general journal entries above.
• Potential pitfall: Not safeguarding books and records.

PARALEGAL
POTENTIAL
• Possible fallout: If you lose your financial information, be it paper or elec-

PITFALLS
tronic, you will be unable to properly report to the CRA, the LSO, or the LFO.
You may face fines or penalties for failing to report on time. You would waste
valuable billing time spent recreating your financial information.
• Proposed recommendation: Store duplicate copies of paper documents off-
site. If using an electronic bookkeeping system, make sure you backup your
data regularly and store copies of electronic records offsite. Update comput-
ers and software when needed.
60
CHAPTER SUMMARY
The accounting cycle has been briefly described in this chapter. You have learned about the practical fac-
tors to consider in selecting a fiscal year. The concepts of debit and credit have been explained, and you
should understand how to analyze transactions. You should be starting to understand the accounting
equation and the rules of debit and credit.
Analyzing business transactions and entering them into a journal are only the first two steps in the
accounting cycle, but getting them right at this stage will make completion of the other steps in the cycle
much easier. The accuracy of entries in the general journal and other journals is the key to smooth sailing
for completion of the other steps.
KEY TERMS
accounting cycle, 40 fiscal year, 40
accounting period, 40 general ledger, 42
adjusted trial balance, 43 journal entries, 42
adjustments, 43 normal credit balance, 44
closing the books, 43 normal debit balance, 44
compound entry, 44 post-closing trial balance, 41
credit (Cr.), 48 Posting, 42
DEAD CLIC, 47 T-accounts, 43
debit (Dr.), 48 trial balance, 42
financial statements, 43 worksheet, 43
fiscal periods, 40
FURTHER READING
guide_final-s.pdf>.
61
LEGAL ACCOUNTING
REVIEW QUESTIONS
True or False
1. Debit entries always cause an increase in an account. (LO3)
2. Adjustments made on a worksheet should be transferred directly to the appropriate financial
statement. (LO2)
3. Credit entries are found on the right side of the accounting equation or T-account. (LO3)
4. The accounting period is established by the tax regulator (for example, the CRA). (LO1)
5. Accounting periods or fiscal periods may be calculated monthly, quarterly, or annually. (LO1)
6. The normal balance for expense accounts is a debit entry. (LO3)
7. The normal balance for asset accounts is a credit entry. (LO3)
8. Each transaction must have a minimum of one debit record entry and one credit record entry.
(LO3)
Short Answer
1. What are the pros and the cons of electing a December 31 fiscal year-end? (LO1)
2. What does it mean to close the books? (LO2)
62
PRACTICE EXERCISES
PRACTICE
EXCEL
In the following list of accounts, complete the table as follows:
a. Indicate the category of account: asset, liability, capital, withdrawal, income, or expense. (LO3)
b. Indicate the normal balance for that category of account. (LO3)
c. Indicate whether the balance in the account increases or decreases when an entry is made on the
side indicated. (LO4)
Normal Increases/
Account Name Category Balance Side Decreases
1 Accounting and Bookkeeping Expense Expense Debit Dr. Increases
2 Accounts Payable/General Dr.
3 Auto Expense Cr.
4 Credit Card Debt Cr.
5 Fees Earned Cr.
6 General Bank Account Dr.
7 Insurance—Prof. Liability Dr.
8 Interest Income Cr.
9 Office Furniture Dr.
10 Owner, Capital Cr.
11 Owner, Drawings Cr.
12 Photocopy Expense Dr.
13 Prepaid Insurance Dr.
14 Prepaid Rent Cr.
15 Salaries Dr.
16 Utilities Cr.
17 Vacation Accrual Payable Cr.
18 General Bank Account Cr.
63
LEGAL ACCOUNTING
PRACTICE
EXCEL
Complete the T-account chart based on the opening balances provided for each account and the trans-
actions listed. Calculate the ending balance for each account. Opening balances are shown in green. (LO3)
1 Withdrew $5,000 from legal practice for personal use.
2 Billed and received payment for legal services rendered, $2,300 (Client A).
3 Received payment for legal services rendered, $1,800 (Client B). This client was billed previously
and an account receivable for the amount of the account had been recorded at that time.
4 Paid supplier for legal texts, $400.
5 Paid process server for filing court documents, $130.
6 Paid for Internet and business email services, $105.
7 Obtained business line of credit, $15,000.
8 Paid interest on bank loan, $85.
General Bank Account Accounts Receivable

Dr. Cr. Dr. Cr.
8,000 3,000
Liabilities Owner’s Equity

Dr. Cr. Dr. Cr.
2,000 9,000
Professional Fees Earned Expenses

Dr. Cr. Dr. Cr.
64
PRACTICE
EXCEL
Using the examples in the box below as a guide, show the increase and decrease that occurs for each of
the transactions in the following T-accounts. Identify and insert the name of the account affected in
each transaction and place the amount on the debit or credit side depending on whether the account is
increasing or decreasing. (LO3)
Example of T-account form:
Accounting Equation: Assets (left) = Liabilities + Owner’s Equity (right)
Example balance sheet:
Assets (100) Liabilities (200)

Debit Credit Debit Credit
(+) Increase (–) Decrease (–) Decrease (+) Increase
Owner’s Equity (300) Owner, Drawings (350)

(–) Decrease (+) Increase (+) Increase (–) Decrease
Example income statement:
Income (400) Expenses (500)

(–) Decrease (+) Increase (+) Increase (–) Decrease
Transactions
a. A paralegal invests capital ($10,000) in a legal services firm.
Dr. Cr. Dr. Cr.
b. A paralegal bills a client for fees ($8,000) on account.
Dr. Cr. Dr. Cr.
c. A paralegal receives a cheque as payment from a client ($5,000) on an outstanding account for
legal services.
Dr. Cr. Dr. Cr.
65
LEGAL ACCOUNTING
d. A paralegal pays an invoice for professional liability insurance with cash ($1,100).
Dr. Cr. Dr. Cr.
PRACTICE
EXCEL
Using the examples in the box below as a guide, analyze each transaction that follows and record the
appropriate entries in general journal format. (LO3, LO4)
Example: On October 1, Judy Roth wrote a cheque for $300 to Minitel in

payment of the phone bill.
Which two accounts are affected?
General Bank Account Telephone Expense
To which category do the affected accounts belong?
Assets Expenses
Is the affected account balance increasing or decreasing?

Decreasing Increasing
Will the account be debited or credited?

Credit Debit
What amount will be debited or credited to each account?

300 300
Record the journal entry for this transaction:

Date
20** Description Dr. Cr.
Payment of September telephone bill
Transactions
a. On October 1, Judy Roth invested $2,000 in her firm.
b. On October 1, Judy Roth purchased computer equipment on account (that is, on credit) for $800.
c. On October 5, Judy Roth invoiced a client for professional fees of $2,500.
66
d. On October 10, Judy Roth received partial payment of $1,500 from a client for the invoice sent in
transaction (c), above.
e. On October 15, Judy Roth paid $600 cash for office furniture.
Use a general journal format to illustrate the transactions in Practice Exercises 3.5 through 3.10.
PRACTICE
EXCEL
Paying Office Expenses (LO3, LO4, LO6)
a. May 1: Ann Litigate wrote a general cheque #25 for $200 to pay her telephone bill.
b. May 1: Ann Litigate wrote a general cheque #26 for $25 to pay Staples for office supplies expense.
PRACTICE
EXCEL
Compound Entries (LO3, LO4, LO6)
a. May 1: Ann Litigate purchased a computer for $1,000 from Computers R Us. She paid for the com-
puter using a credit card and a general cheque. The cheque (#27) was written for $300 and
she put $700 on the credit card.
b. May 1: Ann Litigate paid three months’ rent with a general cheque #28 in the amount of $3,000
($1,000 per month). Of that amount, $1,000 was rent expense for the current month and
$2,000 was prepaid rent for the next two months’ rent.
PRACTICE
EXCEL
Recording and Paying Accounts Payable (LO3, LO4, LO6)
a. May 15: Ann Litigate purchased a photocopier on account (on credit) from Sharpie Copiers. The
cost of the copier is $5,000 and payments are to be made at the rate of $300 per month
until the amount is paid in full. Her first payment is due on June 15.
b. June 15: Ann Litigate made a payment to Sharpie Copiers against the amount owed to them for
the copier in the amount of $300 (cheque #29).
PRACTICE
EXCEL
Recording a Shift in Assets (LO3, LO4, LO6)
a. May 15: Ann Litigate purchased a fax machine from FaxMe and paid $150 with a general
cheque #30.
PRACTICE
EXCEL
Recording Invoices Sent to a Client and Recording Payment on Account by a Client (LO3, LO4, LO6)
a. May 1: Ann Litigate prepared invoice #10 for fees earned and mailed it to her client Barbara Short
for $1,500.
b. May 30: Barbara Short sent a cheque for $1,000 to the firm in partial payment of invoice #10.
67
LEGAL ACCOUNTING
PRACTICE
EXCEL
Recording Investment by Owner and Withdrawal by Owner (LO3, LO4, LO6)
a. May 1: Ann Litigate deposited $10,000 of her personal funds as an investment in her firm.
b. May 15: Ann Litigate withdrew $800 from the firm for her own personal living expenses
(cheque #31).
PRACTICE
EXCEL
Ann Litigate opened her paralegal service practice, Ann Litigate Paralegal Services, in January 20**.
For each of the following transactions, analyze the transaction and prepare the appropriate general jour-
nal entry. (LO3, LO4, LO6)
January 1 – 31, 20**:
1 Made initial capital investment, $10,000
1 Paid professional liability insurance expense in full for the next 12 months with cash, $1,100
1 Law Society membership dues paid for one month with cash, $125
2 Paid monthly business insurance with cash, $50
3 Purchased office furniture with cash, $500
4 Paid for computer software by credit card, $250
5 Paid for cellphone bill by credit card, $75
5 Paid for telephone and Internet service by credit card, $145
10 Paid for court filing fee by credit card (for client R. Scott), $200
15 Invoiced client (L. Bailey, invoice #101) for initial consultation, $175
15 Paid biweekly salary for secretary with cash, $1,000
18 Paid installment payment for leased photocopier (equipment) with cash, $240
23 Invoiced client (R. Smythe, invoice #102) for provincial offences file, $300
25 Paid process server for service of court documents and court filing by credit card for client
(R. Scott), $108
26 Purchased legal accounting publication, Law Practice, Billing & Accounting, by credit card, $100
27 Retained bookkeeper based on a one-year contract and paid in advance with cash, $2,000
30 Withdrew cash from the business for personal use, $800
30 Paid biweekly salary for secretary with cash, $1,000
30 Paid bank account charges with cash (direct bank payment), $35
Ann Litigate Paralegal Services GJ1

General Journal
Date
68
PRACTICE
EXCEL
a. Complete the T-accounts based on the transactions in Practice Exercise 3.11 and provide the bal-
ance for each balance sheet account. Note: Each account starts with $0 opening balance for the pur-
pose of this exercise. (LO3, LO4)
T-Accounts (Assets)
General Bank Account (100) Computer Software (160)
Dr. (+) Cr. (–) Dr. (+) Cr. (–)
0 0
OPENING BALANCE OPENING BALANCE
Prepaid Insurance (125) T-Accounts (Liabilities)

Dr. (+) Cr. (–)
Credit Card Debt (210)
0
OPENING BALANCE Dr. (–) Cr. (+)
0
OPENING BALANCE
Prepaid Expense (135)

Dr. (+) Cr. (–)
0 T-Accounts (Owner’s Equity)
OPENING BALANCE
Owner, Capital (300)

Dr. (–) Cr. (+)
0
OPENING BALANCE
Accounts Receivable (120)
Dr. (+) Cr. (–)
0
OPENING BALANCE
Owner, Drawings (301)

Dr. (+) Cr. (–)
0
OPENING BALANCE
Office Furniture and Equipment (159)
Dr. (+) Cr. (–)
0
OPENING BALANCE
69
LEGAL ACCOUNTING
b. Complete the T-accounts based on the transactions in Practice Exercise 3.11 and add up the totals
for each income and expense account; then, as a final step, total all the income and expense
accounts. (LO3, LO4)
T-Accounts (Income)
Fees Earned (400)
Dr. (–) Cr. (+)
T-Accounts (Expenses)
Salaries Expense (511) General Disbursement Expense (525)
Dr. (+) Cr. (–) Dr. (+) Cr. (–)
Telephone (and Internet Service) Library and Subscriptions (530)

Expense (565) Dr. (+) Cr. (–)
Dr. (+) Cr. (–)
Insurance/Other (528)
Membership/Professional Dues (534) Dr. (+) Cr. (–)
Dr. (+) Cr. (–)
Bank Charges (507)

Equipment Lease (524) Dr. (+) Cr. (–)
Dr. (+) Cr. (–)
Total Income and Expenses

TOTAL INCOME: $ TOTAL EXPENSES: $
70
Case Example: Analysis of Transactions

Ann Litigate is updating her bookkeeping records in preparation for the monthly meeting with her
accountant. She has the following transactions to enter in the general journal, but she is not sure
how to analyze the transactions in order to complete the entries. Use the chart of accounts on the
inside front cover of this textbook and provide your analysis of the transactions listed below:
1. Ann invoiced her client on January 1 ($3,000), but the account is now more than 40 days
past due. What is the entry? What options are available to Ann?
2. Ann earned $1,200 for legal services rendered on another client file. She received a partial
payment ($700) by cheque, but there is an outstanding balance of $500. What is the entry?
71
4 Posting and Trial
Balance
General Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Posting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74
75
Preparing the Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
73
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Post transactions from the general journal to the general ledger.
LO2 Prepare a trial balance.
In Chapter 3, we recorded the opening balance in a general journal, and we recorded trans-
actions for the month of October in the general journal. The next step in the accounting cycle
is to post these entries to a general ledger.
General Ledger
The general ledger provides a summary of the information contained in the general journal.
The information from the general journal is summarized by posting or transferring the in-
formation to the accounts in the general ledger. Without a summary, the firm cannot know
what its bank balance is or how much money has been spent to date in any particular account.
The summary is also required for preparation of financial statements.
The general ledger contains a chart or table for each of the accounts listed on the compa-
ny’s chart of accounts, along with the account number. The example in Figure 4.1 shows the
format for a simple general ledger. The name of the account is General Bank Account; the
account number is 100. The post reference (PR) column is used to indicate the page number
of the general journal where the original transaction was recorded. This makes it easy to
cross-reference and identify journal entries.
The columns in the ledger table include a column for the year and date, an explanation,
the post reference, a column for debits, a column for credits, and a column for the ending bal-
ance. The column to the left of the balance column is headed “Dr./Cr.” This column is used
to indicate whether the running balance is a debit balance or a credit balance. It does not refer
to the entry made on that line, but to the running balance of the account. The running total
will need to be calculated after making each entry in the general ledger accounts.
A general bank account is an asset and usually has a “Dr.” balance, unless the account is
overdrawn (or “in the red”). If the balance in the bank is negative, indicate “Cr.” in the Dr./
Cr. column. The ledger accounts are grouped by category in the same order as they appear in
the chart of accounts: assets, liabilities, owner’s equity, income, and expenses.
General Bank Account Account No. 100

Date
20** Explanation PR Debit Credit Dr./Cr. Balance
FIGURE 4.1 Sample general ledger account
74
CHAPTER 4 Posting and Trial Balance
LO1 Posting
Each entry in the general journal (see Figure 4.2) must be copied to the individual general
ledger accounts. Each debit and credit entry must be posted in the same order as it appears
in the general journal. Posting is recording the debits and credits for each transaction from
the general journal into the general ledger.
EX AMPLE
General Journal
Date
Oct. 1 General Bank Account 6100 5,000
Computer Equipment (Hardware) 6155 900
Office Furniture and Equipment 6158 150
Personal Loan 6 205 4,000
Credit Card Debt 6 210 500
To record account balances from opening balance sheet
Totals 6,050 6,050
FIGURE 4.2 General journal entry to record opening account balances
To post the general journal entry dated October 1 (Fig- STEP 4

ure 4.2) to the general ledger, the following steps should
Calculate the running balance.
be taken (the numbered steps are shown in superscript
in Figure 4.2 and in the following posting entries):
STEP 5
STEP 1 Indicate whether the balance is a debit or a credit bal-
ance in the Dr./Cr. column.
In the general ledger, find the account called General Bank
Account (Figure 4.3). Enter the amount of $5,000 in the
STEP 6
debit column. Because the $5,000 is debited in the general
journal, it must be shown as a debit in the general ledger. Put the number of the account to which the entry was
posted in the “PR” column of the general journal (Fig-
STEP 2 ure 4.2). Post referencing indicates which transactions
have or have not been posted from the general journal
Enter “GJ1” in the PR column of the ledger. This tells
to the general ledger, and also indicates the account to
anyone looking at the books that the debit came from
which the entry has been posted.
page 1 of the general journal.
Repeat steps 1 to 6 to post the second line of the
STEP 3 general journal entry (the credit side) to the Computer
Equipment (Hardware) account in the general ledger
Enter the transaction date in the date column of the
(Figure 4.3).
ledger as shown in the general journal.
75
LEGAL ACCOUNTING
The process provides a trail to show the ledger account because the explanation is in the general journal. If any-
to which an entry in the general journal was posted, and one needs to know what the $1,000 posted on October 1
also shows where the number in the ledger came from. was for, he or she can refer back to page 1 of the general
This process continues until each transaction is entered in journal (GJ1), where the explanation is found. However,
the correct general ledger and the amounts in the general an explanation may be added if the bookkeeper wishes
ledger are totalled to summarize the transactions. to provide extra details about an entry.
An explanation is usually provided for opening entries, Once all the journal entries for the opening account
adjustments, or closing entries. Note that otherwise, no balances have been posted, the general ledger accounts
explanation is required in the general ledger. This is for Justin Case’s firm will appear as in Figure 4.3.
General Ledgers — Justin Case
General Bank Account Acct. No. 6100

Date
3Oct. 1 Opening Entry 2GJ1 15,000 5Dr. 45,000
Computer Equipment (Hardware) Acct. No. 6155

Date
3Oct. 1 Opening Entry 2GJ1 1900 5Dr. 4900
Office Furniture and Equipment Acct. No. 6158

Date
3Oct. 1 Opening Entry 2GJ1 1150 5Dr. 4150
Personal Loan Acct. No. 6205

Date
3Oct. 1 Opening Entry 2GJ1 14,000 5Cr. 4 4,000
Credit Card Debt Acct. No. 6210

Date
3Oct. 1 Opening Entry 2GJ1 1500 5Cr. 4500
Justin Case, Capital Acct. No. 6300

Date
3Oct. 1 2GJ1 11,550 5Cr. 41,550
FIGURE 4.3 Posting opening entries to the general ledger accounts
76
Assume that the journal entries for the rest of October extend to the next page in the general journal (GJ2). Once
all the journal entries for the remainder of October have been posted, the general journal for Justin Case’s firm will
appear as in Figure 4.4.
Justin Case, General Journal GJ1

Date
Oct. 1 Opening Entries
General Bank Account 100 1,000
To record funds invested by owner
1 General Bank Account 100 4,000

Personal Loan 205 4,000
To record loan from father, James Case
1 Computer Equipment, Hardware 155 900

Justin Case, Capital 300 900
To record computer equipment invested by owner at fair market value
1 Office Furniture and Equipment 158 150

To record office furniture invested by owner at fair market value
Totals 6,050 6,050
77
LEGAL ACCOUNTING

Date
Oct. 5 Telephone Expense 565 300
General Bank Account (Cash) 100 300
To record telephone expense for Oct.
5 Office Furniture and Equipment 158 2,000

General Bank Account (Cash) 100 500
Credit Card Debt 210 1,500
8 General Bank Account 100 500

10 Office Supplies/General Expense 535 580

Accounts Payable/General Liabilities 200 580
15 Office Furniture and Equipment 158 100

General Bank Account 100 100
Purchased filing cabinet from Office Equipment Inc.
20 General Bank Account 100 3,000

Fees Earned 400 3,000
30 Rent Expense 538 500

Totals 6,980 6,980
FIGURE 4.4 General journal entries for October transactions
78
After Justin Case has posted all the entries made to date on pages GJ1 and GJ2, the general ledger will have the bal-
ances shown in Figure 4.5. Note that the accounts that do not have any entries are omitted at this time. The general
ledger accounts will be added as required as we complete the posting.
General Ledgers — Justin Case

Date
Oct. 1 GJ1 5,000 Dr. 5,000
5 GJ2 300 Dr. 4,700
5 GJ2 500 Dr. 4,200
8 GJ2 500 Dr. 4,700
15 GJ2 100 Dr. 4,600
20 GJ2 3,000 Dr. 7,600
30 GJ2 500 Dr. 7,100
Computer Equipment (Hardware) Acct. No. 155

Date
Oct. 1 Opening Balance GJ1 900 Dr. 900
Office Furniture and Equipment Acct. No. 158

Date
Oct. 1 Opening Balance GJ1 150 Dr. 150
5 GJ2 2,000 Dr. 2,150
15 GJ2 100 Dr. 2,250
Accounts Payable/General Liabilities Acct. No. 200

Date
Oct. 10 Legal Supplies Inc. GJ2 580 Cr. 580
Personal Loan Acct. No. 205

Date
Oct. 1 Opening Balance—James Case GJ1 4,000 Cr. 4,000
Credit Card Debt Acct. No. 210

Date
Oct. 1 Opening Balance GJ1 500 Cr. 500
5 GJ2 1,500 Cr. 2,000
79
LEGAL ACCOUNTING
Justin Case, Capital Acct. No. 300

Date
Oct. 1 Opening Balance GJ1 1,550 Cr. 1,550
8 GJ2 500 Cr. 2,050
Fees Earned Acct. No. 400

Date
Oct. 20 GJ2 3,000 Cr. 3,000
Office Supplies/General Expense Acct. No. 535

Date
Oct. 10 GJ2 580 Dr. 580
Rent Expense Acct. No. 538

Date
Oct. 30 GJ2 500 Dr. 500
Telephone Expense Acct. No. 565

Date
Oct. 5 GJ2 300 Dr. 300
FIGURE 4.5 General ledger accounts after October posting completed
LO2 Preparing the Trial Balance

A trial balance lists all the accounts in the general ledger with the debit or credit balance
shown for each account (see Figure 4.6). The trial balance is not a financial statement, but the
information in it is used to prepare financial statements. List the accounts in the trial balance
in the same order as they appear in the general ledger. The ending balance from each of the
ledger accounts must be entered in the appropriate debit or credit column. At the end, the
total is calculated for each column, and the total debits must equal the total credits. Draw a
single line above the totals and a double line below the totals.
The heading of the trial balance contains three lines: who, what, and when. The first line
identifies the firm (who), the second line names the statement (what), and the third line
shows the date of the statement or the period it covers (when).
The trial balance is important because it proves that the entries were properly balanced in
the general journal, that they were properly posted to the general ledger, and that the bal-
ances in the general ledger were correctly calculated.
80

Trial Balance
October 31, 20**
# Account Debit Credit
100 General Bank Account $7,100
155 Computer Equipment (Hardware) 900
200 Accounts Payable/General Liabilities $580
205 Personal Loan 4,000
210 Credit Card Debt 1,500
300 Justin Case, Capital 2,550
400 Fees Earned 3,000
538 Rent Expense 500
565 Telephone Expense 300
$11,630 $11,630
FIGURE 4.6 Trial balance
If the totals in the trial balance are not equal, it is likely that one or more errors were made.
These must be found before proceeding further.
Finding Errors in the Trial Balance

To find any errors, follow these steps and work backwards from the last step that was
completed:
1. Calculation error: Check the calculation of the totals in the trial balance. Subtract total
debits from total credits to see what the difference is, then notice if that amount is rec-
ognizable from a journal entry or general ledger that may have been incorrectly posted
or accidentally omitted.
2. Copying error: Check to ensure that the amounts in the general ledger were copied cor-
rectly to the trial balance.
3. Calculation error: Check the arithmetic to ensure that an error was not made in calculat-
ing one or more balances in the ledger accounts.
4. Wrong column: Check to see if a credit amount was entered into the debit column in the
ledger account while posting from the general journal.
5. Wrong column: Check to see if a debit amount was entered into the credit column in the
ledger account while posting from the general journal.
Some errors can still exist even if the debit and credit totals in the trial balance are equal:
• Amounts posted to the wrong ledger account.
• Leaving out an entire transaction when posting from the general journal to the gen-
eral ledgers.
• Compensating errors (an error on the debit side that offsets an error of equal value on
the credit side).
81
LEGAL ACCOUNTING
Common Mistakes
Trying to find mistakes in the trial balance can be frustrating, so here are a few tricks:
1. There is probably a mathematical error if the difference between the total debits and cred-
its is off by 10, 100, 1,000, and so on.
2. There is probably an omission error if the difference is equal to the balance in one of the
general ledger accounts. The amount may accidentally have been omitted. It is also pos-
sible that the number was not posted from the general journal.
3. There is probably a posting error if you can divide the difference in debits and credits by
two. Check to see if a debit was entered on the credit side by mistake, or vice versa, in
the ledger or in the trial balance. For example, a difference of $60 divided by two is $30.
This means that $30 was debited to an account instead of correctly entering the amount
as a credit, or vice versa.
4. There is probably a transposition error if the difference is divisible by nine. A transposi-
tion is the accidental reversal of digits—for example, entering $91 instead of $19 or
$5,520 instead of $5,250. When the numbers are subtracted from each other and the dif-
ference is divided by nine, the result will be an even number. For example, $5,520 –
$5,250 is $270. When $270 is divided by nine, the result is an even $30, which indicates
a possible transposition error.
5. There is possibly a slide error. A slide is an error resulting from incorrect placement of the
decimal point in writing numbers. For example, $5,250 may have been entered as $52.50.
6. There may be a copying error. Compare the balances in the trial balance with the ledger
accounts to check for copying errors.
7. There may be a calculation error. Recalculate the balances in each ledger account.
8. There may be a posting error. Trace all postings from the journal to the ledger.
If the error cannot be found after having completed all these steps, take a break. Next time
you look at the numbers with fresh eyes, the error will probably jump out at you.
• Potential pitfall: Confusing the general ledger charts columns. Each account has a separate general led-
PARALEGAL
POTENTIAL
ger to track the running total. The columns highlighted in blue below (the “Debit” and “Credit” col-
PITFALLS
umns) are like a mini T-account. This is where the debit or credit from that particular journal entry is
recorded. The yellow columns on the right (the “Dr./Cr.” and “Balance” columns) are the running total
of that account, to be kept up to date after each transaction line is posted. The Dr./Cr. column indicates
the sign of the ending account balance. For instance, if the General Bank has a balance of $12,500 and
$2,000 is spent, then the $2,000 is credited in the blue column. The yellow column shows that the end-
ing balance in General Bank is $10,500 and the Dr. associated with the ending balance represents posi-
tive cash remaining. If the column indicated Cr., then that would mean there is a negative cash balance.
Date
Mar 1 Opening balance 12,500 Dr. 12,500
3 2,000 Dr. 10,500
• Possible fallout: Incorrect ending balances in the general ledger leads to an imbalanced trial balance
and incorrect financial statements.
• Proposed recommendation: Be sure to understand the two right-hand columns on the general ledger
and double check the balances for whether or not the ending balance makes sense.
82
Trial Balance
PCL AW® Once opening balances and transactions for the month of October are entered in PCLaw®, the trial bal-
ance is produced using the GL Statements function, as shown in Figure 4.7.
FIGURE 4.7 In PCLaw®, the trial balance is produced using the GL Statements function
83
LEGAL ACCOUNTING
CHAPTER SUMMARY
The accounting cycle starts with an analysis of transactions, which are then recorded in a general journal.
Once the entries have been added to the journal, they must be summarized; this is accomplished by post-
ing the entries to general ledger accounts and calculating the balance for each general ledger account. The
balances in the general ledger are then entered in a trial balance to ensure that the debits are equal to
the credits.
KEY TERMS
post reference (PR), 74 transposition, 82
slide, 82
FURTHER READING
Law Society of Ontario, The Bookkeeping Guide for Paralegals (Toronto: LSO, February 2014), online:
guide_final-s.pdf>. (See especially item 7, Clients’ General Ledger.)
In re Nortel Networks Corp Securities Litigation, Master File No 04 Civ 2115 (LAP) (10 September 2004
and 16 September 2005).
Nortel Networks Corporation (Re), 55 CBR (5th) 229, 2009 CanLII 39492 (Ont Sup Ct J).
Ontario Public Service Employees Union Pension Trust Fund v Clark, 77 OR (3rd) 38, 2005 CanLII 51027
(Ont Sup Ct J).
Re Nortel Networks Corporation (2006), 29 OSC Bull 8608.
84
REVIEW QUESTIONS
Short Answer
1. What does it mean to “post” to the general ledger? (LO1)
2. When receiving a payment in cash, does this increase or decrease the general bank account? How
do you record an increase in this account? How do you record a decrease? (LO1)
3. How do you characterize or recognize a payment to the owner of the law firm (for example, Justin
Case) for his services? (LO2)
4. What is meant by the opening balance on the ledger? What is meant by the closing balance on the
ledger? (LO1)
5. What information gets recorded on the trial balance? (LO2)
6. How do you find and correct errors on the trial balance? (LO2)
7. What are the steps involved in entering transactions in the general journal? (LO1)
(Note: Journal entries are written in chronological order, not according to category; debits are always
written first in the account list when writing journal entries; no balancing or tallying is done.)
PRACTICE EXERCISES
Worksheets containing the forms you need to complete the practice exercises are provided separately in
the working papers for this chapter.
PRACTICE
EXCEL
Using the worksheets provided:
a. Prepare general journal entries for the following transactions for June Lang that occurred during
September 20**. (LO1)
b. Post your entries to the general ledgers. (LO1)
The accounts for June Lang’s firm are the following:
100 General Bank Account 200 Accounts Payable/General Liabilities

120 Accounts Receivable 300 June Lang, Capital
130 Office Supplies 350 June Lang, Drawings
140 Motor Vehicle 400 Fees Earned
158 Office Furniture and Equipment 538 Rent Expense
85
LEGAL ACCOUNTING
Transactions:
Sep. 3 June Lang invested $20,000 cash and office equipment worth $2,000 in her business
6 Purchased a motor vehicle on account for $15,000. She paid $1,000 by cheque and the
balance on credit
13 Bought office supplies for $1,000
15 Withdrew $500 from the business for personal use
20 Invoiced Fred Popper $2,000 for services rendered. Account remains outstanding
30 Paid rent expense to Minto Developments, $650
Worksheets:
June Lang, General Journal GJ4

Date
Description PR Debit Credit
20**
General Ledgers — June Lang

Date
Explanation PR Debit Credit Dr./Cr. Balance
20**
86
Accounts Receivable Account No. 120

Date
20**
Office Supplies Account No. 130

Date
20**
Motor Vehicle Account No. 140

Date
20**
Office Furniture and Equipment Account No. 158

Date
20**
Accounts Payable/General Liabilities Account No. 200

Date
20**
June Lang, Capital Account No. 300

Date
20**
87
LEGAL ACCOUNTING
June Lang, Capital Account No. 300

Date
20**
June Lang, Drawings Account No. 350

Date
20**
Fees Earned Account No. 400

Date
20**
Rent Expense Account No. 538

Date
20**
PRACTICE
EXCEL
Using the worksheets provided, post the general journal entries for the following transactions for Frank
Piper that occurred during June 20** to the general ledgers. (LO1)
The partial ledger of Frank Piper uses the following accounts:
100 General Bank Account (Cash) 200 Accounts Payable/General Liabilities

158 Office Furniture and Equipment 300 Frank Piper, Capital
88
Frank Piper, Paralegal GJ5

General Journal
Date
Opening Entries
June 1 General Bank Account (Cash) 10,000
Frank Piper, Capital 10,000
To record funds invested by owner

Purchased photocopier from Sharp
General Ledgers — Frank Piper
General Bank Account (Cash) Account No. 100

Date
20**

Date
20**

Date
20**
89
LEGAL ACCOUNTING
Frank Piper, Capital Account No. 300

Date
20**
PRACTICE
EXCEL
a. Answer the following questions:
i. Calculate the running balance for the following general ledger account. Indicate whether the
balance column has a debit or credit balance. (LO1)
ii. Was the account overdrawn at any point? (LO1)
iii. What does the post reference refer to? (LO1)

Date
20**
Oct. 1 GJ1 1,000
1 GJ1 700
5 GJ2 2,000
5 GJ2 100
6 GJ2 400
8 GJ2 100
b. Calculate the running balance for the following general ledger account. Indicate whether the bal-
ance column has a debit or credit balance.

Date
20**
Oct. 1 GJ2 1,000
Nov. 1 GJ2 1,000
5 GJ2 30
Dec. 1 GJ2 900
90
c. Calculate the running balance for the following general ledger account. Indicate whether the bal-
ance column has a debit or credit balance.

Date
20**
Oct. 1 GJ2 5,000
Nov. 1 GJ2 300
5 GJ2 200
Dec. 1 GJ2 1,000
15 GJ2 800
PRACTICE
EXCEL
Comprehensive Problem
The following are transactions for Ann Litigate Paralegal Services that occurred in the month of May:
Date
# 20** Transaction Amount
1 May 1 Ann received a cheque from her client, Alan Smith, for legal services 4,000
provided in a criminal law matter
2 May 1 Ann took a draw against the firm’s equity for her personal use 1,500
3 May 1 Ann paid one month’s office rent 1,200
4 May 5 Ann paid for filing fees to the Landlord and Tenant Board on behalf of 145
her client, Ellen Page, with her business credit card
5 May 10 Ann paid her telephone and Internet bill 120
6 May 11 Ann purchased accounting software to help manage her bookkeeping 600
7 May 15 Ann paid salary to her assistant 1,000
8 May 15 Ann paid interest expense on her bank line of credit account 90
9 May 18 Ann purchased office supplies on account (on credit with Legal 250
Stationers Inc.) to replenish her office supplies
10 May 25 Ann purchased new office furniture (filing cabinet) 600
11 May 30 Ann paid bank fees and charges for the month of May 30
12 May 30 Ann paid her credit card bill 100
13 May 30 Ann paid for one month of dues to the Law Society 267
Using the chart of accounts found on the inside front cover of this textbook and the worksheets provided:
a. Prepare general journal entries for the transactions.
b. Post (transfer) the general journal entries to the general ledger accounts. (LO1)
c. Prepare a trial balance. (LO2)
91
LEGAL ACCOUNTING
The following balances have already been recorded for you in the general ledger for the end of April as
the opening balance on May 1:
Ann Litigate, Paralegal

Trial Balance
April 30, 20**
120 Accounts Receivable 635
130 Office Supplies 800
160 Intangible Assets (Computer Software) 1,865
250 Bank Line of Credit 5,000
300 Ann Litigate, Capital 5,500
350 Ann Litigate, Drawings 1,500
$12,800 $12,800
Worksheet a:
Ann Litigate, General Journal GJ4
Date
20**
92
Worksheet b:
General Ledgers — Ann Litigate

Date
20**
May 1 Opening balance ✓ 3,000 Dr. 3,000

Date
20**
May 1 Opening balance ✓ 635 Dr. 635

Date
20**
May 1 Opening balance ✓ 800 Dr. 800

Date
20**
Intangible Assets (Computer Software) Account No. 160

Date
20**
93
LEGAL ACCOUNTING

Date
20**
May 1 Opening balance ✓ 800 Cr. 800
Credit Card Debt Account No. 210

Date
20**
May 1 Opening balance ✓ 1,500 Cr. 1,500
Bank Line of Credit Account No. 250

Date
20**
Ann Litigate, Capital Account No. 300

Date
20**
Ann Litigate, Drawings Account No. 350

Date
20**
May 1 Opening balance GJ4 1,500 Dr. 1,500

Date
20**
94
Bank Charges and Credit Card Expense Account No. 507

Date
20**
Salaries Expense Account No. 511

Date
20**
General Disbursement Expense Account No. 525

Date
20**
Interest Expense Account No. 529

Date
20**
Membership/Professional Dues Account No. 534

Date
20**

Date
20**
95
LEGAL ACCOUNTING
Telephone Expense Account No. 565

Date
20**
Worksheet c:

Trial Balance
May 31, 20**
Total
96
Case Example: Accounting Standards

Nortel Networks
The Nortel Networks case is an infamous and well-documented example of the lack of over-
sight and compliance with accounting standards in the corporate context.
Since as early as 2001, various class-action proceedings and other lawsuits were com-
menced against Nortel Networks Corporation, a telecommunications company, and its dir-
ectors and officers for discrepancies in the company’s financial reporting. The affected
stakeholders were internal, external, and international in nature. For example, the govern-
ment securities regulators in Canada and the United States brought charges against the com-
pany; current and former employees joined in a class action to protect themselves from
losses on their pension plans as well as employment interruptions as a result of Nortel’s
financial losses; and shareholders and investors were defrauded and misinformed about the
company’s financial health. In 2009, Nortel filed for bankruptcy protection under the Com-
panies’ Creditors Arrangement Act (CCAA) in Ontario. Appeals and motions against the com-
pany are still before the courts, and the fallout from Nortel’s decisions since 2000 continues.
Some of the charges laid against the company include these from the class-action suit1
brought by David Lucescu, individually, and on behalf of other shareholders against Nortel:
• Statements made by the company about its financial position were materially false
and misleading (para 28).
• The financial results made by the company were materially overstated (para 28).
• “The [defendants] lacked a reasonable basis for their positive statements about the
Company, its business, operations, earning and prospects” (para 28).
• The defendants “materially misled the investing public, thereby inflating the price of
Nortel common stock, by publicly issuing false and misleading statements and omit-
ting to disclose material facts necessary to make Defendant’s statements, as set forth
herein, not false and misleading. Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse information and mis-
represented the truth about the Company, its business and operations, as alleged
herein” (para 36).
See the Further Reading section for this case and related cases.
Use the table below to identify and discuss the accounting standards and generally
accepted accounting principles that Nortel violated based on the charges identified in the
class action against Nortel Networks.
1 See <http://securities.stanford.edu/filings-documents/1043/NTL09_01/2009518_f01c_0904691.pdf>.
97
LEGAL ACCOUNTING
Action taken by/charge laid against Nortel Accounting principle/standard violated

1. The company made materially false and • Reliability • Going concern
misleading statements about its financial • Relevance principle
position
2. The financial results were materially overstated
3. There was no reasonable basis for the company’s
positive outlook
4. The company materially misled the investing
public
5. The company’s stock value was overinflated
6. The company failed to disclose adverse material
facts
7. The company misrepresented the truth about the
company, its business, and its operations
Case Example: Accounting Application

1. When Ann Litigate calculates her company’s trial balance, she recognizes that there was
an error in the recording of a retainer received from Sam Fisher. The trial balance is
understated and out by $200. How can Ann check and correct this error?
2. On April 5, a new client, Sheila McKay, advised that she would like to retain Ann to com-
mence a small claims proceeding against her neighbour, who borrowed $10,000 but has
failed to pay her back as agreed and as evidenced by a promissory note. Ann prepared
the claim for Sheila and served and filed the plaintiff’s claim form at the Small Claims
Court (Superior Court of Justice). On June 1, 20**, Ann invoiced Sheila for the services
rendered from April 5 to May 30, 20** (invoice #101) as well as for the related disburse-
ments. The total fee charged was equal to $1,500; the total disbursements (paid by and
reimbursable to Ann) were equal to $200, which included the filing fee, the process
server costs, and miscellaneous photocopy/printing costs. Harmonized sales tax (HST;
13 percent) is chargeable on both fees and disbursements. Calculate the total amount
of the invoice that would be sent to the client including fees, disbursements, and HST.
98
5 Preparing Financial
Statements
Preparing the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Preparing the Statement of Owner’s Equity . . . . . . . . . . . . . . . . . . . . . . . . . 105
Preparing the Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
99
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Prepare and interpret the income statement.
LO2 Prepare and interpret the statement of owner’s equity.
LO3 Prepare and interpret the balance sheet.
LO4 Use PCLaw® to prepare the trial balance and financial statements.
In Chapter 4, we posted journal entries to a general ledger and prepared the trial balance.
The next step in the accounting cycle is to prepare the financial statements.
The trial balance (see Figure 5.1) is used to prepare financial statements—first the income
statement, then the statement of owner’s equity, and finally the balance sheet.
It is important to prepare the financial statements in the correct order. The net income or
loss from the income statement is used to calculate the statement of owner’s equity. Once you
know the balance of the owner’s equity, you are able to record that information on the balance
sheet, so it is imperative that the statements be completed in that order. All the information
required for each of the statements is found in the trial balance.
The financial statements do not have debit or credit columns. The left column in the
income statement (Figure 5.2) and in the statement of owner’s equity (Figure 5.3) is used to
calculate subtotals, which are then placed in the column to the right. The balance sheet (Fig-
ure 5.4) is displayed with assets on the left-hand side and liabilities and owner’s equity on the
right-hand side. Additional columns can be placed on either side to add up asset or liability
subtotals, if necessary.
LO1 Preparing the Income Statement

The first statement prepared is the income statement, which shows the revenues and
expenses for a particular accounting period and is sometimes called the profit and loss state-
ment. The heading includes the name of the business (who), the name of the statement
(what), and the period covered by the report (when).
The income statement must be prepared at the end of each fiscal year, but is usually pre-
pared more frequently, typically each month, to inform the owner of the profit or loss for the
period. This information is often required by the firm’s bank and investors.
Income statements show the income earned less expenses incurred over a period of time
to determine whether the firm has made a profit or a loss. If the firm’s total income is higher
than the total expenses, the firm has made a profit. If the firm’s expenses are higher than
total income, the firm has suffered a loss. The profit or loss for the period affects the owner’s
capital account because losses are deducted from the capital account and profits are added to
the capital account. The amount of profit or loss calculated on the income statement is needed
in order to prepare the second statement—the statement of owner’s equity.
The simple form of the income statement is sufficient for the purposes of a paralegal firm.
It will show the revenues earned less the expenses incurred for the period to arrive at a net
profit or net loss.
100
CHAPTER 5 Preparing Financial Statements

Trial Balance
October 31, 20**
Balance Sheet Accounts
300 Justin Case, Capital 2,050 Statement of Owner’s

301 Justin Case, Drawings 0 Equity Accounts

Income Statement Accounts
$11,630 $11,630
FIGURE 5.1 Trial balance showing balance sheet, statement of owner’s equity, and income
statement accounts
Steps in Preparing the Income Statement

When preparing the income statement, keep the following points in mind:
1. The heading section has three lines: the name of the firm (who), the name of the state-
ment (what), and the period covered by the statement (when).
2. Although the statement format has two columns for amounts, they are not debit and
credit columns. The inside column is used to list the balance for each individual account
and for subtotalling, and the outside column is used for the totals of each account cat-
egory, revenues, and expenses.
3. The account balances needed to complete the income statement are found on the trial
balance.
4. The statement has four main parts:
a. Heading: The heading includes the who, the what, and the when. Place the name of
the firm, the name of the statement, and the period covered by the statement in the
heading. Income statements report on the income earned over a period of time,
whether a month, a quarter, or a year. The heading should have a statement that
reads “For the Period Ended _______________.”
101
LEGAL ACCOUNTING
b. Income: List each source of income below the heading “Income” (or “Revenue”) in
the body of the statement. If there is only one source of income, place the amount
in the outside column. If there is more than one source of income, list the account
names, indented under the “Income” heading. Then place the amounts in the
inside column. Draw a subtotal line under the last number entered and place the
total income amount in the outside column.
c. Expenses: List each expense account that has a balance and enter the amount in the
inside column. Place a subtotal line under the last number and enter the total in
the outside column on the “Total Expenses” line at the end of the list.
d. Net income or net loss: Take the difference between the total income and the total
expenses to calculate the net income or net loss. Negative values are recorded in
parentheses to indicate a net loss.
Figure 5.2 illustrates these points.
The information contained in the income statement is not only useful to the owner of the
firm but will also be of interest to the firm’s banker if there is an outstanding line of credit.
It is also used by the CRA for income tax purposes. In a sole proprietorship, the net income
shown on the income statement represents the taxable income of the owner. Remember that
drawings (withdrawals) are what the owner took out of the business for personal use. Income
tax will be payable on the net income for the firm if it is a sole proprietorship.

Income Statement
for the period ended October 31, 20**
Revenue
Fees Earned $3,000
Expenses
Office Supplies/General Expense $580
Rent Expense 500
Telephone Expense 300
Total Expenses 1,380
Net Income $1,620
FIGURE 5.2 Income statement
Interpreting Information from the

Income Statement
The income statement will help to provide answers to the following questions.
With regard to income:
1. Is the income earned during the period reasonable considering the amount of time and
effort spent?
102
2. Should a review of billing practices be done to see if work completed is being billed
effectively?
3. Does the owner need to work harder to increase the amount of income being earned?
4. Is the income earned during the period enough to cover the expenses incurred over the
same period? If not, what needs to be done to improve the situation?
With regard to expenses:
1. Review each of the expenses listed to determine whether the amount being spent on
each account is reasonable.
2. Can the firm afford to increase salaries expense? Would bringing in extra help assist in
increasing revenues?
3. Does the firm need to cut back to reduce expenses (especially if expenses are higher than
income)? If so, where can the firm cut back?
Reporting Income and Expenses

TA X TIP
The CRA’s website has detailed and extensive information for businesses outlining
what is to be declared as income and how expenses can be claimed. The following
headings emphasize some (but not necessarily all) of the tax considerations busi-
ness owners should be aware of as a licensee when preparing records for tax pur-
poses. Income tax interpretation bulletins published by the CRA provide detailed
guidelines for interpretation of various sections of the Income Tax Act and should
be consulted when in doubt.
Accounting for Earnings (Income)

Generally, business income must be reported using the accrual method of accounting. Under
the accrual method, income must be reported in the fiscal period it was earned, regardless of
when payment is received. Similarly, allowable expenses are deducted in the fiscal period in
which they are incurred, whether or not they are paid for in that period. Incur means the firm
has used up or benefitted from the expense.
Other Income
The total income received from other sources, such as a recovery of an amount previously
written off as a bad debt in a previous year, must also be reported, as well as interest income
received for late payment of invoices or on business investments.
Barter Transactions
A barter transaction takes place when any two persons agree to an exchange of goods or ser-
vices and carry out that exchange without using money. If anyone in the firm is involved in a
barter transaction, the goods or services that were received could be considered proceeds
from a business operation. For example, if a paralegal gives free legal services to the
mechanic who fixes his car, this would be considered a barter transaction, and the paralegal
would be required to include the value of the goods or services he provided to the mechanic
in his income. Barter transactions may also have GST/HST implications.
103
LEGAL ACCOUNTING
Accounting for Business Expenses
TA X TIP
A business expense is a cost incurred for the sole purpose of earning business
income. Business expense claims must be documented with a purchase invoice, an
agreement of purchase and sale, a receipt, or some other voucher that supports the
expenditure. If cash is used to pay for any business expenses, be sure to get receipts
or other evidence. Receipts should include the vendor’s name and the date as well
as GST/HST information, which includes the percentage rate and the dollar amount
of GST/HST charged as well as the vendor’s GST/HST registration number.
As a sole proprietor or partner in a partnership, when recording expenses, only
enter the business part of the expense. This means that the following are not included as part
of the expenses:
• salary or wages (including drawings) paid to self or partner(s);
• cost of goods or services that the business owner, the business owner’s family, or the
business owner’s partners and their families used (including such items as food, home
maintenance, or business properties);
• interest and penalties paid on income tax;
• life insurance premiums;
• the part of any expenses that can be attributed to non-business use of business prop-
erty; and
• most fines and penalties imposed after March 22, 2004 under the law of Canada or a
province or a foreign country (this includes parking tickets).
Business-Use-of-Home Expenses
Expenses for the business use of a work space in the business owner’s home can be
deducted as long as one of these conditions is met:
• it is the business owner’s principal place of business, OR
• the space is used to only earn business income and is used as a place to meet clients or
customers on a regular and ongoing basis.
Maintenance costs, such as heating, home insurance, electricity, and cleaning materials,
can also be deducted, as can a part of the business owner’s property taxes, mortgage inter-
est, and capital cost allowance. To calculate what percentage of these expenses can be
deducted, use a reasonable basis, such as the area of the workspace divided by the total area
of your home.
• Potential pitfall: When reviewing corporate financial statements, it may be

PARALEGAL
POTENTIAL
easy to look at a low net income amount and think that the company has not
PITFALLS
performed well. However, when owners pay themselves a salary, as they do in

a corporation, they could be still paying themselves very well personally,
despite the low company net income.
• Possible fallout: If you do not understand financial statements, you may mis-
interpret or misjudge a corporation based on an uninformed or quick review.
• Proposed recommendation: When reading financial statements, consider all
accounts and ask questions of the corporation. Clients can provide answers
to any analysis questions you may have in order to better understand the
financial position of a corporation.
104
LO2 Preparing the Statement of Owner’s Equity

The second statement prepared is the statement of owner’s equity. The heading includes the
name of the business (who), the name of the statement (what), and the period covered by the
report (when).
The goal of this statement is to calculate owner’s equity in the firm after taking into
account any profits or losses of the firm (essentially reinvestments in the business) less
money withdrawn by the owner (which decreases the amount of equity the owner has main-
tained in the business). The calculation determines how the owner’s investment in the firm
has been affected by the operations of the business. The amount calculated for owner’s equity
at the end of the period will be carried over to the balance sheet. In Figure 5.3, it can be seen
that at the end of October, Justin Case’s equity in the firm went up to $3,670 ($2,050 opening
balance + $1,620 net income) because of the profit from operations during the month of Octo-
ber. The amount of the profit ($1,620 to reinvest in the company) was added to the capital at
the beginning of the period ($2,050) to calculate the balance in the capital account or owner’s
equity at the end of the period. If Justin had withdrawn funds from the firm, the amount
withdrawn would have been deducted from capital, resulting in a decrease in the owner’s
equity.
The steps for preparing the statement of owner’s equity are as follows:
1. The heading section has three lines: the name of the firm (who), the name of the state-
ment (what), and the period covered by the statement (when).
2. The statement format for preparing the statement of owner’s equity also uses columns
for calculations. The columns do not designate debit and credit entries.
3. The amounts are taken from the trial balance.
4. First, enter the owner’s capital at the beginning of the period as shown on the trial bal-
ance. Place this amount in the outside column.
5. The next line is the net income or net loss for the period. Take the amount shown on the
income statement that was just prepared and place that amount in the inside column.
6. On the next line, record total withdrawals that were made by the owner during the
period. This amount needs to be deducted from the net income. If there was a net loss,
the net loss and the amount of withdrawals will be added together, which results in a
greater deduction from capital.
7. On the next line, indicate whether there was an increase or a decrease in the capital
account.
a. In the case of a net profit: calculate net income less withdrawals. If the figure is pos-
itive, there has been an increase in the capital account. If the figure is negative,
there has been a decrease in capital.
b. In the case of a net loss: add together the net loss and the withdrawals taken dur-
ing the period. The total is the decrease in capital that occurred over the period.
c. Enter the amount of the increase or decrease in capital and extend the calculation
to the outside column.
8. Total the outside column to arrive at the capital at the end of the period. In the case of a
decrease in capital, subtract the decrease from the first line (owner’s capital at the begin-
ning of the period). In the case of an increase in capital, add the increase to the first line
(owner’s capital at the beginning of the period). This total amount will be used in com-
pleting the owner’s equity portion of the balance sheet.
Figure 5.3 illustrates these points.
105
LEGAL ACCOUNTING

Statement of Owner’s Equity
for the Period Ended October 31, 20**
Justin Case, Capital, Oct. 1, 20** $2,050
Add: Capital Investment in October 0
Total Capital, October 31, 20** $2,050
Net Income for Oct. 20** $1,620
Less: Withdrawals for Oct. 0
Increase in Capital 1,620
Justin Case, Capital Oct. 31, 20** $3,670
FIGURE 5.3 Statement of owner’s equity
Interpreting Information on the

The statement of owner’s equity at the end of a period helps to provide answers to the follow-
ing questions:
1. Has the owner’s investment in the firm increased or decreased? In other words, is the
investment in the firm worth more or less than at the beginning of the period?
2. How much could the owner justify asking for the firm if he or she decided to sell it?
3. How much should the owner ask a partner to invest in the firm if the owner wanted to
take one on? If a partner were to receive a 50 percent interest in the firm, it would be
wise to ask that he or she invest 50 percent of the amount of capital at the end of the
period.
LO3 Preparing the Balance Sheet

The third statement prepared is the balance sheet. The balance sheet is a snapshot of the
financial position of the firm on a particular date, typically the end of the financial period
being reported. The heading includes the name of the business (who), the name of the state-
ment (what), and the date of the report (when).
This statement format can be laid out in different ways. The balance sheet is often laid out
in the shape of a T-account, with the assets on the left and the liabilities and owner’s equity
on the right (see, for example, Figure 2.3 in Chapter 2). This is the format that will be used
for the purposes of this chapter.
Accounting software tends to lay out the balance sheet by placing the assets at the top of
the page and the liabilities and owner’s equity below. When the balance sheet is laid out this
way, the last three columns are usually used for calculations—two for calculating subtotals
and the last one for calculating the final totals.
The balance sheet provides important information about the financial position of the firm.
In other words, the balance sheet shows what the company owns (assets), what it owes
106
(liabilities), and the owner’s investment and reinvestment in the business year after year
(owner’s equity). For example, Figure 5.4 shows that Justin has enough cash in the bank to
meet his current liabilities. The company has $7,100 in the General Bank Account and only
$580 owing to creditors in the current period. It can also be seen that Justin’s investment in
the firm has increased since he started the business on October 1, because his owner’s equity
has gone up. The amount of debt can also be compared to the amount of equity in a company,
as the balance sheet shows everything that a company owns (assets) and that it got either
from borrowing (liabilities) or investing its own money (owner’s equity).
Follow these steps to prepare the balance sheet:
1. The heading section has three lines: who (the name of the firm), what (the name of the
statement), and when (the date of the statement). A balance sheet gives a snapshot of the
firm at a particular date, so the date at the top does not refer to a period as in the income
statement and statement of owner’s equity. Rather, it shows the date for which the state-
ment is being prepared.
2. The amounts that will be entered on the balance sheet are found in the trial balance.
3. Place the title “Assets” above the first column. Place the value of each asset in the third
column. Total the value of the assets, and then enter the total assets at the bottom.
4. Note that the first number in the column has a dollar sign, and then the grand totals.
Follow this convention.
5. Place a dollar sign in front of the total assets and a double underline under the total.
6. Complete the liabilities section by listing the liabilities as shown on the trial balance.
They should be totalled and the sum placed in the outside column.
7. Enter the amount of the capital that was calculated on the statement of owner’s equity
in the owner’s equity section.
8. Add the total liabilities and owner’s equity together. This number should be equal to the
total assets shown above.
9. The balance sheet has now been completed. Place a dollar sign and double underline
under the total for liabilities and owner’s equity.

Balance Sheet
October 31, 20**
Assets Liabilities
General Bank Account $ 7,100 Accounts Payable/General Liabilities $580

Computer Equipment (Hardware) 900 Personal Loan 4,000
Office Furniture and Equipment 2,250 Credit Card Debt 2,000
Total Liabilities $ 6,580
Owner’s Equity

FIGURE 5.4 Balance sheet
107
LEGAL ACCOUNTING
Interpreting Information from the Balance Sheet

The balance sheet will help to provide answers to the following questions:
1. Does the firm have sufficient resources to meet its liabilities?
2. Does the firm need to seek additional investment to meet its expenses or to expand?
3. How much are the outstanding accounts receivable? Should steps be taken to have
accounts paid more quickly so that they do not become bad debts? In that regard, does
the firm need to consider increasing the amounts charged for retainers from clients so
that accounts are paid in a timely manner?
4. Does the firm have excess cash that should be invested in short-term or long-term invest-
ments to gain interest income?
5. Are the debts excessive in relation to the owner’s investment? If so, is the firm at risk of
going bankrupt?
LO4
Financial Statements
PCL AW®
Once opening balances and transactions for the month of October are entered in
PCLaw®, the General Ledger and Financial Statements are created using the GL
Statements function. A statement selection is made, the Current Report Period is
selected, and the system automatically creates the statements. The trial balance was
produced in Chapter 4. The Income Statement and Balance Sheet are shown below.
108
The income statement shows the income for the current period as well as for the year to
date.
In PCLaw®, there is no statement of owner’s equity. The system automatically calculates

the equity and adds the profit (or subtracts the loss) for the period to arrive at the owner’s
equity in the balance sheet.
109
LEGAL ACCOUNTING
CHAPTER SUMMARY
In Chapter 4, the trial balance was prepared after posting the journal entries to the general ledgers. Once
the trial balance is completed, financial statements—income statement, statement of owner’s equity, and
balance sheet—can be prepared for review and analysis of the company’s financial performance.
KEY TERMS
balance sheet, 106 income statement, 100
barter transaction, 103 statement of owner’s equity, 105
FURTHER READING
Canada Revenue Agency (CRA), Checklist for New Small Businesses, online: <https://www.canada.ca/
en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/checklist-small
-businesses.html>.
Canada Revenue Agency (CRA), Reporting Business Income and Expenses (video series). See especially
“Segment 2: Record Keeping,” online: <https://www.canada.ca/en/revenue-agency/news/
cra-multimedia-library/businesses-video-gallery/transcript-reporting-business-income-expenses
-segment-2-record-keeping.html>.
guide_final-s.pdf>. (See especially item 7: Clients’ General Ledger.)
System for Electronic Document Analysis and Retrieval (SEDAR), online: <https://www.sedar.com/>.
SEDAR is the official site that provides access to most public securities documents and information
filed by public companies and investment funds with the 13 provincial and territorial securities
regulatory authorities (Canadian Securities Administrators).
110
REVIEW QUESTIONS
Short Answer
Give a full answer for each question:
1. What information gets recorded on the income statement? (LO1)
2. What information gets recorded on the statement of owner’s equity? (LO2)
3. What information gets recorded on the balance sheet? (LO3)
4. What is a financial statement, and how do you prepare one? (LO1, LO2, LO3)
5. Briefly describe the information that the following financial statements can provide to a business
owner and interested third parties or stakeholders: (LO1, LO2, LO3)
a. income statement
b. statement of owner’s equity
c. balance sheet
6. Review, analyze, and discuss one of Air Canada’s completed financial statements. To find a state-
ment, go to <http://sedar.com/DisplayProfile.do?lang=EN&issuerType=03&issuerNo=00001324>.
Click on “View” to display the company’s public records, and then select the most recent audited
financial statement from the list (for example, February 16, 2018). (LO1, LO2, LO3)
PRACTICE EXERCISES
Worksheets containing the forms you need to complete the practice exercises are provided separately in
the working papers for this chapter.
PRACTICE
EXCEL
Using the trial balance below:
a. Prepare the income statement. (LO1)
b. Prepare the statement of owner’s equity. (LO2)
c. Prepare the balance sheet. (LO3)
The following balances have already been recorded at May 31.
111
LEGAL ACCOUNTING

Trial Balance
May 31, 20**
120 Accounts Receivable 635
130 Office Supplies 1,050
160 Intangible Assets (Computer Software) 2,465
200 Accounts Payable/General Liabilities $1,050
250 Bank Line of Credit 5,000
300 Ann Litigate, Capital 5,500
350 Ann Litigate, Drawings 3,000
507 Bank Charges and Credit Card Expense 30
511 Salaries Expense 1,000
525 General Disbursement Expense 145
529 Interest Expense 90
534 Membership/Professional Dues 267
538 Rent Expense 1,200
Total $17,095 $17,095
Worksheet a:

Income Statement
for the period ended May 31, 20**
Revenue
Expenses
112
Net Profit
Worksheet b:

for the period ended May 31, 20**
Worksheet c:

Balance Sheet
May 31, 20**
Assets Liabilities
Owner’s Equity
Total Assets Total Liabilities and Owner’s Equity
113
LEGAL ACCOUNTING
PRACTICE
EXCEL
Using the worksheets provided, prepare the financial statements for ABC Legal Services based on the
trial balance shown below. Assume that the adjustments have been entered in the journal and have
been entered and posted to the account ledgers. (LO1, LO2, LO3)
ABC Legal Services

Adjusted Trial Balance
December 31, 20**
Account Titles Dr. Cr.
General Bank Account $15,000
Trust Bank Account 35,000
Accounts Receivable 20,250
Prepaid Insurance 700
Prepaid Expense (Rent) 700
Office Supplies 150
Computer Equipment (Hardware) 4,750
Accounts Payable/General Liabilities $2,025
Personal Loan 6,000
Trust Funds Owed 35,000
ABC, Capital 17,165
ABC, Drawings 5,000
Fees Earned 23,000
Expense Recovery 750
Salaries Expense 1,700
Insurance—Professional Liability 2,500
Membership/Professional Dues 200
Office Supplies/General Expense 500
Rent Expense 1,800
Total $88,440 $88,440
114
ABC Legal Services

Income Statement
for the Period Ended December 31, 20**
Income
Total Income
Expenses
Total Expenses
Net Income
ABC Legal Services

ABC, Capital, December 31, 20**
ABC Legal Services, Capital, December 31, 20**
115
LEGAL ACCOUNTING
ABC Legal Services

Balance Sheet
December 31, 20**
Assets
Current Assets
Total Current Assets
Fixed Assets
Total Fixed Assets
Total Assets
Liabilities and Owner’s Equity
Liabilities
Total Liabilities
Owner’s Equity
Total Liabilities and Owner’s Equity
116
6 Special Journals
Why Use Special Journals? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Client Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Billing Out Time on a Client File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Expense Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Client Trust Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Fees Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Recording Payment of an Invoice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Accounts Receivable Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Other Specialized Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Recording Transactions in Specialized Journals . . . . . . . . . . . . . . . . . . . . . . 125
Posting from Special Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Analysis of Each Transaction in November . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Completed Journal and Ledgers to November 30 . . . . . . . . . . . . . . . . . . . . 134
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
117
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Use special journals.
LO2 Record fees billed in the fees book or accounts receivable journal.
LO3 Record receipts in the general receipts journal.
LO4 Record disbursements in the general disbursements journal.
LO5 Post from the special journals to the appropriate general ledger and client general
ledger.
A general journal is too inefficient to be useful for recording all transactions in a legal prac-
LO1
tice. Using specialized journals to record certain transactions is preferable and simplifies the
bookkeeping process. The special journals that are most useful in a small firm are:
• a fees book (also called a fees journal),
• a general receipts journal, and
• a general disbursements journal.
Paralegals need to understand how these special journals work and their relationship to the
accounts in the general ledgers.
The special journals discussed in this chapter are in addition to the specialized trust bank
journal (sometimes called the trust receipts and disbursements journal), which will be discussed
in Chapter 7.
Special journals are set up to efficiently record transactions and eliminate the need to post
every single entry made in the general journal and general ledgers. As you work through this
chapter, you will appreciate that learning to use special journals can be challenging but
worthwhile. The manual approach demonstrated in this chapter illustrates how information
moves through a computerized system. Understanding the special journals produced in this
chapter will help you interpret journals and reports prepared using an electronic system. The
task of creating entries manually is simplified when special journals are used.
Why Use Special Journals?

• A specialized or combination journal saves time and effort by reducing unnecessary
writing.
• Special or combination journals are more efficient and capture specific information.
• Posting to ledger accounts from specialized journals is simpler and more efficient,
because not every entry must be posted individually. For example, instead of posting
each deposit or cheque made individually to the general bank account ledger sheet,
totals are posted at the end of a period.
LO2 Client Billing

An invoice must be prepared and sent to the client before payment on account can be received.
The following information is required to prepare an invoice:
• the amount billed for hours (or partial hours) spent on a file;
• disbursements paid out of the firm’s general bank account on behalf of the client;
118
CHAPTER 6 Special Journals
• recovery of expenses incurred in the office that should be charged to the client, such
as the cost of photocopies, faxes, and postage; and
• a client trust ledger statement showing the amounts on the file received in trust and
paid out from the trust account. (The client trust ledger will be covered in Chapter 7.)
Clients should be billed on a regular basis to keep them informed of the cost of the legal
services being provided. This practice avoids disagreements that can arise if matters are not
billed promptly, because clients can be surprised by the cost of services rendered.
Billing Out Time on a Client File

Many firms use accounting software to track the amount of time spent on a file and bill the
client at an hourly rate that will have been discussed at the time a retainer agreement was
entered into. Firms may also bill out files using a flat rate if the parties have agreed on the
amount that will be charged for a specific file. More information on recording and billing time
is covered in Chapter 12, which deals with computerized time and money management.
Docketing Time and Preparing Invoices

Time spent performing work on a file is recorded using time dockets. Work may be non-billable
or billable. Non-billable work is work performed by the licensee that will not be charged to the
client. This could include, for example, a free consultation or secretarial duties. Billable
work—work that is charged to the client—typically includes meeting with clients, telephone
calls, preparation of legal documents, legal research, and court time.
Lawyers and paralegals generally bill for all time spent on a client file, including work
done by associates, law clerks, and legal assistants. Work performed by a secretary is not
charged to clients because it is considered part of the overhead incurred in running an office.
A variety of docketing methods are available to track the time spent on a file. Law firms
generally express billable time in six-minute (one tenth of an hour) intervals. A minutes-to-
decimal conversion chart, as shown in Figure 6.1, is helpful in making this conversion.
Minutes Decimal Conversion Factor

1-6 0.1
7-12 0.2
13-18 0.3
19-24 0.4
25-30 0.5
31-36 0.6
37-42 0.7
43-48 0.8
49-54 0.9
55-60 1.0
FIGURE 6.1 Minutes-to-decimals conversion chart
119
LEGAL ACCOUNTING
EX AMPLE
If Justin Case worked on a file for 53 minutes at an hourly rate of $100, the amount to bill would be calculated
as follows:
STEP 1 STEP 2
As can be seen in Figure 6.1, 53 minutes falls within the In a docket sheet usually kept in the file, a short explan-
range of 49-54 in the “Minutes” column, for which the ation of the work that was done (and any additional
corresponding decimal conversion factor is 0.9. Justin’s description needed) is recorded.
hourly rate of $80/hour is multiplied by the conversion
factor of 0.9 to obtain the converted hourly rate of $72
($80 × 0.9 = $72).
STEP 3
Once all the time docket entries are completed, the in-
Alternatively, if a conversion chart isn’t handy, a con-
formation will be used to produce the invoice to the
version rate can be determined by dividing 53 minutes
client.
by 60 minutes (per hour) to obtain the conversion rate of
0.88 (53/60 = 0.88), which can then be rounded up to 0.9.
Disbursements
Expenses incurred on behalf of clients, such as charges for deliveries, service of documents, and
any other charges paid by the firm from the general bank account, can be recovered from the cli-
ent. These expenses also need to be journalized and posted to the client’s general ledger account.
Expense Recovery
The firm will want to account for expense recovery—disbursements incurred in the office
that are to be charged to the client.
The LSO has generally taken the position that firms should not profit from disbursements
charged to clients.1 Legitimate expenses that can be passed on to clients include the cost of photo-
copies, faxes, long-distance phone calls, postage, and sometimes special office supplies needed for
court. The amounts passed on to clients must be fair, reasonable, and disclosed to the client in a
timely manner. All items that will be charged as disbursements must be discussed with the cli-
ent, and the amount charged should be shown on the statement of account sent to the client.
Client Trust Ledger

Any amounts paid out of the trust bank account are not included on the invoice but rather are
shown on the statement of trust funds sent to the client. The trust statement included with
the invoice lists all amounts received from the client and deposited into the trust account, as
well as amounts paid from the trust account on the client’s behalf. (Trust statements will be
discussed in more detail in Chapter 7.)
Figure 6.2 shows a sample invoice for Justin Case’s firm.
1 Law Society of Ontario, “Managing Money: Fees and Disbursements,” online: <https://lso.ca/
paralegals/practice-supports-and-resources/topics/managing-money/fees-and-disbursements>.
120

135 Main Street, Yourtown, Ontario K3P 1G9
Telephone: 905-992-8555 Facsimile: 905-992-8556
File #2 Invoice #4
November 22, 20**

Robert Simpson
10 The Driveway
Yourtown, ON
K9G 1V8
Re: Carpenter
DATE DESCRIPTION HOURS AMOUNT WORK DONE BY

Oct. 5 Meeting with client to
receive instructions 0.5 50.00 JC
15 Legal research 1.0 100.00 JC
30 Document preparation 1.0 100.00 JC
Totals 250.00
Total HST on Fees 32.50
DISBURSEMENTS
Paid, Quick Courier 20.00
HST on Disbursements 2.60 22.60
Total Fees and

Disbursements 305.10
AMOUNT DUE 305.10
This is my account.
Justin Case
Justin Case
HST 12345 6789 RT0001
TRUST STATEMENT Disbursements Receipts

Oct. 8 Received from Robert Simpson, retainer 500.00
27 Paid, Canada Post for registered mail 12.00
30 Total Trust 12.00 500.00
Trust Balance 488.00
FIGURE 6.2 Sample invoice with trust statement
121
LEGAL ACCOUNTING
Creating Time Entries Using a Time Sheet

PCL AW®
A matter (a new file) should be opened in the legal software being used as soon as a client retains the firm’s
services in order to generate a file for that particular matter and client number for that client. Time worked
on the file will be recorded using the time sheet feature (see Figure 6.3). In this example, time was entered
for the client, Robert Simpson, for the period October 5 to October 30. The task shows “BW,” which stands
for billable work. The file was set up to bill work at the rate of $100/hour, and the system automatically calcu-
lated the amount for each entry. The explanation code is a shortcut used to describe the work done, so
“mwc” stands for meeting with client. Once the code was added, a description of the purpose for the meet-
ing was added in the adjacent column. The information in the time sheet will be used to create the client’s
bill, so it is important that what is written on the time sheet is grammatically correct.
A file number is also necessary to track any payments made on behalf of the client that need to be charged to the
client. In the given example, a disbursement for courier charges was recorded and billed to the client.
FIGURE 6.3 PCLaw® client time sheet
As client time sheet entries are made (see Figure 6.4a), the time spent is totalled, and the amount owing is calcu-
lated and displayed as a time entries summary in the time sheet (see Figure 6.4b). The system also shows any dis-
bursements paid by the firm on the client’s behalf. Non-billable work is often shown on the bill so that the client can
appreciate time spent on the file for which they are not being charged. For example, if the licensee has provided a
free half-hour consultation, the time spent could be shown on the bill at no charge.
(a)
(b)
FIGURE 6.4 PCLaw® client time entries summary
122
Fees Book
Part V, section 18(7) of the LSO’s by-law 9 requires licensees to maintain a fees book—a
chronological file of copies of billings, showing all fees charged and other billings made to
clients. This can be done by recording the information in the fees book or by keeping a copy
of each invoice in chronological order in a file or binder with tab dividers for each month.
The information in the fees book would be completed as shown in Figure 6.5 and
described below, assuming Justin Case has registered with the CRA for collecting and pay-
ing HST going forward.
Justin Case, Paralegal FB1

Fees Book
Date Inv. File Fees Disbursements HST Total Billed
20** # Client/Re No. Billed Cr. Billed Cr. Billed Cr. AR Dr.
Nov. 1 2 Howes, Cliff re Small Claims Court 1 800.00 104.00 904.00
10 3 Jones, Frank re Highway Traffic Act 2 400.00 52.00 452.00
22 4 Zimmer, Ruth re Carpenter 4 250.00 20.00 35.10 305.10
Totals 1,450.00 20.00 191.10 1,661.10
(400) ✓ (240) (120)
FIGURE 6.5 Fees book for November 20** (after posting)

Date: Record the date of the invoice.
Inv. #: Record the invoice number. Invoices are usually numbered consecutively.
Client/Re: Write the name of the client and the name of the file. Remember that some clients
may have more than one file in the office, so it is important to indicate the file to which the
invoice applies.
File No.: Once the amount from the Fees Billed Cr. column is posted to the general client led-
ger, enter the client file number in the File No. column.
Fees Billed Cr.: Enter the total amount (before tax) of fees for services rendered in this column. The
amount billed for fees should be posted to the client’s general ledger as soon as the bill is recorded.
Disbursements Billed Cr.: Enter the amount billed for disbursements out of the general bank
account in this column. Note that this number is obtained from the client general ledger
sheet for the particular client when the bill is prepared. This amount will not need to be
posted to the client general ledger because the total disbursements were posted when the
entries were made in the general disbursements journal (discussed later in the chapter). Note
that any amounts paid out of the trust account do not appear on the invoice. The client is not
billed since the amount was paid with their own trust money and the amounts paid out of
trust are shown on a trust statement, which is attached to the invoice (see Figure 6.2).
HST Billed Cr.: The amount billed for HST on fees and disbursements as shown on the
invoice to the client must be entered in this column.
Total Billed AR (accounts receivable) Dr.: Enter the total amount billed to the client (including
HST) in this column. Once an invoice is sent out, the total amount of the invoice is an
account receivable (which is an asset on the balance sheet). The total amount billed is entered
in this column and is the sum of the three previous columns: fees, disbursements, and HST.
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LEGAL ACCOUNTING
Posting from the Fees Book

Some notes about posting from the fees book:
1. The individual amounts in the Fees Billed Cr. column are posted to each client’s
Accounts Receivable ledger account on a daily basis. The amount of HST billed would
also be posted daily to the individual client’s general ledger account. Posting to the cli-
ent ledgers every day keeps each client’s balance up to date at all times.
2. The total of the Fees Billed Cr. column is posted as a credit to the Fees Earned account
(400) in the general ledger. Once the total is posted, show the account number below the
total in parentheses to show that the total was posted (see Figure 6.5).
3. Disbursements billed are not posted to the client’s general ledger, because the entry was
posted when the disbursement was paid out of the general bank account when the
expense was incurred. For example, in Figure 6.5, the amount of $20 paid by the firm
on the Zimmer file was recorded in the client’s general ledger at the time the payment
was made on the client’s behalf. This is indicated by placing a checkmark below the
total.
4. The total of the HST Billed Cr. column will be posted to the HST/GST Payable account
(240) as a credit. HST billed by the firm is remitted to the CRA minus any HST paid for
the period. Once the total is posted, show the account number below the total to show
that the total was posted.
5. The total of the Total Billed AR Dr. column is posted to a control account in the general
ledger called Accounts Receivable (120). Once the total is posted, show the account num-
ber below the total to show that it was posted. (Note that the individual amounts in this
column are not posted daily as in step 1.)
Once the entries have been posted, the fees book would appear as shown in Figure 6.5.
Recording Payment of an Invoice

Invoices sent to clients and payments received for those invoices will need to be tracked. The
following steps help track client invoices:
1. An invoice is sent to the client.
2. The amount billed is entered in the fees book.
3. The client pays the bill to the firm or the firm writes a cheque from the trust account
from funds held on behalf of the client in trust.
4. The client’s payment of the accounts receivable is deposited into the general bank
account and the deposit is recorded in the general receipts journal.
5. The entry from the general receipts journal is posted to the client’s general ledger
account to show that payment has been received.
Accounts Receivable Journal

It is recommended that firms maintain an accounts receivable journal in which amounts
billed to and paid by clients are tracked. Typically, accounts receivable journals will provide
details of amounts billed to clients and amounts collected. They may be organized by client
or by lawyer/paralegal, showing dates and amounts billed and amounts paid. The amounts
124
receivable may be shown by amounts outstanding for less than 30 days, for 31 - 60 days, for
61 - 90 days, and so forth. Tracking accounts receivable in this manner helps to ensure
accounts are paid in a timely fashion and that delinquent accounts are easily identified. Most
legal accounting software can produce an accounts receivable journal on demand. If an
accounts receivable journal is not used, a column can be added to the client general ledger to
track accounts receivable and be used to summarize the accounts receivable by way of a list,
as shown in Figure 6.14 later in this chapter.
• Potential pitfall: Not setting aside time to bill clients.

PARALEGAL
POTENTIAL
• Possible fallout: Companies need money coming in from revenue in order to

PITFALLS
pay their liabilities and expenses as they come due. If you do not keep up to
date with client billing, then revenue will not be collected quickly enough to
best manage cash flow.
• Proposed recommendation: Set aside a regular time to bill clients and fol-
low up on uncollected client bills. This may be daily, weekly, biweekly, and
monthly. Set a calendar reminder so you don’t forget.
Other Specialized Journals

In addition to the fees book and the accounts receivable journal, there are two specialized
journals known as the general receipts journal and the general disbursements journal. Many of
the general journal entries that were recorded in Chapter 3 can be recorded in these
specialized journals instead. In Chapter 7, the use of the trust bank journal and two more spe-
cialized journals known as the trust receipts journal and the trust disbursements journal will be
demonstrated. The trust bank journal is a general journal that can be used in place of the
specialized trust (receipts and disbursements) journals.
The general journal, used as a book of original entry in Chapter 2, must still be used for
some situations, such as when a transaction is of a type for which there is no specialized jour-
nal, or when recording adjusting and closing entries. For example, for the purposes of this
course, we have not created a specialized purchases journal for recording accounts payable.
Accounts payable could be recorded using the general journal, or a specialized journal could
be created for the purpose of recording accounts payable if there is sufficient need.
Recording Transactions in
Specialized Journals
Figure 6.6 lists the transactions made by Justin Case in November, a brief description of the
journal that must be used to record the transaction, and to which ledger the transaction will
be posted. The completed journals and ledgers used for posting are included at the end of the
chapter (Figures 6.10 - 6.14). Trust transactions are not shown here because they will be cov-
ered in Chapter 7.
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LEGAL ACCOUNTING
Date
20** Transaction Journal Used Post to Ledger
Nov. 1 Invoice #2 was sent to Cliff Howes re Small Claims Court for Fees book Client’s general ledger
$800 plus HST of $104.
1 Rent was paid to Lucky Landlord in the amount of $300 plus General disburse- General ledger
$39 HST, general cheque #4. ments journal
3 A new client file was opened for Ruth Zimmer v. Bud Carpen- N/A. This does not re- Client’s general and trust
ter re work improperly done on her property. She is claiming quire a journal entry ledger sheets must be
damages in the amount of $24,000 for repairs that had to be because no financial opened for client in order to
made. Open a file for Ruth Zimmer (file #4). No retainer was transaction occurred record future transactions
received.
4 Justin paid $268.75 plus $34.94 HST for a total of $303.69 to General disburse- General ledger
cover Law Society of Ontario membership dues for October, ments journal
November, and December—general cheque #5.
5 Justin wrote a cheque to himself for $800 for personal General disburse- General ledger
expenses. General cheque #6. ments journal
6 A letter was sent to Bud Carpenter on the Zimmer file setting General disburse- Client’s general ledger
out the claim. The letter was sent by Quick Courier at a cost of ments journal (excluded HST amount)
$20 plus $2.60 for HST for a total of $22.60. The amount was
paid by general cheque #7.
10 Fees were billed to Frank Jones re Highway Traffic Act for $400 Fees book Client’s general ledger
plus $52 HST (invoice #3). There were no disbursements.
10 Partial payment on account was received from Cliff Howes for General receipts Client’s general ledger
$700 (trust cheque #4). journal
15 Justin paid the telephone bill in the amount of $80, plus $10.40 General disburse- General ledger
for HST, general cheque #8, general bank account. ments journal
20 Justin received the amount of $300 from Frank Jones to be General receipts Client’s general ledger
applied to invoice #3. journal
21 Justin sold the printer he had invested in the firm to Jane Cro- General journal General ledger
zier. He received $50 for the printer.
22 Justin sent an interim bill to Ruth Zimmer in the amount of Fees book and Client’s general ledger
$250 for fees and for disbursements of $20 plus HST of $35.10 general receipts
for a total of $305.10 (invoice #4). The bill was paid immedi- journal
ately in cash when it was handed to Ruth.
30 Justin received a bill from the Law Society for $1,075 plus HST General journal, General ledger
of $139.75 for a total of $1,214.75. The first payment on account because we do not
is not due until April 14 next year. He wishes to enter this as an have an accounts
account payable. payable journal
FIGURE 6.6 Transactions made by Justin Case, November 20**
126
LO3 General Receipts Journal

The general receipts journal is used to record money received by the firm and deposited in
the general bank account. Pursuant to the LSO by-laws, licensees are required to maintain a
book of original entry showing all money received 2 by the firm and must record:
• the date on which money is received,
• the method by which money is received,
• the amount of money received, and
• the person from whom money is received.
The types of entries that are entered in the general receipts journal are:
• money received from a client for payment on account,
• money transferred from the trust bank account to the general bank account for pay-
ment of an invoice sent to the client, and
• money transferred from the trust bank account to the general bank account to cover
payment of disbursements properly made by the firm. This can be done even if the
amount has not yet been billed to the client.
The headings used in a general receipts journal designed to suit the requirements of a
paralegal firm are illustrated in Figure 6.7. Additional columns could be added at the discre-
tion of the bookkeeper to capture specific information. The journal in Figure 6.7 contains the
information required by the LSO.
Justin Case, Paralegal GRJ1

General Receipts Journal
General Accounts
Date Particulars/ File Bank Receivable
20** Name of Account Method of Payment No. Dr. Cr.
Nov. 10 Howes, Cliff re Small Claims Court Transfer from trust chq. #4, inv. #2 1 700.00 700.00
15 Jones, Frank re Highway Traffic Act Transfer from trust chq. #5, inv. #3 2 300.00 300.00
22 Zimmer, Ruth re Carpenter Payment on inv. #4, cash 4 305.10 305.10
30 Totals 1,305.10 1,305.10
(100) (120)
Proof Dr. Cr.
1,305.10
1,305.10
1,305.10 1,305.10
FIGURE 6.7 General receipts journal for November 20** (after posting)
Date: The date column is used to record the date the money is received.
Name of Account: The name of the client and the name of the matter for which payment is
being made is shown in this column. It is important to record sufficient information so that
it is clear to which client ledger account the amount needs to be posted.
2 By-law 9, part V, s 18(5).
127
LEGAL ACCOUNTING
Particulars/Method of Payment: An explanation providing details regarding the transaction is

placed here. These details should include the invoice number to which the payment is to be
applied, if applicable. The LSO also requires that the method of payment be shown—for ex-
ample, whether payment is made by cheque, cash, debit, money order, or other means. The
client file number is entered in this column when posting is done to the client ledger.
General Bank Dr.: The total amount received and being deposited in the general bank account
is recorded in this column.
Accounts Receivable Cr.: When payment is received from a client on an outstanding invoice,
the amount paid on the account for fees and disbursements is recorded in the accounts receiv-
able column. Entries recorded in this column should be posted immediately to the client’s
general ledger account so that client accounts are kept up to date.
All receipts deposited into the general bank account are recorded in the general receipts
journal. The total of the General Bank Dr. column is posted to the general bank account as a
debit at the end of the period because debits increase assets and receipts increase cash in the
bank. The individual amounts will be posted to the individual ledgers, either in the general
ledger or in the client general ledger, wherever appropriate.
You may wonder what happened to debits and credits and the double-entry system of
bookkeeping. Even though special journals are being used, the entries will be posted to two
places. The sum of the General Bank Dr. column is posted as a debit to the general bank
account ledger sheet in the general ledger. The individual amounts in the Accounts Receiv-
able Cr. column are posted as a credit to the client general ledger accounts.
Each line recorded in the general receipts journal must be a balanced entry. The General
Bank Dr. amount must be equal to the Accounts Receivable Cr. amount.
After all the entries for the month are recorded, the columns are totalled, and the balance
is proven by comparing the credit total to the debit total. Figure 6.7 shows that the journal
debits and credits balance. Although bookkeepers do not usually show the proof at the bot-
tom of the journal sheet, students are encouraged to show the proof on every journal.
Posting from the General Receipts Journal

Entries in the general receipts journal must be posted to the appropriate ledgers, where in-
formation is summarized.
1. General Bank Dr.: Individual lines do not need to be posted. The total of this column is
debited to the general ledger in the account called General Bank Account (100). The
advantage of using the general receipts journal is that the need to post each individual
transaction to the general bank account is avoided.
2. Accounts Receivable Cr.: The individual amounts listed in this column must be posted as
a debit to each client account affected by the transaction. The amount is entered in the
Payments from Client column in the client’s general ledger. The client file number is
placed in the PR column in the journal to indicate that the individual amounts were
posted to each client’s general ledger. At the end of the month, a list of the accounts
receivable is prepared showing the amount owed by each client on that date.
The column total is credited to the Accounts Receivable account (120) in the general ledger.
It is a good practice to prepare a list of accounts receivable each period by listing the client
files and the balance owed as shown in the client’s general ledger at the end of the month.
128
LO4 General Disbursements Journal

Payments made out of the general bank account can be recorded in the general disburse-
ments journal. A general disbursements journal designed to suit the requirements of a para-
legal firm is illustrated in Figure 6.8. Additional columns may be added at the discretion of
the bookkeeper if specific information needs to be captured.
Pursuant to the LSO by-laws, licensees are required to maintain a book of original entry
showing all money paid out3 by the firm and must record:
• the date on which money is disbursed;
• the method by which money is paid, including the identifier of any document used to
pay money (such as a cheque number, debit transaction number, etc.);
• the amount of money disbursed; and
• the person to whom money is paid.
The information in the general disbursements journal would be completed as shown in
Figure 6.8.
Justin Case, Paralegal GDJ1

General Disbursements Journal
General Client’s HST General
Date Method/ Paid To/Particulars File No./ Ledger General Paid Bank
20** Ref. # Client/Re PR Acct. Dr. Ledger Dr. Dr. Acct. Cr.
Nov. 1 chq. #4 Lucky Landlord, Rent Exp. 538 300.00 39.00 339.00
4 chq. #5 LSO re Dues Oct. – Dec. 534 268.75 34.94 303.69
5 chq. #6 J. Case, Drawings 350 800.00 800.00
6 chq. #7 Quick Courier, Zimmer re Courier Exp. 4 20.00 2.60 22.60
15 chq. #8 Unitel re Telephone Exp. 565 80.00 10.40 90.40
30 Totals 1,448.75 20.00 86.94 1,555.69
(240) (100)
Proof Dr. Cr.
1,448.75 1,555.69
20.00
86.94
1,555.69 1,555.69
FIGURE 6.8 General disbursements journal for November 20** (after posting)
Date: The date column is used to record the date the transaction occurs.
Method/Ref. #: Indicate how the payment was made by showing the cheque number, the
debit reference, or other relevant information.
Paid To/Particulars: Record the name of the payee (person or company paid) and what the
payment was for (for example, telephone expense, salaries, filing court documents). If a
3 By-law 9, part V, s 18(6).
129
LEGAL ACCOUNTING
disbursement made on behalf of a client is being recorded, record the name of the payee, the
file name, and the reason the funds were paid (for example, Quick Courier, Zimmer re Cou-
rier Exp.). You may use more than one line to make the entry.
General Ledger Acct. Dr.: Record the amount to be debited to the general ledger account for
the expense incurred. For example, in Figure 6.8, $90.40 was paid to Unitel for telephone
expense (the phone cost $80, plus $10.40 HST), so $80 was recorded in this column. This
amount should be posted to the general ledger account called Telephone Expense (565); the
$10.40 amount paid for HST will be put in the HST Paid Dr. column, and the column total
will be posted in the general ledger.
Client’s General Ledger Dr.: When the firm pays expenses on behalf of a client from the gen-
eral bank account, the amount paid will be entered in this column and it will be posted to
the client’s general ledger sheet. The amount paid out for the client’s file will be charged
to the client at the time of billing.
HST Paid Dr.: The amount of HST paid on the transaction should be entered in this column.
Once the firm starts to remit HST, the amount collected and the amounts paid out will be
deducted from one another, and any payment owing will have to be remitted to the CRA.
HST will be dealt with more thoroughly in Chapter 11.
General Bank Acct. Cr.: Enter the total amount of the cheque written in this column.
Posting from the General Disbursements Journal

Entries in the general disbursements journal must be posted to the appropriate ledgers,
where information is summarized.
1. General Ledger Acct. Dr.: The amounts in this column must be posted to the individual
accounts affected. The number in the preceding PR column indicates the account to
which the entry was posted.
2. Client’s General Ledger Dr.: This amount paid out on behalf of a client is recorded in the
client’s general ledger account. The number in the PR column corresponds to the client
file number in the client’s general ledger.
3. HST Paid Dr.: The total amount is posted to the HST/GST Payable account (this is a lia-
bility account [240], but note that the entry is a debit, which means it is a decrease in the
liability for HST). The HST/GST Payable account number (240) is entered at the bottom
of the column to show that the amount was posted.
4. General Bank Acct. Cr.: The total for this column is posted to the general bank account
in the general ledger and the General Bank Account number (100) is entered at the bot-
tom of the column to show that the amount was posted.
General Journal Entries

When a particular transaction does not fit into one of the special journals used by the firm,
the entry can be made using the general journal. Each line is then posted to the appropriate
ledger account. Figure 6.10 at the end of this chapter shows examples of such general journal
entries.
130
LO5 Posting from Special Journals

Chapters 2 and 3 detailed how a general journal is used to record transactions for a business
and how the transactions are then posted to the general ledger. There are several different
types of ledgers that will be encountered when working in a legal practice:
• General ledger: This ledger records receipts and disbursements for the firm that are
used for the purposes of preparing the financial statements—the income statement,
statement of owner’s equity, and balance sheet. The general ledger will have a ledger
sheet for each of the accounts listed in the chart of accounts. The entries made in the
general journal are posted to the general ledger.
• Client’s general ledger: This ledger contains a separate sheet for each client file. All the
payments received from a client for payment on invoices, payments made from the
firm’s general bank account on behalf of a client, and expense recovery items, such as
charges for photocopies and faxes charged to a client, are recorded in the client’s gen-
eral ledger. A running total of the balance is calculated.
• Client’s trust ledger: This ledger contains a separate sheet for each client file. All the
receipts and payments from the trust bank account related to a client file will have to
be posted to the client’s trust ledger. It is important to keep a running total of the bal-
ance in the client’s trust ledger account so that the balance held for each client is
always up to date. The entries made in the trust bank journal are posted to the indi-
vidual client trust ledger sheet for each client. The total receipts and payments from
the trust bank journal are posted to the account in the general ledger. Because the
trust bank journal and trust ledgers will be covered in Chapter 7, they have not been
included in this chapter.
• Combined client’s general and trust ledger: It is sometimes convenient to combine the cli-
ent’s general ledger sheets and the client’s trust ledger sheets for each file on one page.
In that way, only one ledger sheet needs to be looked at to view the status of a client’s
account. The information found in a ledger that combines both the client general led-
ger and client trust ledger transactions will include the following items:
• all transactions that were posted from the trust bank journal showing all receipts
and payments made in trust on behalf of a client;
• all transactions that were posted from the general journal to the client ledger accounts
for individual clients;
• all invoices recorded in the fees book that have been billed to the client; and
• all payments received from a client and the balance owing on the account, if any.
Analysis of Each Transaction in November

Figure 6.9 shows an analysis of all the transactions referred to above. The completed journal
and ledgers are shown at the end of this chapter (Figures 6.10 - 6.14).
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LEGAL ACCOUNTING
Nov. 1—Invoice #2 was sent to Cliff Howes re Small Claims Court for $800 plus HST of $104.
1. Which journal is • The amount of fees charged on an invoice must be recorded in the fees book in the column
to be used? Fees Billed Cr.
2. How will this • The amounts $800 and $104 are entered in the client’s general ledger for Cliff Howes under the
entry be posted? appropriate columns for fees and HST.
Nov. 1—Rent was paid to Lucky Landlord in the amount of $300 plus $39 HST, general cheque #4.
3. Which journal is • This is a disbursement out of the general bank account, so the total amount of the entry must
to be used? be placed in the general disbursements journal under the General Bank Acct. Cr. column.
• Record the amount for rent ($300) in the General Ledger Acct. Dr. column.
• Record the amount of HST in the HST Paid Dr. column.
4. How will this • Post the amount of $300 for rent expense to the general ledger account.
entry be posted? • Do not post the individual amounts for the other two columns because the totals will be posted
at the end of the month.
Nov. 3—A new client file was opened for Ruth Zimmer v. Bud Carpenter re work improperly done on her property. She is
claiming damages in the amount of $24,000 for repairs that had to be made. Open a file for Ruth Zimmer (file #4). No
retainer was received.
5. Which journal is • N/A. Opening of a file does not require a journal entry.
to be used?
6. How will this • You will need to open a client ledger sheet for Zimmer in the client’s general and trust ledgers
entry be posted? for the purpose of making entries in the future.
Nov. 4—Justin Case paid $268.75 plus $34.94 HST for a total of $303.69 to cover LSO membership dues for October,
November, and December—general cheque #5.
7. Which journal is • This is a payment out of the general bank account, so record the transaction in the general
to be used? disbursements journal:
– General Ledger Acct. Dr. column: $268.75
– HST Paid column: $34.94
– General Bank Acct. Cr. column: $303.69
8. How will this • Post the expense of $268.75 for Law Society membership dues to the general ledger account
entry be posted? called Membership/Professional Dues.
Nov. 5—Justin wrote a cheque to himself for $800 for personal expenses—general cheque #6.
9. Which journal is • This is a payment out of the general bank account, so record the transaction in the general
to be used? disbursements journal:
– General Ledger Acct. Dr. column: $800
– General Bank Acct. Cr. column: $800
10. How will this • Post the withdrawal of $800 to the general ledger account called Justin Case, Drawings.
entry be posted?
Nov. 6—A letter was sent to Bud Carpenter on the Zimmer file setting out the claim. The letter was sent by Quick Courier at
a cost of $20 plus $2.60 for HST for a total of $22.60. The amount was paid by general cheque #7.
11. Which journal is • This is a disbursement out of the general bank account, so the total amount of the entry should
to be used? be placed in the general disbursements journal under the General Bank Acct. Cr. column.
• Also enter the amount of $20 in the Client’s General Ledger Dr. column of the general
disbursements journal.
12. How will this • Post the amount from the Client’s General Ledger Dr. column to the ledger sheet for Zimmer.
entry be posted? Do not post the amount of $2.60 for HST because this will be included in the total posted to
the general ledger at the end of the month.
Nov. 10—Fees were billed to Frank Jones re Highway Traffic Act for $400 plus HST of $52 (invoice #3).
13. Which journal is • The $400 amount of fees charged is to be recorded in the fees book in the column
to be used? Fees Billed Cr.
14. How will this • The amount of $400 is posted to the client’s general ledger for Frank Jones under the column
entry be posted? Fees. HST will be posted at the end of the month to the general ledger account.
132
Nov. 10—Partial payment on account was received by transferring funds from the trust account for Cliff Howes. There was
$700 in the Cliff Howes trust account, so Justin wrote cheque #4 from trust for $700, then deposited the cheque in his
general bank account. Record the receipt of payment in this transaction. (Trust entries not included here.)
15. Which journal is • The deposit of $700 in the firm’s general bank account is recorded in the general receipts
to be used? journal in the General Bank Dr. column and also in the Accounts Receivable Cr. column.
16. How will the • The amount received from the client will be posted to the client’s general ledger to show that
entry be posted? the client paid $700 on account.
Nov. 15—Justin paid the telephone bill in the amount of $80, plus $10.40 for HST, general cheque #8, general bank account.
17. Which journal is • Record the amount of $90.40 for telephone expense to the general disbursements journal in the
to be used? column General Bank Acct. Cr.
• Enter the amount of $80 in the General Ledger Acct. Dr. column and the $10.40 in the HST Paid
Dr. column.
18. How will this • Post the amount of $80 to the general ledger on the sheet for telephone expense.
entry be posted?
Nov. 20—Justin transferred the amount of $300 held in trust for Frank Jones by writing cheque #5 on the trust account. He
then deposited the cheque in the general bank account and applied payment to invoice #3. Record receipt of the payment of
$300 in the general bank account.
19. Which journal is • The deposit of $300 in the firm’s general bank account is recorded in the general receipts
to be used? journal in the General Bank Dr. column and also in the Accounts Receivable Cr. column.
20. How will this • The amount received from the client will be posted to the client’s general ledger to show that
entry be posted? the client paid $300 on account.
Nov. 21—Justin sold the printer he had invested in the firm to Jane Crozier. He received $50 for the printer.
21. Which journal is • Record the receipt from the sale of the printer as a debit in the general journal.
to be used? • Record the decrease in the asset computer equipment on the next line in the general journal.
22. How will this • Post the entries to the general ledger as a debit to the General Bank Account and as a credit to
entry be posted? the Computer Equipment account.
Nov. 22—Justin presented an interim bill to Ruth Zimmer in the amount of $250 for fees and for disbursements of $20 plus
HST of $35.10 for a total of $305.10 (invoice #4). Ruth Zimmer immediately paid the bill in cash when the bill was presented
to her.
23. Which journal is • Record the fees billed in the fees book under the Fees Billed Cr. column.
to be used? • Record the $20 billed under the Disbursements Billed column and the HST under the HST
Billed column.
• Show the total amount of the bill ($305.10) in the Total Billed AR Dr. column.
24. How will this • Post the amount billed ($250) to the client’s general ledger for Ruth Zimmer and post the HST
entry be posted? of $35.10. You do not need to post the amount of $20 because it was already entered on
November 6.
25. Which journal is • You have received payment in cash from Ruth Zimmer. Record the amount received in the
to be used? general receipts journal under the General Bank Dr. column and also under the Accounts
Receivable Cr. column.
26. How will this • Post the amount of $305.10 received to the client’s general ledger for Zimmer to show that she
entry be posted? has paid the fee.
Nov. 30—Justin received a bill from Trimemco for professional liability insurance, in the amount of $1,075 plus HST of
$139.75 for a total of $1,214.75. The first payment on account is not due until April 14 next year.
27. Which journal is • This entry should be made using the general journal. It is a compound entry.
to be used? • Record the professional liability insurance expense of $1,075 as an expense (debit) on the first
line: Insurance, Professional Liability.
• Record the HST of $139.75 as a debit on the second line and record the account payable of
$1,214.75 as a credit on the third line. Enter the explanation on the fourth line.
28. How will the • Post each entry to the accounts in the general ledger.
entry be posted?
FIGURE 6.9 Analysis of all transactions for Justin Case, November 20**
133
LEGAL ACCOUNTING
Completed Journal and Ledgers to November 30

General Journal
Date
Nov. 21 General Bank Account 100 50.00
Computer Equipment 155 50.00
To record funds received on sale of printer
30 Membership/Professional Dues 534 1,075.00
HST/GST Payable 240 139.75
Accounts Payable 200 1,214.75
To record professional dues payable
Totals 1,264.75 1,264.75
FIGURE 6.10 Justin Case, general journal entries for November 20**

General Ledgers

Date
Oct. 1 GJ1 1,000.00 Dr. 1,000.00
1 GJ1 4,000.00 Dr. 5,000.00
5 GJ2 300.00 Dr. 4,700.00
5 GJ2 2,000.00 Dr. 2,700.00
6 GJ2 500.00 Dr. 3,200.00
15 GJ2 100.00 Dr. 3,100.00
20 GJ2 3,000.00 Dr. 6,100.00
30 GJ2 500.00 Dr. 5,600.00
Nov. 21 Sale of Printer to Crozier GJ3 50.00 Dr. 5,650.00

30 Totals from General Receipts Journal GRJ1 1,305.10 Dr. 6,955.10
30 Totals from General Disb. Journal GDJ1 1,555.69 Dr. 5,399.41
134
Trust Bank Account Account No. 115

Date
Oct. 30 Trust Totals for October TJ1 4,100.00 2,820.00 Dr. 1,280.00
Nov. 30 Trust Totals for November TJ2 1,000.00 Dr. 280.00

Date
Nov. 30 Total AR—November FB1 1,661.10 Dr. 1,661.10
Nov. 30 Totals for November GRJ1 1,305.10 Dr. 356.00
Computer Equipment (Hardware) Account No. 155

Date
Oct. 1 GJ1 900.00 Dr. 900.00
Nov. 21 Sale of Printer to Crozier GJ3 50.00 Dr. 850.00

Date
Oct. 1 GJ1 150.00 Dr. 150.00
5 GJ2 2,000.00 Dr. 2,150.00
15 GJ2 100.00 Dr. 2,250.00

Date
Oct. 10 Legal Supplies Inc. GJ2 580.00 Cr. 580.00
Nov. 30 Law Society Dues GJ3 1,214.75 Cr. 1,794.75
Personal Loan Account No. 205

Date
Oct. 1 J. Case GJ1 4,000.00 Cr. 4,000.00
135
LEGAL ACCOUNTING
Trust Funds Owed Account No. 215

Date
Oct. 31 Trust Funds Owed to Clients TJ1 4,100.00 2,820.00 Cr. 1,280.00
Nov. 30 Trust Funds Owed November 30 TJ2 1,000.00 Cr. 280.00
HST/GST Payable Account No. 240

Date
Nov. 31 Total Billed to Clients FB1 191.10 Cr. 191.10
Nov. 30 Total Disbursed for November GDJ1 86.94 Cr. 104.16
30 HST on Professional Dues GJ3 139.75 Dr. 35.59
Justin Case, Capital Account No. 300

Date
Oct. 1 GJ1 1,000.00 Cr. 1,000.00
1 GJ1 900.00 Cr. 1,900.00
1 GJ1 150.00 Cr. 2,050.00
5 GJ2 500.00 Cr. 2,550.00
Justin Case, Drawings Account No. 350

Date
Nov. 5 Withdrawal of funds for personal expenses GDJ1 800.00 Dr. 800.00

Date
Oct. 20 GJ2 3,000.00 Cr. 3,000.00
Nov. 30 Total Fees Billed—November FB1 1,450.00 Cr. 4,450.00
Insurance, Professional Liability Account No. 527

Date
Nov. 30 Insurance premium due April next year G13 1,075.00 Dr. 1,075.00
136

Date
Nov. 4 Law Society Dues GDJ1 268.75 Dr. 268.75
Office Supplies/General Expense Account No. 535

Date
Oct. 10 GJ2 580.00 Dr. 580.00

Date
Oct. 30 GJ2 500.00 Dr. 500.00
Nov. 1 GDJ1 300.00 Dr. 800.00

Date
Oct. 5 GJ2 300.00 Dr. 300.00
Nov. 15 Unitel GDJ1 80.00 Dr. 380.00
FIGURE 6.11 Justin Case, general ledgers as of November 20**

Client General Ledger
Account: HOWES, Cliff re Small Claims Court File No. 001

Payments
Date Received From/Paid To Disbursements from Balance
20** Explanation Expenses Paid HST Fees Client Owed
Nov. 1 Invoice #2 104.00 800.00 904.00
10 Transfer from Trust 700.00 204.00
137
LEGAL ACCOUNTING
Account: JONES, Frank re Highway Traffic Act File No. 002

Payments
Nov. 10 Fees Billed, invoice #3 52.00 400.00 452.00
20 Justin Case, Payment on invoice #3 300.00 152.00
Account: ZIMMER, Ruth re Ruth Zimmer v. Bud Carpenter File No. 004
Payments
Nov. 6 Quick Courier 20.00
22 Fees Billed, invoice #4 35.10 250.00 305.10
22 Zimmer, on Account 305.10 0.00
FIGURE 6.12 Justin Case, client general ledger for November 20**
Supporting Documents
TA X TIP
The CRA requires business owners to keep organized accounting and financial
documents that summarize the information from the supporting documents. Ex-
amples of such documents include ledgers, journals, financial statements, state-
ments of accounts, income tax returns, and GST/HST tax credit returns.
Documents business owners must keep to support transactions identified in
the records include invoices for fees, purchase receipts, vouchers, contracts (such
as a lease), bank deposit slips, cancelled cheques, credit card receipts, logbooks,
emails, and correspondence supporting transactions.
These records can be kept in English or French.
138

Trial Balance
November 30, 20**
100 General Bank Account $5,399.41
120 Accounts Receivable 356.00
155 Computer Equipment (Hardware) 850.00
158 Office Furniture and Equipment 2,250.00
200 Accounts Payable $1,794.75
205 Personal Loan 4,000.00
240 HST/GST Payable 35.59
300 Justin Case, Capital 2,550.00
350 Justin Case, Drawings 800.00
400 Fees Earned 4,450.00
527 Insurance, Professional Liability 1,075.00
534 Membership/Professional Dues 268.75
535 Office Supplies/General Expense 580.00
538 Rent Expense 800.00
565 Telephone Expense 380.00
$12,794.75 $12,794.75
FIGURE 6.13 Justin Case, trial balance, November 30, 20**

List of Accounts Receivable
November 30, 20**
Balance
File No. Name of Client/Re Owed
1 HOWES, Cliff re Small Claims Court $204.00
2 JONES, Frank re Highway Traffic Act 152.00
Total Owed by Clients $356.00
FIGURE 6.14 Justin Case, list of accounts receivable
139
LEGAL ACCOUNTING
CHAPTER SUMMARY
Learning how to use special journals can seem complicated, but ultimately, they simplify your record-
keeping. Special journals do this by grouping certain transactions in one column so that you do not need
to post as many entries. This saves time and avoids errors. Keeping the client general ledger and the client
trust ledger on the same page will help you to see the flow of transactions between the two ledgers.
Technology is a useful tool for using special journals because the software usually records and posts
the information automatically to the correct place. The manual approach used in this chapter helps you to
understand how the information flows through a computerized system. If you do not understand how the
information is processed manually, you will have difficulty understanding the information created by a
computerized system. Further, some paralegals may not be able to afford specialized computer bookkeep-
ing software when they start out—so it is good to know how books must be set up and maintained.
KEY TERMS
billable work, 119 general disbursements journal, 129
expense recovery, 120 general receipts journal, 127
fees book, 123 Non-billable work, 119
fees journal, 118 special journals, 118
FURTHER READING
Canvas Network, Intro to Accounting, “Study: Subsidiary Ledgers and Special Journals,” online:
<https://learn.canvas.net/courses/37/pages/study-subsidiary-ledgers-and-special-journals>. For
additional information, scroll down the page to Additional Resources and select “Special Journals
and Subsidiary Ledgers,” which links to a video on an external site.
Lawyers’ Professional Indemnity Company, Managing the Finances of Your Practice, online:
<http://www.practicepro.ca/practice/pdf/Managing_Finances_booklet.pdf>. Download a PDF
of the booklet to see the sections related to established practices (for example, fee
agreements, docketing, and billing).
LexisNexis Canada, PCLaw® billing and accounting software FAQ, online: <http://law.lexisnexis.com/
literature/back_office_faqs.pdf>. See the sections related to billing, client disbursements, and time
entries.
140
REVIEW QUESTIONS
True or False
1. A fees book includes only information about legal fees charged to clients. (LO2)
2. An accounts receivable journal is an example of a special journal. (LO2)
3. The general disbursements journal is used only for disbursements made on behalf of clients,
which are recoverable by the paralegal. (LO4)
4. Every receipt shown on the general receipts journal will have a corresponding entry on the
general disbursements journal for the same accounting period. (LO3)
5. An invoice should be created each and every time fees and disbursements are billed to a cli-
ent. (LO2)
6. Entries from a special journal do not need to be posted to the general ledger. (LO5)
7. The Accounts Receivable account found on the general ledger can be further subdivided by
clients. (LO3)
8. The general journal replaces the need for special journals. (LO1)
Short Answer
1. Which of the following entries would be recorded in the general receipts journal? (LO3)
a. The firm was paid $300 as a retainer by a client.
b. The firm received a credit of $50 from the landlord for rent.
c. The firm paid photocopies expense to be recovered from a client.
d. The firm wrote a cheque to itself from the trust account to pay for an invoice sent to the client.
e. The firm paid money out of trust to cover filing fees of $150 paid the previous week from the
firm’s general bank account and deposited the amount in its general bank account.
2. What is the purpose of the general disbursements journal? (LO4)
3. What is the benefit of maintaining a fees book? (LO2)
4. Which columns in the fees book are posted as a total, and to which account are they posted? (LO2)
5. Which individual items in the fees book get posted to the client’s general ledger? (LO2)
PRACTICE EXERCISES
PRACTICE
EXCEL
The following invoices were sent to clients by Justin Case. Record the invoice information in the fees
book for the firm. Calculate and enter the HST (13%) for each invoice and the total amount of the
bill. (LO2)
a. April 1: Sent invoice #102 to L. Forte (File No. 102); fees billed, $800, and disbursements were $120.
b. April 10: Sent invoice #103 to D. W. Coleman (File No. 89); fees billed, $500, and disbursements
were $250.
141
LEGAL ACCOUNTING
c. April 20: Sent invoice #104 to Ruth Zimmer (File No. 40); fees billed, $250, and disbursements
were $20.
d. April 30: Sent invoice #105 to First Time Janitorial (File No. 103); fees billed, $299.99, and dis-
bursements were $14.59.

Fees Book FB1
Date Inv. Client/Re File Fees Billed Disbursements HST Billed Total Billed
20** # No. Cr. Billed Cr. Cr.
Cr.

Using the Fees Journal you completed in Practice Exercise 6.1, post the entries from the Fees Journal to
the Client General Ledgers provided below. Note that the disbursements were previously posted from
the Disbursements journal so they do not have to be reentered. (LO2)

Client General Ledgers
Account: Ruth Zimmer File No. 40

Date Received From/Paid To Disbursements Payments Balance
20** Explanation PR Expenses Paid HST Fees from Client Owed
142
Account: D. W. Coleman File No. 89

Account: L. Forte File No.

102
Account: First Time Janitorial File No.

103
PRACTICE
EXCEL
Prepare the appropriate special journals and client general ledgers based on the following transactions
for Ann Litigate in the operation of her paralegal practice during the month of July. Record the amount
paid for HST where appropriate. (LO5)
Cheque stubs show the following cheques were written on the Ann Litigate General Bank Account for
expenses paid by the firm. Record the entries in the General Disbursements Journal.
1. July 1: Paid rent expense (invoice #1001 payable to Magnum Office Managers), $1,200 plus HST
of $156 for a total amount of $1,356, cheque #217, A. Litigate.
2. July 7: Paid courier invoice account (invoice #A0-111 from Fast Courier), $30 plus HST of $3.90
for a total of $33.90, cheque #218.
143
LEGAL ACCOUNTING
3. July 7: Paid courier invoice account (invoice #A-112) $60 plus HST of $7.80 recoverable from cli-
ent, L. Forte, cheque #219.
4. July 9: Paid court filing fees, $240 to the Minister of Finance ($120 recoverable from client L.
Bailey; $120 recoverable from R. Smythe) (no HST payable on court fees), cheque #220.
5. July 15: Paid professional liability insurance (payable to ABC Insurance), in the total amount of
$167, cheque #221. Insurance has 8 percent tax only.
6. July 30: Paid salary to assistant, $2,000, cheque #222.
The following invoices were billed to clients during the month of July. Record the invoices in the Fees
Book for Ann Litigate’s legal firm. Refer to the section above on the General Disbursements Journal
where necessary.
1. July 9: Billed L. Forte for legal services (invoice #400), $500 (plus HST) plus disbursements
previously recorded (courier charge) for a total of $632.80.
2. July 15: Billed L. Bailey for legal services (invoice #401), $1,000 plus HST, plus disbursement of
$120 for court filing fees (no HST payable on court fees) for a total of $1,250.
3. July 31: Billed client (R. Smythe) on invoice #402, for disbursements only of $120 (no HST pay-
able) for a total of $120.
Ann Litigate’s firm received payment on the following invoices during the month of July. Record the
receipts in the General Receipts Journal for the firm.
1. July 23: Received payment by cheque from L. Forte for invoice #400 (L. Forte), in the amount of $632.80.
2. July 30: Received partial payment of invoice #401 (L. Bailey), $750.
Ann Litigate made an investment in her firm. This transaction needs to be recorded in the General Jour-
nal for the firm.
1. July 31: Capital investment (from Ann to the firm), $8,000, cheque #24, A. Litigate (from her per-
sonal account).
Ann Litigate, Paralegal GDJ1
General Client’s
Date Method/ Paid To/Particulars PR General Bank
Ledger Acct. General HST Paid Dr.
20** Ref. # Client/Re /File Account Cr.
Dr. Ledger Dr.
144
Ann Litigate, Paralegal FB1

Fees Book
Total
Date Inv. Disbursements HST Billed
Client/Re Ref. Fees Billed Billed
20** # Billed Cr.
AR Dr.
Ann Litigate, Paralegal GRJ1

Date Particulars/ General Accounts
Name of Account PR
20** Method of Payment Bank Dr. Receivable Cr.
Ann Litigate, Paralegal GJ3

General Journal
Date
20**
145
LEGAL ACCOUNTING
PRACTICE
EXCEL
Once you have completed the entries in the special journals set out in Practice 6.3, post the following
entries: (LO5)
1. Post the General Journal Entries to the Individual General Ledger Accounts.
2. Post the entries from the General Disbursements Journal as follows:
a. Post the entries in the General Ledger Account Dr. to each individual ledger account in the
General Ledger or the Client General Ledger. Complete the PR column indicating the account
to which the amounts were posted.
b. Post the totals for the HST Paid and General Bank account to the General Ledger Accounts.
Show the post reference of the account posted to in brackets below the column.
3. Post the entries from the Fees Book to the Client General Ledgers and to the General Ledger
Accounts. The reference column should show the client account or file number to which the fees
were posted.
a. The disbursements billed column does not need to be posted, as these were posted previously.
b. Post the totals of the HST Billed column and the Total Billed Accounts Receivable column to
the respective General Ledger Accounts. Enter the account number to which the totals were
posted in brackets below the total posted.
4. Post the entries from the General Receipts Journal to the Client General Ledgers and the General
Ledger.
a. Post the individual receipted amounts to the Client’s General Ledger and indicate the account
number in the post reference column.
b. Post the totals of the General Bank Dr. and Accounts Receivable Cr. Accounts to the General
Ledger and show the account number to which the amounts were posted in brackets below the
totals.
5. Complete the totals in the General Ledgers and the General Client Ledger once all posting has
been completed.
6. Prepare the trial balance.
Also prepare a list of the total accounts receivable owed to

HINT
Ann for the month. The total should be equal to the total of
the Accounts Receivable Account in the General Ledger.
146

Account: FORTE, L. File No. 04

Received From/Paid To Payments
Date Disbursements Balance
Explanation HST Fees from
20** Expenses Paid Owed
PR Client
Account: BAILEY, L. File No. 05

PR Client
Account: SMYTHE, R. File No. 06

PR Client

General Ledgers as of July 31, 20**
General Bank Account Account No.

100
Date Dr./
Explanation PR Debit Credit Balance
20** Cr.
147
LEGAL ACCOUNTING
Accounts Receivable Account No.

120
Date Dr./
20** Cr.
Office Furniture and Equipment Account No.

158
Date Dr./
20** Cr.
Accounts Payable/General Liabilities Account No.

200
Date Dr./
20** Cr.
HST Payable Account No.

240
Date Dr./
20** Cr.
Ann Litigate, Capital Account No.

300
Date Dr./
20** Cr.
Ann Litigate, Drawings Account No.

350
Date Dr./
20** Cr.
148
Fees Earned Account No.

400
Date Dr./
20** Cr.
Salaries Expense Account No.

511
Date Dr./
20** Cr.
Insurance—Professional Liability Account No.

527
Date Dr./
20** Cr.
Office Supplies/General Expense Account No.

535
Date Dr./
20** Cr.
Rent Expense Account No.

538
Date Dr./
20** Cr.
Delivery Expense Account No.

550
Date Dr./
20** Cr.
149
LEGAL ACCOUNTING

Trial Balance
July 31, 20**
PRACTICE
EXCEL
Complete the invoices provided based on the following time docket entries prepared by Ann Litigate. (LO2)
To calculate billable time, divide the number of

HINT
minutes billed by 60 (minutes) and round up to

the nearest 0.10.
Time Docket Entries

A. Johnston—Matter No. 01 (Small Claims Matter—Johnston v. Delaney)
Date
20** Description Start Time End Time Total Time
June 18 Initial consultation with client to discuss options for 10:30 a.m. 11:00 a.m. 0.50 hours
small claim matter (30 min/60 min)
June 20 Conduct research on issues related to trespass 3:00 p.m. 4:15 p.m. 1.30 hours
(75 min/60 min)
June 22 Prepare initial draft of statement of claim and email 11:20 a.m. 12:50 p.m. 1.50 hours
to client for review (90 min/60 min)
June 28 Follow-up meeting with client to discuss draft 10:00 a.m. 10:45 a.m. 0.80 hours
statement of claim for the purpose of finalizing (45 min/60 min)
same statement of claim based on client comments
150
Time Docket Entries

J. Palmer—Matter No. 06 (Provincial Offences Matter)
Date
20** Description Start Time End Time Total Time
May 15 Phone call and initial consultation with J. Palmer 1:55 p.m. 2:15 p.m. 0.40 hours
(20 min/60 min)
May 20 Meeting with client to discuss upcoming court date 5:30 p.m. 6:00 p.m. 0.50 hours
(30 min/60 min)
June 5 Review disclosure and conduct research (section 130, 10:15 a.m. 11:00 a.m. 0.80 hours
Highway Traffic Act) in preparation for upcoming court date (45 min/60 min)
June 12 Attend at Provincial Offences Court and negotiate a 9:00 a.m. 10:15 a.m. 1.30 hours
settlement with the Crown (75 min/60 min)
Invoice for A. Johnston
ANN LITIGATE PARALEGAL SERVICES INVOICE #1015

11 Any Street, Ottawa, Ontario K1A 0B0
June 30, 20**
Mr. Anthony Johnston

123 Avenue Road
Ottawa, Ontario K1A 0C0
FOR SERVICES RENDERED RE SMALL CLAIMS MATTER:
Hours Billable Rate Amount

Date Billed Description (/h) Billed
FEES: Subtotal
HST (13%)
DISBURSEMENTS
Quantity Description Unit Price Amount
45 pages Photocopies 0.25/page
15 pages Fax transmissions 1.00/page
DISBURSEMENTS: Subtotal
HST (13%)
TOTAL (FEES, DISBURSEMENTS, AND HST)
Total
TOTAL BALANCE OWING
151
LEGAL ACCOUNTING
Invoice for J. Palmer
ANN LITIGATE PARALEGAL SERVICES INVOICE #1016

11 Any Street, Ottawa, Ontario K1A 0B0
June 30, 20**
Ms. Janet Palmer

567 Jane Street
Ottawa, Ontario K1A 0C1
FOR SERVICES RENDERED RE HIGHWAY TRAFFIC ACT MATTER:
Hours Billable Rate Amount

Date Billed Description (/h) Billed
FEES: Subtotal
DISCOUNT, FLAT RATE SERVICE ($450.00): Subtotal
HST (13%)
DISBURSEMENTS
Quantity Description Unit Price Amount
25 pages Photocopies 0.25/page
35 km Travel to/from Provincial Offences Court 0.40/km
DISBURSEMENTS: Subtotal
HST (13%)
TOTAL (FEES, DISBURSEMENTS, AND HST)
Total
TOTAL BALANCE OWING
PRACTICE
EXCEL
You are a new paralegal with a general bank account balance of $10,000. You have not yet set up a
trust account.
The following events take place in your first month of business, November 2014:
1. You are retained by Sarah Smith to commence an action in a Small Claims Court matter. You do
not ask her for a money retainer. On November 4, you issue the plaintiff’s claim. You pay the fee
of $80 with cheque #100. Client matter #1010.
2. You pay for office rent to Laurence Plaza in the amount of $500 (plus HST) with cheque #101 on
November 5.
152
3. The defendant fails to file a defence within the required time. On November 8, you arrange for the
clerk to note the defendant in default and enter default judgment. You pay the fee of $40 with
cheque #102.
4. You pay for office repairs to Repairs’R’Us in the amount of $120 (plus HST) with cheque #103 on
November 13.
5. Your total fees to Sarah Smith are $750 (plus HST). Your final invoice is #1, dated November 14.
Include disbursements.
6. You pay yourself $1,000 on November 15 with cheque #104.
7. You receive Sarah Smith’s personal cheque for $967.50 on November 20. The cheque is #245.
You deposit to the bank on November 20.
Record the transactions in the appropriate form(s) provided. (LO1, LO2, LO3, LO4)
Bank of Hamilton Credit Account of:

Date: Mohawk Paralegal
Transit: 98765 General Account
Account number: 2345678991
Cheques and Credit Card Vouchers Details Cash
× $5
× $10
× $20
× $50
× $100
Cdn Cash Total
Credit Card Vouchers

Total and Cheques Forwarded
Mohawk Paralegal
Method of
Date Funds received from Amount
payment
153
LEGAL ACCOUNTING
Mohawk Paralegal
Date Method of payment/Reference number Paid to Particulars HST paid Amount
Mohawk Paralegal
Account: Re:
Client matter no.:
Payment
Expenses HST on HST on Balance
Date Particulars Fees from
paid expenses Fees owing
client
Account: Re:
Client matter no.:
Payment
client
154
Account: Re:
Client matter no.:
Payment
client
Mohawk Paralegal
Fees Book
Invoice Disbursements
Date Client Fees billed HST billed Total billed
number billed
155
LEGAL ACCOUNTING
Case Example: Special Journals

Ann Litigate has prepared the following invoices dated May 30, 20**:
Client Matter #21-xx: $1,250.00 (Total Fees, Disbursements, and HST)

Fees Billed: $1,000.00
Disbursement Recoverable: $120.00, Court Filing Fees (no HST)
HST Billed: $130.00
Client Matter #08-xx: $583.20 (Total Fees, Disbursements, and HST)

Fees Billed: $500.00
Disbursement Recoverable: $16.10, Courier Fees (Speedy Courier)
HST Billed: $67.10
Client Matter #11-xx: $1,672.40 (Total Fees, Disbursements, and HST)

Fees Billed: $1,440.00
Disbursement Recoverable: $40.00, Travel Expense (Mileage)
HST Billed: $192.40
Client Matter #29-xx: $864.45 (Total Fees, Disbursements, and HST)

Fees Billed: $750.00
Disbursement Recoverable: $15.00, Photocopy Charges (Kwick Print)
HST Billed: $99.45
Answer the following questions and list the steps that Ann will need to take for these transactions.
Identify the appropriate special journals and ledgers.
1. How can Ann keep track of the balance owing by her clients once the invoices are issued?
2. When Ann receives payment on an invoice, how can she keep track of the payments made
by her clients?
3. Suppose Ann paid $100 in disbursements or expenses on behalf of her client and wishes to
recover the cost from the client.
a. What entries should Ann make when the expense is incurred?
b. What entries should Ann make when the expenses paid by Ann are not yet paid by the
client?
c. What entries should Ann make when the client subsequently pays the expense?
156
7 Trust Accounting
Difference Between a General Account and a Trust Account . . . . . . . . . . . 158
Cash Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Trust Bank Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Matter-to-Matter Trust Transfer Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Valuable Property Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Practice Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
157
LEGAL ACCOUNTING
LO1 Understand the difference between general accounts and trust accounts.
OUTCOMES
LEARNING
LO2 Be aware of the record-keeping requirements for trust accounts.
LO3 Create entries in a trust bank journal.
LO4 Post from the trust bank journal to the client trust ledgers.
LO5 Prepare a client trust listing and compare the total with the trust bank balance.
LO6 Incorporate trust information into the firm’s financial statements.
LO7 Record matter-to-matter transfers.
LO8 Understand the valuable property record.
Keeping track of transactions affecting the trust bank account and maintaining all the trust
records required by the LSO is like maintaining a parallel set of books for the firm (see Fig-
ure 7.1). Recording receipts and disbursements promptly and accurately ensures that you are
able to meet your client trust obligations as they arise. Your trust records should always be up
to date, and you should check clients’ trust ledgers periodically to look for unusual or incor-
rect items. For example, was an amount entered in the wrong client’s account?
Required for Trust Bank Account Required for General Bank Account
Trust bank journal or trust receipts and General journal or general receipts and
disbursements journal disbursements journal
Trust transfer journal (matter-to-matter transfers) Fees book
General ledger
Client’s trust ledger Client’s general ledger (recommended)
Valuable property record
Book of duplicate cash receipts Book of duplicate cash receipts
Trust bank reconciliation with trust listing Bank reconciliation
FIGURE 7.1 Financial records maintained: trust bank account versus general bank account
Once all the records have been completed, the information will be merged into one set of
financial reports showing a balance sheet for the firm in which the information from both
the general and trust accounts is consolidated.
LO1 Difference Between a General

Account and a Trust Account
Chapter 1 discussed the general bank account and the mixed trust account. Trust account rec-
ords are subject to much more scrutiny by the LSO than general bank account records
158
CHAPTER 7 Trust Accounting
because these accounts hold money that belongs to clients, not to the firm. Trust records are
not required if the firm does not receive any funds in trust for clients.
Trust accounting will need to be used in the following situations:
• When money is received from another party on behalf of a client. For example, a court case
may have been settled in favour of the client, and funds are paid to the firm to be held
in trust until the client signs a release and it is delivered to the other party’s lawyer.
• When money is received from a client to be paid to another party. For example, a court case
may have been settled and a client, having lost, brings funds into the firm to pay the
judgment to the successful party.
• When retainers are received from clients to pay for future legal services and future disburse-
ments. These receipts must be held in the mixed trust account.
• When payments are made by the firm on behalf of its client. These payments can be paid
out of the trust account if the client has given a monetary retainer. For example, the cli-
ent may have authorized the firm to pay a fine from funds held on her behalf in trust.
• When reimbursement for proper expenses is paid out of the firm’s general bank account on
behalf of a client. For example, the firm may have paid to issue a claim but did not have
funds in trust for the client. Once the client brings in funds, the amount paid out by
the firm from its general bank account can be transferred from trust to the general
account to pay for the disbursement(s).
• For payment on account after a bill has been sent to the client. Once the client has been
billed, funds can be transferred from the trust account to the general bank account to
pay the amount owing, but only up to the amount held in trust for that particular
client.
LO2 Deposits and Withdrawals from Trust

By-Law 9 of the LSO requires that trust funds such as cash, cheques, negotiable by the licensee,
cheques drawn by the licensee on the licensee’s trust account, and credit card sales slips in the
possession and control of the licensee should be deposited in the trust account immediately.
You should deposit any trust money you receive by the end of the next banking day.
Trust cheques or bank drafts cannot be made payable to “cash” or “bearer,” and cash
should never be withdrawn from the trust account, because an audit trail is required. Deposit
records kept by the firm must indicate the date on which funds were deposited, the firm’s
name, the bank account number, the source of each receipt, the name of the client, and the
amount of the deposit (see Figure 7.2). Each deposit slip should be stamped by a bank teller.
If funds are deposited using an automated teller machine, the ATM receipt needs to be
attached to the corresponding deposit slip.
• Potential pitfall: Holding business money in the trust account.

PARALEGAL
POTENTIAL
• Possible fallout: Losing track of which clients have trust balances; may appear
PITFALLS
to be a way to hide money earned or HST collected from CRA.

• Proposed recommendation: Remember to use trust accounts only for client
trust money. Use the general bank account for all business money.
159
LEGAL ACCOUNTING
CREDIT ACCOUNT OF: BUSINESS ACCOUNT DEPOSIT SLIP

JUSTIN CASE, PARALEGAL
BANK OF MONEY
IN TRUST
ONTARIO, CANADA
ACCOUNT NUMBER 232017661
DATE: INITIALS:
DAY MONTH YEAR DEPOSITOR’S TELLER’S
03 OCT 20** JC NM
LIST OF CHEQUES:
CHEQUE IDENTIFICATION AMOUNT
CASH COUNT:
1 HOWES, CLIFF 1,000.00 X 5
X 20
2 JONES, FRANK 500.00 X 20
JONES 2 X 50 100.00
3 X $1 COIN
X $2 COIN
4
COIN TOTAL
5
CASH COUNT
6
CASH SUBTOTAL 100.00
7
DEPOSIT:
8 CASH SUBTOTAL 100.00
CHEQUE SUBTOTAL 1,500.00 CHEQUE SUBTOTAL 1,500.00
TOTAL # OF CHEQUES 2 DEPOSIT TOTAL $ 1,600.00
FIGURE 7.2 Sample trust account deposit slip
Cash Receipts
By-law 9, part III, section 4(1) of the LSO contains a provision that a licensee shall not receive
or accept from a person, in respect of any one client file, cash in an aggregate amount equal
to or exceeding Cdn$7,500.
Exceptions to this requirement are found in section 6 of the by-law and deal mostly with
funds received from public bodies or financial institutions. There is an exception if cash is
received from a client for the purpose of paying a fine or penalty. There is also an exception
if cash is received for fees, disbursements, expenses, or bail, provided that any refund out of
such receipts is also made in cash.
As a minimum additional requirement to maintaining the usual records, a book of dupli-
cate cash receipts must be kept with each receipt, identifying the date on which cash is
received, the person from whom cash is received, the amount of cash received, the client for
160
whom cash is received, and any file number in respect of which cash is received (see Figure
7.3). The signatures of the licensee or the person authorized by the licensee to receive cash,
and of the person from whom cash is received, are also required (by-law 9, part V, section 19).
The receipt book must be kept for a ten-year period pursuant to by-law 9, part V, section 23(2).
DUPLICATE CASH RECEIPT NUMBER 1001
RECEIVED FROM Frank Jones DATE 03/10/20**

dd/mm/yr
ON BEHALF OF FILE NO. 2
AMOUNT One hundred dollars DOLLARS ( 100.00 )
Frank Jones Justin Case

Signature of Payor Authorized signature on behalf of firm
GST/HST REG. NO. RT12345
FIGURE 7.3 Sample receipt
Remember that money received on behalf of a client for future services or future disburse-
ments must be deposited into the mixed trust bank account, and all amounts received and
paid out on behalf of clients must be tracked. A company’s balance sheet includes two trust
control accounts: the trust bank account (moneys received from clients) and the trust funds
owed accounts (moneys owed to clients). These trust accounts provide a total of all moneys
received in trust for each client and a total of all moneys owed to each client.
The same double-entry bookkeeping system that applies to general accounting also applies
to trust accounting.
LO3 Trust Bank Journal

All the transactions recorded in previous chapters related to general journal entries. When
recording amounts related to trust receipts and disbursements, it is faster and more practical
to use a special trust bank journal, sometimes called a trust receipts and disbursements jour-
nal, in which all financial transactions related to the mixed trust bank account are entered.
Keeping trust records in a separate journal helps to eliminate errors and makes it easier to
reconcile bank balances at the end of each month. This chapter will teach you how to record
transactions in the trust bank journal and how to post the entries to the individual client led-
gers, also called client trust ledgers. Note that trust balances are incorporated into the finan-
cial statements for the firm using the two control accounts: Trust Bank Account (115, an asset
account) and Trust Funds Owed (215, a liabilities account). (See the chart of accounts listed
on the inside front cover of this textbook.) Some firms prefer to keep two different trust jour-
nals, one for trust receipts and one for trust disbursements, while other firms use a single
journal for both receipts and disbursements.
161
LEGAL ACCOUNTING
Book of Original Entry

The trust records to be kept pursuant to the LSO’s by-law 9, part V, section 18(1) include a
book of original entry identifying the following transaction details:
• each date on which money is received in trust for a client;
• the method by which money is received;
• the person from whom money is received;
• the amount of money received;
• the purpose for which money is received; and
• the client for whom money is received in trust.
Steps in Using the Trust Bank Journal

1. Record the trust bank journal entry (see Examples 1 and 2).
2. Post trust receipts and disbursements to each individual client trust ledger.
3. Prepare the client trust listing (total balance is transferred/posted to Trust Funds Owed).
4. Post the total trust receipts and trust disbursements to the Trust Bank Account ledger
(115) and the Trust Funds Owed ledger (215).
Recording Debits and Credits in the Trust Bank

Journal
When funds are received by the firm and deposited into the trust bank account, the entry will
be recorded as a debit to the account. This is because Trust Bank Account (115) is an asset
account, and assets have a normal debit balance. A credit entry will also be made to the cli-
ent’s trust ledger account to show that the funds are owed to the client. At the end of each
period, the amounts in the client trust ledgers are totalled and the amount is posted to the
control account Trust Funds Owed (215) as a credit because this is a liability account. Trust
funds owed to clients must be equal to the amount in the trust bank account. Funds held in
the trust account are shown as an asset on the balance sheet. Trust funds owed to clients are
shown in the liabilities section of the balance sheet.
The examples that follow show the steps in recording receipts and disbursements in a
trust bank journal.
162
EX AMPLE 1
Recording a Trust Receipt
On October 2, Cliff Howes, client file no. 1, brought Jus- STEP 4
tin Case a retainer in the amount of $1,000 (in the form of
In the Method of Payment column, indicate how the cli-
a money order) for a Small Claims Court action against
ent paid—via a money order, cheque, credit card, or
his neighbour, dealing with a dispute over a fence.
other means.
STEP 1 STEP 5
Enter the date of the receipt.
In the Dr. column, enter $1,000 because funds were
received and had to be deposited into the trust bank
STEP 2 account. Trust Bank Account (115) is an asset account,
In the Received From/Paid To column, show the so it is debited to indicate an increase in the account.
amount as “Rec.” and enter the name of the person
from whom the funds were received. STEP 6
Post the amount of $1,000 to the client’s trust ledger
STEP 3 sheet by entering the amount in the Receipts (Cr.) col-
Under Client/Description, indicate the client file name umn in the Cliff Howes file no. 1 ledger sheet (Figure
and the reason the funds were received. 7.5). Show that the amount was posted by filling in the
file number in the File No. column of the journal.
Justin Case, Paralegal TJ1

Trust Bank Journal
Trust Bank Account
Date File
20** Received From/Paid To No. Client/Description Method of Payment Dr. Cr.
Oct. 2 Rec. Cliff Howes 1 Cliff Howes/Retainer Money Order 1,000
163
LEGAL ACCOUNTING
EX AMPLE 2
Recording a Trust Disbursement
On October 3, Justin wrote a cheque on the Cliff Howes STEP 3
file to Deliveries Inc. to pay the amount of $20 to send a
Under Client/Description, indicate the name of the cli-
demand letter by courier to Howes’ neighbour.
ent and the reason the funds were paid out.
STEP 1 STEP 4
Enter the date of the cheque.
In the Method of Payment column, indicate the trust
cheque number used to pay the bill.
STEP 2
In the Received From/Paid To column, show the STEP 5
amount as “Pd.” and enter the name of the company to
Leave the Dr. column blank.
which the funds were paid.
STEP 6
In the Cr. column, enter the amount of $20 paid out of
the trust account.

Trust Bank Journal
Trust Bank Account
Date File
20** Received From/Paid To No. Client/Description Method of Payment Dr. Cr.
Oct. 2 Rec. Cliff Howes 1 Cliff Howes/Retainer Money Order 1,000
3 Pd. Deliveries Inc. 1 Cliff Howes/Courier Chq. 1 20
Follow the same steps as in the examples above for the transactions that took place from
October 5 to the end of the period. Figure 7.4 shows the trust bank journal entries for Octo-
ber once the totals have been posted to the client trust ledgers. Posting from the trust bank
journal is discussed in the following section.
Transactions
On October 5, Frank Jones, client file no. 2, paid Justin a retainer in the amount of $600 using his
credit card and cash for defence of charges under the Highway Traffic Act.
On October 15, Justin received a bank draft in the amount of $2,500 from the neighbour’s firm,
James Settlor, in full settlement of the claim made by Cliff Howes.
On October 16, the funds received in settlement were paid to Cliff Howes.
On October 20, Justin represented Frank Jones in court and negotiated a reduced fine of $300. He
paid the Minister of Finance the amount of the fine from trust funds held on behalf of the client.
164

Trust Bank Journal
Trust Bank Account
Date File Method of
20** Received From/Paid To No. Client/Description Payment Dr. Cr.
Oct. 2 Rec. Cliff Howes 1 Cliff Howes/Retainer Money Order $1,000
3 Pd. Deliveries Inc. 1 Cliff Howes/Courier Chq. 1 20
5 Rec. Frank Jones 2 Frank Jones/Retainer Credit Card 500 600
Cash 100
15 Rec. James Settlor 1 Cliff Howes/Settlement Bank Draft 2,500
16 Pd. Cliff Howes 1 Cliff Howes/Settlement Chq. 2 2,500
20 Pd. Minister of Finance 2 Jones/Payment of Fine Chq. 3 300
31 Totals $4,100 $2,820
(115/215) (115/215)
FIGURE 7.4 Trust bank journal entries for October (after posting)
LO4 Posting from the Trust Bank Journal

Now that all the transactions for the month of October have been entered, total the columns
in the trust bank journal. Post the totals from the trust bank account Dr. and Cr. columns to
the general ledger for the firm (Trust Bank Account No. 115). Post the individual amounts to
each client trust ledger sheet.
The figures in the File No. column indicate that the individual amounts were posted to
each client’s trust ledger sheet. This should be done on a daily basis when the entries are
recorded in the journal.
The numbers at the bottom of the trust bank account Dr. and Cr. columns (115/215) in
Figure 7.4 indicate that the total deposits and cheques made to the trust account were posted
to the general ledger.
The client trust ledgers in Figure 7.5 show how the information was posted from the trust
bank journal to the client trust ledger accounts. Note that a running total of the balance in
the client’s trust ledger account was calculated after each transaction. In this way, the lawyer/
paralegal will always know how much money each client has to his or her credit in the mixed
trust bank account.
Although there is only one entry for each date in the trust bank journal, Figure 7.5 shows
that double entries have been made. Each amount in the trust bank journal is transferred to
the individual client ledger accounts in the client trust ledger. These transactions are posted
on a daily basis.
165
LEGAL ACCOUNTING

Client Trust Ledgers

Client Trust Ledger
Date Received From/Paid To Disbursements Receipts Balance in
20** Explanation (Dr.) (Cr.) Trust
Oct. 2 Retainer 1,000 1,000
3 Deliveries Inc. 20 980
15 James Settlor, Settlement 2,500 3,480
16 Cliff Howes, Settlement Funds 2,500 980
Account: JONES, Frank re Highway Traffic Act File No. 002

Client Trust Ledger
Oct. 5 Retainer 600 600
20 Minister of Finance, Fine 300 300
FIGURE 7.5 Client trust ledgers after posting
Some general principles about posting from the trust bank journal:
1. The individual amounts in the Dr. column of the trust bank journal are posted to the
Receipts (Cr.) column in the client’s trust ledger on a daily basis. Thus, there is a debit
entry and a credit entry, which balances the books. Each client ledger sheet is kept up to
date at all times, as posting is done daily and a running total is calculated. The client file
number is entered in the trust bank journal to show the client trust account to which
the entry was posted.
Trust Bank Account Dr. = Client Trust Ledger Sheet Cr.
2. The individual amounts in the Cr. column of the trust bank journal are posted to the
Disbursements (Dr.) column in the client’s trust ledger on a daily basis, and the file
number is entered in the trust bank journal to show that the entry has been posted.
Again, there is a double entry—a credit entry reducing the balance in the bank account
and a debit entry in the respective client’s trust ledger sheet.
Trust Bank Account Cr. = Client Trust Ledger Sheet Dr.
3. The totals of the trust bank account debit and credit columns are posted to the trust bank
account in the general ledger. This is usually done at the end of the month.
4. A list of balances owed to clients, called the client trust listing, is prepared showing the
total amounts held by each client. This information is obtained from the individual cli-
ent trust ledger accounts (Figures 7.5 and 7.6). This total amount is entered in the
166
general ledger account Trust Funds Owed (215). The balance in this account must be
equal to the balance in the Trust Bank Account (115) (see Figure 7.7).
Trust Bank Account Balance = Total of Client Trust Listing

(115) (215)
LO5 Proving That Debits Equal Credits

To prove that there are no errors in the trust bank journal after posting, check to make sure
that the balance in the general ledger account Trust Bank Account (115) is the same as the
total of the list of balances owed to clients prepared at the end of the period.

List of Balances Owed to Clients
October 31, 20**
File No. Account Balance Owed
1 HOWES, Cliff re Small Claims Court $980
2 JONES, Frank re Highway Traffic Act 300
Total Owed to Clients $1,280
FIGURE 7.6 Client trust listing at October 31
The total amount in the client trust listing as of October 31 is $1,280, with the individual
amounts shown in Figure 7.6. After posting to the general ledger, the balance in Trust Bank
Account (115) is $1,280. This serves as proof that the amounts in the client ledgers are equal
to the amount in the bank.

Date
Oct. 31 Trust Totals for October TJ1 4,100 2,820 Dr. 1,280

Date
Oct. 31 Howes, Cliff 001 980 Cr. 980
31 Jones, Frank 002 300 Cr. 1,280
FIGURE 7.7 General ledger, trust bank account at October 31
Possible Error
An error to watch for when comparing the client trust listing with the trust bank account bal-
ance is whether an amount was accidentally posted to the wrong client ledger. The total cli-
ent trust listing and the bank balance might be equal, but the amount debited or credited to
an individual client could be incorrect.
167
LEGAL ACCOUNTING
LO6 Trial Balance

A trial balance of the general ledger accounts after the trust posting is completed would be as
shown in Figure 7.8.

Trial Balance
October 31, 20**
115 Trust Bank Account 1,280
215 Trust Funds Owed 1,280
300 Justin Case, Capital 2,550
$12,910 $12,910
FIGURE 7.8 Trial balance including Trust Bank Account and Trust Funds Owed
Because the only changes made were to the trust bank account and trust funds owed to
clients, this will have no effect on the firm’s income statement or on the statement of owner’s
equity for the month of October, so these statements are not reproduced here. However, the
balance sheet would show the trust bank account and the trust funds owed as in Figure 7.9.
The LSO requires licensees to maintain a record showing a comparison made monthly of
the total balances held in the trust account or accounts and the total of all unexpended bal-
ances of funds held in trust for clients as they appear from the financial records. An explan-
ation must be provided giving the reasons for any differences between the totals in the client
ledger and the reconciled bank balance (by-law 9, part V, section 18(8)). This point will be dis-
cussed in greater detail when bank reconciliations are covered in Chapter 10.
168

Balance Sheet
October 31, 20**
Assets Liabilities
General Bank Account $ 7,100 Accounts Payable/General Liabilities $580
Trust Bank Account 1,280 Credit Card Debt 1,500
Computer Equipment (Hardware) 900 Trust Funds 1,280
Office Furniture and Equipment 2,250 Personal Loan 4,000
Total Liabilities $ 7,360
Owner’s Equity
J. Case, Capital 4,170
FIGURE 7.9 Balance sheet including trust assets and trust liabilities
LO7 Matter-to-Matter Trust Transfer Journal

Whenever trust funds are moved from one client’s trust ledger account to another client’s
trust ledger account, the transfer must be recorded in a matter-to-matter trust transfer jour-
nal, and the reason for the transfer must be explained (by-law 9, part IV, section 9(1)(4) and
part V, section 18(4)). The special journal used to record these transactions is called the trust
transfer journal.
Sometimes a client may instruct the firm to transfer funds held in trust on his or her
behalf over to another file. This situation might arise if a parent has a file with the firm and
a child is charged with an offence. The parent assumes responsibility for the child’s defence
and instructs the paralegal to use money held in trust in the parent’s account to cover the cost.
• Potential pitfall: Spending trust money for business purposes.

PARALEGAL
POTENTIAL
• Possible fallout: Your license can be suspended permanently if you are found
PITFALLS
to have spent client trust money for items not involving clients.
• Proposed recommendation: Never spend client money on anything that is not
specifically for that client. Do not spend trust money on behalf of other cli-
ents or for your business or personal expenses.
169
LEGAL ACCOUNTING
EX AMPLE 3
On November 1, Cliff Howes, client file no. 1, has $980 left in his trust account after receiving the settlement paid
in his court case. Also, on November 1, he instructs the firm to transfer $280 to a new file in the name of Larry
Howes as a retainer to cover legal fees in defending his son’s shoplifting case.
This transaction must be recorded in a matter-to-matter trust transfer journal showing that money was moved
from one client to another:
Trust Transfer Journal
Date Received From/Paid To File Allocated Transfer
20** Reason for Transfer No. Client Amount Amount
Nov. 1 Cliff Howes 1 Cliff Howes –280
1 Larry Howes 3 Larry Howes 280 280
To transfer funds to account of Larry Howes
Clients’ instructions should be obtained before transferring funds from one matter to another matter if the two
matters are for the same client. If the transfer is made from one client to another client, these instructions should
be obtained in writing prior to any transfer being made.
A new client ledger would have to be opened for the Larry Howes file, and the transfer would be posted in the cli-
ent ledgers as follows:

Oct. 2 Retainer 1,000 1,000
3 Deliveries Inc. 20 980
15 James Settlor, Settlement 2,500 3,480
16 Cliff Howes, Settlement Funds 2,500 980
Nov. 1 Cliff Howes, Transfer to File No. 3 280 700
Account: HOWES, Larry File No. 003

Nov. 1 Transfer from Cliff Howes 280 280
Note that the total balance in the trust bank account has not been affected by this transaction, because funds
were moved only between two client trust ledger accounts. No cheque needs to be written to complete this trans-
action; however, the transfer must be shown in the firm’s records.
The client list of trust funds owed to clients will reflect this transaction at the end of November when the trust
listing is prepared.
170
LO8 Valuable Property Record

Another trust record required by the LSO is the valuable property record (by-law 9, part V, sec-
tion 18(9)). The record is used to record all property, other than money, held in trust for cli-
ents, and describes each item and identifies the date on which the licensee took possession,
the person who had possession immediately before the licensee took possession, the value,
the client for whom each item is held in trust, the date on which possession is given away,
and the person to whom the item is given.
Valuable property can be anything of value held for clients, such as bond certificates, share
certificates, jewellery, or collector’s items. Anything that a paralegal could convert to cash on
his or her own authority should be included. It would be wise to investigate any insurance
implications before agreeing to hold valuable property for clients. And you would certainly
need to have written instructions from everyone before getting involved in such a situation.
The valuable property record is not used to record any trust moneys because these must
be shown in the financial accounting records. Items such as term deposits and bank accounts
held at a financial institution must be reported in the financial records, not in the valuable
property record. Pursuant to by-law 9, sections 18(9) and 23, the valuable property record
must be kept for ten years plus the current year.
Although holding a client’s valuable property does not typically fall within a paralegal’s
role, the following scenario is not an impossible one.
EX AMPLE 4
On October 20, Frank Jones brought a stamp collection in to the firm for safekeeping. This collection is still held by
the firm. On November 1, Larry’s parents made him turn over his hockey cards to Justin Case to ensure their son
helped pay for his legal fees for the shoplifting charge. The parents insisted that if Larry did not work to contribute
to his legal costs, Justin Case would be authorized to sell the cards and apply the proceeds to Larry’s legal fees. Jus-
tin sold the cards on December 15 because Larry did not come up with the money as required. The proceeds from
the sale would be deposited in the trust bank account to the credit of Larry Howes.

Valuable Property Record
Description of Received Value of
Client Property Date Received From Property Given To Date Given
Jones, Frank Stamp Collection Oct. 20, 20** Jones, Frank 200
Howes, Larry Hockey Cards Nov. 1, 20** Howes, Larry 60 Joe’s Pawn Shop Dec. 15, 20**
Practice Audits
Section 49.2 of the Law Society Act1 authorizes spot audits of members with a view to ensur-
ing that licencees engage in proper management practices. Audits include an assessment of
financial record-keeping practices to ensure compliance with by-law 9. The primary goal of
audits is to provide on-site guidance aimed at helping the licensee correct minor deficiencies
with respect to record-keeping, and to address any deficiencies that could adversely affect
1 RSO 1990, c L.8.
171
LEGAL ACCOUNTING
service to clients. Where misconduct is found, reviewers are required to report that miscon-
duct pursuant to rule 6.10(3) of the Rules of Professional Conduct.2 Failure to meet minimum
standards can result in suspension of membership until the LSO is satisfied that the licensee
is meeting the minimum standards of professional competence. It is usual to receive a two-
week advance notice of a spot audit. If members try to defer or cancel audit appointments,
they will be required to fax a copy of the most recent trust bank reconciliation to the auditor.
Failure to do so may result in an immediate unannounced visit.
Using the Trust Bank Features to Record Receipts and

PCL AW®
Payments
Retainers and other trust funds received are entered in PCLaw® by recording the amount received using
the trust bank receipt feature (Figure 7.10). Recording the amount received shows the amount in the trust
bank account and records it in the client trust ledgers. The PCLaw® system creates a deposit slip when
requested. Note that the system indicates how the client paid, whether it be by cash or credit card. There
is also a hold receipt feature whereby the paralegal can place a hold on the deposit for a certain period of
time. This feature is used to ensure cheques are not written against a deposit until the client’s cheque has
been honoured by the client’s bank.
FIGURE 7.10 A trust bank receipt in PCLaw®

Disbursements from trust are recorded using the trust cheque feature in PCLaw® (Figure 7.11). Creating a trust
cheque entry records the amount of the cheque as a credit to the trust bank account and as a debit to the specified
client account.
2 Law Society of Ontario, Rules of Professional Conduct (1 October 2014; amendments current to
25 January 2018), online: <https://lso.ca/about-lso/legislation-rules/rules-of-professional-conduct>.
172
FIGURE 7.11 A trust cheque in PCLaw®

The system records deposits and cheques written on the trust bank account in the trust bank journal (Figure 7.12).
FIGURE 7.12 A trust bank journal in PCLaw®
173
LEGAL ACCOUNTING
Amounts entered in the trust bank journal are also automatically posted to the client ledgers (Figure 7.13). The
client ledgers show all transactions affecting each account and provide totals so that the paralegal can always know
what amount is held for each client in trust.
FIGURE 7.13 A client ledger in PCLaw®
174
CHAPTER SUMMARY
There are some similarities between trust accounting and general accounting: each has books of original
entry and ledgers, and the double-entry bookkeeping system applies to both types of accounting. Trust
accounting requires some additional records, whereas general accounting will incorporate information
from the trust records into the financial statements for the firm. Most trust records must be maintained
for a period of ten years plus the current year, whereas general records are required to be maintained for
the most recent six full years plus the current year. See Chapter 10 for more discussion on this. All bank
accounts, whether trust or general, must be reconciled at the end of each month.
In keeping with the LSO’s mandate to protect the interests of the public, licensees must be vigilant in
ensuring that the obligations set out by the Law Society Act and its by-laws and the Rules of Professional
Conduct are followed. The LSO regularly conducts spot audits on members, and mishandling of trust
funds can result in discipline or losing one’s licence. If you purchase accounting software for a firm, it is
wise to ensure that the system purchased can handle trust transactions and properly record transactions
in a client ledger.
KEY TERMS
cash receipts, 160 trust bank account, 158
client ledgers, 161 trust bank journal, 161
client trust ledgers, 161 trust control accounts, 161
matter-to-matter trust transfer journal, 169 valuable property record, 171
trial balance, 168
FURTHER READING
Law Society of Ontario, Bookkeeping Guide for Paralegals (Toronto: LSO, December 2015), online:
guide_final-s.pdf>. (See General Receipts Journal and General Disbursements Journal.)
Law Society of Ontario, By-Laws. “By-Law 9 – Financial Transactions and Records,” online:
<https://www.lso.ca/about-lso/legislation-rules/by-laws>. (See also the Appendix of this textbook.)
Law Society of Ontario, Complete Paralegal Rules of Conduct, online: <https://lso.ca/about-lso/
legislation-rules/paralegal-rules-of-conduct/complete-paralegal-rules-of-conduct>.
Law Society of Ontario, Paralegal Professional Conduct Guidelines, online: <https://lso.ca/about-lso/
legislation-rules/paralegal-professional-conduct-guidelines>.
175
LEGAL ACCOUNTING
REVIEW QUESTIONS
Short Answer
1. A client bill is paid in part by trust moneys held on behalf of the client and in part by cheque. How
will the paralegal record this transaction? (LO3)
2. If a client has two separate matters being handled by a paralegal, can that client authorize the
transfer of funds from one trust account to the other? Explain. What if the transfer of funds is from
a third-party trust account? Explain. (LO7)
3. When would a paralegal use a book of duplicate cash receipts? For how long would this record
have to be maintained? (LO2)
4. How are monetary retainers recorded? Identify the appropriate journal and/or ledger. (LO2)
5. How can you verify that the trial balance after the trust posting is correct? (LO6)
6. Why is it important to review client ledgers from time to time? (LO4)
7. Which journal is used to track payments made from the trust bank account? (LO3)
8. A client entrusts to a paralegal her certificate of authenticity of a vintage coin collection that is the
subject of a small claims dispute. How would the paralegal record and track this item? (LO3)
PRACTICE EXERCISES

Justin Case received the following amounts to be deposited into his trust account on March 1. (LO2)
• Justin received a cash payment from Victoria Hubert (file no. 35) in the amount of $245.50 on
March 1 and deposited the amount in his trust account. The receipt consisted on the following
denominations: four $50 bills, two $20 bills, one loonie, two toonies, and two quarters.
• Justin received a bank draft from Samuel Betts (file no. 50) as a retainer for $550 to be deposited
on March 1.
• Justin received cheque #25 in the amount of $1,500 from Mike Dolan (file no. 45) as a retainer to
be deposited on March 1.
a. Prepare the cash receipt using the forms provided.
b. Prepare the deposit slip using the forms provided.
176
DUPLICATE CASH RECEIPT NUMBER 150
RECEIVED FROM DATE

dd/mm/yr
ON BEHALF OF FILE NO.
AMOUNT DOLLARS
Signature of Payor Authorized signature on behalf of firm

TAX REG. NO.
CREDIT ACCOUNT OF: BUSINESS ACCOUNT DEPOSIT SLIP
JUSTIN CASE, PARALEGAL BANK OF MONEY

IN TRUST
ACCOUNT NUMBER 232017661 ONTARIO, CANADA
DATE: INITIALS:
DAY MONTH YEAR DEPOSITOR’S TELLER’S
LIST OF CHEQUES:
CHEQUE IDENTIFICATION AMOUNT
CASH COUNT:
1 X 5
X 20
2 X 20
X 50
3 X $1 COIN
X $2 COIN
4
COIN TOTAL
5
CASH COUNT
6
CASH SUBTOTAL
7
DEPOSIT:
8 CASH SUBTOTAL
CHEQUE SUBTOTAL CHEQUE SUBTOTAL
TOTAL # OF CHEQUES DEPOSIT TOTAL
177
LEGAL ACCOUNTING
PRACTICE
EXCEL
The following transactions occurred during the month of August 20**, which affect the Ann Litigate
trust account.
August 1 – 31, 20**:
1 L. Jones Bailey paid a retainer to Ann Litigate in the amount of $1,000 (money order).
1 R. Smythe paid a retainer to Ann Litigate in the amount of $1,000 (bank draft).
1 L. Forte paid a retainer to Ann Litigate in the amount of $500 (cheque #48).
3 Paid Quick Messenger $20.80 (HST included) with trust cheque #20 for deliveries on the L. Jones
Bailey file.
5 Paid Ann Litigate $500 from the trust account (trust cheque #21) from the L. Jones Bailey account
to pay the balance outstanding on invoice #401.
8 Paid Minister of Finance from the trust account, $100 (trust cheque #22) on the R. Smythe file to
set matter down for trial.
10 Paid Ann Litigate out of trust account (trust cheque #23) on the L. Jones Bailey file to reimburse
her for $120 paid for court filing fees on July 7 out of her General Bank Account.
a. Prepare the appropriate Trust Bank Journal entries to record the transactions in the Trust Bank.
(LO3)
b. Post the transactions from the Trust Bank Journal in 7.2(a) to the Client Trust Ledgers provided.
(LO4)
c. Prepare a list of Balances Owed to Clients as of August 31 and enter the totals in Trust Funds
Owed in the General Ledger (215). (LO5)
d. Post the totals from the Trust Bank Journal to the Trust Bank Account in the General Ledgers
provided. The total owed to clients and the total balance in the Trust Bank Account (115) should
be the same. (LO5)

Trust Bank Journal TJ1
Date File Method of Trust Bank Account
Received From/Paid To Client/Description
20** No. Payment Dr. Cr.
31 Totals
0.00 0.00
178
Client General Ledgers and Client Trust Ledger
Account: FORTE, L. File No. 04
Client General Ledger Client Trust Ledger
Date Received From/Paid To
20** Explanation Disbursements Payments Balance Disbursements Receipts Balance in
HST Fees
Expenses Paid from Client Owed (Dr.) (Cr.) Trust
Account: BAILEY, L. JONES File No. 05

HST Fees

Account: SMYTHE, R. File No. 06
HST Fees
CHAPTER 7

Trust Accounting
179
LEGAL ACCOUNTING

June 30, 20**
Total Owed to Clients

General Ledger Accounts

Date
20**

Date
20**
HST Payable Account No. 240

Date
20**
180

Date
20**

Date
20**

Date
20**
Insurance—Professional Liability Account No. 527

Date
20**

Date
20**
181
LEGAL ACCOUNTING
Delivery Expense Account No. 550

Date
20**
PRACTICE
EXCEL
Ann Litigate had the following trust transactions in the month of June:
Date
# 20** Transaction Amount
1 June 1 Ann received a cheque (#91) from a new client, Jessica Palmer, file matter #6, $2,500
as a retainer deposit in an immigration law matter.
2 June 1 Ann wrote trust cheque #352 on the trust bank account in payment of invoice $4,000
#518 previously sent to Karen Charles, file matter #4. Assume that on May 30,
Charles had a balance of $4,500.
3 June 8 There is an amount of $60 charged to Daniel Pitt, file matter #3 for photocopy $60
charges incurred in the preparation of a document brief for use at an upcoming
criminal trial. Invoice #519 was sent to Daniel Pitt, and Ann wishes to recover
the charges for the disbursement from trust (trust cheque #353). Assume that
on May 30, Pitt had a balance of $1,000.
4 June 25 Louise Forte sent cheque #47 written on her personal bank account to the firm $3,130
in the amount of $3,130, file matter #8. Ann deposited the cheque into the trust
bank account and then wrote trust cheque #354 in payment of invoice #520 for
$1,130 and held the balance remaining in trust as a retainer.
Review the sample worksheet below and then using the worksheets provided:
a. Prepare the appropriate trust bank journal entries to record the transactions shown above. (LO3)
b. Post the entries to the client trust ledgers. (LO4)
c. Post the totals to the appropriate general ledger accounts. (LO4)
d. Complete the client trust listing at the end of the month. Does the listing match the amount in
Account No. 215 (Trust Funds Owed)? (LO5)
182
Sample worksheets
On June 18, Paralegal receives $1,500 as a retainer from a new client, Anthony Johnston.
Ann Litigate, Paralegal TJ1
Trust Bank Journal
Date Received From/ File Method of Trust Bank Account
Client/Description
20** Paid To No. Payment Dr. Cr.
June 18 Rec. Anthony Johnston 01 Johnston, retainer Cheque 1,500
30 Totals 1,500 0
(115) (115)
Sample client ledger after posting

Account: JOHNSTON, Anthony File No. 06

Client Trust Ledger
June 18 Retainer 1,500 1,500
Worksheet a:
Ann Litigate, Paralegal TJ1
Trust Bank Journal
Client/Description
Totals
183
LEGAL ACCOUNTING
Worksheet b:
Account: File No.

CLIENT TRUST LEDGER
Date Received From/Paid To Disbursements Receipts
Balance in Trust
20** Explanation (Dr.) (Cr.)
Worksheet c:
General Ledger Accounts

Date
20**
May 30 Opening balance 5,500

Date
20**
June 30 Total from client listing
Worksheet d:
June 30, 20**
06 PALMER, J. re Immigration
04 CHARLES, K.
03 PITT, D.
08 FORTE, L.
Total Owed to Clients
184
PRACTICE
EXCEL
You are a new paralegal with a general bank account balance of $8,000. On April 1 you set up a mixed
trust account for your paralegal practice. The following events take place in your first two months of
business, April and May 2014:
1. You are retained by Julie Moody in Matter 101. You receive $1,700 in trust to the credit of Matter
101 on April 1. Certified cheque #5489.
2. You are retained by Frances Buxton in Matter 107. You receive $500 in trust to the credit of Matter
107 on April 2. Certified cheque #277.
3. You pay for office rent to Mohawk Mall in the amount of $1,000 (plus HST) with general cheque
#101 on April 3.
4. On April 4, you issue the plaintiff’s claim for Julie Moody (Matter 101). You pay the court fee of
$75 with trust cheque #1 payable to Small Claims Court.
5. On April 6, you issue the defendant’s claim for Frances Buxton (Matter 107). You pay the court
fee of $75 with trust cheque #2 payable to Small Claims Court.
6. On April 7, you file a defence for Frances Buxton (Matter 107). You pay the fee of $40 with trust
cheque #3 payable to Small Claims Court.
7. You pay yourself $2,000 on April 30 with cheque #102.
8. You pay for office rent to Mohawk Mall in the amount of $1,000 (plus HST) with general cheque
#103 on May 3.
9. You are retained by John Bender in Matter 112. You receive $2,000 in trust to the credit of Matter
112 on May 8. Certified cheque #310.
10. Matter 101 goes to settlement conference on April 10. No settlement is reached at the settlement
conference, or within 30 days thereafter. On May 10, you request a date for trial. The court fee of
$100 is paid out of the trust account with cheque #4 payable to Small Claims Court.
11. On May 12, you issue the defendant’s claim for John Bender (Matter 112). You pay the court fee of
$75 with trust cheque #5 payable to Small Claims Court.
12. You pay for Hydro in the amount of $150 plus HST, on May 14 with cheque #104.
13. On May 15, you deliver an interim invoice to Julie Moody. Your fees, excluding HST, are $1,100.
The total amount of invoice #200, including HST, is $1,243. You transfer the funds from trust to
pay the invoice.
14. On May 16, you deliver an interim invoice to Frances Buxton. Your fees, excluding HST, are $300.
The total amount of invoice #201, including HST, is $339. You transfer the funds from trust to pay
the invoice.
15. On May 17, you deliver an interim invoice to John Bender. Your fees, excluding HST, are $1,500.
The total amount of invoice #202, including HST, is $1,695. You transfer the funds from trust to
pay the invoice.
16. You pay yourself $2,000 on May 31 with cheque #105.
17. You are retained by Clark Morgans in Matter 120. You receive $1,600 in trust to the credit of Matter
120 on May 31. Certified cheque #886.
18. According to the Trust Account bank statement, the May 31 balance is $733. Trust cheques #4 and
#5 were outstanding. Clark Morgans’ trust receipt was also outstanding.
185
LEGAL ACCOUNTING
Complete the following:

a. Detailed duplicate trust deposit slips (LO2)
b. Trust Disbursements Journal (LO3)
c. Trust Receipts Journal (LO3)
d. Clients’ Trust Ledgers (LO4)
e. Clients’ General Ledgers (Chapter 6, LO2)
f. Fees Book (Chapter 6, LO2)
g. General Disbursements Journal (Chapter 6, LO4)
h. General Receipts Journal (Chapter 6, LO3)
i. Trust Reconciliation (LO5)
j. Client Trust Balances (LO5)

× $5
× $10
× $20
× $50
× $100
Cdn Cash Total
Trust Disbursements Journal

Method of payment/
Date Paid to Client Amount
Reference number
186
Mohawk Paralegal
Trust Receipts Journal
Date Funds received from Client Method of payment Amount
Mohawk Paralegal
Clients’ Trust Ledger
Account: Julie Moody Re: Small Claims

Client matter no.: 101
Date Particulars Receipts Disbursements Trust Balance
Account: Frances Buxton Re: Small Claims

Account: John Bender Re: Small Claims

Account: Clark Morgans Re: Small Claims

187
LEGAL ACCOUNTING
Mohawk Paralegal
Fees’ Book
Date Client Fees billed HST Billed Total Billed
number billed
Mohawk Paralegal
Clients’ General Ledger

Expenses HST on HST on Payment Balance
Date Particulars Fees
paid expenses fees from client owing



188
Mohawk Paralegal
Method of payment/
Date Paid to Particulars HST paid Amount
Reference number
Mohawk Paralegal
Date Funds received from Particulars Method of payment Amount
PRACTICE
EXCEL
You are a new paralegal with a general bank account balance of $12,000. On August 1 you set up a
mixed trust account for your paralegal practice. The following events take place in your first two months
of business, August and September 20**:
1. You pay for office rent to Jackson Mall in the amount of $950 (plus HST) with general cheque
#200 on August 1.
2. You are retained by Carol Seaver in Matter 2050. You receive $2,500 in trust to the credit of Matter
2050 (Small Claims) on August 2. Certified cheque #658.
3. You are retained by Edna Garrett in Matter 2125. You receive $1,050 in trust to the credit of Matter
2125 (Small Claims) on August 3. Certified cheque #798.
4. On August 4, you issue the defendant’s claim for Edna Garrett (Matter 2125). You pay the court
fee of $75 with trust cheque #101 payable to Small Claims Court.
5. On August 6, you issue the plaintiff’s claim for Carol Seaver (Matter 2050). You pay the court fee
of $75 with trust cheque #102 payable to Small Claims Court.
6. On August 9, you file a defence for Edna Garrett (Matter 2125). You pay the fee of $40 with trust
cheque #103 payable to Small Claims Court.
7. You pay yourself $2,300 on August 15 with cheque #201.
8. You pay for office rent to Jackson Mall in the amount of $950 (plus HST) with general cheque
#202 on September 3.
189
LEGAL ACCOUNTING
9. You are retained by Tony Micelli in Matter 2226. You receive $3,400 in trust to the credit of Matter
2226 (Small Claims) on September 8. Certified cheque #359.
10. On September 13, you issue the defendant’s claim for Tony Micelli (Matter 2226). You pay the
court fee of $75 with trust cheque #104 payable to Small Claims Court.
11. Matter 2050 goes to settlement conference on August 14. No settlement is reached at the
settlement conference, or within 30 days thereafter. On September 14, you request a date for
trial. The court fee of $100 is paid out of the trust account with cheque #105 payable to Small
Claims Court.
12. You pay Rogers Telephone for telephone expenses in the amount of $200, plus HST, on Sep-
tember 15 with cheque #203.
13. On September 16, you deliver an interim invoice to Edna Garrett. Your fees, excluding HST,
are $400. The total amount of invoice #100, including HST, is $452.
14. On September 17, you transfer the funds (ET #987) from trust to pay invoice #100.
15. On September 18, you deliver an interim invoice to Carol Seaver. Your fees, excluding HST,
are $900. The total amount of invoice #101, including HST, is $1,017.
17. On September 20, you deliver an interim invoice to Tony Micelli. Your fees, excluding HST,
are $1,400. The total amount of invoice #102, including HST, is $1,582.
19. You pay yourself $1,800 on September 26 with cheque #204.
20. You are retained by Arnold Jackson in Matter 2389. You receive $2,000 in trust to the credit of
Matter 2389 (Small Claims) on September 29. Certified cheque #144.
21. According to the Trust Account bank statement, the September 30 balance is $3,784. Trust
cheques #102, #104, and #105 were outstanding. Arnold Jackson’s trust receipt was also
outstanding.
Complete the following on the worksheets provided:

a. Detailed duplicate trust deposit slips (LO2)
b. Trust Disbursements Journal (LO3)
c. Trust Receipts Journal (LO3)
d. Clients’ Trust Ledgers (LO4)
e. Fees Book (Chapter 6, LO2)
f. Clients’ General Ledgers (Chapter 6, LO2)
g. General Disbursements Journal (Chapter 6, LO4)
h. General Receipts Journal (Chapter 6, LO3)
190

× $5
× $10
× $20
× $50
× $100
Cdn Cash Total
Trust Disbursements Journal

Method of payment/
Date Paid to Client Amount
Reference number
Mohawk Paralegal
Trust Receipts Journal
Date Funds received from Client Method of payment Amount
191
LEGAL ACCOUNTING
Mohawk Paralegal
Clients’ Trust Ledger
Account: Carol Seaver Re: Small Claims

Account: Edna Garrett Re: Small Claims

Account: Tony Micelli Re: Small Claims

Account: Arnold Jackson Re: Small Claims

192
Mohawk Paralegal
Fees Book
Date Client Fees billed HST Billed Total Billed
number billed
Mohawk Paralegal
Clients’ General Ledger




193
LEGAL ACCOUNTING
Mohawk Paralegal
Method of payment/
Date Paid to Particulars HST paid Amount
Reference number
Mohawk Paralegal
Date Funds received from Particulars Method of payment Amount
194
Case Example: LSO Rules

Ann Litigate operates a paralegal firm, operating under the name Ann Litigate Paralegal Services,
and employs a part-time secretary. Ann works as a sole practitioner and deals with all professional,
business, and administrative matters of the firm. For example, Ann does all the banking to ensure
that she has control over her general and trust bank accounts in accordance with the rules and reg-
ulations of the LSO, and she does all the bookkeeping.
Ann is concerned about her record-keeping responsibilities because she is so busy with the
day-to-day operations of the business as well as meeting deadlines and client expectations. Al-
though Ann keeps all her source documents, she sometimes waits until the end of the month to
complete the various journals and ledgers pursuant to section 18 of the LSO’s by-law 9, and then
she becomes overwhelmed. What best-practice strategies or tools can Ann use to meet all of her
obligations? Discuss.
195
8
Adjusting Accounts
for Financial
Statements
Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Preparing a Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Types of Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Preparing Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Adjusted Trial Balance Column . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
Income Statement and Balance Sheet Columns . . . . . . . . . . . . . . . . . . . . . . 210
Completing the Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
197
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Record the trial balance in a worksheet.
LO2 Prepare adjusting entries at the end of a period.
LO3 Prepare an adjusted trial balance.
LO4 Complete the income statement and balance sheet portions of a worksheet.
Once the trial balance is prepared, the next step in the accounting cycle is to prepare a work-
sheet on which required adjustments are made before financial statements can be prepared.
In this chapter you will learn how to prepare a worksheet, adjust entries, and prepare an
adjusted trial balance. You will also use this information to complete the financial statements
portion of the worksheet.
Figure 8.1 highlights these next steps in the accounting cycle.
8 1
trial balance
2
7 Post
entries
Record
adjusting and
closing entries
3
6 Prepare
trial balance
Prepare financial
statements
5 4
Complete
trial balance
FIGURE 8.1 Steps in the accounting cycle
198
CHAPTER 8 Adjusting Accounts for Financial Statements
Adjusting Entries
At the end of the fiscal year, the firm is required to prepare an accurate and detailed state-
ment of its revenues and expenses for income tax purposes. As discussed in Chapter 5, this
is called an income statement and is used to calculate the profit (or loss) for the year. If the
firm is a sole proprietorship, the business owner will have to include the amount of the profit
on his or her personal income tax return. A worksheet enables the accountant to organize and
check data, and make any necessary adjustments, before financial statements are prepared.
Before preparing his personal income tax return, Justin Case will want to ensure his rec-
ords have been maintained in accordance with Canadian generally accepted accounting prin-
ciples (GAAP). In particular, he will want to make certain that the matching principle has
been respected, that is, that expenses incurred during the current accounting period are
related to or have contributed toward the revenue that was generated during the same period.
This principle is fundamental to the accrual basis of accounting.
Justin does not want to pay more income tax than he has to, so the statements will be
reviewed and the entries adjusted with a view to ensuring that the numbers are accurate and
that all expenses and deductions he is entitled to claim have been recorded. The reverse is
also true: when reporting income for tax purposes, Justin must not understate his profit as a
result of income or expenses not being recorded in the correct period.
The following is a sample of some of the adjusting entries needed in a firm. The adjust-
ment process for Justin will include the following steps:
• Completing an accurate office supplies inventory and writing off supplies used as an
expense.
• Calculating capital cost allowance or depreciation on Justin’s assets and recording the
amount of depreciation as an expense.
• Reviewing his accounts receivable to determine whether there are any bad debts to be
written off.
• Reviewing the accuracy of his liabilities and making any necessary corrections.
• Ensuring there are no revenues and expenses that are to be carried over to the next
operating year.
• Preparing an adjusted trial balance.
LO1 Preparing a Worksheet

The worksheet consolidates all adjustments to a firm’s revenues and expenses. If the work-
sheet is prepared by hand, it can be completed in pencil because it is not a permanent record.
Once the worksheet has been completed, the adjusting entries will be entered in the books of
the firm using the general journal, and these entries will be posted to each of the ledger
accounts affected.
The worksheet enables the bookkeeper to make sure that the books are balanced at each
stage up to completion of the financial statements before starting the accounting cycle over
again for the next period. A worksheet includes the following six column headings, as shown
in Figure 8.2:
199
LEGAL ACCOUNTING
Adjusted
Trial Trial Income Balance
Account Titles Balance Adjustments Balance Statement Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
FIGURE 8.2 Typical worksheet headings
1. Account Titles: The account numbers and names in the far left column of the worksheet
are taken from the general ledger. The account number is not a requirement, but it can
be included if the bookkeeper finds it helpful. For the purposes of this chapter, account
numbers are included. The accounts are listed in the order of the trial balance: assets,
liabilities, owner’s equity, revenue, and expense.
2. Trial Balance: This section contains all of the account balances as found in the general
ledger. Accounts with a zero balance are not listed. Additional account titles from the led-
ger will be added as they are needed once adjustments are made.
3. Adjustments: Each amount in the trial balance must be reviewed by the business owner,
bookkeeper, or accountant to determine whether any adjustments are required. An
adjusting entry can be recorded at the end of each accounting period, for example, each
month. Some business owners may be satisfied with doing adjusting entries annually
at the end of the fiscal year. Others may want to do them more often. Once the adjust-
ments have been made, the debit and credit columns must be totalled to ensure that the
adjusted debits are equal to the adjusted credits. The entries in the Adjustments column
are assigned a letter for reference purposes, giving the corresponding debit and credit
entries for a particular adjustment the same letter. This is helpful in tracking the entries
that were made if you are looking for errors.
4. Adjusted Trial Balance: After the adjusting entries are recorded in the worksheet, the bal-
ance in each account is recalculated to arrive at the new balance for each account, and
the amount is placed in the Adjusted Trial Balance column. Amounts from the trial bal-
ance that have not been adjusted are simply carried over to the Adjusted Trial Balance
column. If there was an adjustment made to an account, a calculation of the new bal-
ance must be done. Debits are added to debits, credits are added to credits, and debits
and credits are subtracted from one another. Once the horizontal calculations have been
completed, the debit and credit column totals of the Adjusted Trial Balance column must
be equal.
5. Income Statement: Extend the amounts for the income and expense accounts from the
Adjusted Trial Balance column to the Income Statement column of the worksheet. These
are the accounts with the numbers 400 to 599. Be careful to enter the amounts in the cor-
rect column for debit and credit. Revenue will normally be in the credit column, whereas
expenses will normally be in the debit column. The difference between the income (credit)
column and the expense (debit) column is the profit or loss for the period.
6. Balance Sheet: Extend the amounts of assets, liabilities, and owner’s equity from the
Adjusted Trial Balance column to the Balance Sheet column. The asset accounts are the
accounts starting with the numbers 100 to 199, the liabilities are the accounts starting with
the numbers 200 to 299, and the owner’s equity accounts start with the numbers 300 to
399. Total the debit and credit columns once the entries have been copied from the
Adjusted Trial Balance column. These totals will not be equal. The amount calculated as
profit or loss from the income statement will be used to balance the debit and credit col-
umns in the Balance Sheet column in the bottom portion of the worksheet.
200
LO2 Types of Adjusting Entries

Common adjustments include:
• prepaid expenses,
• amortization or depreciation,
• work in progress (WIP),
• accrued expenses, and
• accrued revenues.
Prepaid Expenses
Prepaid expenses represent items that have been paid for in advance. As the asset is used, the
cost becomes an expense, and the amount used must be shifted from the balance in the asset
account (Cr. the prepaid asset) to the expense section of the ledger (Dr. the expense). Com-
mon examples of prepaid expenses are prepaid insurance, office supplies, and prepaid rent.
Amortization or Depreciation
Amortization or depreciation refers to the estimated amount of a long-term asset that is used
up during the period. The diminished value will be shown on the firm’s balance sheet. The
amount claimed for depreciation is an expense. Assets such as computers and office furni-
ture have an extended life and are expected to be used by the firm for more than one account-
ing period. They cannot totally be written off as expenses in the year they are purchased. The
cost of the item will be written off as an expense over the estimated useful life of the asset.
This procedure complies with the matching principle in accounting. For income tax pur-
poses, the amount expensed is called capital cost allowance (CCA). When amortization
expense is recorded, it is considered an operating expense, even though no cash is actually
spent. (The cash was spent when the asset was acquired.)
There are some terms with which you need to be familiar when discussing depreciation:
• Historical cost refers to the original price paid for an item.
• Class refers to assets included in a particular account. For example, the account for
office furniture will include desks, chairs, waiting room furniture, and so on.
• Accumulated depreciation refers to the total amount that has been expensed against a
particular asset over time.
• Depreciation expense refers to the periodic write-off of long-term assets.
• Book value is the historical cost of the asset minus the accumulated depreciation. The
number will decrease from period to period if no new assets have been added to the class.
• Residual value refers to the estimated value of the asset at the end of its useful
life. Residual value is used when calculating depreciation expense.
• Contra-asset account is an account in the chart of accounts that has the opposite Dr./
Cr. sign that is expected of its account type. In the case of accumulated depreciation,
this contra-asset account records the depreciation of an asset. This account totals the
amount of depreciation taken each period and is used to reduce the value of the asset
on the balance sheet.
Depreciation will affect both the balance sheet and the income statement. The value of the
asset on the balance sheet is being reduced by the amount of accumulated amortization
taken. The expenses of the firm on the income statement are increased by the depreciation
expense taken, resulting in lower income for the firm.
201
LEGAL ACCOUNTING
EX AMPLE 1
Depreciation
Suppose Justin Case purchased a photocopier costing $10,000 and took $79.17 depreciation in the month of De-
cember. The asset account would appear as follows on the balance sheet:
Historical cost
Assets
Office equipment 10,000.00 (Dr.)

Less: Accumulated depreciation on equipment 79.17 (Cr.) 9,920.83 (Dr.)
Accumulated depreciation Book value

(contra-asset account)
FIGURE 8.3 Depreciation of an asset
The amount of $79.17 will be posted as a debit to depreciation expense to balance the entry.
The value of the office equipment account shows the original cost of the photocopier. However, the accumulated
depreciation for the period is linked to the office equipment account and the depreciation is subtracted (or cred-
ited) against the value. Once it is credited, the amount $9,920.83 represents the book value of the asset. Justin will
know how much was originally paid for the photocopier because the historical cost does not change on the balance
sheet. Amortization will increase from period to period, reducing the book value of the asset as time goes by.
Calculating Amortization
To depreciate an asset, how much of its cost is used up each period will need to be calculated.
The CRA has specific rules that tell businesses in Canada how they can depreciate their
assets for tax purposes. It is not necessary to use this calculation for financial reports because
the value allowed by the CRA may be different from what the business owner feels is the use-
ful life of an asset.
For the purposes of this textbook, two methods of calculating amortization on assets will
be discussed, but the straight-line amortization method will be used for doing adjusting
entries.
Straight-Line Amortization Method

The straight-line amortization method depreciates the value of an asset over its useful life
after deducting its residual value, which refers to the estimated value of the asset at the end
of its useful life. The amount of depreciation remains constant for each period.
The following formula is used to calculate the rate of amortization using the straight-line
method:
Depreciation = Cost of Equipment − Residual Value

Estimated Useful Life
202
EX AMPLE 2
Suppose Justin purchased a photocopier that cost $10,000 and it was expected to last ten years, at which time he
expected the residual value would be $500. The calculation of depreciation would be as follows:
$10,000 – $500 $9,500

= = $950 per year or $79.17 per month ($950/12)
10 years 10 years
The photocopier is depreciating at a constant rate of $950 per year or $79.17 per month ($950/12 months). Using
the straight-line method for calculating depreciation on Justin’s photocopier, the book value at the end of four years
would be $6,200:
Office Historical Residual Depreciation Accumulated Book

Equipment Life Cost Value Year 9,500/10 yrs. Depreciation Value
Photocopier 10 10,000 500 1 950 950 9,050
10,000 500 2 950 1,900 8,100
10,000 500 3 950 2,850 7,150
10,000 500 4 950 3,800 6,200
FIGURE 8.4 Calculation of depreciation using the straight-line method
Declining Balance Amortization Method

The CRA requires a business to calculate capital cost allowance using the declining balance
method.1 This means you claim CCA on the capital cost (original cost) of the property minus
the CCA you claimed in previous years, if any. The remaining balance—the undepreciated
capital cost (UCC)—declines over the years as CCA is claimed. The CRA prescribes the rates
to be applied to each asset class as well as the formula used for calculating.
Work in Progress
Work in progress (WIP) refers to services that have not been completed or that have been per-
formed in part but are still in progress and, therefore, not yet included as earned income or
revenue. As mentioned in Chapter 2, paralegals may not exclude the value of work in pro-
gress from their income as is allowed for lawyers and accountants. An adjustment might be
required to include as revenue the value of work in progress that has not yet been billed in
income for the period. Usually, invoices are recorded when they are sent out and are shown
as income. However, work in progress is recorded only when the invoice is sent. The revenue
recognition principle of GAAP and the CRA rules governing paralegals require paralegals to
include the value of work done on a file that has not yet been billed as revenue for the period.
The balance sheet would also show the value of this work as an account receivable.
1 Canada Revenue Agency, “Claiming Capital Cost Allowance (CCA),” online: <http://www.cra-arc.gc.ca/
tx/bsnss/tpcs/slprtnr/rprtng/cptl/menu-eng.html>.
203
LEGAL ACCOUNTING
Accrued Expenses
Accrued expenses refer to costs incurred in a period that are both unpaid and unrecorded.
For example, a business could have accrued interest expense owing on an unpaid liability.
Salaries often must be adjusted because the employee may be owed a certain number of days’
pay at the end of the period, but payday is in the next period. Accrued vacation pay is a lia-
bility owing to the employee for which an adjustment may be required.
Accrued Revenues
Accrued revenues refer to income that has been earned but has not yet been received or recorded.
For example, accrued interest revenue on an investment may have accumulated over the period,
but may not have been received and not have been recorded in the records of the business. If Jus-
tin Case had a guaranteed investment certificate of $10,000 invested at the rate of 2 percent per
annum, the daily interest accruing on the investment would be $10,000 × 2 percent per annum
(365 days), or 55 cents a day. If he held the investment for 90 days, the adjustment would be $49.50.
Value of Work in Progress

TA X TIP
One of the adjustments that will need to be calculated for income tax purposes is
the value of WIP if it has not already been included. The income statement pre-
pared for the purposes of filing an income tax return must include all fees received
for goods or services that were provided, whether money is received or will be
received for it. A legal professional’s income generally includes the value of their
work in progress. Professional fees for the current year are the total of:
• all amounts received during the year for professional services, whether the ser-
vices are provided before or during the current year or after the current year-end;
plus
• all amounts receivable at the end of the current year for professional services
provided during the current year; and
• the value of any WIP at the end of the current year for which amounts have not
been received during the year; minus
• all amounts receivable at the end of the previous year-end; and
• the value of WIP that was included.
Preparing Adjusting Entries

Justin Case selected December 31 as his fiscal year-end. Once the accounting entries were com-
pleted, he prepared the trial balance as of December 31, and the balances were entered in the
Trial Balance column of the completed worksheet in Figure 8.8 at the end of this chapter.
Adjusting Entries for Year-End

Upon reviewing the trial balance for his books at the end of December (Figure 8.5), Justin real-
izes that some transactions need to be adjusted before the financial statements for the year can
be finalized. Each type of adjusting entry is demonstrated using the accounts described below.
Remember that even when doing adjusting entries, there must be a debit and a credit entry
for the books to remain balanced. Each adjustment is identified with a letter of the alphabet
204
(a, b, c, d, e, and so on) to track the corresponding debit and credit. Once an adjustment is com-
pleted, the rows across the page must be totalled to calculate the new balance in each account.
This calculated amount is placed in the Adjusted Trial Balance column, as shown in Figure 8.6.

Worksheet
for the Month Ended December 31, 20**
Trial Balance
100 General Bank Account $4,906.91
115 Trust Bank Account 15,280.00
120 Accounts Receivable 25,000.00
125 Prepaid Insurance 600.00
130 Office Supplies 630.00
155 Computer Equipment (Hardware) 6,520.00
200 Accounts Payable/General Liabilities $6,890.00
210 Credit Card Debt 2,500.00
215 Trust Funds Owed 15,280.00
350 Justin Case, Drawings 1,800.00
400 Fees Earned 31,580.00
511 Salaries Expense 960.00
533 Meals and Entertainment Expense 350.00
534 Membership/Professional Dues 1,343.75
535 Office Supplies/General Expense 580.00
538 Rent Expense 1,100.00
565 Telephone Expense 479.34
Total $61,800.00 $61,800.00
FIGURE 8.5 Trial balance at December 31
Adjustment (A): Prepaid Expenses

Justin has prepaid insurance of $600 on the trial balance. The insurance premiums cover one
year; the policy starts on December 1 of this year and expires on November 30 next year. He
must allocate the cost of the insurance over a 12-month period and cannot take the whole
expense this year. This insurance covers liability for fire and theft on his premises.
The adjustment is calculated as follows:
$600/12 months = $50 per month
205
206
LEGAL ACCOUNTING
Adjusted
Trial Balance Adjustments Trial Balance
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Calculating the Balances in the Adjusted Trial Balance
General Bank When there is no adjustment, simply place the trial balance amount
100 4,906.91 4,906.91
Account in the Adjusted Trial Balance column, respecting Dr. and Cr.
––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Place the letter identifying the transaction in the column provided.
Each transaction will have the same letter in two locations, one for
Prepaid the debit (see account 527 below) and one for the credit.
125 600.00 a 50.00 550.00
Insurance + = Calculate the new balance: $600 Dr. – $50 Cr. = $550. Place the
difference of $550 in the debit column, because the balance is a debit.
––––––––––––––––––––––––––––––––––––––––––––––––––––––––
If the trial balance has a credit balance, and there are no adjustments,
Accounts
200 6,890.00 d 6,890.00 enter the amount in the credit column of the Adjusted Trial Balance
Payable
column.
Personal If the trial balance has a credit balance and the adjustment is a credit,
205 3,000.00 100.00 3,100.00
Loan + = add the two credits together to obtain the new balance.
––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Add both debits together to get the new amount for salaries expense
Salaries
511 960.00 e 240.00 1,200.00 and place the total in the debit column of the Adjusted Trial Balance
Expense + = column.

––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Total 61,800.00 61,800.00 Leave this space blank Totals for the trial balance must be equal.
For the new accounts added at the end of the trial balance, the
Insurance balance will be the amount entered in the Adjustments column. Place
527 a 50.00 50.00
Expense the amount in the Adjusted Trial Balance column, respecting Dr. and
Cr. This is the entry that corresponds to entry “a” above.
––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Total Dr. and Cr. for adjusting entries must be equal.
Totals 1,146.01 1,146.01 62,466.01 62,466.01
Total Dr. and Cr. for the adjusted trial balance must be equal.
FIGURE 8.6 Extending balances to the adjusted trial balance

Justin must expense $50 for the month of December and leave the rest of the insurance
premium in the prepaid insurance (asset) account. The adjusting entry required is a credit of
$50 to the prepaid insurance account and a debit to the insurance expense account for $50.
The adjusting entry required is as follows:
527 Insurance Expense Dr. $50

125 Prepaid Insurance Cr. $50
The steps followed to enter this adjustment in the worksheet are as follows (and are shown
in Figure 8.7):
1. Enter $50 in the credit column of prepaid insurance and place the letter (a) next to the entry.
2. The account named Insurance Expense (527) is not listed in the trial balance. The
account name must be added at the end of the list in the Account Titles column.
3. Enter the expense of $50 as a debit in the Adjustments column. Place the letter (a) next
to the entry in the space provided.
4. Calculate the new account balance, taking the adjustments into consideration. The
adjusted balance for prepaid insurance is $600 − $50, or $550. The insurance expense
account has a new balance of $50. Calculate the new balances and place them in the
Adjusted Trial Balance column in the correct column for debit or credit.
Adjustment (B): Office Supplies

Justin did an inventory of the supplies he has on hand in his supply cupboard. The amount
remaining on December 31 is worth approximately $200. His trial balance shows a value of
$630 in the office supplies account.
Calculation of the adjustment:
Inventory shown in trial balance $630

Less: Amount left in stock $200
Amount used over the period $430
The goal of this adjustment is to show the correct value of what is left as an asset, which is
$200, and to record the amount of $430 that was used as an expense.
Justin must record the amount of $430 as an expense, and he has to credit the asset
account Office Supplies (130) to reduce the amount of the asset.
535 Office Supplies/General Expense Dr. $430

130 Office Supplies Cr. $430
The steps followed to enter this adjustment in the worksheet are as follows, and are shown in
the completed worksheet in Figure 8.8 at the end of the chapter:
1. Enter $430 in the credit column of the asset account Office Supplies (130) and place the
letter (b) next to the entry.
2. The account Office Supplies/General Expense (535) is listed in the Account Titles col-
umn, so it does not have to be added for this entry. Enter the expense of $430 as a debit
in the Adjustments column. Place the letter (b) next to the entry in the space provided.
3. Calculate the new account balances after making the adjustments. The adjusted balance
for Office Supplies (130) is $630 less the credit of $430, or $200. The adjusted balance for
Office Supplies/General Expense (535) is $580 plus $430, or $1,010.
207
LEGAL ACCOUNTING
Adjustment (C): Depreciation

The account for Computer Equipment (Hardware) (155) has a value of $6,520 in the trial bal-
ance. Justin believes the assets have a useful life of about five years and that there will be no
residual value for this equipment.
Calculation of depreciation using the straight-line method:
Cost of Equipment – Residual Value $6,520 – 0

= = $1,304/12 months = $108.67
Estimated Useful Life 5
The annual depreciation of the equipment is $1,304. Suppose Justin has had the equip-
ment in his business for only three months and wishes to take three months’ worth of depre-
ciation. He would multiply the monthly amount, or $108.67, by three months, for total
depreciation of $326.01.
522 Depreciation Expense Dr. $326.01

156 Depreciation—Computer Equipment Cr. $326.01
The steps followed to enter this adjustment in the worksheet are as follows and are shown
in Figure 8.8:
1. The account Depreciation Expense (522) is not listed in the Account Titles column, so
the account name needs to be added below the last entry in the Account Titles column.
2. Enter the amount of depreciation expense ($326.01) as a debit in the Adjustments col-
umn. Place the letter (c) next to the entry.
3. The contra-asset account Depreciation—Computer Equipment (156) is not listed in the
Account Titles column, so it also must be added. Add this below the account Deprecia-
tion Expense (522). Enter $326.01 as a credit in the Adjustments column and place the
letter (c) next to the entry.
for Depreciation—Computer Equipment (156) is $326.01, and for Depreciation Expense
(522) is $326.01.
5. Note that the account Computer Equipment (Hardware) (155) has not been changed. The
value of this account has remained at $6,520, its historical value.
Adjustment (D): Personal Loan

Justin paid $1,000 to his father on the loan he accepted, but $100 of that was interest. His rec-
ords show that he owes his father $3,000, but he in fact he owes his father $3,100 because the
$100 for interest did not reduce the principal amount owing. Justin should have recorded the
payment as a debit to Interest Expense (529) of $100 and $900 to the Personal Loan liability
account (205). Because Justin’s books show the amount of the loan outstanding at $3,000, he
must correct this entry. He can do this using the following adjusting entry:
529 Interest Expense Dr. $100

205 Personal Loan Cr. $100
The steps required to enter this adjustment in the worksheet are as follows and are shown in
Figure 8.8:
208
1. The account Interest Expense (529) is not listed in the Account Titles column, so the
account name will need to be added below the last entry in the column.
2. Enter the amount of interest expense of $100 as a debit in the Adjustments column. Place
the letter (d) next to the entry.
3. The personal loan secured by Justin was recorded in the account Personal Loan (205) in
the liabilities section of the balance sheet. This account is listed on the trial balance, so
the amount of $100 can be entered as a credit in the Adjustments column. Place the let-
ter (d) next to the entry.
for Personal Loan (205) is $3,100, and Interest Expense (529) has a debit balance of $100.
These amounts are shown in the Adjusted Trial Balance column.
• Potential pitfall: Not completing adjusting journal entries at month, quarter, or

PARALEGAL
POTENTIAL
year-end.
PITFALLS
• Possible fallout: This will result in inaccurate financial information. Since

paralegal sole proprietors pay income tax to the CRA based on their company
net income, taxes may be over- or understated and an incorrect payment
could be made to the CRA.
• Proposed recommendation: Analyze all trial balance accounts at year-end to
determine if an adjustment is needed. For example, if there is a prepaid asset
such as insurance or office supplies, consider if the prepaid asset was used up in
the period and needs to be expensed. If the period-end adjustments are not well
understood by the paralegal, consider hiring a bookkeeper or accountant to help.
Adjustment (E): Accrued Salaries Expense

Justin has a part-time employee who works five days a week, from Monday to Friday, and receives
$80 a day, or $400 a week. She gets paid every two weeks on Friday. She was paid on December
12 and December 26, and she will receive her next paycheque on the next payday, which is
January 9, next year. However, at the end of the fiscal period, December 31, the employee is owed
three days’ pay for December 29, 30, and 31. This payment will be made on January 9. An adjust-
ing entry is therefore required to reflect the accrued salaries expense payable for three days at the
rate of $80 a day for a total of $240. This can be done using the following adjusting entry:
511 Salaries Expense Dr. $240

220 Accrued Salaries Payable Cr. $240
The steps required to enter this adjustment in the worksheet are as follows and are shown
in Figure 8.8:
1. The account Salaries Expense (511) is already listed in the Account Titles column. Debit
the Adjustments column $240 to show the expense for salaries, and then place the let-
ter (e) in the box next to the entry.
2. Accrued Salaries Payable (220) is not listed in the Account Titles column and must be
added at the end.
3. Enter the amount of accrued salaries payable of $240 as a credit in the Adjustments col-
umn. Place the letter (e) in the box next to the entry.
for Salaries Expense (511) will be $1,200, and Accrued Salaries Payable (220) will have a
credit balance of $240. These amounts are shown in the Adjusted Trial Balance column.
209
LEGAL ACCOUNTING
Checking the Adjusting Entries

To ensure that no mistakes were made in entering the adjusting entries, total the debit and
credit columns of the Adjustments column in the worksheet (see Figure 8.8). The total deb-
its must equal the total credits. If the totals are not equal, stop and look for errors using the
same strategies for finding errors that were explained in Chapter 4. Do not proceed until
these columns are balanced.
LO3 Adjusted Trial Balance Column

All account balances from the trial balance must be extended to the Adjusted Trial Balance
column (see Figure 8.8). If the balances across the accounts were not already calculated as the
adjustments were prepared, this is a good point to do it. Many people prefer to wait until all
the adjustments are completed before calculating the adjusted trial balance. Remember to
add debits together and to add credits together. Take the difference when calculating debits
plus or minus credits and make sure the result is entered in the correct column. Keep in
mind what the normal balance is supposed to be for each category of account (see Chapter 3).
Side of the account used to record an increase
Debit Credit
Accounts with a normal Expenses Liabilities Accounts with a normal
debit balance credit balance
Assets Income
+ = Dr. + = Cr.
Drawings Capital
DEAD CLIC
If the balance is not the normal balance associated with that category of account, ask your-
self, “why not?”
Looking for Errors

Consider the following potential errors:
• Calculation error: Two debits were not added together and instead were subtracted
from one another or vice versa.
• Calculation error: The debits and credits were not subtracted.
• Entry in wrong column: The entry was put in the debit column instead of the credit
column or vice versa.
• The balances from the trial balances were not carried over for the accounts that had no
adjustment.
Once the debit and credit columns in the adjusted trial balance are equal, it is time to
move on to the preparation of the financial statements.
LO4 Income Statement and Balance Sheet Columns

The totals from the adjusted trial balance should be carried over to the Income Statement col-
umn or the Balance Sheet column, depending on the category of account. Figure 8.7 shows
the balances once they have been extended. Copy the amounts one by one from the adjusted
trial balance over to the correct statement. Remember that the accounts numbered 100 to 399
belong in the Balance Sheet column and should be extended to the respective debit or credit
columns. The accounts numbered 400 to 599 belong in the Income Statement column, so
these amounts should be extended to the respective debit or credit columns.
210
Take care not to include the asset accounts listed at the bottom of the worksheet in the wrong
category or statement. Pay particular attention to the contra-asset account for accumulated depre-
ciation and the salaries payable account. These are credit balances that belong on the balance sheet.
Completing the Worksheet

Total the debit and credit columns of the Income Statement and Balance Sheet columns of the
worksheet. The next task is to calculate the Income Statement and Balance Sheet columns.
Calculating Net Profit or Loss

Figure 8.7 shows the following steps (in superscript) in calculating the net profit or net loss:

Worksheet
Income Statement Balance Sheet
Dr. Cr. Dr. Cr.
Totals Totals Totals Totals
Totals 15,959.10 131,580.00 556,506.91 530,886.01
4 Net Profit 2 25,620.90 6 25,620.90
331,580.00 331,580.00 756,506.91 756,506.91 8
FIGURE 8.7 Completing the bottom portion of the worksheet
1. Total the Dr. and Cr. columns in the income statement section. They will not be equal.
2. Subtract the total credits and debits. If the credits on the income statement are higher than
the debits, a net profit exists, but if the debits are higher than the credits, the result is a net
loss. Enter the net loss in the space below whichever column has the smaller total.
3. Add the numbers at the bottom of the columns. The total debits should now equal the
total credits at the bottom of the Income Statement column.
4. Write “Net Profit” or “Net Loss” in the Account Titles column.
Completing the Balance Sheet Portion of the Worksheet

Figure 8.7 shows the following steps (in superscript) in completing the balance sheet portion
of the worksheet:
5. Total the Dr. and Cr. columns in the balance sheet portion of the worksheet. They will
not be equal.
6. Place the amount of the net profit or loss from step 2 in the space below whichever col-
umn has the smaller total.
7. Add the balance sheet debit and credit columns on the last line of the worksheet. The
debit and credit columns must be equal.
8. Rule the columns by placing a single line above and a double line below the totals.
A completed worksheet with all the adjustments and balances extended is shown in Figure 8.8.
Once the net profit or loss has been calculated and the result used to balance the columns
under the balance sheet heading, all the information needed to prepare financial statements
for the firm is now available.
211
212
LEGAL ACCOUNTING

Worksheet
Adjusted
Trial Balance Adjustments Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
100 General Bank Account 4,906.91 4,906.91 4,906.91
115 Trust Bank Account 15,280.00 15,280.00 15,280.00
120 Accounts Receivable 25,000.00 25,000.00 25,000.00
125 Prepaid Insurance 600.00 a 50.00 550.00 550.00
130 Office Supplies 630.00 b 430.00 200.00 200.00
155 Computer Equipment
(Hardware) 6,520.00 6,520.00 6,520.00
158 Office Furniture and
Equipment 2,250.00 2,250.00 2,250.00
200 Accounts Payable/
General Liabilities 6,890.00 6,890.00 6,890.00
205 Personal Loan 3,000.00 d 100.00 3,100.00 3,100.00

210 Credit Card Debt 2,500.00 2,500.00 2,500.00
215 Trust Funds Owed 15,280.00 15,280.00 15,280.00
300 Justin Case, Capital 2,550.00 2,550.00 2,550.00
350 Justin Case, Drawings 1,800.00 1,800.00 1,800.00
400 Fees Earned 31,580.00 31,580.00 31,580.00
Adjusted
Trial Balance Adjustments Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
511 Salaries Expense 960.00 e 240.00 1,200.00 1,200.00
533 Meals and
Entertainment Expense 350.00 350.00 350.00
534 Membership/
Professional Dues 1,343.75 1,343.75 1,343.75
535 Office Supplies/General
Expense 580.00 b 430.00 1,010.00 1,010.00
538 Rent Expense 1,100.00 1,100.00 1,100.00
565 Telephone Expense 479.34 479.34 479.34
Total 61,800.00 61,800.00
527 Insurance Expense a 50.00 50.00 50.00

522 Depreciation Expense c 326.01 326.01 326.01
156 Depreciation—
Computer Equipment c 326.01 326.01 326.01
529 Interest Expense d 100.00 100.00 100.00
CHAPTER 8
220 Accrued Salaries

Payable e 240.00 240.00 240.00
Totals 1,146.01 1,146.01 62,466.01 62,466.01 5,959.10 31,580.00 56,506.91 30,886.01

Net Profit 25,620.90 25,620.90
Totals 31,580.00 31,580.00 56,506.91 56,506.91
FIGURE 8.8 Completed worksheet

Adjusting Accounts for Financial Statements
213
LEGAL ACCOUNTING
CHAPTER SUMMARY
The accrual basis of accounting requires that financial statements reflect revenues when earned and
expenses when incurred so that they are reported in the correct accounting period. The adjustment pro-
cess enables the record-keeper to adjust account balances to ensure that what is reported in the financial
statements accurately reflects the financial position of the firm. A paralegal wishing to know how his or
her business is doing will want to prepare an income statement fairly frequently. This practice tells the
owner whether the company is making or losing money. The balance in the bank account is not always an
indication of how your business is doing. The bank balance may show income from various sources, such
as an investment by the owner, a transfer from the line of credit, or revenue earned.
Remember that a paralegal working as a sole proprietor does not receive a salary. Money is taken out of
the firm by way of drawings. The income statement and balance sheet will tell the owner whether or not there
is a profit from which a draw can be taken. Recording amortization on assets and preparing the common
adjustments help to ensure that the financial records of the firm accurately reflect its financial position.
KEY TERMS
accrued interest expense, 204 depreciation, 201
accrued interest revenue, 204 depreciation expense, 201
accrued revenues, 204 historical cost, 201
accrued salaries expense, 209 matching principle, 199
accumulated depreciation, 201 office supplies inventory, 199
adjusting entry, 204 prepaid expenses, 201
amortization, 201 residual value, 201
book value, 201 revenue recognition principle, 203
capital cost allowance (CCA), 201 straight-line amortization method, 202
class, 201 undepreciated capital cost (UCC), 203
contra-asset account, 201 work in progress (WIP), 203
FURTHER READING
Canada Revenue Agency, “Accounting Methods,” online: <http://www.cra-arc.gc.ca/tx/bsnss/tpcs/
slprtnr/ccntng-eng.html>.
Canada Revenue Agency, “Claiming Capital Cost Allowance (CCA),” online: <http://www.cra-arc.gc.ca/
tx/bsnss/tpcs/slprtnr/rprtng/cptl/menu-eng.html>.
Canada Revenue Agency, Guide RC4070(E) Rev. 17, Information for Canadian Small Businesses, online:
<https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4070/rc4070-17e.pdf>. See especially
Chapter 5—Income Tax.
Canada Revenue Agency, Guide T4002(E) Rev. 17, Self-Employed Business, Professional, Commission,
Farming, and Fishing Income: 2017, online: <https://www.canada.ca/content/dam/cra-arc/formspubs/
pub/t4002/t4002-17e.pdf>.
Canada Revenue Agency, “Small Businesses and Self-Employed Income,” online: <http://www.cra-arc
.gc.ca/selfemployed>.
Michael Cooke, “External T.I. 2014-0531461E5—Paralegals and Work in Progress Election” (28 May
2014), online: <https://taxinterpretations.com/cra/severed-letters/2014-0531461e5>.
214
REVIEW QUESTIONS
True or False
1. The worksheet is an example of a financial statement. (LO1)
2. A contra-asset account reduces the value of an asset. (LO2)
3. An accrual is an adjustment that recognizes when cash is received or used to make a payment. (LO2)
4. Book value means the same thing as fair market value. (LO2)
5. Prepaid expense is an asset account reflected on the balance sheet. (LO2)
6. Paralegals can elect to exclude WIP in reporting income at the end of the financial year. (LO2)
7. Capital cost allowance is a tax reporting term used in the calculation of depreciating assets. (LO2)
8. Accumulated depreciation has a normal credit balance (Cr.). (LO2)
Short Answer
1. When Ann Litigate purchased $1,000 worth of stationery and supplies for the office, she recorded
the purchases in the asset account Office Supplies (130). At the end of the year, she calculated the
value of her office supply stock as $350. (LO2)
a. What must Ann do to correctly reflect the accrued assets and expenses over the course of the
past three months?
b. Calculate the value of the office supplies used during the period.
c. Which accounts need to be adjusted to record the office supplies used?
d. If Ann does not make the necessary adjustment to her books, which account will be overstated
and which will be understated?
e. How would failure to make the adjustment affect:
i. the income statement?
ii. the balance sheet?
2. What is the relationship between the adjusted trial balance and the income statement, balance
sheet, and statement of owner’s equity? (LO3)
PRACTICE EXERCISES
PRACTICE
EXCEL
Complete the following table by calculating depreciation using the straight-line method for five years. (LO2)
Calculation of depreciation using the straight-line method

Office Historical Residual Depreciation Accumulated Book
Life Year
Equipment Cost Value 3,500/10 yrs. Depreciation Value
Computers 10 4,000 500 1 350 350 3,650
2 350 700 3,300
3
4
5
215
LEGAL ACCOUNTING

Using the worksheet provided, prepare the adjusting entries for Ann Litigate’s financial records, which
her accountant will use in preparing her year-end financial statements. (LO2, LO3)
a. Dec. 31: Payment on account received (invoice #xx501, M. Arbor), $1,000.
b. Dec. 31: Prepaid professional insurance used up, $2,500 (one-year policy, from February of this
year until February of next year, valued at $3,000).
c. Dec. 31: Rent expense recognized (Magnum Office Managers), $1,200.
d. Dec. 31: Office supplies used up, $200.
e. Dec. 31: Depreciation of computer equipment, $1,360/year based on the declining balance amorti-
zation calculation. Assume that Ann purchased the computer equipment for $6,800 in the previ-
ous year and that the annual depreciation being claimed is 20 percent.

Worksheet
Adjusted Trial
Account Titles Trial Balance Adjustments
Balance
Dr. Cr. Dr. Cr. Dr. Cr.
120 Accounts Receivable 3,500
125 Prepaid Insurance 3,000
128 Prepaid Expense (Rent) 1,200
155 Computer Equipment (Hardware) 6,800
156 Depreciation—Computer
Equipment
200 Accounts Payable/General Liabilities 6,500
300 A. Litigate, Capital 12,500
350 A. Litigate, Drawings 2,000
522 Depreciation Expense
527 Insurance—Professional Liability
535 Office Supplies/General Expense
538 Rent Expense
Totals 52,550 52,550
216
PRACTICE
EXCEL
Prepare the income statement and balance sheet portion of the worksheet from the adjusted trial bal-
ance for Ann Litigate’s firm. (LO4)
Worksheet
Adjusted Trial
Account Titles Income Statement Balance Sheet
Balance
Dr. Cr. Dr. Cr. Dr. Cr.
125 Prepaid Insurance 500
128 Prepaid Expense (Rent) 0
155 Computer Equipment (Hardware) 6,800
156 Depreciation—Computer
Equipment 1,360
300 A. Litigate, Capital 12,500
310 A. Litigate, Withdrawals 2,000
522 Depreciation Expense 1,360
527 Insurance—Professional Liability 2,500
Totals 53,910 53,910
Net Profit

Prepare the following adjusting entries for Peter Bitter’s Legal Services firm and complete all columns of
the worksheet. (LO2, LO3, LO4)
a. An adjustment for office supplies is required. The ending inventory as of December 31 is $300.
Expense the office supplies used up over the period.
b. The landlord required prepayment of rent when Peter’s firm moved into the premises. The
amount of $1,200 has now been used up and needs to be written off as an expense.
c. At year-end, the firm owes three days’ salary to the assistant at the rate of $90 per day.
d. The firm is taking $300 depreciation on office furniture and equipment.
217
218
Peter Bitter’s Legal Services
Worksheet
LEGAL ACCOUNTING
Adjusted Income
Account Titles Trial Balance Adjustments Balance Sheet
Trial Balance Statement
128 Prepaid Expense (Rent) 3,000
130 Office Supplies 1,200
159 Dep. Office Furniture and Equipment 600
220 Accrued Salaries Payable
300 Peter Bitters, Capital 13,170
350 Peter Bitters, Drawings 6,000
522 Depreciation Expense 250
527 Insurance—Professional Liability 450

Totals 52,470 52,470
Net Profit
Case Example: Financial Statements

Ann Litigate has scheduled a meeting with her small-business bank manager to discuss getting an
additional line of credit. However, the bank manager has concerns about Ann’s current debt ratio
because this would be an additional credit facility. She has asked Ann to provide her with an
interim financial statement. Ann does not understand why the bank manager needs this informa-
tion because the bank produces statements for her general bank account and trust account each
month. She thought that these bank statements, together with last year’s tax return and financial
statement, would be sufficient. Also, Ann does not know what information to provide to her ac-
countant to prepare the interim financial statement, because she tends to contact the accountant
only at the end of the year when she does her tax reporting.
1. Why would the bank manager need to see an interim, year-to-date financial statement as
part of the bank approval process?
2. What are some of the things that Ann will need to discuss with her accountant? Which
items on the balance sheet or income statement will likely require an adjustment? (Hint:
Assess the before-adjustment and after-adjustment journal entries that may be required
for such items on the balance sheet or income statement.)
3. What records will Ann need to review and update so that the accountant is in a good pos-
ition to prepare the financial statement?
219
9 Final Steps in the
Accounting Cycle
The Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
The Statement of Owner’s Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
The Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
Recording the Year-End Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Preparing Closing Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
Preparing the Post-Closing Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
General Ledger Accounts at the End of the Fiscal Year . . . . . . . . . . . . . . . . 230
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
221
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Journalize and post adjusting entries to the general ledger.
LO2 Journalize and post closing entries.
LO3 Prepare a post-closing trial balance.
Once the worksheet is completed, you have the information needed to prepare final financial
statements for the period. In our case, we will prepare the statements as of the end of the year
for Justin Case. The financial statements must be prepared in the following order:
1. Income statement
2. Statement of owner’s equity
3. Balance sheet
Figure 9.1 highlights these final steps in the accounting cycle.
8 1
trial balance
2
7 Post
entries
Record
adjusting and
closing entries
3
6 Prepare
trial balance
Prepare financial
statements
5 4
Complete
trial balance
FIGURE 9.1 Steps in the accounting cycle

The worksheet prepared for Justin Case in Chapter 8 will be used for the preparation of
the final income statement, the statement of owner’s equity, and the balance sheet. The work-
sheet will also be used to record the adjusting entries in the general journal in order to make
them part of the firm’s permanent record.
222
CHAPTER 9 Final Steps in the Accounting Cycle
The Income Statement

The information needed for preparing the income statement is found on the worksheet for
the end of the period.

Income Statement
Income
Fees Earned $31,580.00
Expenses
Meals and Entertainment Expense $ 350.00
Membership/Professional Dues 1,343.75
Office Supplies/General Expense 1,010.00
Rent Expense 1,100.00
Salaries Expense 1,200.00
Telephone Expense 479.34
Insurance Expense— Professional Liability 50.00
Depreciation Expense 326.01
Interest Expense 100.00
Total Expenses 5,959.10
Net Income $25,620.90
FIGURE 9.2 Income statement
The Statement of Owner’s Equity

The information that is needed to prepare the statement of owner’s equity is found on the
worksheet for the end of the period.

Justin Case, Capital, December 1, 20** $2,550.00
Net Income for December $25,620.90 From income statement
Less: Withdrawals for December 1,800.00 From balance sheet
Increase in Capital 23,820.90
Justin Case, Capital, December 31, 20** $26,370.90
FIGURE 9.3 Statement of owner’s equity

223
LEGAL ACCOUNTING
The Balance Sheet

Now that the owner’s equity at the end of the period has been calculated, the balance sheet
can be completed.
Once the financial statements have been completed, the books are ready to be closed for
the year. The adjusting entries that were entered in the worksheet will need to be recorded,
and the year-end closing entries will also need to be prepared.

Balance Sheet
December 31, 20**
Assets
Current Assets
General Bank Account $ 4,906.91
Trust Bank Account 15,280.00
Accounts Receivable 25,000.00
Prepaid Insurance 550.00
Office Supplies 200.00
Total Current Assets $45,936.91
Fixed Assets
Computer Equipment (Hardware) $6,520.00
Less: Accumulated Depreciation on 326.01 6,193.99
Computer Equipment
Office Furniture and Equipment 2,250.00
Total Fixed Assets 8,443.99
Total Assets $54,380.90

Liabilities
Accounts Payable/General Liabilities 6,890.00
Personal Loan 3,100.00
Credit Card Debt 2,500.00
Accrued Salaries Payable 240.00
Trust Funds Owed 15,280.00
Total Liabilities 28,010.00
Owner’s Equity
Justin Case, Capital 26,370.90 From Statement
of Owner’s Equity
Total Liabilities and Owner’s Equity $54,380.90
FIGURE 9.4 Balance sheet
224
LO1 Recording the Year-End Adjustments

The year-end adjustments that were made on the worksheet must be recorded in the permanent
records of the firm. These entries will be made using the general journal (see Figure 9.5).
Follow these steps to record adjusting entries:
1. Enter the title “Adjusting Entries” on the first line.
2. Copy the entry for each adjustment from the worksheet to the general journal, listing
the debit entry first and the credit entry on the second line.
3. An explanation is not required because the “Adjusting Entries” title has been placed at
the top of the column. Skip one line and enter the next adjusting entry.
4. Record the entries in the Adjustments column of the worksheet (a to e in this case) by
repeating steps 2 and 3 for each entry until they have all been recorded.
5. Total the debits and credits in the general journal. The totals should be the same as the
totals in the Adjustments column of the worksheet.
6. Once all the adjusting entries in the general journal have been entered, post each entry
to the respective account in the general ledger, indicating that the entry is an adjusting
entry in the description. Remember to complete the PR numbers in the general journal
and in the reference in the general ledger account as each entry is posted.

General Journal
Date
Adjusting Entries
Dec. 31 Insurance—Professional Liability 527 50.00
Prepaid Insurance 125 50.00
31 Office Supplies/General Expense 535 430.00

Office Supplies 130 430.00
31 Depreciation Expense 522 326.01

Depreciation—Computer Equipment 156 326.01
31 Interest Expense 529 100.00

Personal Loan 205 100.00
31 Salaries Expense 511 240.00

Accrued Salaries Payable 220 240.00
Totals 1,146.01 1,146.01
FIGURE 9.5 Adjusting entries
225
LEGAL ACCOUNTING
LO2 Preparing Closing Entries

Before starting to record transactions for the new year, the books for the previous fiscal period
must be closed. Balance sheet accounts are referred to as permanent accounts because their bal-
ances carry over from one fiscal period to the next; the balance in the bank on December 31 will
carry over to the next year—it does not disappear just because the fiscal year-end has arrived.
This is true of all the assets. The same goes for any liabilities outstanding—they unfortunately
do not disappear just because the end of the year has come. However, income, expense, and
withdrawal accounts need to be zeroed out because each year needs to be started fresh. It is for
this reason that these three categories of account are referred to as temporary accounts.
Closing entries are used to set the temporary account balances to zero at the end of the fis-
cal year. Closing entries:
• allow the paralegal to accumulate new data for the income, expense, and withdrawal
accounts starting with the first day of the new fiscal year; and
• enable the paralegal to update the capital account going forward by transferring the net
income or net loss to a permanent account (called income summary or retained earnings).
As illustrated in the journal entries shown below, there are four steps in the process for
preparing closing entries:
1. Clear the balance in the income accounts and transfer the balance to the income summary.
• Debit income accounts/credit income summary.
2. Clear the balance in the individual expense accounts and transfer the total to the income
summary.
• Debit income summary/credit expense accounts.
3. Clear the balance in the income summary (net income) account and transfer the balance
to the capital account.
• Debit income summary/credit capital (if net income).
4. Clear the balance in the drawings account and transfer the balance to the capital account.
• Debit capital/credit drawings.
Step 1: Closing the Income (Revenue) Accounts

Use the information shown on the income statement to close accounts.
Close all accounts with a credit balance by debiting each income account with a credit bal-
ance to get a zero balance. For example, in the Justin Case income statement (Figure 9.2), the
Fees Earned account has a credit balance of $31,580. Debit the Fees Earned account by that
amount. To have a balanced entry, credit the income summary account.
General Journal GJ5

Date
Closing Entries
Dec. 31 Fees Earned 400 31,580
Income Summary 355 31,580
To close income accounts
FIGURE 9.6 General journal closing entries—income accounts
226
Step 2: Closing the Expense Accounts

Close all the accounts on the income statement with a debit balance (expense accounts) by
crediting each account. This will bring each account down to zero. Debit the income sum-
mary account with the total debits. Remember that in the general journal, debits are entered
on the first line and credits below so that the first line of your closing entry will be income
summary, followed by a list of each expense account that is being closed. Each entry must be
posted to the general ledger. Once the postings are completed, all the expense accounts
should have a zero balance, and the income summary account will show the debits that when
subtracted from the credits show the net profit.
General Journal GJ5

Date
Dec. 31 Income Summary 355 5,959.10
Depreciation Expense 522 326.01
Insurance—Professional Liability 527 50.00
Interest Expense 529 100.00
Meals and Entertainment Expense 533 350.00
Membership/Professional Dues 534 1,343.75
Office Supplies/General Expense 535 1,010.00
Rent Expense 538 1,100.00
Salaries Expense 511 1,200.00
Telephone Expense 565 479.34
To close expense accounts
FIGURE 9.7 General journal closing entries—expense accounts
Step 3: Closing the Income Summary Account

Once the closing entries for the income and expense accounts have been posted, the general
ledger shows a credit balance in the income summary account. After posting, the balance in
this account is equal to the net income (or net loss) of the firm. Figure 9.8 shows the income
summary account after the closing entries for the income and expense accounts have been
posted.
Income Summary Account No. 355

Date Explanation PR Debit Credit Dr./Cr. Balance
20**
Dec. 31 To close income accounts GJ5 31,580.00
31 To close expense accounts GJ5 5,959.10 Cr. 25,620.90
FIGURE 9.8 Income summary account in general ledger

In order to clear the net income amount from the income summary account, a closing
entry must be created by debiting the income summary account and crediting the capital
account.
227
LEGAL ACCOUNTING
The general journal closing entry made to close the income summary account is as shown
in Figure 9.9.
General Journal GJ5

Date
Dec. 31 Income Summary 355 25,620.90
Justin Case, Capital 300 25,620.90
To close income summary account
FIGURE 9.9 Closing entries—income summary
Step 4: Closing the Drawings Account

Clear the balance in the drawings account and transfer the balance to the capital account. The
owner of a sole proprietorship takes withdrawals for personal use over the course of the year,
and this account needs to be cleared. As was seen on the statement of owner’s equity, with-
drawals decrease the owner’s equity in the firm. For this reason, the amount taken by way of
withdrawals will be transferred to the capital account and used to decrease the owner’s equity
in the firm. This account is cleared at the end of the fiscal year. Drawings taken in the subse-
quent year will start from zero and be accumulated over the next year.
The closing entry required to close the drawings account is as shown in Figure 9.10.
General Journal GJ5

Date
Dec. 31 Justin Case, Capital 300 1,800.00
Justin Case, Drawings 350 1,800.00
To close drawings into capital
FIGURE 9.10 General journal closing entries—drawings
Once the closing entries are posted, the general ledger capital and drawings accounts will
appear as in Figure 9.11.
• Potential pitfall: Paralegals may try to save money by doing their year-end
PARALEGAL
POTENTIAL
accounting on their own

PITFALLS
• Possible fallout: Mistakes can be made in completing general ledger postings,

period-end adjustments, financial statements, and tax filings with the CRA.
• Proposed recommendation: Although it may be tempting for paralegals to
complete their year-end accounting and tax return on their own (in order to
save accounting fees), it is important to have complete and accurate financial
information for every fiscal year. For this reason, it may be recommended that
paralegals hire an accountant to complete their year-end work.
228

Date
Dec. 1 Balance Forward ✓ 2,550.00 Cr. 2,550.00
31 Closing Entry—Income Summary 25,620.90 Cr. 28,170.90
31 Closing Entry—Drawings 1,800.00 Cr. 26,370.90

Date
Dec. 1 Balance Forward ✓ 1,800.00 Dr. 1,800.00
31 Closing Entry GJ5 1,800.00 0.00
Justin Case, Income Summary Account No. 355

Date
Dec. 31 Closing Entry—Income Account GJ5 31,580.00 Cr. 31,580.00
31 Closing Entry—Expense Accounts GJ5 5,959.10 Cr. 25,620.90
31 Closing Entry—Net Income transfer to Capital GJ5 25,620.90 0.00
FIGURE 9.11 General ledger capital, drawings, and income summary accounts after posting
LO3 Preparing the Post-Closing Trial Balance

Once all the adjusting entries and closing entries have been recorded and posted, a post-
closing trial balance must be prepared. All temporary accounts will have been closed, and the
only balances remaining in the general ledger should be in the permanent accounts. Prepare
a list of all the general ledger accounts with a balance. They have been placed in numerical
order in the post-closing trial balance shown in Figure 9.12.
229
LEGAL ACCOUNTING

Post-Closing Trial Balance
December 31, 20**
Dr. Cr.
100 General Bank Account $ 4,906.91
115 Trust Bank Account 15,280.00
120 Accounts Receivable 25,000.00
125 Prepaid Insurance 550.00
130 Office Supplies 200.00
155 Computer Equipment (Hardware) 6,520.00
156 Depreciation—Computer Equipment $ 326.01
200 Accounts Payable/General Liabilities 6,890.00
210 Credit Card Debt 2,500.00
215 Trust Funds Owed 15,280.00
220 Accrued Salaries Payable 240.00
Totals $54,706.91 $54,706.91
FIGURE 9.12 Post-closing trial balance
General Ledger Accounts at

the End of the Fiscal Year
Figure 9.13 shows Justin’s general ledger accounts at the end of December once the year-end
was completed. Note that only those accounts from December 1 (where a balance forward was
recorded) to the end of December are included here. The asset, liability, and capital accounts
show a balance, but the drawings, income, and expense accounts are at zero, ready to start the
new fiscal year.

General Ledgers

Date
230

Date

Date
Prepaid Insurance Account No. 125

Date
Dec. 1 Prepaid Insurance ✓ 600.00 Dr. 600.00
Dec. 31 Adjusting Entry GJ4 50.00 Dr. 550.00

Date
Dec. 1 Balance Forward ✓ 630.00 Dr. 630.00
31 Adjusting Entry GJ4 430.00 Dr. 200.00

Date
Depreciation—Computer Equipment Account No. 156

Date
Dec. 1 Adjusting Entry GJ4 326.01 Cr. 326.01
Depreciation—Office Furniture and Equipment Account No. 158

Date

Date
231
LEGAL ACCOUNTING

Date
31 Adjusting Entry GJ4 100.00 Cr. 3,100.00

Date

Date
Accrued Salaries Payable Account No. 220

Date
Dec. 31 Adjusting Entry GJ4 240.00 Cr. 240.00

Date
31 Closing Entry—Income GJ5 25,620.90 Cr. 28,170.90
Summary
31 Closing Entry—Drawings GJ5 1,800.00 Cr. 26,370.90

Date

Date
Dec. 31 To close income accounts GJ5 31,580.00 Cr. 31,580.00
31 To close expense accounts GJ5 5,959.10 Cr. 25,620.90
31 To transfer balance to Capital GJ5 25,620.90 0.00
232

Date

Date
31 Adjusting Entry GJ4 240.00 Dr. 1,200.00
Depreciation Expense Account No. 522

Date
Dec. 31 Adjustment—Computer GJ4 326.01 Dr. 326.01
Equipment
31 Closing Entry GJ5 326.01 0.00

Date
Interest Expense Account No. 529

Date
Meals and Entertainment Expense Account No. 533

Date
233
LEGAL ACCOUNTING

Date

Date
31 Adjusting Entry GJ4 430.00 Dr. 1,010.00

Date

Date
FIGURE 9.13 General ledgers after closing
234
Legal Requirements for Keeping Records

TA X TIP All records, such as paper documents as well as those stored in an electronic
medium (such as on computer disk), must be kept in Canada or made available in
Canada at the request of the CRA. The records must be in English or French.
A business is required to keep orderly records of all income received. All
receipts, invoices, vouchers, and cancelled cheques indicating outlays of money
must also be kept. Such outlays include:
• salaries and wages;
• operating expenses such as rent, advertising, and capital expenditures; and
• miscellaneous items such as charitable donations.
Records must be permanent and contain a systematic account of income, deductions,
credits, and other information needed to file income tax and GST/HST returns. Incomplete
records that use approximations instead of exact amounts are not acceptable. The records
must:
• allow individuals to determine how much tax they owe, or the tax, duties, or other
amounts to be collected, withheld, or deducted, or any refund or rebate they may
claim; and
• be supported by vouchers or other necessary source documents.
If receipts or other vouchers are not kept to support expenses or claims, and there is no
other evidence available, the CRA will probably reduce the expenses or claims that have been
made.
The Six-Year Requirement

If tax returns are filed on time, records must be retained (other than certain documents for
which there are special rules) for six years from the end of the last tax year to which they
relate. Every record necessary for dealing with an objection or appeal must be kept until it is
resolved and the time for filing any further appeal has expired, or until the six-year period has
expired, whichever is later.
235
LEGAL ACCOUNTING
CHAPTER SUMMARY
In this chapter, you have completed the accounting cycle up to preparation of the post-closing trial bal-
ance. The post-closing trial balance serves as a check to ensure that the ledger accounts are in balance. All
the temporary accounts have been cleared, and you are ready to begin the accounting cycle over again for
the next fiscal period. The post-closing trial balance contains the balances for opening the books for the
new fiscal year.
The financial statements were prepared for the end of the year. They can be prepared more frequently if
you need to see how the business is doing or for submitting to a lender who requires the information.
KEY TERMS
balance sheet accounts, 226 income summary account, 226
closing entries, 224 permanent accounts, 226
expense accounts, 227 post-closing trial balance, 229
income account, 226 temporary accounts, 226
FURTHER READING
Canada Revenue Agency, Business and Professional Income 2014, online: <https://www.canada.ca/
content/dam/cra-arc/formspubs/pbg/t2125/t2125-14e.pdf>. Financial reporting for sole proprietors.
Canada Revenue Agency, “General Index of Financial Information (GIFI),” online: <http://www.cra-arc
.gc.ca/tx/bsnss/tpcs/crprtns/rtrn/wht/gifi-ogrf/menu-eng.html>. Corporate financial statements.
L Kenway, “Accounting and Bookkeeping Checklists,” Bookkeeping-Essentials.com, online:
<http://www.bookkeeping-essentials.com/bookkeeping-checklist.html>. Select the “Year End
Accountant Checklist” link.
L Kenway, “Learn How to Read Your Internal Financial Reports,” Bookkeeping-Essentials.com, online:
<http://www.bookkeeping-essentials.com/accounting-training.html>. Select the “Balance sheet” and
“Income statement” links.
MaRS Discovery District, online: <http://www.marsdd.com/collections/accounting/financial-statements>.
See the following topics:
• “Accounting Mechanics: An Example of Financial Statements,” online: <http://www.marsdd.com/
mars-library/financial-statement-example>.
• “Reading a Financial Statement: The Balance Sheet (Assets, Liabilities and Equity),” online:
<http://www.marsdd.com/mars-library/reading-financial-statement-balance-sheet-assets-liabilities
-equity>.
• “Reading a Financial Statement: The Income Statement,” online: <http://www.marsdd.com/
mars-library/reading-financial-statement-income-statement>.
236
REVIEW QUESTIONS
True or False
1. Revenue and expenses are temporary accounts that reset to zero at the end of each fiscal year.
(LO2)
2. At closing, all temporary and permanent account balances are brought to zero. (LO2)
3. The post-closing trial balance includes only the permanent accounts: assets, liabilities, and
equity. (LO3)
4. To close the revenue accounts, you debit the revenue accounts. (LO2)
5. The income summary is a permanent account that is transferred to the opening balance in the
next fiscal period. (LO2)
6. To close the expense account, you debit the expense account. (LO2)
7. To close the income summary account, you transfer the ending balance to the capital account.
(LO2)
8. The ending balances on the general ledger and the post-closing trial balance become the
opening balances in the new fiscal period. (LO3)
9. At the close of the fiscal year, the general ledger accounts must be updated to reflect all
adjustments. (LO1)
10. The post-closing trial balance serves as a check to ensure that the ledger accounts are in bal-
ance. (LO3)
Short Answer
1. What happens to the drawings account at the end of the accounting cycle? (LO2)
2. What information does the general ledger report at the end of the accounting cycle? (LO1)
3. What are the four steps involved in closing the accounts at the end of the accounting cycle? (LO2)
4. Name two categories of accounts that are “permanent accounts.” (LO2)
5. Name three categories of accounts that are “temporary accounts.” (LO2)
PRACTICE EXERCISES
PRACTICE
EXCEL
Following are the adjustments and the financial statements for Ann Litigate for the period ended
December 31, 20**.
Dec. 31: Payment on account received (invoice #xx501, M. Arbor), $1,000.
Dec. 31: P
repaid professional insurance used up, $2,500 (one-year policy, from February of this year
until February of next year, valued at $3,000).
Dec. 31: Rent expense recognized (Magnum Office Managers), $1,200.
Dec. 31: Office supplies used up, $200.
237
LEGAL ACCOUNTING
Dec. 31: D
epreciation of computer equipment, $1,360/year based on the declining balance amortization
calculation

Income Statement
Income
Fees Earned $10,550
Expenses
Salaries Expense $1,000
Depreciation Expense 1,360
Rent Expense 1,200
Total Expenses 6,650
Net Income $3,900

Ann Litigate, Capital, December 1, 20** $12,500
Net Income for December $3,900
Less: Withdrawals for December 2,000
Increase in Capital 1,900
Ann Litigate, Capital, December 31, 20** $14,400
238

Balance Sheet
December 31, 20**
Assets
Current Assets
Office Supplies 600
Total Current Assets $38,460
Fixed Assets
Computer Equipment (Hardware) $6,800
Less: Accumulated Depreciation on Computer Equipment 1,360 5,440
Total Fixed Assets 5,440
Total Assets $43,900

Liabilities
Total Liabilities 29,500
Owner’s Equity
Ann Litigate, Capital 14,400
Total Liabilities and Owner’s Equity $43,900
239
LEGAL ACCOUNTING
a. Using the December 31 adjustments and the financial statements, record the appropriate adjust-
ing entries in Ann Litigate’s general journal. (LO1)
Ann Litigate, Paralegal GJ8
General Journal
Date
20**
Adjusting Entries
Dec. 31
240
b. Post the adjusting entries to the individual general ledger accounts for December 31, 20**. (LO1)
General Ledgers

Date
20**
Dec. 31 Opening balance December 1 ✓ Dr. 15,360

Date
20**

Date
20**

Date
20**
Prepaid Expense Account No. 128

Date
20**
Dec. 31 Opening balance December 1 (rent) ✓ Dr. 1,200

Date
20**
Dec. 31 Opening balance December 1 ✓ Dr. 800
241
LEGAL ACCOUNTING

Date
20**

Date
20**
Dec. 31 Opening balance December 1 ✓ 0

Date
20**
Dec. 31 Opening balance December 1 ✓ Cr. 6,500

Date
20**

Date
20**

Date
20**
242
Ann Litigate, Drawings Account No. 350

Date
20**

Date
20**

Date
20**
Dec. 31 Opening balance December 1 Cr. 10,550

Date
20**

Date
20**

Date
20**
243
LEGAL ACCOUNTING

Date
20**

Date
20**

Date
20**

Date
20**
c. In the same general journal, once the adjusting entries have been posted, prepare the closing
entries and post them to the general ledger. Use the same general journal and general ledgers
you used for parts (a) and (b). (LO2)
244
d. Using the general journal and general ledgers from parts (b) and (c), close the income summary
and drawings accounts to the Ann Litigate, Capital account. Then prepare the post-closing trial
balance. (LO3)
December 31, 20**
115 Trust Bank Account
120 Accounts Receivable
125 Prepaid Insurance
128 Prepaid Expense (Rent)
130 Office Supplies
155 Computer Equipment (Hardware)
156 Depreciation—Computer Equipment
200 Accounts Payable/General Liabilities
210 Credit Card Debt
215 Trust Funds Owed
300 Ann Litigate, Capital
Totals
245
LEGAL ACCOUNTING
PRACTICE
EXCEL
Below is the adjusted trial balance for ABC Legal Services for the period ended December 31, 20**.
ABC Legal Services

Adjusted Trial Balance
December 31, 20**
Prepaid Expense (Rent) 700
Office Supplies 150
Computer Equipment (Hardware) 4,750
Depreciation — Computer Equipment $950
Personal Loan 6,000
ABC, Capital 17,165
ABC, Drawings 5,000
Fees Earned 23,000
Expense Recovery 750
Salaries Expense 1,700
Depreciation Expense 950
Rent Expense 1,800
Total $89,390 $89,390
246
a. Using the worksheet provided, prepare the closing entries for December 31, 20**. (LO2)
ABC Legal Services GJ3
General Journal
Date
20**
Closing Entries
247
LEGAL ACCOUNTING
b. Using the worksheet provided, post to the general ledgers at December 31, 20**. (LO2)
ABC Legal Services
General Ledgers
at December 31, 20**

Date
20**
Dec. 31 Balance Forward ✓ Dr. 15,000

Date
20**

Date
20**

Date
20**
Dec. 31 Balance Forward ✓ Dr. 700
Prepaid Expense Account No. 128

Date
20**

Date
20**
248

Date
20**

Date
20**
Dec. 31 Balance Forward GJ3 Cr. 950

Date
20**
Dec. 31 Balance Forward ✓ Cr. 2,025

Date
20**

Date
20**

Date
20**
249
LEGAL ACCOUNTING
ABC Legal Services, Capital Account No. 300

Date
20**
ABC Legal Services, Drawings Account No. 350

Date
20**

Date
20**

Date
20**
Expense Recovery Account No. 410

Date
20**
Dec. 31 Balance Forward ✓ Cr. 750
250

Date
20**

Date
20**
Dec. 31 Balance Forward GJ3 Dr. 950

Date
20**
Dec. 31 Balance Forward GJ3 Dr. 2,500

Date
20**

Date
20**
Dec. 31 Balance Forward GJ3 Dr. 500
251
LEGAL ACCOUNTING

Date
20**
Dec. 31 Balance Forward GJ3 Dr. 1,800

Date
20**
c. Using the worksheet provided, prepare the post-closing trial balance. (LO3)
ABC Legal Services
December 31, 20**
252
Case Example: Year-End Financial Statements

Ann Litigate had a meeting with her accountant, who advised her that there were some discrep-
ancies in the information Ann provided. Consequently, the year-end financial statement will have
to be adjusted and revised.
1. What steps can Ann take to ensure that the accountant has all the relevant information
and that such information is accurate? Discuss. (LO1)
2. What are some common issues with financial statement preparation that Ann can avoid
next time? Discuss. (LO1)
253
10
Banking Procedures
and Accounting
for Cash
Petty Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
Banking Procedures and Handling of Money . . . . . . . . . . . . . . . . . . . . . . . . 259
Reconciling a Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
Reconciling the Mixed Trust Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . 266
Maintenance and Retention of General and Trust Records . . . . . . . . . . . . . 271
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
255
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Establish and replenish a petty cash fund.
LO2 Reconcile a general bank account.
LO3 Reconcile a trust bank account.
LO1 Petty Cash

Because paying for small purchases by cheque can be time-consuming, inconvenient, and
impractical, most businesses establish a fund for payment of incidental expenses. The petty
cash fund is used to pay for minor expenses, such as postage and office supplies, or to make
change if a client is paying with cash. The firm’s policy regarding the types of expenditures
that are acceptable for petty cash reimbursements should be clear and communicated to all
members of the firm.
The petty cash system is one example of cash controls that protect against loss, misuse, or
fraud in the handling of cash.1 It ensures that funds from petty cash will not be used inap-
propriately—for example, to pay for an employee’s lunch because he or she was short of
money that day.
Establishing a Petty Cash Account

You will need to establish an account called Petty Cash on the chart of accounts in the Cur-
rent Assets category. Justin Case has given it number 105, so it appears directly below account
100 (General Bank Account), and he will create a ledger in the general ledger called Petty
Cash to track the money going in and out of Petty Cash.
Use a general journal entry to establish the petty cash fund. Justin has decided it would be rea-
sonable to have a fund of $50. A cheque is issued from the general bank account and cashed for
the predetermined amount, and the cash is placed in a safe location, usually a petty cash box with
a lock on it. Figure 10.1 shows the general journal entry used to establish a petty cash fund.

General Journal
Date
Jan. 5 Petty Cash 105 50
To establish petty cash fund
FIGURE 10.1 General journal entry to establish fund
1 Law Society of Ontario, The Bookkeeping Guide for Paralegals, online: <https://lawsocietyontario
.azureedge.net/media/lso/media/legacy/pdf/p/paralegal_bookkeeping_guide_final-s.pdf> at 59-67.
256
CHAPTER 10 Banking Procedures and Accounting for Cash
Recording Petty Cash Entries

A system should be established requiring pre-numbered written requests (vouchers) sup-
ported by original receipts for items to be paid out of petty cash to any person.
The information from the vouchers can be transferred to an auxiliary petty cash record,
but that is not essential. It is sufficient to attach the purchase receipt to the petty cash voucher
and keep the vouchers in the petty cash box until entries are made in the general journal.
Figure 10.2 shows a sample voucher used for withdrawals from petty cash.
PETTY CASH
VOUCHER NO. 1
AMOUNT $4.80
DATE January 8, 20**
PAID TO Tom’s Office Supply
FOR Pens
DEBIT ACCT. ACCT.
NAME Office Supplies/General Expense NO. 535
APPROVED BY Judith Wells, Assistant

PAYMENT
RECEIVED BY Justin Case
FIGURE 10.2 Petty cash voucher

At all times, the amount of cash plus the total amount of the vouchers should equal the
total value of the fund, as shown in Figure 10.3.
Total paid out $4.80

Cash in petty cash box 45.20
Total petty cash fund $50.00
FIGURE 10.3 Balancing funds in a petty cash box
Replenishing a Petty Cash Account

In order to replenish the fund to bring the amount of petty cash back up to $50, Judith Wells,
who as Justin’s assistant is responsible for completing the petty cash vouchers, must record
the expenses in the general journal and post the entries to the correct account. If she does
not keep a record similar to the one in Figure 10.3, she will use the vouchers to create the gen-
eral journal entries. Once the entries are made, she will write a cheque payable to herself (or
to cash) for the total amount that was spent—in this case, $23.50—and summarize the
vouchers as shown in Figure 10.4. At the bank, she will cash the petty cash cheque and return
to the office and replenish the petty cash box back to $50.
257
LEGAL ACCOUNTING
Date
20** Description Account Receipts Paid Out Balance
Jan. 5 Establish Fund 105 50.00 50.00
9 Office Supplies/General Expense 535 4.80 45.20
20 Postage Expense 563 6.00 39.20
23 Maintenance and Repairs 532 8.20 31.00
(cleaning products)
30 Delivery Expense 550 4.50 26.50
Total Spent $23.50
30 Replenish Fund, Cheque #25 105 23.50 50.00
FIGURE 10.4 Petty cash record tracking expenses
If Judith finds that the fund is too small and needs to be replenished too often, she can
simply increase it by writing another cheque to increase the amount kept in petty cash. The
journal entry would be similar to the entry that was made establishing the fund. The balance
in the general ledger for petty cash usually remains constant at the amount at which the fund
has been established. Figure 10.5 shows the journal entries that were made to establish the
fund and then to replenish it.

General Journal
Date
Jan. 5 Petty Cash 105 50.00
General Bank Account 100 50.00
To establish petty cash fund
Jan. 30 Office Supplies/General Expense 535 4.80

Postage Expense 563 6.00
Maintenance and Repairs (cleaning products) 532 8.20
Delivery Expense 550 4.50
Petty Cash 105 23.50
To record payments from petty cash
Jan 30 Petty Cash 105 23.50
To replenish petty cash fund
FIGURE 10.5 General journal entries to establish and replenish petty cash fund
Cash Short and Over

A firm may use the petty cash or keep a separate float in the office for the purpose of making
change if a client pays with cash. This float will consist of coins and small bills, usually total-
ling between $25 and $200, depending on the size of the firm. If for some reason the cash in
the petty cash box does not equal the amount of the vouchers, the amount of cash short or
the amount by which the cash is over should be recorded in a general ledger account called
258
cash short and over. If the cash is short, the Cash Short and Over account is debited, like an
expense. If the cash is over, the Cash Short and Over account is credited.
Banking Procedures and

Handling of Money
In addition to complying with the requirements of the LSO for setting up trust accounts and
reporting to the LFO, certain internal cash controls should be in place to help run the prac-
tice more efficiently and to reduce the risk of errors and fraud.2
When a bank account is opened with a financial institution, the bank will require that a
signature card be filled in as a safeguard against forgery of cheques or other instruments.
The bank will provide a set of cheques and a deposit book containing deposit slips to be com-
pleted for banking transactions. It is a requirement to list each cheque that is being deposited,
as well as any cash, and indicate the source of the funds on the deposit slip. (See Figure 7.2
for a sample trust account deposit slip.) Deposits to the general bank account will include
similar information. When the deposit is made, the person making the deposit and the bank
teller will initial the deposit slip, and the teller will stamp the copy of the deposit slip as proof
of the transaction. When using an automated teller to make deposits, you should be aware of
all the bank’s terms and the risks involved in using an ATM. Make sure a receipt of the
deposit is attached to the firm’s deposit book.
Withdrawals are allowed from an ATM for the general bank account, but not for trust
accounts. Ensure that the signature card for the trust account has been encoded for deposits
only by your financial institution.
Debit and credit cards can be used to pay for general office expenses. If a debit card is
used, the amount will be deducted directly from the firm’s bank account. It is important to
keep receipts for any credit or debit card payments because the bank or credit card statements
are not sufficient evidence of purchases for tax purposes.
Cheque Endorsement
Endorsement refers to the signing or stamping of a cheque prior to depositing it. Cheques
must be endorsed or signed by the person to whom the cheque is made payable before they
can be deposited. Three common types of endorsement are as follows:
• Blank endorsement: Once the back of the cheque is signed by the person to whom it was
made payable, it can be further endorsed and cashed by anyone else. This type of endorse-
ment can be unsafe because anyone who gets a hold of a blank endorsed cheque could sign
the back and cash it. Very few banking institutions will allow blank endorsement.
• Full endorsement: The person signing the back of the cheque indicates to whom the
cheque may be made payable. For example, a cheque made payable to Justin Case could
be endorsed by him, “Pay to the order of Judith Wells,” at which point Judith would be
entitled to cash the cheque. Very few banking institutions will allow full endorsement.
• Restrictive endorsement: This type of endorsement is the usual method used in law
firms. It specifies that the cheque must be deposited to the firm’s bank account. A
stamp for endorsement purposes is often provided when a business bank account is
first opened. If a stamp is not used, you will be required to endorse the back of the
cheque with the account number to which the cheque is being deposited.
2 Ibid.
259
LEGAL ACCOUNTING
Deposit to the Credit of

JUSTIN CASE
R#20552-004 ACC #0216-520634
FIGURE 10.6 Endorsement using stamp
Cheques
Handwritten business cheques often come in a binder with a stub attached, which is used to
keep track of the deposits made to the account, the cheques written, and the bank balance.
The cheque stubs can be used to create journal entries. Terms that are encountered with
regard to cheques include the following:
• Drawer: The person writing the cheque (sometimes referred to as the payor).
• Drawee: The financial institution on which the cheque is drawn.
• Payee: The person to whom the cheque is written.
Many firms use accounting software that simultaneously produces cheques when a bill is
being paid, records the payment in the proper journal, and then posts the amount to the cor-
rect ledger accounts. This type of software is a great time saver and a useful tool for keeping
all records current. Printable cheques can be purchased to print directly from the accounting
software.
LO2 Reconciling a Bank Account

Reconciliation is the process used to compare the bank statement balance with the balance
in the bank shown in the firm’s general ledger. Each month the firm will receive a bank state-
ment for each of its bank accounts, showing the following information:
• the balance at the beginning of the month;
• all deposits that have been received in the account;
• all cheques that have been cleared through the account (cancelled cheques);
• all bank charges for the account; and
• the balance at the end of the month.
Banks no longer return cancelled cheques with the bank statement. Instead, for a fee,
a scanned copy of the front and back of cheques is provided with the bank statement. The
scanned copies show the particulars of when and where a cheque was cashed and by whom.
How to Reconcile the General and

Trust Bank Balances
Although there is no formal requirement to reconcile a firm’s general operating account with
the bank statement, it is good business practice to ensure that the bank records and the
accounting records agree.
When reconciling a bank balance, the following discrepancies should be looked for:
• A deposit in transit is one that appears on the firm’s general ledger but does not appear
on the bank statement. This can happen if the deposit was entered in the firm’s books
260
but not taken to the bank until the next day (on the day after the cut-off date for the
bank statement).
• An outstanding cheque is one written by the firm that is not shown on the bank state-
ment because it has not been cashed by the payee. Because it was not presented to the
bank for payment, the bank does not show it on the statement; however, it has been
deducted (credited) from the bank general ledger record.
• Bank service charges often vary from month to month and need to be recorded in the
firm’s books once the amount is determined.
• An NSF cheque is one that was deposited but did not go through because there were
insufficient funds in the account of the drawer (typically a client). When this happens,
the bank notifies the firm by sending a debit memorandum indicating that the deposit
has been reversed. There are usually bank service charges associated with any returned
cheques. The firm could also have one of its own cheques returned if there were insuf-
ficient funds in the bank account to cover it when it was presented for payment. NSF
cheques are sometimes referred to as bounced cheques. The service charges for writ-
ing a bad cheque are substantial, sometimes as much as $25 for a single bounced
cheque.
EX AMPLE 1
The ending bank balance as shown on the general bank STEP 3
statement for Justin’s firm at the end of November is
Insert the bank balance at the end of the month from
$5,414.31. However, the general ledger shows a balance
the bank statement on the “Balance per Bank State-
of $5,366.91 at the end of November, a difference of
ment” line and place the balance from the general led-
$47.40. The goal is to find out why there is a difference
ger account on the “Balance per General Bank Account
and to make any corrections needed.
Ledger” line near the bottom of the form.
Financial institutions have their own format for pre-
paring bank statements, but the information contained
is similar for all banks. Figure 10.7 shows the general STEP 4
bank statement received by Justin Case for the month Compare all of the cancelled cheques (those that have
of November. been cashed at the bank) on the bank statement, not-
ing whether there are any discrepancies in the amounts
shown on the bank statement and on the cheque
STEP 1 images. Compare the cheques shown on the bank
Complete the form on the back of the bank statement if statement and those shown in the general disburse-
there is one, or use a form designed by the firm for the ments journal. Place a check mark next to the cheque
purpose of reconciling the bank statements. The com- amount on the bank statement and a check mark next
pleted form used for reconciling a general bank to the corresponding amount in the general disburse-
account is shown in Figure 10.8. This form demon- ments journal. Any cheques that are not checked off in
strates the reconciliation of Justin’s general bank bal- the disbursements journal are outstanding.
ance for the month of November.
STEP 2
Fill in the date of reconciliation at the top of the form,
in Justin’s case, November 30, 20**.
261
262
ROYAL BANK OF MONEY GENERAL BANK RECONCILIATION
P.O. Box 5011, Station A General Bank Account Statement as at November 30, 20**
Montreal, QC H3C 3B8
GENERAL BANK ACCOUNT
Justin Case, Paralegal November 1, 20** to November 30, 20** Balance per Bank Statement 5,414.31
LEGAL ACCOUNTING
135 Main Street

Yourtown, Ontario K3P 1G9 Account number: 0216-520634 Less: Outstanding Cheques (See list below) –113.00
Plus: Outstanding Deposits 50.00

ACCOUNT SUMMARY FOR THIS PERIOD
Plus/Minus Bank Error 0.60
Opening Balance on Nov. 1, 20** $5,600.00
Total Deposits and Credits + $1,272.00 Reconciled General Bank Balance at November 30, 20** 5,351.91
Total Cheques and Debits – $1,457.69
Closing Balance on Nov. 30, 20** = $5,414.31 Outstanding Cheques
Cheque Number Date Amount
ACCOUNT ACTIVITY DETAILS #7 Nov. 6 22.60
Cheques and Deposits #8 Nov. 15 90.40
Date Description Debits and Credits Balance
Nov. 01 Opening Balance 5,600.00
Nov. 02 Chq. #4 339.00 ✓ 5,261.00
Nov. 12 Deposit 700.00 ✓ 5,961.00
Nov. 14 Chq. #5 303.69 ✓ 5,657.31 Total Outstanding Cheques 113.00
Nov. 15 Deposit 300.00 ✓ 5,957.31
BALANCE PER BOOKS
Nov. 15 Bank Charges 15.00 o/s 5,942.31
Balance per General Bank Account Ledger 5,366.91
Nov. 22 Deposit 272.00* 6,214.31
Add: Deposits by Bank Not Shown in Books
Nov. 22 Chq. #6 800.00 ✓ 5,414.31
Deduct: Bank Charges –15.00

Bank Errors
Closing Balance 5,414.31
NSF Cheque
Please check this Account Statement without delay and advise us of any error or omission within 45 days of the statement date.
Adjusted Balance per Books at November 30, 20** 5,351.91
Royal Bank of Money GST Registration Number: R1052481028
* Bank error; should be 272.60.

FIGURE 10.8 General bank reconciliation
FIGURE 10.7 General bank statement
Justin Case, Paralegal GDJ1

General Client’s HST General
Date Method/ Paid To/Particulars Ledger General Paid Bank
20** Ref. # Client/RE PR Acct. Dr. Ledger Dr. Dr. Account Cr.
Nov. 1 chq #4 Lucky Landlord, Rent Exp. 538 300.00 39.00 339.00 ✓
4 chq #5 LSO re dues Oct. – Dec. 534 268.75 34.94 303.69 ✓
5 chq #6 J. Case, Drawings 350 800.00 800.00 ✓
6 chq #7 Quick Courier, Zimmer re Courier Exp. 4 20.00 2.60 22.60
15 chq #8 Unitel re Telephone Exp. 565 80.00 10.40 90.40
30 Totals 1,448.75 20.00 86.94 1,555.69
FIGURE 10.9 General disbursements journal checked off
STEP 5 STEP 9
Prepare a list of outstanding cheques. List these Outstanding deposits: Compare the total amount of the
amounts on the bank reconciliation form in the “Out- deposits on the bank statement to the total deposits
standing Cheques” section. Sum the outstanding shown in the general ledger for the month (Figure 10.11).
cheques and place the total on the “Less: Outstanding In Justin’s situation, there was a deposit of $50 made
Cheques” line as shown in Figure 10.8. using the general journal on November 21 that does not
appear on the bank statement. Enter the amount of the
outstanding deposits on the “Plus: Outstanding Depos-
STEP 6 its” line on the bank reconciliation form. Add additional
Look for any amounts in the Cheques and Debits col- lines if there is more than one deposit outstanding.
umn of the bank statement that did not appear in the
general disbursements journal. Deduct the amount in
the “Balance per Books” section of the bank reconcilia- STEP 10
tion. Add lines as required. These are items that are not Bank errors: These are relatively rare but do occur occa-
yet recorded in the firm’s accounting records. sionally. Typical bank errors include an entry being
made to another customer’s account or incorrectly
recording the amount of a deposit or cheque. Notify the
STEP 7 bank if it has made an error and the bank will correct it.
Check to see if there were any cheques outstanding In Justin’s case, a bank error can be noted in the depos-
from the previous month that have still not cleared the its entered on the bank statement. The records of the
bank. In Justin’s case, there are none. If there were any, firm show a deposit for $272.60 on November 22 (see
you would add those cheques to the outstanding list Figure 10.10), but the bank recorded the amount as
because they are still outstanding. You might also $272.00. The bank account is understated by $0.60, so
choose to do a follow-up at that point to see why the the bank must add this amount to the bank balance.
cheques had not been cashed. When this occurs, the bank should be contacted and
asked to make the correction, and a bank memo
STEP 8 requested to confirm the correction. Place the amount
on the “Plus/Minus Bank Error” line.
Using the deposit book for the general bank account
(see Figure 10.10), compare all deposits on the bank
statement with those in the deposit book, checking off STEP 11
each item and noting any discrepancies in the amounts. Calculate the reconciled bank balance. In Justin’s case, a
total of $5,351.91 will be arrived at.
263
264
CURRENT ACCOUNT DEPOSIT SLIP
DATE INITIALS LIST OF CHEQUES DEPOSIT SUMMARY
12 11 ** JC RW CHEQUE IDENTIFICATION
DD MM YR Depositor Tellers NAME CHEQUE REF. # AMOUNT
LEGAL ACCOUNTING
CASH COUNT COIN 1 Howes Tr. Chq. #4 File No. 1 700.00 Visa Vouchers
X5 2
X 10 3 Cash Subtotal
X 20 4
X 50 5 Cheque Subtotal 700.00
X 100
Cash Subtotal $ Cheque Subtotal $ 700.00 Deposit Total $ 700.00 ✓
R#20552-004 ACC #216-520634 CREDIT ACCOUNT OF JUSTIN CASE, PARALEGAL

CASH COUNT COIN 1 Jones Tr. Chq. # 5 File No. 2 300.00 Visa Vouchers
X5 2
X 10 3 Cash Subtotal
X 20 4
X 50 5 Cheque Subtotal 300.00

X 100
Cash Subtotal $ Cheque Subtotal $ 300.00 Deposit Total $ 300.00 ✓
FIGURE 10.10 Deposit slips for general bank account (continued on next page)
CASH COUNT COIN 2.60 1 Visa Vouchers
Zimmer X5 2
No. 4 7 X 10 70.00 3 Cash Subtotal 272.60
X 20 4
2 X 50 100.00 5 Cheque Subtotal
1 X 100 100.00
Cash Subtotal $ 272.60 Cheque Subtotal $ Deposit Total $ 272.60 ✓

CHAPTER 10
CASH COUNT COIN 1 Visa Vouchers

Crozier X5 2
No. 5 1 X 10 10.00 3 Cash Subtotal 50.00
2 X 20 40.00 4
X 50 5 Cheque Subtotal
X 100
Cash Subtotal $ 50.00 Cheque Subtotal $ Deposit Total $ 50.00 o/s
FIGURE 10.10 Deposit slips for general bank account (concluded)

Banking Procedures and Accounting for Cash
265
LEGAL ACCOUNTING

Date
Oct. 30 GJ2 500.00 Dr. 5,600.00
Nov. 21 GJ3 50.00 Dr. 5,650.00
30 Totals from General Receipts Journal GRJ1 1,272.60 Dr. 6,922.60
30 Totals from General Disbursements Journal GDJ1 1,555.69 Dr. 5,366.91
FIGURE 10.11 General bank account ledger sheet
STEP 12 journal entry must be created and posted to the general

ledger. The journal entry that would be made is shown
The line indicating the adjusted balance per books at
in Figure 10.12.
the end of the month must equal the reconciled general
bank balance at the end of the month.
STEP 14
STEP 13 Any credits made to the account by the bank should also
be recorded. For example, if the bank had paid interest
Bank charges or credits: The bank statement should be
on the account, it would need to be entered. In Justin’s
looked at to determine whether there are any bank
case, there weren’t any credits.
charges that have not been recorded in the records.
Note that there is a bank charge of $15. This amount
must be deducted from the balance in the general led- STEP 15
ger to arrive at the correct bank balance. Deduct $15 on Compute the adjusted balance at the bottom of the form
the bank charges line. Because these bank charges per the firm’s books. This amount should equal the rec-
were not recorded in the books of the firm, a general onciled general bank balance shown in Figure 10.8.

Date
Nov. 30 Bank Charges and Credit Card Expense 507 15.00
To record bank charges for November
FIGURE 10.12 General journal entry to record bank charges
LO3 Reconciling the Mixed Trust Bank Account

Chapter 7 discussed how to enter data into the trust bank journal and post to the client trust
and general ledgers. The individual doing the bookkeeping will need to have the bank state-
ment and these records on hand when preparing the bank reconciliation statement for a
mixed trust account.
266
By-law 9, part V, section 18(8) of the LSO requires that the monthly bank reconciliation
statement be accompanied by a monthly trust comparison showing the amount of money
held in trust for each client. This is done by preparing:
• a reconciliation of the trust bank balance; and
• a detailed listing showing the amount of money held in trust for each client and iden-
tifying each client for whom money is held in trust.
By-law 9, part V, section 22(2) requires that the trust bank reconciliation and trust compar-
ison be completed by the 25th day of the following month for all trust funds held. The bank
statement for the previous month is usually sent out before the end of the second week of the
following month or is available earlier using online banking, so the 25th gives an individual
plenty of time to prepare the reconciliation (see Figure 10.13). Any discrepancies discovered
in the trust account records should be corrected as soon as they are discovered. Any bank or
posting errors should be corrected before the month-end.
Bear in mind that each trust bank account operated by the firm, including interest-
bearing accounts, GICs, and term deposits, must be reconciled every month—even if there
was no activity in the account for a particular month.
October 1 to
October 30 } Transactions occur
November 10 Bank statement received for previous month
November 25 Deadline for preparation of bank reconciliation for month of October
November 30 Correcting entries made before end of month
FIGURE 10.13 Timeline for mixed trust bank reconciliation

The process followed to complete the trust bank reconciliation statement is similar to rec-
onciling the general bank account, but with a few added steps.
EX AMPLE 2
STEP 1 journal in the accounting records or deposit book.
Check off all cheques that cleared the bank in the rec-
Compare the cheque images of the cancelled cheques
ords (we have used the trust bank journal; see Fig-
with the entries shown on the trust bank statement (Fig-
ure 10.15) and on the trust bank account statement
ure 10.14) and note any discrepancies in the amounts
(Figure 10.14). List any outstanding cheques, including
shown. Verify whether the error was made by the bank
the cheque number, date of issue, and amount on the
or by the firm and make any necessary corrections.
bank reconciliation, and then place the total on the
“Less: Outstanding Cheques” line (Figure 10.17).
STEP 2
Outstanding cheques: Compare the cheque entries on
the trust bank statement with those in the trust bank
267
LEGAL ACCOUNTING
ROYAL BANK OF MONEY

P.O. Box 5011, Station A Trust Bank Account Statement
Justin Case, Paralegal, Trust October 1, 20** to October 31, 20**

135 Main Street
Yourtown, Ontario K3P 1G9 Account number: 0216-520635

Opening Balance on Oct. 1, 20** $0.00
Total Deposits and Credits + $4,100.00
Total Cheques and Debits – $2,820.00
Closing Balance on Oct. 31, 20** = $1,280.00
ACCOUNT ACTIVITY DETAILS

Date Description Cheques Deposits Balance
and Debits and Credits
Oct. 03 Deposit 1,600.00 ✓ 1,600.00
Oct. 08 Chq. #1 20.00 ✓ 1,580.00
Oct. 16 Deposit 2,500.00 ✓ 4,080.00
Oct. 30 Chq. #2 2,500.00 ✓ 1,580.00
FIGURE 10.14 Trust bank account statement

Trust Bank Journal
20** Paid To No. Client/Description Payment Dr. Cr.
Oct. 2 Rec. Cliff Howes 1 Cliff Howes/Retainer Money Order 1,000 ✓
3 Pd. Deliveries Inc. 1 Cliff Howes/Courier Chq. #1 20 ✓
3 Rec. Frank Jones 2 Frank Jones/Retainer Credit Card $500 600 ✓
Cash $100
15 Rec. James Settlor 1 Cliff Howes/Settlement Bank Draft 2,500 ✓
16 Pd. Cliff Howes 1 Cliff Howes/Settlement Chq. #2 2,500 ✓
20 Pd. Minister of Finance 2 Jones/Payment of Fine Chq. #3 300 o/s
31 Totals 4,100 2,820

(115) (115)
FIGURE 10.15 Trust bank journal
268

October 31, 20**
File No. Account Last Activity Date Balance Owed
1 HOWES, Cliff re Small Claims Court Oct. 15 980.00
2 JONES, Frank re Highway Traffic Act Oct. 9 300.00
Total Owed to Clients 1,280.00
FIGURE 10.16 Client trust listing
STEP 3 STEP 6
Outstanding deposits: Compare the entries on the bank Client trust listing:
statement with the entries in the trust bank journal or • Prepare a list of client balances from the client trust
the deposit book for the trust bank account. Check off ledgers, identifying the clients for whom funds are
all corresponding deposits on the trust bank statement held in trust at the end of the previous month.
and trust bank journal, noting any discrepancies in the
• List the client names with the balance in the trust
amounts. Note that in this example, the deposit $1,600
accounts, including the last activity date, to help
is shown as two entries in the trust bank journal but as
monitor inactive or dormant accounts.
one amount on the trust bank account statement. Any
deposits for the previous month that are not recorded • Total the client trust listing as shown in Figure
on the bank statement should be listed by date and 10.16. Enter the information from the client trust
amount. Enter the total amount of the outstanding listing in the “Client Trust Listing” section, as
deposits on the “Plus: Outstanding Deposits” line on shown in Figure 10.17.
the trust bank account reconciliation (Figure 10.17).
STEP 7
STEP 4 Trust comparison: Compare the reconciled trust bank
List any bank errors and/or posting errors individually balance (Figure 10.17) with the client trust listing total
by date of occurrence and provide a brief explanation. A (Figure 10.16). The two amounts should be equal. If the
copy of any supporting documentation, such as a bank amounts are not the same, the discrepancy must be
memo, should be attached to the reconciliation. found and corrected immediately.
STEP 5
Calculate the reconciled mixed trust balance on the
bank reconciliation form. Enter this amount on the
“Reconciled Mixed Trust Balance” line.
269
LEGAL ACCOUNTING

TRUST BANK RECONCILIATION
as at October 31, 20**
TRUST BANK ACCOUNT
Balance per Bank Statement 1,580
Less: Outstanding Cheques (See list below) 300
Plus: Outstanding Deposits

List:
Plus/Minus Bank Error
Reconciled Mixed Trust Balance at October 31, 20** 1,280
Outstanding Cheques
Cheque Date Amount
Number
Chq. #3 Oct. 20, 20** 300
Total Outstanding Cheques 300
CLIENT TRUST LISTING

(from clients’ trust ledger balances)
File Name Last Activity Date Amount

1. HOWES, Cliff re Small Claims Court Oct. 15, 20** 980
2. JONES, Frank re Highway Traffic Act Oct. 9, 20** 300
Total Trust Liabilities to Clients at October 31, 20** 1,280
TRUST COMPARISON
Reconciled Trust Bank Balance 1,280

Total of unexpected balances per client’s trust ledger 1,280
FIGURE 10.17 Trust bank account reconciliation
• Potential pitfall: Not reconciling the trust bank account monthly.

PARALEGAL
POTENTIAL
• Possible fallout: Client money could be spent inappropriately; shortfalls in

PITFALLS
trust may go unnoticed; paralegals could get in trouble with the LSO for not
completing bank reconciliations.
• Proposed recommendation: Reconcile trust accounts monthly, get help from
an accountant if needed, and resolve any reconciliation differences immedi-
ately upon discovery.
270
Reviewing the Trust Bank Reconciliation

When reviewing the monthly trust comparisons, the paralegal should:
• Ensure that the bank reconciliations are prepared before the 25th of the following
month.
• List items that were reconciled, giving a clear explanation that can be traced to the
bank statement. It is a requirement to provide this information to the LSO when the
firm’s annual report is filed.
• If there are any cheques that have remained uncashed for more than two months, fol-
low up to see why they were not cashed. It might be necessary to put a stop payment on
a cheque if it has been lost, and a replacement cheque will then need to be prepared.
• If a cheque is stale-dated (more than six months old), a stop payment should be placed
on it. If this is done, a reversing entry will be required to place the funds back in the
client’s trust ledger account. It is necessary to inquire as to why the cheque was not
cashed and provide a replacement cheque, if necessary.
• Ensure that the balance in each client’s trust ledger is correct. If an amount was
entered in the wrong client’s account, this will not be revealed by the bank reconcilia-
tion process. The paralegal reviewing the client listing should notice if an amount
shown on a client’s trust ledger appears to be incorrect.
• Once work on a file has been finished, an invoice should be sent to the client. If funds
remain in trust, a refund should also be sent.
• If the bank is taking bank charges out of the trust account, make sure that the bank is
contacted and an arrangement is made for all bank charges to be taken out of the gen-
eral bank account, as required by the LSO.
Maintenance and Retention of

General and Trust Records
The financial records required to be maintained for general and trust accounts may be
entered and posted by hand or electronic means, but if the records are entered and posted by
hand, this should be done in ink.3 If electronic records are maintained, a licensee must
ensure that a paper copy of the record can be produced promptly on the LSO’s request.4 If rec-
ords are kept electronically, it is important to back them up frequently in case of a computer
crash. By-law 9 also requires that trust financial records be entered and posted so that they
are current at all times.5
General Bank Records

The financial records required by the LSO related to general bank accounts must be kept for
at least six years plus the current year.6 These records include the fees book, general receipts
and disbursements journals, general ledgers, and all related bank records such as passbooks,
3 By-law 9, part V, s 21(1).

4 Ibid, s 21(2).
5 Ibid, s 22(1).
6 Ibid, s 23(1).
271
LEGAL ACCOUNTING
cancelled cheques, trust transfer journals, and bank reconciliations. If money is received in
cash, a book of duplicate receipts must be kept for the most recent six full years plus the cur-
rent year.
Trust Bank Records

The financial records related to trust accounts required by the LSO must be kept for ten years
plus the current year.7 These records include the trust bank journal, the monthly trust recon-
ciliation, valuable property record, and all bank passbooks, cashed cheques, signed electronic
trust transfer requisitions, and printed confirmations of electronic transfers.
Dormant Accounts
Dormant accounts are funds held in trust on behalf of a client that are unclaimed. Perhaps a
client paid a retainer and then disappeared, and you have been unable to contact her over a
period of two years. Section 59.6 of the Law Society Act permits a licensee to apply for permis-
sion to transfer such funds to the LSO if the client cannot be located despite reasonable
efforts after two years, or if the lawyer or licensed paralegal is unable to determine who is en-
titled to the money. The procedure for transferring such moneys to the LSO is set out in by-
law 10.
Documentation for a CRA Audit

TA X TIP
Regardless of whether a paralegal’s business is organized as a sole proprietorship,

partnership, or corporation, there is a high likelihood that it will be audited by the
CRA at some point.
The CRA auditor can examine books and records, documents, previous tax
returns, and business records including ledgers, journals, invoices, receipts, con-
tracts, and bank statements with bank reconciliations. Personal records such as
bank statements, mortgage documents, and credit card statements, as well as
personal or business records of a spouse or family member, may be included.
Adjustments made by the bookkeeper or accountant to arrive at income for tax
purposes can also be reviewed.
7 Ibid.
272
CHAPTER SUMMARY
The objective of this chapter has been to outline the obligations of a licensee with respect to reviewing the
accounting records at the end of each month to ensure that the requirements of the LSO are being met.
Reconciling the general bank account promptly each month is part of the month-end process before com-
pleting your financial statements. If the duties of operating and maintaining bank accounts are delegated
to others, the reconciliation will enable the licensee to evaluate whether tasks are being performed cor-
rectly and in compliance with LSO rules. Any errors or differences identified by the reconciliation may alert
you to a need for greater supervision of employees who may need additional training.
KEY TERMS
cash controls, 256 outstanding cheque, 261
cash short and over, 259 payee, 260
deposit in transit, 260 payor, 260
dormant accounts, 272 petty cash, 256
drawee, 260 reconciliation, 260
drawer, 260 service charges, 261
endorsement, 259 signature card, 259
NSF cheque, 261 trust comparison, 267
FURTHER READING
Canadian Bankers Association (CBA), “Cheques—What You Need to Know,” online: <https://www.cba.ca/
cheques-what-you-need-to-know>. See the section “Cheque Cashed by a Different Individual
(Counter-Signed Cheques).” The CBA advises consumers to “check with your financial institution to
find out if counter-signed cheques are accepted.”
Law Society of Ontario, “Reconciling a Trust Account,” online: <https://lso.ca/lawyers/practice-supports
-and-resources/topics/managing-money/trust-accounts/reconciling-a-trust-account>.
Law Society of Ontario, The Bookkeeping Guide for Paralegals (Toronto: LSO, February 2014) at 70-71
(“Monthly Financial Review Checklist”), online: <https://lawsocietyontario.azureedge.net/media/lso/
media/legacy/pdf/p/paralegal_bookkeeping_guide_final-s.pdf>.
273
LEGAL ACCOUNTING
REVIEW QUESTIONS
True or False
1. By-law 9 of the LSO requires that the general bank ledger be reconciled by the 25th day of the
following month after the date of the bank statement. (LO3)
2. The petty cash account balance is changed only when establishing, increasing, or decreasing
the petty cash balance limit. (LO2)
3. Outstanding cheques are added to the bank statement balance. (LO2)
4. “Deposit to the Credit of” is an example of a full endorsement. (LO1)
5. Deposits in transit are added to the bank statement balance. (LO2)
6. Adjustments to the bank statement balance require an adjustment entry in the general jour-
nal. (LO2, LO3)
7. After preparing the trust bank reconciliation, any bank or posting errors should be corrected
before the end of the month in which the most recent bank statement is received. (LO3)
8. The ending balances on the general bank ledger or trust bank ledger must equal the ending
bank statement reconciled balance in order for the records to be reconciled. (LO2, LO3)
9. Petty cash is an expense account reflected on the income statement. (LO1)
10. The value of the petty cash account is equal to the petty cash voucher total and the remaining
cash balance in the petty cash box. (LO1)
Short Answer
1. Discuss the following statement: “It is important to keep receipts for any credit or debit card
payments.” (LO2)
2. What are some of the goals of internal controls for a business? What are some key considerations
for paralegals? (See Law Society of Ontario, The Bookkeeping Guide for Paralegals, in Further
Reading.) (LO2)
3. What are the record-keeping requirements for general bank account records and trust bank
account records, as set out in by-law 9? For how long must the records be kept? (LO3)
4. What are the seven steps involved in reconciling the trust bank account against the trust bank
ledger? (LO3)
274
PRACTICE EXERCISES
PRACTICE
EXCEL
Practice Exercise 10.1 (LO1)
Ann Litigate advises her administrative assistant to establish a petty cash fund with a limit of $150 for
minor and day-to-day expenses. Ann also advises the administrative assistant that, as custodian of the
petty cash fund, she is to replenish the petty cash on a monthly basis.
a. Prepare the general journal entry to show the establishment of the account (January 1, 20**).
b. Based on the following petty cash expenses for the month, prepare the petty cash record tracking
expenses:
Jan. 6 Courier charges, Voucher #1 ($15)
Jan. 10 Postage, Voucher #2 ($10.65)
Jan. 12 Parking, Voucher #3 ($12.75)
Jan. 17 Office supplies, miscellaneous, Voucher #4 ($33.50)
Jan. 23 Courier charges, Voucher #5 ($18)
Jan. 27 Postage, Voucher #6 ($10.65)
Jan. 30 Parking, Voucher #7 ($12.75)
c. Prepare the journal entries showing the expenses from the petty cash record tracking expenses
and the replenishment of the petty cash fund (January 31, 20**).
General Journal
Date
20**
Check and Balance Petty Cash Fund

HINT
The amount of cash on hand plus the amount of all petty cash vouchers is
equal to the total value of the fund.
Total paid out $113.30

Cash in petty cash box 36.70
Total petty cash fund $150.00
PRACTICE
EXCEL
Review and compare Ann Litigate’s general bank account ledger for January 20** and the general bank
statement for the month-end January 31.
a. Record and note any differences and discrepancies.
b. Prepare the bank reconciliation using the worksheet provided.
c. Prepare adjusting journal entries in the general journal in respect of any corrections.
275
LEGAL ACCOUNTING

Date Dr./
20** Explanation PR Debit Credit Cr. Balance
Jan. 1 Opening Balance GJ2 Dr. 6,300.00
1 Cheque #11 GJ2 1,500.00 Dr. 4,800.00
20 Transfer from Trust re Invoice #14-201 GJ2 800.00 Dr. 5,600.00
30 Cheque #12 GJ2 1,300.00 Dr. 4,300.00
31 Cheque #13 GJ2 118.73 Dr. 4,181.27
31 Cheque #14 GJ2 450.00 Dr. 3,731.27
Bank Statement (General Bank Account)

11 Any Street, Ottawa, ON K1A 0B0
ABC Bank
1000 Front St.
Ottawa, ON
Jan. 1 – Jan. 31, 20**
Date Description Reference Debit Credit Balance
December 31, 20** Balance Forward Cr. $6,300.00
January 1, 20** Cheque #11 200 1,500.00 Cr. $4,800.00
January 3, 20** Deposit—Cheque 121 1,000.00 Cr. $5,800.00
January 19, 20** ATM W/D 004430 11.50 Cr. $5,788.50
January 20, 20** TFR FR 10002 JXY01 800.00 Cr. $6,588.50
January 30, 20** Cheque #12 203 1,300.00 Cr. $5,288.50
January 31, 20** Service Charge 23.00 Cr. $5,265.50
Total Debits and $2,834.50 $1,800.00

Credits
Closing Balance $5,265.50
Note re bank statement: Debit (Withdrawal); Credit (Deposit)
276

GENERAL BANK RECONCILIATION
as at January 31, 20**
GENERAL BANK ACCOUNT

Balance per Bank Statement
Less: Outstanding Cheques (See list below)
Reconciled General Bank Balance at January 31, 20**
Outstanding Cheques
Total Outstanding Cheques
BALANCE PER BOOKS
Balance per General Bank Account Ledger
Deduct: Bank Charges
ATM Withdrawals
Bank Errors
NSF Cheque
Adjusted Balance per Books at January 31, 20**

General Journal
Date
20**
277
LEGAL ACCOUNTING
PRACTICE
EXCEL
Review and compare Ann Litigate’s trust bank account ledger for January 20** and the trust bank state-
ment for the month-end January 31.
a. Record and note any differences and discrepancies. Note that an error was made by the book-
keeper when cheque #0138 was entered. The amount should have been entered as $280 instead
of $260. This has resulted in a $20 overdraft in the B. Saul Client Trust Ledger Account. In addi-
tion, remember that the service charge should not be deducted from the trust account. The bank
will need to be asked to reverse this entry. The error needs to be reconciled and the bank needs to
be contacted to correct the account for bank charges.
b. Prepare the bank reconciliation using the worksheet provided.
c. Compare the reconciled trust bank balance with the client trust listing total.
d. Prepare the adjusting journal entry in the trust bank journal provided in respect of any corrections.

Date Dr./
20** Explanation PR Debit Credit Cr. Balance
Jan. 1 Opening Balance TJ2 Dr. 10,000.00
1 Retainer Received— TJ2 1,500.00 Dr. 11,500.00
A. Paulo, Cheque #11225
3 Refund to Client from Trust— TJ2 260.00 Dr. 11,240.00
B. Saul, Cheque #0138
20 Transfer from Trust re Invoice #14-201 TJ2 800.00 Dr. 10,440.00
30 Retainer Received— TJ2 2,000.00 Dr. 12,440.00

C. Charles, Cheque #002
Bank Statement (Trust Bank Account)

11 Any Street, Ottawa, ON K1A 0B0
ABC Bank
1000 Front St.
Ottawa, ON
Jan. 1 – Jan. 31, 20**
Date Description Reference Debit Credit Balance
December 31, 20** Balance Forward Cr. $10,000.00
January 1, 20** Deposit—Cheque 11225 1,500.00 Cr. $11,500.00
January 3, 20** Cheque 0138 280.00 Cr. $11,220.00

January 20, 20** TFR FR 10002 JXY01 800.00 Cr. $10,420.00
January 31, 20** Service Charge 23.00 Cr. $10,397.00
Total Debits and Credits $1,103.00 $1,500.00

Closing Balance $10,417.00
Note re bank statement: Debit (Withdrawal); Credit (Deposit)

278

TRUST BANK RECONCILIATION
as at January 31, 20**
TRUST BANK ACCOUNT

Balance per Bank Statement
Less: Outstanding Cheques (See list below)
Reconciled Mixed Trust Balance at January 31, 20**
Outstanding Cheques
Total Outstanding Cheques
BALANCE PER BOOKS
Balance per Trust Bank Account Ledger
Deduct: Bank Charges
Bank Errors
NSF Cheque
Adjustments
Chq. #0138 January 3, 20**
Incorrect Entry per Books
Correct Entry per Bank Statement
Add to Trust Bank Ledger
Adjusted Balance per Books at January 31, 20**
279
LEGAL ACCOUNTING

List of Balances, Trust Funds Owed
January 31, 20**
File No./Account Name Last Activity Date Balance Owed
File No. 101, Moore, C. Nov. 15, 20** 2,100.00
File No. 102, Abernathy, L. Dec. 1, 20** 1,700.00
File No. 103, Pasec, S. Dec. 15, 20** 200.00
File No. 104, Smith, A.L. Dec. 29, 20** 3,000.00
File No. 105, Saul, B. Jan. 3, 20** (20.00)
File No. 106, Reuter, D. Jan. 20, 20** 1,940.00
File No. 107, Charles, C. Jan. 30, 20** 2,000.00
File No. 108, Paulo, A. Jan. 1, 20** 1,500.00
Total Trust Funds Owed $12,420.00
Ann Litigate Paralegal Services TJ2

Trust Bank Journal
Client/Description
280
Case Example: Trust Bank Account Reconciliation

Ann Litigate compared her trust bank account statement against her trust bank journal and
noticed a discrepancy. Review the following trust receipts and disbursements journals, trust bank
account ledger, and trust bank statement for Ann Litigate for the month of May 20** and advise
her on how to prepare a bank reconciliation by answering the following questions. (LO3)
a. Are there any outstanding deposits for the period?
b. Are there any outstanding cheques for the period?
c. Are there any withdrawals improperly made from the trust bank account for such items as
service and bank charges that need to be reversed by the bank?
d. What is the bank balance at the end of the month shown on the trust bank statement?
e. What is the bank balance shown in the trust bank account ledger?
f. What needs to be done to reconcile the two amounts?
g. What should the total of the client trust ledgers and the reconciled bank balance be?
Trust Receipts Journal TRJ1

Date Method of
20** Received from Description Payment Amount
May 1 S. Bailey S. Bailey—Retainer Chq. #058 1,500
12 C. Smythe C. Smythe—Retainer Chq. #021 1,000
15 D. Pitt D. Pitt—Retainer Chq. #002 1,750
28 R. Park, Defendant F. Moore—Settlement Chq. #011 5,000
30 K. Thomas K. Thomas—Retainer Chq. #095 2,000
Total 11,250
(115)
Trust Disbursements Journal TDJ1

Date Method of
20** Paid to Description Payment Amount
May 5 Ann Litigate F. Moore—Courier charges Trust Chq. #0023 40
recoverable
12 Ann Litigate B. Daley—Paid invoice #350 Trust Chq. #0024 1,100
30 F. Moore F. Moore—Settlement Trust Chq. #0025 5,000
Total 6,140
(115)
281
LEGAL ACCOUNTING

Date
20** Description PR Debit Credit Dr./Cr. Balance
May 1 Opening Balance 0
30 Trust Totals for May TJ1 11,250 6,140 Dr. 5,110
ABC Credit Union

Trust Bank Statement
May 1 to May 30, 20**
Debit
Date (With- Credit
20** Description Ref. drawals) (Deposits) Balance
BALANCE FORWARD 0
May 1 Deposit $1,500 $1,500
5 Cheque 23 $40 $1,460
12 Deposit $1,000 $2,460
15 Cheque 24 $1,100 $1,360
15 Deposit $1,750 $3,110
28 Deposit $5,000 $8,110
30 Deposit $2,000 $10,110
Total Debits (Withdrawals) and $1,140 $11,250

Credits (Deposits)
Closing Balance $10,110
282
11
Accounting for
GST/HST, Payroll,
and Income Tax
Goods and Services Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
283
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Describe different methods for calculating GST/HST and making remittances to
the Canada Revenue Agency.
LO2 Calculate, record, and remit payroll deductions.
LO3 Explain common income tax considerations.
Goods and Services Tax

The goods and services tax (GST) is a multi-level, value-added tax that was introduced in
Canada on January 1, 1991 by the then prime minister Brian Mulroney and his finance min-
ister, Michael Wilson. Most Canadians and Canadian companies must pay GST/HST on their
purchases, including legal fees. Some groups and organizations, such as diplomats, govern-
ments, and status Indians, are exempt from paying GST/HST. However, if a false claim for
exemption is made by a client, and even if a fake exemption card is presented to avoid paying
the tax, the business owner still must account for the tax that should have been collected.
The provinces of New Brunswick, Nova Scotia, Newfoundland and Labrador, Ontario, and
Prince Edward Island — referred to as the participating provinces — harmonized their provin-
cial sales tax with the GST to create the harmonized sales tax (HST). The current rate for
HST in Ontario is 13 percent, which includes the 5 percent federal goods and services tax and
the 8 percent provincial retail sales tax.
As mentioned in Chapter 1, paralegals are considered a small supplier, exempted from col-
lecting GST/HST if their total annual revenues from all of their businesses are $30,000 or
less.
Remitting GST/HST to the Receiver General

To complete a GST/HST return, it is necessary to know the following amounts:
• The total fees and disbursements or other revenues on which GST/HST is charged.
• The amount of GST/HST charged (even if it was not yet collected).
• The amount of GST/HST the business owner paid or is payable on purchases made for
the business. This is referred to as the input tax credit (ITC).
• Other amounts might also have to be included on the GST/HST report, such as install-
ments paid during the year or other adjustments being claimed.
For a sole proprietor with a fiscal year-end of December 31 and an annual reporting period
for GST/HST purposes, payment is due no later than April 30, although the return is not due
until June 15. Payments may be made to the Receiver General using online banking, at a
financial institution, or by mail. The CRA does not accept credit cards. A penalty plus inter-
est is charged on any balance owing if the return is not received by the CRA on time. The
penalty is calculated as 1 percent of the amount owing, plus 25 percent of that amount mul-
tiplied by the number of months the return is overdue, up to 12 months.
284
CHAPTER 11 Accounting for GST/HST, Payroll, and Income Tax
Maintenance of Records
Usually, all sales and purchase invoices and other records related to your business operations
and the GST/HST need to be kept for six years from the end of the year to which they relate. If
the business owner wants to destroy these records after six years, the CRA recommends that a
written request be sent and to wait for written approval to do so. As a registrant, it is necessary
that the invoices provided by the suppliers used show the correct information to support your
input tax credit (ITC) claims. Registered businesses from which goods or services are pur-
chased must provide invoices showing their GST/HST registration number and other required
information. Verifying that a supplier has provided a valid GST/HST number can be done
through the CRA’s online GST/HST Registry. The CRA administers an audit program, during
which auditors may ask to see a business owner’s records. During an audit, the CRA will make
sure that the business owner has charged and reported the GST/HST when required, and that
the business owner is entitled to all the ITCs that have been claimed on the return.
Many rules apply to what can and cannot be claimed as an ITC. As a guideline, claim only
those tax-deductible purchases that are authorized under the Income Tax Act on which GST/
HST is charged. For example, under the Income Tax Act, the deduction for meals and enter-
tainment expenses is limited to 50 percent of the cost of the meals and entertainment. Like-
wise, the ITCs claimed for this expense are also limited to 50 percent of the amount paid. If
a business owner qualifies to claim home office expenses for income tax purposes, the ITCs
applicable can be claimed to the portion of the home expenses allowed to be deducted from
the business owner’s income for calculating net income for tax purposes. A special calcula-
tion is required to claim GST/HST paid on the purchase of a vehicle. The amount allowed for
GST/HST is based on what the business owner is entitled to claim based on the permissible
capital cost allowance (CCA). It is advisable to check the CRA website information on claim-
ing ITCs or speak to a tax professional to ensure the amounts being claimed are allowed.
LO1 Methods for Calculating GST/HST Remittance

There are three methods used for tracking GST/HST:
• the regular method,
• the simplified method, and
• the quick method.
The quick method will not be discussed here because persons who provide legal, accounting,
or actuarial services in the course of their professional practice are not permitted to use it.
A paralegal may use either the regular or the simplified method for calculating the amount
of GST/HST that must be remitted to the Receiver General.
Regular Method
If the regular method is to be used for submitting GST/HST remittances, it should be ensured
that journals and ledgers are set up with the necessary columns for tracking GST/HST billed to
clients and GST/HST paid or payable on purchases by the firm. This will provide the bookkeeper
with the data needed for completing the returns. To use the regular method for calculating the
amount of GST/HST that will need to be remitted, it is necessary to know the following:
• the total amount of fees billed to clients on which GST/HST was charged over the
reporting period;
• the total amount of GST/HST charged to clients, whether or not it has been collected;
• the total amount the firm paid or is payable on tax-deductible purchases for GST/HST; and
285
LEGAL ACCOUNTING
• the difference between the amount of GST/HST collected from clients and the amount
of GST/HST paid or payable for purchases. This is the amount of net tax that either
needs to be remitted or for which the firm is entitled to a refund.
If legal or other software is being used for accounting purposes, the calculation of these
amounts and preparation of a report is usually done automatically. Figure 11.1 shows the
GST/HST return template that is available on the CRA website.1
Goods and Services Tax / Harmonized Sales Tax (GST/HST) Return Working Copy
Do not use this working copy to file your return or to make payments at your financial institution.
Name Business number
R T
Reporting period Year Month Day Year Month Day Due date Year Month Day
From to
Working copy (for your records)
Copy your Business number, the reporting period, and the amounts from the highlighted line numbers in this worksheet to the
▼
corresponding boxes in your GST/HST return.

Enter your total sales and other revenue. Do not include provincial sales tax, GST
101 00
or HST. If you are using the Quick Method of accounting, include the GST or HST.
Net tax calculation
Enter the total of all GST and HST amounts that you collected or that became collectible
by you in the reporting period. 103
Enter the total amount of adjustments to be added to the net tax for the reporting period
(for example, the GST/HST obtained from the recovery of a bad debt). 104
Total GST/HST and adjustments for period (add lines 103 and 104) 105
Enter the GST/HST you paid or that is payable by you on qualifying expenses (input tax
credits – ITCs) for the current period and any eligible unclaimed ITCs from a previous period. 106
Enter the total amount of adjustments to be deducted when determining the net tax for the
reporting period (for example, the GST/HST included in a bad debt). 107
Total ITCs and adjustments (add lines 106 and 107) 108
Net tax (subtract line 108 from line 105) 109

Other credits if applicable
Do not complete line 111 until you have read the instructions.
Enter any instalment and other annual filer payments you made for the reporting period.
If the due date of your return is June 15, see the instructions. 110
Enter the total amount of the GST/HST rebates, only if the rebate form indicates that you
can claim the amount on this line. For filing, information, see instructions. 111
Total other credits (add lines 110 and 111) 112
Balance (subtract line 112 from line 109) 113 A

Other debits if applicable
Do not complete line 205 or line 405 until you have read the instructions.
Enter the total amount of the GST/HST due on the acquisition of taxable real property. 205
Enter the total amount of other GST/HST to be self-assessed. 405
Total other debits (add lines 205 and 405) 113 B
Balance (add lines 113 A and 113 B) 113 C
▼ ▼
Line 114 and line 115: If the result entered on line 113 C is a negative amount, enter the Refund claimed Payment enclosed
amount of the refund you are claiming on line 114. If the result entered on line 113 C is a
positive amount, enter the amount of your payment on line 115. 114 115
Instructions
Line 110
Annual filer with a June 15 due date: If you are an individual with business income for income tax purposes and have a December 31 fiscal year-end,
the due date of your return is June 15. However, any GST/HST you owe is payable by April 30. This payment should be reported on line 110 of your
GST/HST Tax Return.
Line 111: Some rebates can reduce or offset your amount owing. Those rebate forms contain a question asking you if you want to claim the rebate amount on
line 111 of your GST/HST Tax Return. Tick yes on the rebate form(s) if you are claiming the rebate(s) on line 111 of your GST/HST Tax Return. If you file your
return electronically, send the rebate application by mail to the Prince Edward Island Tax Centre.
Line 205: Complete this line only if you purchased taxable real property for use or supply primarily (more than 50%) in your commercial activities and you are
a GST/HST registrant (other than an individual who purchases a residential complex) or you purchased the property from a non-resident. If you qualify for an
input tax credit on the purchase, include this amount on line 108.
Line 405: Complete this line only if you are a GST/HST registrant who has to self-assess GST/HST on an imported taxable supply or who has to self-assess
the provincial part of HST.
Personal information is collected under the Excise Tax Act to administer tax, rebates, and elections. It may also be used for any purpose related to the administration or enforcement of the Act such as audit,
compliance and the payment of debts owed to the Crown. It may be shared or verified with other federal, provincial/territorial government institutions to the extent authorized by law. Failure to provide this
information may result in interest payable, penalties or other actions. Under the Privacy Act, individuals have the right to access their personal information and request correction if there are errors or
omissions. Refer to Info Source at cra.gc.ca/gncy/tp/nfsrc/nfsrc-eng.html, Personal Information Bank CRA PPU 241.
FIGURE 11.1 GST/HST return working copy

Reproduced with permission of the Minister of National Revenue, 2018.
1 Canada Revenue Agency, “Goods and Services Tax/Harmonized Sales Tax (GST/HST) Return Working
Copy,” online: <http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/bspsbch/rtrns/rtrnwkcpy-eng.pdf>.
286
Simplified Method
When the simplified method is being used, the bookkeeping records do not need to show the
purchase price of goods and GST/HST paid separately. To be eligible to use this method,
annual fees income and purchases must be $1 million or less. To calculate the GST/HST, add
up the ITC-eligible business expenses, including the GST/HST paid. Expenses on which no
GST/HST is payable, such as salaries, may not be included; only GST/HST charged on pur-
chases deductible as legitimate business expenses under the Income Tax Act can be claimed.
For example, for those living in Ontario, which has a combined GST/HST rate of 13 percent
(5 percent federal and 8 percent provincial), the simplified method calculation would be as
follows:
Description Expenses
Rent (includes HST) $1,070.00
Salaries (HST does not apply) 3,000.00
Insurance (HST does not apply) 50.00
Advertising (HST included) 214.00
Office supplies (HST included) 230.00
Total purchases and expenses $4,564.00
Step 1
• Add all purchases and expenses including the HST (GST and PST) $4,564.00
• Subtract non-taxable items (salaries and insurance) –3,050.00
Taxable expenses $1,514.00
Step 2
• Multiply taxable expenses on which you paid 13 percent HST by 13/113 to $174.18
calculate the input tax credit
FIGURE 11.2 Simplified calculation of GST/HST
Calculate the net tax for each GST/HST reporting period and report this on the GST/HST
return. To do so, calculate:
• the GST/HST collected or that became collectible on the fees billed during the report-
ing period;
• the GST/HST payable using the simplified calculation above; and then
• take the difference between these two amounts, including any adjustments, to arrive
at the net tax.
A positive amount must be remitted to the Receiver General. If the GST/HST paid is more
than the GST/HST the firm has charged or collected, a claim for a refund for the difference
can be made.
Note that the GST/HST rate used above is for Ontario, and the multiplier of 13/113 will
vary with the GST/HST rates for each province.
Deciding which method is best for calculating GST/HST is complicated. The business
owner may wish to speak to an accountant when making a decision.
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LEGAL ACCOUNTING
Remitting GST/HST
Before the end of each GST/HST reporting period, the business owner will receive a form to
complete from the CRA that must be filled in and returned along with any payment owing.
If the business owner files quarterly, the return must be sent along with the amount owing
before the end of the following month. That is, a report covering January to March would
have to be filed before the end of April. If the business owner files annually, the report must
be sent within three months after the end of the one-year period. Returns and remittances
(payments) may be made by filing online, at a financial institution, or by mail.
LO2 Payroll
Salaries can represent a large part of the operating expenses for a firm. Employers are
responsible for deducting CPP contributions, EI premiums, and income tax from remuner-
ation paid to employees and for remitting the deductions to the CRA along with the required
reports. If a firm does not fulfill its obligations or comply with payroll requirements, it may
be assessed a penalty with interest, or incur other consequences. On prosecution, a person
can be fined from $1,000 to $25,000 or fined and imprisoned for a term of up to 12 months.
The CRA can assess a penalty of 10 percent of the amount of CPP, EI, and income tax that
was not deducted and will apply a penalty of 20 percent to second or later failures under cer-
tain circumstances.
When an employee is hired, the business owner must:
• obtain the employee’s social insurance number (SIN), and
• obtain from the employee a completed Form TD1, Personal Tax Credits Return.2
The Payroll Process

Employee pay will be established with the employee at the time of hire. It may be a salary
based on various pay periods, usually weekly, biweekly, or monthly. When hiring an em-
ployee, ensure there is a clear understanding of the rate being paid, the hours of work, and
other benefits, such as sick days and vacation time.
Suppose Justin Case hires an assistant who will work from 8:30 to 5:00 every day (with one
hour off for lunch) at an hourly rate of $20 per hour. That would make for a 7.5-hour day, or
37.5 hours a week. At the rate of $20 an hour, this would yield a gross pay of $750 a week.
Gross pay is the full amount of the employee’s earnings, before taking (or “withholding”) any
deductions for CPP, EI, and income tax. Justin will need to determine how frequently the em-
ployee will be paid to determine the gross pay for each pay period before the payroll deduc-
tions at source can be calculated.
2 Canada Revenue Agency, “Filing Form TD1, Personal Tax Credits Return,” online:
<https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/td1/td1-fill-18e.pdf>.
288
Gross pay $750 per week x 52 weeks $39,000

Weekly $39,000/52 pay periods $750
Bi-weekly $39,000/26 pay periods $1,500
Twice a month $39,000/24 pay periods $1,625
Monthly $39,000/12 pay periods $3,250
FIGURE 11.3 Calculation of gross pay
TD1 Form
When hiring an employee, the employee’s social insurance number must be recorded and the
employee must fill in the TD1 form. This form is used to determine the employee’s claim
code to calculate the amount of income tax to be deducted from an individual’s employment
income. There are two forms that must be completed: one federal and one provincial or ter-
ritorial. Employees complete the forms and give them to their employer, who should keep a
completed form with their records.
For the purposes of this chapter, assume that Justin’s assistant, Judith Wright, has com-
pleted the TD1 form and arrived at a claim code 1, because she was previously unemployed
and has personal deductions she could claim, such as tuition fees and childcare expenses.
Payroll Calculator
The easiest way for an employer to calculate source deductions that must be taken from the
employee’s paycheque and the amounts that will need to be remitted (as employer) is to use
the Payroll Deductions Online Calculator on the CRA website, online at: <https://www
.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/payroll-deductions
-online-calculator.html>. The CRA also has tables that can be used manually to look up the
amount that must be deducted, although this manual method can be cumbersome.
EX AMPLE 1
Justin Case went to the CRA website and used the payroll calculator to find out what deductions had to be taken
and how much he would have to remit to the CRA for the pay period. Figure 11.4 shows the report obtained using
the payroll calculator.
The report indicates that on a gross paycheque of $1,625, the amount of $147.45 must be deducted for federal
taxes and $73.97 for provincial taxes, totalling $221.42. Claim Code 1 from the TD1 Form was used for the purposes
of this calculation. The deduction from gross pay for CPP is $73.22 and for EI is $26.98. The total deductions come
to $321.62, and Judith will receive a paycheque of $1,303.38.
Figure 11.5 shows the general journal entries required to record the salaries expense, the employer’s payroll con-
tributions, and the employer’s remittance to the Receiver General for the salaries paid on December 15. The payroll
deductions calculations from Figure 11.4 provide the information that is needed to make these entries.
289
LEGAL ACCOUNTING
Employee’s name: Judith Wright

Employer’s name: Justin Case, Paralegal
Pay period frequency: Twice a month (24 pay periods a year)
Date the employee is paid: 2018-12-15
Province of employment: Ontario
Federal amount from TD1: Minimum—11,809.00 (Claim code 1)
Provincial amount from TD1: Minimum—10,354.00 (Claim code 1)
Salary or wages income (assume $750 gross/week) 1,625.00
Total cash income 1,625.00
Taxable income for the pay period 1,625.00
Pensionable earnings for the pay period 1,625.00
Insurable earnings for the pay period 1,625.00
Federal tax deduction (Payroll Tax Table, D) 147.45
Provincial tax deduction (Payroll Tax Table, E) 73.97
Total tax deductions 221.42
CPP deductions (Payroll Tax Table, B) 73.22
EI deductions (Payroll Tax Table, C) 26.98
The employer’s EI premium is equal to 1.4 times the employee’s premium,
unless a reduced rate applies.
Total deductions 321.62
Net amount 1,303.38
Employer Remittance Summary
Employee CPP contributions 73.22
Employer CPP contributions 73.22
Subtotal of Canada Pension Plan (CPP) 146.44
Employee EI contributions 26.98
Employer EI contributions 37.77
Subtotal of Employment Insurance (EI) 64.75
Tax deductions 221.42
For this calculation, remit this amount 432.61
FIGURE 11.4 Payroll deductions online calculation
STEP 1
December 15—This entry reflects that Judith Wright was paid $1,625 but received a cheque for $1,303.38 because
the source deductions for income tax and her share of CPP and EI were taken off her paycheque. However, the firm
is entitled to write off $1,625 as a salaries expense because that is its cost.
STEP 2
December 15—The firm contributes the employer’s share of EI and CPP for Judith and is entitled to write those
expenses off as a tax-deductible expense. Because the remittance is not sent immediately, it is posted to payroll
liability accounts.
290
STEP 3
December 31—When the firm forwards the source deductions taken from Judith’s salary on the 15th plus the
employer’s share it owes, the liability accounts (CPP, EI, income tax payable) are debited, thus reducing the bal-
ances to zero, and a cheque payable to the Receiver General for the amount owing to the CRA is credited to the
general bank account.

General Journal
Date
Dec. 15 Salaries Expense 511 1,625.00
Income Taxes Payable 217 221.42
CPP Payable 218 73.22
EI Payable 219 26.98
General Bank Account 100 1,303.38
To record payroll for Dec. 15
15 CPP Expense 518 73.22

EI Expense 517 37.77
To record employer’s payroll contributions
31 Income Taxes Payable 217 221.42

To record remittance to Receiver General for December
Totals 2,168.60 2,168.60
FIGURE 11.5 General journal entries recording payroll
Vacation Pay and Vacation Time

Employees are entitled to be paid vacation pay after their first full year of employment. Typ-
ically, in Ontario, an employee is entitled to a minimum payment of 4 percent of gross annual
earnings. The employee accrues vacation pay as he or she earns wages regardless of vacation
time taken, not taken, or carried over.
Normally, employees take the time off and receive a regular paycheque while they are
away. However, if their employment is terminated and vacation pay is owed, this must be
paid and will be subject to the source deductions and employer contributions to CPP and EI
described above.
291
LEGAL ACCOUNTING
The normal minimum vacation time is two weeks in each year that the employee is
employed, which represents 4 percent of the year. The employment contract or policy agree-
ment should explain how to handle vacation time that is not taken or is carried over past the
prescribed or agreed-upon deadline to take such vacation.3
Taxable Benefits
Some employers provide taxable benefits for their employees, such as medical and dental cov-
erage, life insurance premiums, and company cars. Some of these benefits are deemed to be
taxable benefits in the hands of an employee and will be included on the T4 slip issued to the
employee at the end of the year.
T4 Information Return
On or before the last day of February in each year, a T4 information return must be filed with
the CRA, and each employee must be provided with a T4 slip for their personal income tax
purposes. A copy of each T4 slip prepared, as well as a T4 summary of remuneration paid,
must be sent to the CRA. These forms can be obtained online at the CRA website.
LO3 Income Tax

Legal Requirements for Keeping Records
All records for income tax purposes, such as paper documents as well as those stored in an
electronic medium (such as on computer hard drive or USB flash drive), must be kept in
Canada or made available in Canada at the request of the CRA. The records must be in Eng-
lish or French.
A business is required to keep orderly records of all income received. All receipts, invoices,
vouchers, and cancelled cheques indicating outlays of money must also be kept. Such outlays
include:
• salaries and wages;
• operating expenses such as rent, advertising, and capital expenditures; and
• miscellaneous items such as charitable donations.
Records must be permanent and contain a systematic account of income, deductions, cred-
its, and other information needed to file income tax and GST/HST returns. Incomplete rec-
ords that use approximates instead of exact amounts are not acceptable. The records must:
• allow a business owner to determine how much tax is owed, or the tax, duties, or other
amounts to be collected, withheld, or deducted, or any refund or rebate that may be
claimed; and
• be supported by vouchers or other necessary source documents.
If receipts or other vouchers are not kept to support business expenses or claims, and
there is no other evidence available, the CRA will likely deny the expenses or claims that have
been made.
3 Ontario Ministry of Labour, “Vacation Time and Vacation Pay,” online: <http://www.labour.gov.on.ca/
english/es/pubs/guide/vacation.php>.
292
The Six-Year Requirement

If tax returns are filed on time, records must be retained (other than certain documents for
which there are special rules) for six years from the end of the last tax year to which they
relate. Every record necessary for dealing with an objection or appeal must be kept until it is
resolved and the time for filing any further appeal has expired, or until the six-year period
mentioned above has expired, whichever is later.
Types of Operating Expenses

Personal or Living Expenses
In most cases, personal and living expenses cannot be deducted, except for travelling
expenses incurred in the course of carrying on a business while away from home. The gen-
eral rule is that business owners cannot deduct outlays or expenses that are not directly
related to earning business income.
Prepaid Expenses
A prepaid expense is an expense you pay ahead of time. If the accrual method of accounting
is being used, claim any expense that is prepaid in the year or years in which the related
benefit is received. For instance, if the annual business insurance is prepaid, only the portion
of the expense that relates to the months that occurred in the current fiscal year can be
claimed.
Accounting and Legal Fees

Fees incurred for external professional business advice or services, including consulting fees
can be deducted, as can accounting and legal fees incurred to get advice and help in keeping
records as well as fees incurred for preparing and filing income tax and GST/HST returns.
Advertising Expenses
Expenses for advertising, including advertisements in Canadian newspapers and on Canad-
ian television and radio stations, can be deducted.
Bad Debts
A bad debt is an amount owing from a client that a business owner will not receive payment for.
This can arise as a result of client bankruptcy. An amount for a bad debt can be deducted if:
• it’s determined that an account receivable is a bad debt in the year, and
• the amount of revenue had already been included in the income.
For more information, see Interpretation Bulletin IT-442R, “Bad Debts and Reserves for
Doubtful Debts.”4 This bulletin may be replaced by the CRA with “Folio 9 Bad Debts & Debt
Forgiveness”5 at some future date.
4 Canada Revenue Agency, “Bad Debts and Reserves for Doubtful Debts,” online: <http://www.cra-arc
.gc.ca/E/pub/tp/it442r/it442r-e.html>.
5 Canada Revenue Agency, “Folio 9 Bad Debts & Debt Forgiveness,” Income Tax Folio Index, online:
<https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-
tax-folios-index.html#S4>.
293
LEGAL ACCOUNTING
Business Tax, Fees, Licences, and Dues

Annual licence fees, law association membership dues, and any business taxes incurred to
run the business can be deducted. However, club membership dues (including initiation
fees) cannot be deducted if the main purpose of the club is to provide dining, recreational, or
sporting facilities for its members.
Insurance Expenses
All regular commercial insurance premiums incurred on any buildings, machinery, and
equipment that are used for the business can be deducted. Life insurance premiums are gen-
erally not deductible.
Interest and Bank Charges

The interest incurred on money borrowed to run the business can be deducted. There is a
limit on the interest that can be deducted on money that is borrowed to buy a passenger
vehicle.
Maintenance and Repairs Expenses

The cost of labour and materials for any minor repairs or maintenance done to property that
is used to earn income can be deducted. However, business owners cannot deduct the value
of their own labour. Costs that are incurred for repairs that are capital in nature cannot be
deducted, but the business owner may be able to claim CCA on the repaired property. A cap-
ital expense generally gives a lasting benefit or advantage, thereby extending the estimated
life of the asset. For example, the cost of putting vinyl siding on the exterior walls of a wooden
house is a capital expense.
Meals and Entertainment Expenses

The maximum that can be claimed for food, beverages, and entertainment expenses is
50 percent of either the amount spent or an amount that is reasonable in the circumstances,
whichever is less.
The 50 percent limit also applies to the cost of meals when business owners or their
employees travel or go to a convention, conference, or similar event. However, special rules
can affect the claim for meals in these cases. The 50 percent limit does not apply if meal and
entertainment expenses are incurred to provide a Christmas party or similar event and all
the employees from a particular location are invited; however, business owners are limited to
six of these events each year. Also, the 50 percent limit does not apply to meal and entertain-
ment expenses incurred for a fundraising event that was mainly for the benefit of a registered
charity.
Entertainment expenses include tickets and entrance fees to an entertainment or sporting
event, gratuities, cover charges, and room rentals such as for hospitality suites. For more in-
formation, see Interpretation Bulletin IT-518R, “Food, Beverages and Entertainment
Expenses.”6
6 Canada Revenue Agency, “Food, Beverages and Entertainment Expenses,” online: <http://www.cra-arc
.gc.ca/E/pub/tp/it518r/it518r-e.pdf>.
294
Motor Vehicle Expenses

When claiming motor vehicle expenses, note that travel from home to the office is not con-
sidered travel for business purposes. It is the responsibility of the individual to get to and
from work each day, not the responsibility of the business.
Expenses incurred to run a motor vehicle that is used to earn business income can be
deducted. However, several factors can affect the deduction. The kind of vehicle owned can
affect the expenses deducted. Motor vehicle expenses can be deducted only when they are
considered reasonable and the business owner has receipts to support them. The types of
deductible expenses include the following:
• fuel and oil;
• maintenance and repairs;
• insurance;
• licence and registration fees;
• capital cost allowance;
• interest paid on a loan used to buy the motor vehicle; and
• leasing costs.
Figure 11.6 shows the calculation of motor vehicle expenses for Justin Case. The deduct-
ible business portion of Justin’s vehicle expenses is $4,770. He can also include additional
fees he pays for business, such as parking fees of $40 or a supplementary business insurance
cost of $100, to increase his deduction to $4,910.
Calculation of Motor Vehicle Expenses

Kilometres driven to earn business income 27,000
Total kilometres driven in the year 30,000
Percentage for business use: 27,000/30,000 x 100 90%
Expenses:
Gas and oil 2,400
Insurance 1,900
Interest 800
Maintenance and repairs 200
Total expenses for the car 5,300
Calculation of deduction for tax purposes: $5,300 x 90% 4,770
FIGURE 11.6 Calculating vehicle expenses
To get the full benefit of a vehicle claim, a record of the total kilometres driven for personal
use and the kilometres driven to earn business income must be kept. For each business trip,
list the date, destination, purpose, and number of kilometres driven. Record the odometer
reading of the vehicle at the start and end of the fiscal period.
Capital cost allowance is claimable on the cost of the vehicle up to a maximum value of
$30,000. The rate of depreciation allowed is 30 percent with an adjustment in the year of
acquisition, which reduces the allowed deductible amount for CCA by one-half.
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LEGAL ACCOUNTING
Leasing Costs for a Passenger Vehicle

Amounts incurred to lease a motor vehicle that is used to earn income can be deducted. When
a passenger vehicle is used to earn income, there is a limit on the amount of the leasing costs
that can be deducted. If the lease agreement for the passenger vehicle includes items such as
insurance, maintenance, and taxes, they can be included as part of the lease charges.
Work Space in Home Expenses

If a business owner rents a home in which there is a home office that is used, the part of the
rent and any expenses incurred that relate to the work space can be deducted. The amount that
can be deducted for business-use-of-home expenses, regardless of whether the home is rented
or owned, cannot be more than the net income from the business before these expenses are
deducted. In other words, these expenses cannot be used to increase or create a business loss.
EX AMPLE 2
Justin has space in his home devoted to the sole purpose of running his business. The business uses an area of
35 square metres. The house has 800 square metres, and the annual household expenses are $5,800.
The calculation to determine the tax deduction for use of the space is as follows:
35/800 square metres × $5,800 expenses = $253.75
Justin can deduct a total of $253.75 for work space in home expenses. Because capital gain and recapture rules
will apply if he deducts CCA on the business-use part of his home if he owns the home and he later sells it, he
should seek professional advice before doing this.
Computer and Other Equipment Expenses

If computers, cellular telephones, fax machines, and other equipment are being leased, the
percentage of the lease costs that reasonably relate to earning business income can be
deducted. The percentage of airtime expenses for a cellular telephone that reasonably relate
to earning business income can also be deducted. If a computer, cellular telephone, fax
machine, or other such equipment is bought, the actual cost of these items cannot be
deducted in the first year, as presumably the asset will be used for a few years. But CCA can
be deducted as well as interest paid on money borrowed to buy this equipment that reason-
ably relates to earning business income.
• Potential pitfall: Not filing GST/HST, payroll deductions, and tax returns on
PARALEGAL
POTENTIAL
time.
PITFALLS
• Possible fallout: The paralegal will be charged penalties and interest. The
paralegal may also be denied a loan or other form of credit as potential
creditors may ask to see the notices of assessment indicating that the para-
legal is not behind on filing returns and making payments.
• Proposed recommendation: The paralegal must manage their money carefully
so as to not miss CRA payments. The paralegal should hire an accountant to
help file returns, if needed.
296
Convention Expenses
Business owners can deduct the cost of going to a maximum of two conventions a year. The
conventions must:
• relate to the business or professional activity; and
• be held by a business or professional organization within the geographical area where
the organization normally conducts its business.
This second requirement may not apply if an organization from another country sponsors the
convention and the convention relates to the business or professional activity.
Sometimes, convention fees include the cost of food, beverages, or entertainment. How-
ever, the convention organizer may not show these amounts separately on its bill. If this is
the case, business owners should subtract $50 from the total convention fee for each day the
organizer provides food, beverages, or entertainment. Business owners can deduct this daily
$50 amount as a meal and entertainment expense. However, the 50 percent limit applies to
the daily $50 amount.
EX AMPLE 3
Justin attended a two-day convention in May that cost him $600. The organizer did not indicate what part of the
$600 fee was for food and entertainment. The CRA allows business owners to claim the following convention
expenses:
Cost of meals and entertainment

Two days at $50/day = $100 allowed at 50% $50 Total deduction $550
Cost of convention ($600 – $100 meals) $500
Office Expenses
The cost of office expenses, which include small items such as pens, pencils, paper clips, sta-
tionery, and stamps can be deducted. Office expenses do not include larger items such as fil-
ing cabinets, chairs, and desks, which are capital items and can be claimed using CCA since
they will be used in future years as well as the current year.
Salaries, Including Employer’s Contributions

Salaries and the employer’s share of contributions paid to employees can be deducted. These
salaries are reported by the end of February on a T4 slip (statement of remuneration paid) or
T4A slip (statement of pension, retirement, annuity, and other income).
Amounts paid or payable to business owners or their business partners are not deductible
and cannot be expensed. They are considered drawings. A drawing is any withdrawal of cash,
other assets, or services of a business by the proprietor or partners. This includes such trans-
actions by the proprietor or partners (or family members) as withdrawing cash for non-business
use and using business assets or services for personal use. Professionals must include the
cost or value of personal use of business assets or services in their drawings for the year
rather than showing them as expenses in their books. Drawings are not an expense of the
business; they represent a reduction in the owner’s equity of the business.
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LEGAL ACCOUNTING
Salaries Paid to Family Members

Salaries paid to business owners’ children or spouses (including common law partners) can
be deducted as long as all these conditions are met:
• the salary is actually paid;
• the work the child or spouse does is necessary for earning business or professional
income; and
• the salary is reasonable when considering the child’s age, and that the amount paid is
what would be paid to someone else.
The business owner must keep documents to support the salary paid to their child. If
the child is paid by cheque, keep the cancelled cheque. If the child is paid with cash, have the
child sign a receipt. The salary a business owner pays to their spouse can also be deducted.
When business owners pay their spouse a salary, they should use the same rules that apply
to paying their child. Salaries paid to a business owner’s children and spouse need to be
reported on T4 slips, the same as is done for other employees. However, business owners can-
not claim as an expense the value of board and lodging that is provided to their dependent
children or spouse.
Telephone and Utilities Expenses

Expenses for telephone and utilities, such as gas, oil, electricity, and water, can be deducted,
if the expenses are incurred to earn income. Expenses for utilities that are related to the busi-
ness use of workspace in the business owner’s home can also be claimed.
Deductions and Remittances

To be able to deduct a business expense, business owners must have carried on a business in
the fiscal period in which the expense was incurred. Because of this, business owners must
be very clear about the date their business started. Determining exactly what can be claimed
as a start-up expense can be difficult.
Capital Gains
If you sell an asset for more than it cost, you may have a capital gain, which is taxable.
Tax Information Videos

TA X TIP
The CRA has a number of tax information videos for individuals and small busi-
nesses on topics such as preparing income tax and benefit returns, and reporting
business income and expenses. To watch these videos, go to <https://www
.canada.ca/en/revenue-agency/news/cra-multimedia-library.html>. Videos that
provide helpful information on filing of HST/GST for new businesses are found
online at <https://www.canada.ca/en/revenue-agency/news/cra-multimedia-library/
businesses-video-gallery/gst-q-a.html>.
298
Applying GST/HST to Client Accounts

TA X TIP Rule 8.01(2) of the LSO’s Paralegal Rules of Conduct requires licensees to promptly
meet all financial obligations incurred in the course of practice. One responsibility
is to collect and remit HST to the CRA. Licensees must confirm how GST/HST
applies to the specific legal services and disbursements they provide. They should
consult with an accounting or tax professional to discuss how to implement HST
properly within their internal accounting and invoicing systems.
The CRA has published a policy to deal with GST/HST on disbursements,
which would also apply to paralegals. Its GST/HST Policy Statement P-209R can be
found at <https://www.canada.ca/en/revenue-agency/services/forms-publications/
publications/p-209r.html>. This policy expands on the obligation of the firm to pay
GST/HST on disbursements paid on behalf of its clients. The disbursements described in
this policy statement are characterized as either “incurred as agent” or “not incurred as
agent.”
The phrase “incurred as agent” indicates that the disbursement described is generally
incurred in a lawyer’s capacity as agent for a particular client. As such, no GST/HST is exigi-
ble (able to be charged) on the subsequent reimbursement by the client. The phrase “not
incurred as agent” indicates that the disbursement described is generally incurred otherwise
than in a lawyer’s capacity as agent for a particular client, so GST/HST is eligible on the sub-
sequent reimbursement by the client.
For example, in the area of civil litigation practice, common disbursements considered to
be incurred as agent are court fees to start a legal proceeding, motion fees, court filing fees,
or notice of trial fees. Because these fees are deemed by the CRA to be incurred as agent for a
particular client, GST/HST is not charged on the disbursements when the client is invoiced.
However, in civil litigation practice, payment of witness fees, fees for recording services,
transcript production or special examiner fees, service of document fees, and fees paid to
have an expert prepare a report in respect of a particular proceeding or to have the expert
appear at trial are all subject to GST/HST because they are considered “not incurred as
agent.”
The CRA considers disbursements not incurred as agent to include such items as pay-
ment made for telephone charges, photocopy charges, courier costs, costs for travel by the li-
censee, and postage. GST/HST is charged on these amounts even though GST/HST may
have been charged on the original invoice to the firm.
299
LEGAL ACCOUNTING
CHAPTER SUMMARY
Taxes are a fact of life that most of us have come to accept, but who knew that working as a paralegal
would turn you into a tax collector? In this chapter, we have examined your responsibilities with regard to
collection and remittance of GST/HST, collection and remittance of payroll deductions, and payment of
income taxes. These tasks are time-consuming, and you must keep yourself informed because tax laws
change frequently. Although rates may change, the basic principles remain fairly constant.
Remember that although you are not paid to collect and remit taxes for the government, you will cer-
tainly be penalized if you fail to complete these tasks in a correct and timely manner. It is advisable for li-
censees to consult with an accountant when the time comes to file tax returns each year.
KEY TERMS
bad debt, 293 information return, 292
business expenses, 287 input tax credit (ITC), 285
goods and services tax (GST), 284 payroll deductions, 288
gross pay, 288 personal deductions, 289
GST/HST, 284 records, 285
harmonized sales tax (HST), 284 taxable benefits, 292
income tax, 292 tax year, 293
FURTHER READING
Canada Revenue Agency, “Business Video Gallery,” online: <https://www.canada.ca/en/revenue-agency/
news/cra-multimedia-library/businesses-video-gallery/gst-q-a.html>.
Canada Revenue Agency, Form T2125, “Statement of Business or Professional Activities,” online:
<https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2125/t2125-fill-17e.pdf>.
Canada Revenue Agency, Guide RC4070(E) Rev.17, “Information for Canadian Small Businesses,” 2018,
online: <https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4070/rc4070-17e.pdf>.
300
REVIEW QUESTIONS
True or False
1. GST/HST is remitted on the total amount of GST/HST charged and collected. (LO1)
2. The simplified method of calculating GST/HST payable does not need to show the purchase
price of goods and GST/HST paid separately but is based on eligible business expenses based
on a prescribed formula. (LO1)
3. Paralegals have the option of using the quick method to calculate the amount of GST/HST to
be paid. (LO1)
4. Legal and accounting fees incurred by a business owner for external business-related advice
can be deducted as a business expense. (LO3)
5. Business records should be maintained for a minimum period of six years from the end of the
last tax year to which such records relate. (LO3)
6. Payroll calculations include the withdrawals made by the business owner from the business.
(LO2, LO3)
7. Input tax credits can be claimed only on purchases made by the business. (LO1)
8. Salaries and the employer’s share of contributions paid to employees can be deducted as
business expenses. (LO2)
9. A small supplier for GST/HST purposes is required to register for GST/HST as soon as it com-
mences operation, regardless of its total annual revenue. (LO1)
10. A business can claim only those expenses or portions of such expenses that are related or
attributed to earning income for the business. (LO3)
Short Answer
1. What are the record-keeping requirements for business records as stated by the CRA? (LO3)
2. What are some examples of ineligible business expenses? (LO3)
3. What are the steps involved in calculating GST/HST payable using the regular method? (LO1)
4. What are the steps involved in calculating payroll? (LO2)
301
LEGAL ACCOUNTING
PRACTICE EXERCISES
PRACTICE
EXCEL
Based on the entries below in the fees journal and general disbursements journal, prepare a GST/HST
worksheet for the month of January 20** according to the regular method. The worksheet is based on
the GST/HST return working copy shown in Figure 11.1.
Fees Journal (Service Revenue)

Date Disbursements HST Billed Total Amount
20** Invoice # Client Fees Billed Billed (13% ON) Billed
Jan. 1 400 L. Forte 500.00 60.00 72.80 632.80
3 401 L. Bailey 1,000.00 120.00* 130.00 1,250.00
5 402 R. Smythe 0.00 120.00* 0.00 120.00
10 403 C. Schultz 5,000.00 0.00 650.00 5,650.00
15 405 L. Pepino 1,500.00 0.00 195.00 1,695.00
18 406 R. Saunders 800.00 300.00 143.00 1,243.00
25 407 B. Enders 2,400.00 160.00 332.80 2,892.80
Totals: 11,200.00 760.00 1,523.60 13,483.60
* HST not applicable

Method HST Paid/ Total
Date of Amount Payable Amount
20** Paid To Description Payment Paid (13% ON) Paid
Jan. 1 Magnum Office A. Litigate—Paid rent, invoice Chq. #217 1,000.00 130.00 1,130.00
Manager #1001
7 ATB Web Services A. Litigate—Paid invoice #A0-111 Chq. #218 120.00 15.60 135.60
15 A. Booth, secretary A. Litigate—Paid salary expense* Chq. #219 1,000.00 0.00 1,000.00
15 ABC Insurance A. Litigate—Paid invoice #501 Chq. #220 165.00 21.45 186.45
25 Centrum Parking A. Litigate—Paid monthly Chq. #221 100.00 15.00 115.00
parking invoice #AA123
29 SSI Computers A. Litigate—Paid for computer Chq. #223 700.00 105.00 805.00
and Electronics equipment
30 A. Booth, secretary A. Litigate—Paid salary expense* Chq. #224 1,000.00 0.00 1,000.00
31 AAA Advertising A. Litigate—Paid invoice #A0-112 Chq. #226 85.00 12.75 97.75
Totals: 4,170.00 299.80 4,469.80
* HST not applicable
302
Net GST/HST Tax Payable

Total Fees Billed
Total Disbursements Billed
Total GST/HST Charged
Total Purchases (tax-deductible, ITCs)
Total GST/HST paid or payable on tax-deductible
purchases
Net GST/HST Tax
GST/HST Worksheet, Net GST/HST Calculation

(for the Month of January 20**)
Total GST/HST Collected or Collectible Line 103 $ complete
Adjustments Line 104 $ complete, if applicable
Line 105 $ add Lines 103 and 104
Total GST/HST Paid or Payable for Eligible Expenses Line 106 $ complete
Adjustments Line 107 $ complete, if applicable
Total ITCs Line 108 $ add Lines 106 and 107
Net GST/HST Line 109 $ subtract Line 108
from Line 105

Ann Litigate hired a law clerk and wishes to issue her first paycheque. The clerk’s annual salary
is $39,000 per year, and the TD1 Form indicated that claim code 2 applies. Salary is paid twice a
month on the 15th and on the last day of the month. Vacation pay is paid when the clerk takes
holidays. Using the CRA payroll calculator, calculate the payroll deductions for the clerk’s first
paycheque as of May 15. Complete the table that follows:
a Gross salary (taxable income) due on May 15, 20**

b Federal Tax deductible
c Provincial Tax deductible
d Total tax deductions
e CPP deduction
f EI deduction
g Employer CPP contributions
h Employer EI contributions
303
LEGAL ACCOUNTING
Case Example: Employer, Small Business, and

Professional Responsibilities
Review the online CRA resource “Checklist for New Small Businesses” (<https://www.canada.ca/
en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/
checklist-small-businesses.html>) and help Ann Litigate create a customized checklist for her
CRA filings as an employer and as a small business proprietor and legal professional. (LO1, LO2)
304
12
Computerized Time
and Money
Management
Getting Started with Legal Accounting Software . . . . . . . . . . . . . . . . . . . . . 307
Setting Up the Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
Creating Opening Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
Time Entries and Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
Trust Receipts and Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310
Recording Receipts and Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311
Billing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
End-of-Period Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
Maintaining Electronic Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
305
LEGAL ACCOUNTING
OUTCOMES
LEARNING LO1 Use legal accounting software to enter the opening balance sheet.
LO2 Use legal accounting software to manage client files.
LO3 Record time and fees and prepare invoices.
LO4 Record trust receipts and disbursements.
LO5 Enter general receipts and disbursements.
LO6 Recover client costs.
LO7 Understand billing requirements.
Large law firms usually have a centralized accounting department to perform all accounting
functions, but smaller firms may use a system in which the licensee and his or her support
staff all participate in performing these functions. The systems implemented may range
from a manual system (by hand), to spreadsheet software, to general or legal accounting soft-
ware. Most legal firms use some sort of accounting software, whether it is generic or a dedi-
cated legal accounting program.
Before purchasing accounting software, you should have a good idea of what tasks you
want the software to perform. Are you just looking for time entry and billing? Do you need
software that will do all journal entries for both trust and general accounts, automatically
post them and then prepare reports and financial statements? What kinds of reports would
be useful in your practice? Do you want productivity reports showing how time is being man-
aged, and reports that prepare GST/HST returns? A major consideration for paralegals start-
ing out will be the cost of the system or software, including the cost of updates, support, and
renewal fees. Is the system being investigated easy to use, or does it require extensive train-
ing? Do you want to be able to access the software through a mobile device when away from
the office? The system you select will be determined by the size of the firm and whether the
system needs to be centralized or accessed by various individuals.
A few of the popular software providers for legal services firms are Amicus Attorney, Clio,
ESILAW, PCLaw®, and Intuit QuickBooks. Some software companies store data on a web
server, while others store data on your desktop. We are not recommending the use of any par-
ticular accounting software, and this chapter will focus generally on software specifically
designed for use in legal practices. The main functions we will review are file management,
general and trust accounting, and time and billing.
When starting your own practice, you may find the cost of purchasing specialized legal
software daunting. However, keep in mind that the time and effort used to set up a good
accounting system will save time and money down the road. It is amazing how a bill gener-
ated by a computer can look so much more professional and as a result be less likely to be
questioned than one produced by other means.
A good system pays off in other ways. Legal software programs have been developed that
keep the requirements of the LSO in mind and with a view to helping licensees comply with
by-law 9. You should be able to produce the records required by the LSO seamlessly, prac-
tically at the press of a button. However, the old adage “garbage in, garbage out” applies even
with the best of software. The information produced by your system will only be as good as
the information that is put into it. It is important to establish good bookkeeping practices at
the outset.
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CHAPTER 12 Computerized Time and Money Management
Getting Started with Legal

Accounting Software
Once the paralegal has selected the accounting system that meets their needs, time needs to be
taken to set it up properly. Or, the paralegal may be employed by a firm that uses particular soft-
ware, and the paralegal will be expected to learn to use it correctly. Although the paralegal may
experience some initial frustration, the time and effort required to learn any new software will
be well spent because they will learn how to gain maximum benefit from its features.
We will use the PCLaw® Experimental Set of Books for Reif, Black, and Brito to provide
practice exercises to demonstrate how to use the PCLaw® software. Be aware that the main
toolbar has a Help feature that the user can access to get clarification on any issues they are
having with the software. The user should not hesitate to browse the Help menus provided
to locate specific information about any system they may be using.
Setting Up the Firm

The firm network administrator will usually set up the firm before the paralegal starts using
any accounting software. For the purposes of this textbook, the names of the lawyers, para-
legals, or law clerks have to be entered into the system along with other firm information,
such as rates to be charged by each user.
If PCLaw® software is being used, use the PCLaw® Tutorial 12.1 to set up the firm Reif,
Black, and Brito.
LO1 Creating Opening Entries

When accounting records for a practice are being set up, the opening balance sheet is entered
into the books to record the opening balances for the firm. PCLaw® uses the Startup feature
for this purpose. A sample of opening entries for Justin Case’s firm using PCLaw® was
shown in Chapter 3 (see Figure 3.8).
Use PCLaw® Tutorial 12.2 to enter the opening balance sheet for Reif, Black, and Brito.
LO2 Managing Client Files

The system provides two numbers on file opening: a client number and a client matter or file
number. The client number identifies the name and contact information of the client. The
file or client matter number describes particulars about the area of law for which the firm has
been retained. When a new client file is opened for an existing client, the original client
number is used.
Once all the information is entered into the system, print labels for the client file. The
label contains information about the file, such as the client name, description, client and file
numbers, contact information for the client, responsible lawyer, and date the file was opened.
Type of Law
The system will ask for the type of law that applies to the matter. Classifications of law gen-
erally include such topics as provincial offences, litigation, corporate, or miscellaneous.
Selecting this feature allows the firm to track useful information regarding the sources of the
firm’s income. These classifications are also helpful for collecting statistics for preparation of
307
LEGAL ACCOUNTING
the licensee’s annual report to the LSO, which asks for a breakdown of the percentage of time
spent on various types of law.
Use PCLaw® Tutorial 12.3 to open client files for clients that we will be using in the tuto-
rials that follow.
Conflict of Interest Search

Rule 1.02 of the Paralegal Rules of Conduct defines conflict of interest as the existence of a sub-
stantial risk that a paralegal’s loyalty to or representation of a client would be materially and
adversely affected by the paralegal’s own interest or duties to another client, a former client,
or a third person. The risk must be more than a mere possibility; there must be a genuine,
serious risk to the duty of loyalty or to client representation arising from the retainer.
When a new client approaches a firm, it is important to conduct a conflict search that
checks all of the firm’s clients, files, calendars, and vendors to determine if there are any pre-
vious contacts with a potential client or file that could lead to a conflict of interest. Nothing is
more frustrating, embarrassing, and perhaps expensive to a firm than having to withdraw
from a file because a conflict of interest was not discovered in a timely manner. If no conflict
of interest is found, the firm may then accept the retainer and open a client file.
Use PCLaw® Tutorial 12.4 to conduct a conflict search.
Closing Client Files

Archiving files is a job that often suffers the indignity of procrastination. But archiving reg-
ularly helps to keep records accurate. It is important to be vigilant when it comes time to close
client files. Legal accounting software will assign and track a closed file number for archived
files to make it easy to retrieve the file if it is ever required. Closing the file when the matter
is finished helps to produce client reports that are accurate and reliable. Producing a client
listing that contains files that were finished but not closed on the system years ago is frustrat-
ing and not helpful. When a list of current clients needs to pulled up, no one wants the list to
include the names and balances for inactive files. The anticipated date for destruction of a file
can be entered when the file is closed.
Files that are to be destroyed should be shredded to protect confidential information con-
tained in them, and a certificate of destruction should be obtained from the company after
shredding. The experimental books in PCLaw® do not allow us to close client files, so no
tutorial is provided for this purpose.
LO3 Time Entries and Billing

The time and billing function of accounting software uses explanation codes to indicate the
activity that was performed by the licensee. Examples of some commonly used explanation
codes are shown in Figure 12.1.
Explanation Codes
att attendance at ct correspondence to lr legal research
cf correspondence from dr drafting mwc meeting with client
FIGURE 12.1 Explanation codes
308
Effort can be saved when entering time by using an explanation code such as “att” and
allowing the system to autofill the phrase to “attendance at.” Other information can then be
added to the explanation such as attendance at “court.” In addition to being a time-saving
device, explanation codes avoid typographical errors. Codes can be added or deleted when the
time and billing system is set up to autofill the description of work that is most commonly
billed to a file. The paralegal is not required to use the codes, but once these shortcuts become
familiar, the paralegal will benefit from the time saved and errors avoided.
Recording Time Entries

There are several different ways software can be used to charge fees to a matter:
• enter time recorded by hand on a time slip;
• use the time-tracking function of the software to track meetings, telephone calls, and
so on;
• charge a flat rate; and
• convert appointments and phone calls into time entries.
Firms usually bill clients based on the amount of time spent working on a file or based on
a flat rate or fee. A flat fee is common in files such as traffic court, where the time that will
be required is easy to estimate.
When time is being billed by the hour, it is usual to bill in tenths of an hour. Most firms
bill time out in six-minute blocks, with each block representing one-tenth of an hour. This
makes the calculation of the hourly rate straightforward and has been recognized as reason-
able by the profession. It is hard to imagine anyone interrupting what they are doing, taking
a phone call, then making a note on the file in less than six minutes. This compromise seems
to be acceptable to clients and works for the office. Most time and billing software will round
time entries up to the nearest tenth of an hour by default, but this standard can be changed
if desired. Figure 12.2 shows a minutes-to-decimal conversion chart to help you calculate
blocks of one-tenth of an hour when making time entries. The billable rate, which is the
hourly rate charged on a file, is multiplied by the time spent working on the file. Each legal
professional working in the firm may have a number of hourly rates charged, depending on
the type of matter and the client retainer that was entered into.
Minutes Decimals
1–6 0.1
7–12 0.2
13–18 0.3
19–24 0.4
25–30 0.5
31–36 0.6
37–42 0.7
43–48 0.8
49–54 0.9
55–60 1.0
FIGURE 12.2 Minutes-to-decimal conversion chart
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LEGAL ACCOUNTING
EX AMPLE
If Justin Case worked for 53 minutes on a file at an hourly rate of $80, the software would cal-
culate the amount to bill as follows:
STEP 1
Convert 53 minutes to tenths of an hour, or 0.9, then multiply 0.9 × $80/hour = $72.
STEP 2
To create time entries, go to the time entry section in the software, enter the date and file
number, select the name of the person who did the work, enter the time and rate if not auto-
matically selected, and let the software calculate the dollar amount to bill.
STEP 3
An explanation of the work that was done is entered using the explanation code and any
additional description the paralegal wishes to use.
STEP 4
Once all the time entries are completed, this information will be used to produce the invoice
to the client. It is important to spellcheck the entries before saving to correct any typographi-
cal errors, because no one wants any errors or types to show on the final invoice to the cli-
ent. Remember, when recording time entries, what is typed in the explanation section will
appear on the bill.
Use PCLaw® Tutorial 12.5 to enter time entries on various client files and to print a pro-
ductivity report with a time listing for the period.
LO4 Trust Receipts and Disbursements

A trust receipt can be entered as a deposit to the trust bank account in the system. A deposit
slip is printed containing all the information required by the LSO, such as from whom the
money was received, the amount of the deposit, and the method of payment (number on
the client’s cheque). This slip can be taken to the bank and stamped by the teller, along
with the firm’s deposit book. The amount of the deposit is posted as a debit to the trust bank
account and credited to the individual client’s trust ledger sheet, enabling the paralegal to
know the current balance of funds held in trust for each client at all times.
Just as with general cheques, trust cheques can also be recorded and printed using legal
accounting software. Once a cheque is entered into the system, the trust bank account will
be credited and the client trust ledger will be debited. Some software is programmed to safe-
guard against anyone writing a cheque against a client’s trust ledger if there are insufficient
funds in that particular client’s account. The system produces a warning that there are insuf-
ficient funds in the account. When preparing the trust bank reconciliation, which can also
be done using the software, the system will produce the client trust listing for comparison
with the trust bank balance. However, the bank reconciliation feature is not available for ex-
perimental books.
310
Use PCLaw® Tutorial 12.6 to record retainers received from clients and print a trust
listing.
• Potential pitfall: As paralegals and lawyers become busy in their practice, it

PARALEGAL
POTENTIAL
may become difficult for them to keep up with day-to-day bookkeeping.

PITFALLS
• Possible fallout: Incomplete accounting information can cause many prob-

lems for businesses, such as missed due dates to the CRA or the LSO, poor
decisions made based on a lack of information, unbilled billable hours, over-
due balances owing from clients, and losing track of receipts from clients.
• Proposed recommendation: In order to ensure accounting information is
always up to date, paralegals should schedule the task of updating financial
information into the accounting system into a calendar, to be completed on a
daily, weekly, biweekly, and/or monthly basis, regardless of whether it is
tracked electronically or in a manual set of books. If the task becomes over-
whelming due to the difficulty of the work or the busyness of the practice, a
bookkeeper or accountant should be hired on a contract, part-time, or full-
time basis.
LO5 Recording Receipts and Disbursements

Legal accounting software should allow the paralegal to write general or trust cheques and
make deposits in the program, then print the required cheque or deposit slip. Special print-
able cheques will need to be purchased to use this function. If the office does not purchase
pre-formatted cheques, cheques can be written by hand and then entered into the system
without printing.
The many advantages of a program that records deposits and cheques in journals and
simultaneously posts them to the proper general, special, and client ledger accounts include
the following:
• Deposit and cheque balances will always be current.
• Deposits are automatically posted to the individual client’s ledger sheet, and the bank
account is debited.
• GST/HST is recorded and tracked for preparation of the GST/HST report. The amount
of the payment is posted directly to the account to be charged. For example, if Justin
Case wrote a $565 cheque for rent, which includes $65 for GST/HST and $500 for pay-
ment of rent, the system automatically journalizes the entries and posts $500 to the
rent expense account and $65 to the GST/HST input tax credits account, and also cred-
its the general bank account for $565. All this happens when the cheque is written. If
explanation codes are used for writing the cheque—for example, “rnt” for rent
expense—the system automatically knows the number of the account where
rent expense is to be posted. There is no need to look up the account number on the
chart of accounts.
• Even if cheques are manually prepared, they can be entered into the system by com-
pleting the pro forma cheque on the system, and the cheque is simply not printed.
Use PCLaw® Tutorial 12.7 to enter cheques for payment of disbursements for the firm and
payments made from trust for client expenses.
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LEGAL ACCOUNTING
LO6 Recovering Client Costs

Some costs incurred in an office on behalf of clients are not paid for by cheque. Photocopies,
faxes, and postage are examples of amounts that get billed to a client without a corresponding
bill being received by the firm for that expense. Some photocopiers, facsimile machines, and
postage meters are equipped to provide a printout summarizing photocopies and faxes to be
charged to a particular client file. In order to recover these expenses from the client, they
must be entered into the system, either periodically or at the time of billing.
Because the expense for these items can be substantial, it is worth taking the time to track
and bill them. These entries may appear in a special journal called a client cost recovery jour-
nal and also in the client ledger. Once entered, they will show up on the invoice produced
when the client bill is prepared.
Use PCLaw® Tutorial 12.8 to enter disbursements being charged to the client by the firm.
LO7 Billing Requirements

It is important to develop good billing practices. The LSO requires that a bill be rendered
prior to payment being deposited into the General Bank Account for services rendered. Fail-
ure to provide invoices to clients on a regular basis can cause cash flow problems. Clients
should be informed of the cost of services rendered on a regular basis to prevent surprises
when the bill is delivered to the client. Quick bills are convenient to use for walk-in clients.
The Create Bill function is used to provide an invoice to the client for services rendered after
the pre-bill has been reviewed and approved.
Use PCLaw® Tutorial 12.9 to prepare a Quick Bill and to Create a Bill.
End-of-Period Functions
Legal accounting software can produce the financial statements for any period that is
requested, making it easy to get an income statement and balance sheet showing the results
from the paralegal’s practice on a regular basis. The software also provides bank reconcilia-
tion features for reconciling general and trust bank accounts.
Use PCLaw® Tutorial 12.10 to prepare an HST Report and Financial Statements.
Maintaining Electronic Records

If electronic records are kept, be sure to have backups of the system. The paralegal may be
required to produce printed copies of information by the LSO. Having to go back and re-create
a set of books because of a computer crash, or even a break-in during which office computers
are stolen, is a hardship that is easily avoided. Most insurance companies will not cover the cost
of paying someone to re-enter all the data; they cover only the cost of restoring the backup.
Electronic Records
TA X TIP
The CRA requires all taxpayers to retain their business records in an electronically readable format. The
retained records must provide the information necessary to determine the person’s liabilities and obliga-
tions, or their entitlement to any refund or rebate under the Income Tax Act. The taxpayer is not relieved of
this responsibility because of the utilization of a third party, such as an accountant or other service pro-
vider. All retained records must be clearly labelled and stored in a secure environment in Canada.
312
CHAPTER SUMMARY
Legal software can take care of many functions in a firm, such as tracking calendar appointments, tickler
systems, and phone calls, as well as maintaining financial records. Many systems have applications that
can be accessed from a mobile device, so entries can be made from any location. Some licensees have
found this to be a very convenient feature. Maintaining accurate and up-to-date accounting records is a
requirement of the LSO. By implementing a good legal accounting system that has billing and accounting
features, you will meet the LSO’s requirements and be more productive. It is important to be familiar with
how legal software works because, at the very least, employees hired by legal firms are usually expected to
be familiar with relevant software applications used in the management of a law practice.
KEY TERMS
billable rate, 309 conflict search, 308
client cost recovery journal, 312 flat rate, 309
client matter, 307 legal accounting software, 306
client number, 307 time entry and billing, 306
conflict of interest, 308
FURTHER READING
Law Society of Ontario, “Guide to Opening Your Practice for Paralegals,” online: <https://lso.ca/
paralegals/practice-supports-and-resources/topics/opening,-operating-or-closing-a-practice/
guide-to-opening-your-practice-for-paralegals>.
Law Society of Ontario, “Practice Management Guidelines,” online: <https://lso.ca/lawyers/
about-your-licence/practice-review/practice-management-guidelines?lang=en-ca>.
313
LEGAL ACCOUNTING
REVIEW QUESTIONS
Short Answer
1. How do you determine what the best legal accounting system or software is for your practice?
(LO1)
2. What are some of the advantages of having a computerized legal accounting system? (LO1)
3. What are the rules established under by-law 9 regarding the maintenance of electronic records?
(LO5)
4. What are the key considerations in opening a new client file? (LO1)
5. Why should you close files in a timely and systematic manner? (LO1)
314

Case Example: Simulation Exercises
The following simulation exercises can be used to practise making entries using various types of
legal accounting software. If you are using PCLaw®, tutorials specific to PCLaw® software are pro-
vided below. The entries should be adapted as needed to correspond with the features of the legal
software being used. Although the LSO does not require paralegals to learn how to use legal
accounting software for licensing purposes, students may find themselves employed in a firm that
uses such software, so it is useful to get some practice. Students may wish to inquire about get-
ting a free download from an accounting software provider to try out a system. Your role as a para-
legal or law clerk should be entered when setting up the information regarding the firm.
The exercises are designed to demonstrate the following features:
• perparing the accounting system by entering accounting, lawyer, paralegal, and law clerk in-
formation;
• opening files for new clients;
• perparing time entries on client files;
• recording receipts and disbursements in general and trust accounts;
• conducting conflict searches for new clients;
• recovering costs for client disbursements such as photocopies and faxes;
• perparing invoices and transfer of funds from trust to general bank accounts;
• closing a client file; and
• preparing financial reports.
Simulation Exercise 12.1: Preparing the Accounting System (LO1)

Set up your system by inserting the name, address, and telephone numbers of the law firm. You
should also enter a GST registration number such as RT 112233. Make any other adjustments to
the system settings that your instructor thinks are necessary.
The names of any paralegals, lawyers, and law clerks working in the firm should be added to the
system, as well as their billable rates for various files.
Simulation Exercise 12.2: Creating a Matter for a New Client (LO2)

You should learn the terminology that applies to the software you are using. Help resources are
usually available and should be consulted as needed. You must create a file for each new client.
New files are often referred to as “matters,” and each client matter is given a unique number. Cli-
ent matters or files are usually numbered consecutively, and the numbers are assigned by the
system. Each new client will also have an assigned client number, which is used for all matters
related to that particular client. So client no. 1 might have several matters or files, each with a dif-
ferent matter number. It is useful to have a client number because this avoids having to rekey the
client’s name and address each time a new matter or file is opened for that particular client.
a. Create a new client matter on your system titled “Karen Fisher v Reveal Cosmetics.” Karen
Fisher has come to Justin Case to see about launching a product liability suit against Reveal
Cosmetics. Justin feels she has a good case. The type of law is litigation, and you should
select the rate at which the file is to be billed. Fill in the description box for the file by nam-
ing the client and the defendant. The description will be the reference line used on the
invoice sent to the client; it also appears on the file label. Enter the client’s name, address,
315
LEGAL ACCOUNTING
and telephone number in the areas provided by your system. The system will assign Fisher
client no. 1.
Karen Fisher has asked the firm to represent her in a second matter against James King
regarding an encroachment on her property. Open a second file for this client, not allowing
the system to allocate a new client number. Keep the same client number and allow the
system to create a new matter or file number. The firm has quoted a flat rate for this mat-
ter of $3,500. Enter this information into your system.
b. Using what you have learned, create a new client matter for a second client, Robert Crook-
shank. Title it “Robert Crookshank re Traffic Court.” Crookshank will be represented in this
matter by a different paralegal in the firm at a different rate. The client’s address is 123
York Street, Yourtown, Ontario, and his telephone number is (555) 235-2323. The system
will automatically assign client no. 2 to Crookshank because no. 1 is taken up by Karen
Fisher, and it will allocate file no. 3 to the matter.
Once you have completed this exercise, prepare a list of clients using your software.
Simulation Exercise 12.3: Recording Time and Fees (LO3)

This exercise describes how to enter hours recorded on a time slip using legal accounting soft-
ware. When entering time, use the minutes-to-decimal conversion chart provided in this chapter.
Use explanation codes, if available, to describe the work done, such as “mwc” for “meeting with
client.” You can add to the description by including further information such as “to discuss liability
suit.” You may wish not to charge for the initial interview. The software will allow you to show no
charge. It is a good idea to enter this time and show it as not being charged so that the client will
be able to appreciate the fact that she received a free consultation.
Enter the following time entries for Justin Case on the Karen Fisher v Reveal Cosmetics file using
appropriate dates. Remember to convert time to tenths of an hour when recording time entries.
Month 3 Meeting with client to discuss liability suit—½ hour at no charge

5 Instructing legal staff—20 minutes
9 Legal research by the law clerk for 1 hour and 15 minutes
15 Review correspondence from opposite party with offer to settle—15 minutes
18 Meeting with client to discuss settlement offer—35 minutes
Justin has also provided a time slip setting out the following services performed on the Robert
Crookshank file. Record the time entries.
Month 4 Meeting with client to discuss traffic charge—½ hour

5 Review of HTA sections and legal research—1 hour and 15 minutes
9 Attendance at traffic court and negotiation of plea—2 hours
316
Justin also worked on the Karen Fisher v J King easement dispute file. Record the time entries.
Month 5 Researching cases on easements—2 hours and 20 minutes

15 Correspondence with opposite party—½ hour
20 Response with offer to settle for $3,000—15 minutes
25 Meeting with client to sign minutes of settlement—20 minutes
30 Report to client—20 minutes
Produce a report to show the time entries you have made. Your system should allow you to re-
enter the system to make corrections to any incorrect time entries.
Simulation Exercise 12.4: Recording Trust Receipts and Retainers (LO4)

Before a retainer can be entered into a client file or matter, a file must be opened for that client
matter on the system. If you do not already have a file for a client, open a file. Then enter the
retainers received by depositing the funds to the trust bank account.
The following retainers were received and new files opened by the firm. Conduct a conflict
search and create a new client file for the following persons: Susan Silver, David Silver, Angela
Finelli, Stephen Bell, and Peter Stubbs. You or your instructor can make up the description,
address, and telephone number for each client. Use the preferred default rate for all new files.
Date
20** Transaction Details Amount Method Total
Month 1 Karen Fisher v J King re easement—retainer 800 cheque 800
3 Susan Silver re traffic retainer 900 cr. card 900
3 Robert Crookshank re traffic court—retainer 700 cert. cheque 700
3 David Silver re Small Claims Court—retainer 100 cr. card 100
8 Angela Finelli re traffic—no retainer received Open client file only
10 Stephen Bell, Small Claims Court—no Open client file only
retainer received
11 Peter Stubbs re Small Claims Court—retainer 200 cash 200
30 Received from J. King—settlement on Karen 3,000 bank draft 3,000
Fisher v J King file
Simulation Exercise 12.5: Recording General and Trust Disbursements (LO5)

Record the following transactions in your legal software, being careful to use the correct bank
account for each transaction. If funds are available in trust for any client, use trust funds; if not,
you need to use the general bank account.
317
LEGAL ACCOUNTING
Date
20** Transaction Details Amount HST Total
Month 1 Paid rent to Minto Management (chq. #G198) 1,200 156 1,356
3 Paid membership dues to the Law Society of Ontario 600 78 678
(chq. #G199)
6 Expense recovery. The following charges were Calculate and enter
recorded for disbursements made in the office, which under expense recovery
are to be billed to clients:
• Photocopies: (.25 each)
– David Silver 20 copies
– Stephen Bell 10 copies
– Crookshank 30 copies
• Faxes: (.30 each)
– David Silver 3 pages
– Stephen Bell 8 pages
– Peter Stubbs 2 pages
12 Paid traffic ticket to Minister of Finance on behalf of 90 0 90
Susan Silver (chq. #T10)
26 Paid Royal Bank—interest on loan (chq. #G200) 120 0 120
26 Paid Minister of Finance to file statement of defence 40 0 40
re David Silver (chq. #T11)
27 Paid fine on behalf of Robert Crookshank to Minister 500 0 500
of Finance (chq. #T12)
27 Paid Minister of Finance to issue notice of 100 0 100
garnishment on Stubbs file (chq. #T13)
28 Paid to issue claim re Stephen Bell 75 0 75
(chq. #G201) (no retainer)
Simulation Exercise 12.6: Preparing Invoices to Clients (LO6, LO7)

Prepare invoices for the following client files:
• Karen Fisher v Reveal Cosmetics
• Karen Fisher v J King
• Robert Crookshank re Traffic Court
• Peter Stubbs re Small Claims Court: you have been asked to prepare a quick bill and charge
the client $250 for services rendered plus $3.50 for disbursements incurred but not yet
recorded. Record the disbursement at the time it is entered on the bill.
Simulation Exercise 12.7: Conducting a Conflict Search and Closing a

Client File (LO2)
John King has called your office to set up an appointment regarding starting an action against Peter
Silver. Conduct a conflict search to determine whether there is a potential conflict of interest.
318
You have completed all work to be done on the Karen Fisher v J King file. Close the file on your
system
Simulation Exercise 12.8: Reconciling the Bank Statement and Preparing

Reports (LO4, LO5)
Using the bank statement for Justin Case’s trust account for the month, reconcile the bank state-
ment with your records.
ROYAL BANK OF MONEY

P.O. Box 5011, Station A Trust Bank Account Statement
Justin Case, Paralegal Month 1, 20** to Month 3*, 20**

135 Main Street
Yourtown, Ontario K3P 1G9 Account number: 0216-520635

Opening Balance at Beginning of Month $1,000.00
Total Deposits and Credits + $5,800.00
Total Cheques and Debits – $730.00
Closing Balance at End of Month = $6,070.00
ACCOUNT ACTIVITY DETAILS

Date Description Cheques and Debits Deposits and Credits Balance
Mo. 01 Deposit 800.00 1,800.00
Mo. 03 Deposit 900.00 2,700.00
Mo. 03 Deposit 800.00 3,500.00
Mo. 03 Deposit 100.00 3,600.00
Mo. 12 Deposit 200.00 3,800.00
Mo. 18 Chq. #T10 90.00 3,710.00
Mo. 24 Chq. #T11 40.00 3,670.00
Mo. 27 Chq. #T12 500.00 3,170.00
Mo. 27 Chq. #T13 100.00 3,070.00
Mo. 30 Deposit 3,000.00 6,070.00
On your system, prepare a GST/HST report for last month.

Prepare an income statement and a balance sheet for the month.
319
Appendix
BY-LAW 9
Financial Transactions
and Records
Made: May 1, 2007
Amended: June 28, 2007
January 24, 2008
February 21, 2008
March 20, 2009 (editorial changes)
September 29, 2009 (editorial changes)
April 28, 2011
May 3, 2011 (editorial changes)
October 19, 2015 (editorial changes)
Law Society of Ontario, By-Laws, online: <https://lso.ca/about-lso/legislation-rules/by-laws>.
321
LEGAL ACCOUNTING
PART I (h) Civic Holiday;

INTERPRETATION (i) Labour Day;
Interpretation (j) Thanksgiving Day;
1. (1) In this By-Law, (k) Remembrance Day, and where Remem-
brance Day falls on a Saturday or Sunday, the
“arm’s length” has the same meaning given it in the In-
following Monday;
come Tax Act (Canada);
(l) Christmas Day, and where Christmas Day
“cash” means current coin within the meaning of the
falls on a Saturday or Sunday, the following
Currency Act (Canada), notes intended for circulation in
Monday and Tuesday, and where Christmas
Canada issued by the Bank of Canada pursuant to the
Day falls on a Friday, the following Monday;
Bank of Canada Act and current coin or banks notes of
countries other than Canada; (m) Boxing Day; and
“charge” has the same meaning given it in the Land (n) any special holiday proclaimed by the Gover-
Registration Reform Act; nor General or the Lieutenant Governor;
“client” means a person or group of persons from “lender” means a person who is making a loan that is
whom or on whose behalf a licensee receives money or secured or to be secured by a charge, including a charge
other property; to be held in trust directly or indirectly through a relat-
ed person or corporation;
“firm of licensees” means,
“licensee” includes a firm of licensees;
(a) a partnership of licensees and all licensees
employed by the partnership, “money” includes cash, cheques, drafts, credit card
sales slips, post office orders and express and bank
(b) a professional corporation established for money orders;
the purpose of practising law in Ontario and
all licensees employed by the professional “related” has the same meaning given it in the Income
corporation, Tax Act (Canada);
(c) a professional corporation established for the “Teranet” means Teranet Inc., a corporation incorpor-
purpose of providing legal services in Ontar- ated under the Business Corporations Act, acting as agent
io and all licensees employed by the profes- for the Ministry of Consumer and Business Services.
sional corporation, or
Time for doing an act expires on a holiday
(d) a professional corporation established for
the purpose of practising law and providing (2) Except where a contrary intention appears, if
legal services in Ontario and all licensees em- the time for doing an act expires on a holiday, the act
ployed by the professional corporation; may be done on the next day that is not a holiday.
“holiday” means,
When deemed in trust
(a) any Saturday or Sunday;
(3) For the purposes of subsections 9(1), (2) and
(b) New Year’s Day, and where New Year’s Day (3) and section 14, cash, cheques negotiable by the li-
falls on a Saturday or Sunday, the following censee, cheques drawn by the licensee on the licensee’s
Monday; trust account and credit card sales slips in the posses-
(c) Family Day sion and control of the licensee shall be deemed from
the time the licensee receives such possession and con-
(d) Good Friday;
trol to be money held in a trust account if the cash,
(e) Easter Monday; cheques or credit card sales slips, as the case may be,
(f ) Victoria Day; are deposited in the trust account not later than the fol-
lowing banking day.
(g) Canada Day, and where Canada Day falls on
a Saturday or Sunday, the following Monday;
322
APPENDIX By-Law 9: Financial Transactions and Records
PART II Handling of money by suspended licensee

HANDLING OF MONEY BY BANKRUPT 2.2 (1) Subject to subsection (2) and section 2.3, a
LICENSEE suspended licensee shall not, during the suspension re-
ceive from or on behalf of a person or group of persons
Handling of money by bankrupt licensee any money or other property and shall not otherwise
2. (1) Subject to subsections (2) and (3), a licensee handle money or other property that is held in trust for
who is bankrupt within the meaning of the Bankrupt- a person or group of persons.
cy and Insolvency Act (Canada) shall not receive from or
on behalf of a person or group of persons any money or Exception
other property and shall not otherwise handle money or (2) A suspended licensee may receive from or on
other property that is held in trust for a person or group behalf of a person or group of persons money,
of persons.
(a) in payment of fees for services performed
Exception by the suspended licensee for the person or
group; or
(2) A licensee who is bankrupt within the mean-
ing of the Bankruptcy and Insolvency Act (Canada) may (b) in reimbursement for money properly ex-
receive from or on behalf of a person or group of per- pended, or for expenses properly incurred, on
sons money, behalf of the person or group.
(a) in payment of fees for services performed by Trust account
the licensee for the person or group; or
2.3 (1) A suspended licensee shall, within 30 days of
(b) in reimbursement for money properly ex- the beginning of the suspension,
pended, or for expenses properly incurred,
on behalf of the person or group. (a) withdraw from every trust account kept in
the name of the suspended licensee, or in the
Same name of the firm of licensees of which the
suspended licensee is a partner or by which
(3) A licensee who is bankrupt within the meaning
the suspended licensee is employed, and, as
of the Bankruptcy and Insolvency Act (Canada) may apply
required, pay to the appropriate person,
in writing to the Society for permission to receive from or
on behalf of a person or group of persons any money or (i) money properly required for payment
other property, other than as permitted under subsection to a person on behalf of a client,
(2), or for permission to handle money or other property
(ii) money required to reimburse the sus-
that is held in trust for a person or group of persons, and
pended licensee for money properly
the Society may permit the licensee to do so, subject to
expended, or for expenses properly in-
such terms and conditions as the Society may impose.
curred, on behalf of a client,
PART II.1 (iii) money required for or toward pay-
HANDLING OF MONEY BY LICENSEE WHOSE ment of fees for services performed by
LICENCE IS SUSPENDED the suspended licensee, and
Interpretation (iv) all other money that belongs to the

suspended licensee or to a person
2.1 In this Part, other than a client;
“suspended licensee” means a licensee who is the sub- (b) after complying with clause (a), withdraw
ject of a suspension order; “suspension order” means from every trust account kept in the name of
an order made under the Act suspending a licensee’s li- the suspended licensee, or in the name of the
cence to practise law in Ontario as a barrister and solici- firm of licensees of which the suspended li-
tor or to provide legal services in Ontario, regardless of censee is a partner or by which the suspended
whether the suspension begins when the order is made
or thereafter.
323
LEGAL ACCOUNTING
licensee is employed, all money belonging to exempt the suspended licensee from or modify the re-
a client and pay the money to, quirement, subject to such terms and conditions as the
Society may impose.
(i) the client,
(ii) another licensee to whom the client PART III
has directed the suspended licensee to CASH TRANSACTIONS
make payment, or
Def inition
(iii) another licensee who has agreed with
the suspended licensee to accept pay- 3. In this Part,
ment in the event that the suspended li- “funds” means cash, currency, securities and negoti-
censee is unable to comply with able instruments or other financial instruments that
subclause (i) or (ii); and indicate the person’s title or interest in them; “public
(c) after complying with clauses (a) and (b), body” means,
(i) close every trust account that was kept (a) a department or agent of Her Majesty in right
in the name of the suspended licen- of Canada or of a province;
see, and
(b) an incorporated city, metropolitan authority,
(ii) cancel or cause to be cancelled the town, township, village, county, district, rural
suspended licensee’s signing authority municipality or other incorporated municipal
on every trust account that was kept in body or an agent of any of them; and
the name of the firm of licensees of
which the suspended licensee is a (c) an organization that operates a public hospital
partner or by which the suspended li- and that is designated by the Minister of Na-
censee is employed. tional Revenue as a hospital under the Excise
Tax Act (Canada) or agent of the organization.
Compliance with clause (1)(b) not required
Cash received
(2) A suspended licensee is not required to com-
ply with clause (1)(b) if the client’s file is transferred, in 4. (1) A licensee shall not receive or accept from a
accordance with Part IV of By-Law 7.1, to another licen- person, in respect of any one client file, cash in an ag-
see in the firm of licensees of which the suspended li- gregate amount of 7,500 or more Canadian dollars.
censee is a partner or by which the suspended licensee
is employed. Foreign currency
(2) For the purposes of this section, when a li-
Application of sections of Part IV censee receives or accepts from a person cash in a for-
(3) Subsection 9(3) and sections 10, 11 and 12 eign currency the licensee shall be deemed to have
apply to the withdrawal of money from a trust account received or accepted the cash converted into Canadian
under this section. dollars at,
(a) the official conversion rate of the Bank of
Report to Society on compliance Canada for the foreign currency as published
(4) A suspended licensee shall, not later than in the Bank of Canada’s Daily Noon Rates that
thirty days after the suspension begins, complete and is in effect at the time the licensee receives or
file with the Society, in a form provided by the Society, a accepts the cash; or
report confirming and providing details of the suspend-
(b) if the day on which the licensee receives or
ed licensee’s compliance with this section.
accepts cash is a holiday, the official conver-
sion rate of the Bank of Canada in effect on
Permission to be exempt from requirement
the most recent business day preceding the
2.4 A suspended licensee may apply in writing to the day on which the licensee receives or accepts
Society for an exemption from or a modification of a re- the cash.
quirement mentioned in this Part, and the Society may
324
Application PART IV
5. Section 4 applies when, in respect of a client file,
TRUST ACCOUNT
a licensee engages in or gives instructions in respect of
TRUST ACCOUNT TRANSACTIONS
the following activities:
1. The licensee receives or pays funds. Money received in trust for client
2. The licensee purchases or sells securities, 7. (1) Subject to section 8, every licensee who re-
real properties or business assets or entities. ceives money in trust for a client shall immediately pay
the money into an account at a chartered bank, provin-
3. The licensee transfers funds by any means.
cial savings office, credit union or a league to which the
Credit Unions and Caisses Populaires Act, 1994 applies
Exceptions
or registered trust corporation, to be kept in the name
6. Despite section 5, section 4 does not apply when of the licensee, or in the name of the firm of licensees
the licensee, of which the licensee is a partner, through which the
licensee practises law or provides legal services or by
(a) receives cash from a public body, an author-
which the licensee is employed, and designated as a
ized foreign bank within the meaning of sec-
trust account.
tion 2 of the Bank Act (Canada) in respect of
its business in Canada or a bank to which
Interpretation
the Bank Act (Canada) applies, a cooperative
credit society, savings and credit union or (2) For the purposes of subsection (1), a licensee
caisse populaire that is regulated by a prov- receives money in trust for a client if the licensee re-
incial Act, an association that is regulated by ceives from a person,
the Cooperative Credit Associations Act (Can-
(a) money that belongs in whole or in part to a
ada), a company to which the Trust and Loan
client;
Companies Act (Canada) applies, a trust com-
pany or loan company regulated by a prov- (b) money that is to be held on behalf of a client;
incial Act or a department or agent of Her
(c) money that is to be held on a client’s direc-
Majesty in right of Canada or of a province
tion or order;
where the department or agent accepts de-
posit liabilities in the course of providing fi- (d) money that is advanced to the licensee on ac-
nancial services to the public; count of fees for services not yet rendered; or
(b) receives cash from a peace officer, law en- (e) money that is advanced to the licensee on ac-
forcement agency or other agent of the Crown count of disbursements not yet made.
acting in an official capacity;
Money to be paid into trust account
(c) receives cash pursuant to an order of a tribunal;
(3) In addition to the money required under sub-
(d) receives cash to pay a fine or penalty; or
section (1) to be paid into a trust account, a licensee
(e) receives cash for fees, disbursements, ex- shall pay the following money into a trust account:
penses or bail provided that any refund out
1. Money that may by inadvertence have been
of such receipts is also made in cash.
drawn from a trust account in contravention
of section 9.
2. Money paid to a licensee that belongs in part
to a client and in part to the licensee where
it is not practical to split the payment of the
money.
325
LEGAL ACCOUNTING
Money to be paid into trust account: money received 2. Money that is received by the licensee as pay-
before licence issued ment of fees for services for which a billing
has been delivered, as payment of fees for
(3.1) If a licensee who holds a Class P1 licence re-
services already performed for which a bill-
ceives from a person, prior to being issued the licence,
ing will be delivered immediately after the
money for services yet to be rendered to a client and the
money is received or as reimbursement for
licensee does not perform the services for the client by
disbursements made or expenses incurred by
May 2, 2010, the licensee shall on May 3, 2010 pay the
the licensee on behalf of a client.
money into a trust account.
Record keeping requirements
Withdrawal of money from trust account
(3) A licensee who, in accordance with subsec-
(4) A licensee who pays into a trust account
tion (1), does not pay into a trust account money which
money described in paragraph 2 of subsection (3) shall
he or she receives in trust for a client shall include all
as soon as practical withdraw from the trust account
handling of such money in the records required to be
the amount of the money that belongs to him or her.
maintained under Part V.
One or more trust accounts
Withdrawal of money from trust account
(5) A licensee may keep one or more trust accounts.
9. (1) A licensee may withdraw from a trust ac-
count only the following money:
Money not to be paid into trust account
1. Money properly required for payment to a cli-
8. (1) A licensee is not required to pay into a trust
ent or to a person on behalf of a client.
account money which he or she receives in trust for a
client if, 2. Money required to reimburse the licensee for
money properly expended on behalf of a cli-
(a) the client requests the licensee in writing not
ent or for expenses properly incurred on be-
to pay the money into a trust account;
half of a client.
(b) the licensee pays the money into an account
3. Money properly required for or toward pay-
to be kept in the name of the client, a person
ment of fees for services performed by the li-
named by the client or an agent of the client;
censee for which a billing has been delivered.
or
4. Money that is directly transferred into another
(c) the licensee pays the money immediately
trust account and held on behalf of a client.
upon receiving it to the client or to a person
on behalf of the client in accordance with or- 5. Money that under this Part should not have
dinary business practices. been paid into a trust account but was through
inadvertence paid into a trust account.
Same
Permission to withdraw other money
(2) A licensee shall not pay into a trust account
the following money: (2) A licensee may withdraw from a trust ac-
count money other than the money mentioned in sub-
1. Money that belongs entirely to the licensee or
section (1) if he or she has been authorized to do so by
to another licensee of the firm of licensees of
the Society.
which the licensee is a partner, through which
the licensee practises law or provides legal
Limit on amount withdrawn from trust account
services or by which the licensee is employed,
including an amount received as a general re- (3) A licensee shall not at any time with respect
tainer for which the licensee is not required to a client withdraw from a trust account under this
either to account or to provide services. section more money than is held on behalf of that cli-
ent in that trust account at that time.
326
Manner in which certain money may be withdrawn 2. The electronic transfer system used by the li-
from trust account censee must be one that will produce, not later
than the close of the banking day immediately
10. A licensee shall withdraw money from a trust ac-
after the day on which the electronic transfer
count under paragraph 2 or 3 of subsection 9(1) only,
of funds is authorized, a confirmation from
(a) by a cheque drawn in favour of the licensee; the financial institution confirming that the
data describing the details of the transfer and
(b) by a transfer to a bank account that is kept in
authorizing the financial institution to carry
the name of the licensee and is not a trust ac-
out the transfer were received.
count; or
3. The confirmation required by paragraph 2
(c) by electronic transfer.
must contain,
Withdrawal by cheque i. the number of the trust account from
which money is drawn,
11. A cheque drawn on a trust account shall not be,
ii. the name, branch name and address
(a) made payable either to cash or to bearer; or of the financial institution where the
(b) signed by a person who is not a licensee ex- account to which money is transferred
cept in exceptional circumstances and except is kept,
when the person has signing authority on iii. the name of the person or entity in
the trust account on which a cheque will be whose name the account to which
drawn and is bonded in an amount at least money is transferred is kept,
equal to the maximum balance on deposit
iv. the number of the account to which
during the immediately preceding fiscal year
money is transferred,
of the licensee in all the trust accounts on
which signing authority has been delegated v. the time and date that the data describ-
to the person. ing the details of the transfer and au-
thorizing the financial institution to
Withdrawal by electronic transfer carry out the transfer are received by
the financial institution, and
12. (1) Money withdrawn from a trust account by
electronic transfer shall be withdrawn only in accord- vi. the time and date that the confirma-
ance with this section. tion from the financial institution is
sent to the licensee.
When money may be withdrawn 4. Before any data describing the details of the
(2) Money shall not be withdrawn from a trust transfer or authorizing the financial institu-
account by electronic transfer unless the following con- tion to carry out the transfer is entered into the
ditions are met: electronic trust transfer system, an electronic
trust transfer requisition must be signed by,
1. The electronic transfer system used by the li-
censee must be one that does not permit an i. a licensee, or
electronic transfer of funds unless, ii. in exceptional circumstances, a person
i. one person, using a password or access who is not a licensee if the person has
code, enters into the system the data signing authority on the trust account
describing the details of the transfer, from which the money will be drawn
and and is bonded in an amount at least
equal to the maximum balance on de-
ii. another person, using another password posit during the immediately preced-
or access code, enters into the system ing fiscal year of the licensee in all trust
the data authorizing the financial insti- accounts on which signing authority
tution to carry out the transfer. has been delegated to the person.
327
LEGAL ACCOUNTING
5. The data entered into the electronic trust Same

transfer system describing the details of the
(6) In exceptional circumstances, the tasks re-
transfer and authorizing the financial institu-
quired by subsection (5) may be performed by a person
tion to carry out the transfer must be as speci-
other than the licensee, if the person has signing authority
fied in the electronic trust transfer requisition.
on the trust account from which the money will be drawn
Application of para. 1 of subs. (2) to sole practitioner and is bonded in an amount at least equal to the max-
imum balance on deposit during the immediately pre-
(3) Paragraph 1 of subsection (2) does not apply ceding fiscal year of the licensee in all trust accounts on
to a licensee who practises law or provides legal servic- which signing authority has been delegated to the person.
es without another licensee as a partner, if the licensee
practises law or provides legal services through a profes- Electronic trust transfer requisition
sional corporation, without another licensee practising
law or providing legal services through the profession- (7) The electronic trust transfer requisition re-
al corporation and without another licensee or person quired under paragraph 4 of subsection (2) shall be in
as an employee, if the licensee himself or herself enters Form 9A.
into the electronic trust transfer system both the data de-
scribing the details of the transfer and the data authoriz- Def initions
ing the financial institution to carry out the transfer. 13. (1) In this section,
Same “closing funds” means the money necessary to com-
plete or close a transaction in real estate; “transaction
(4) In exceptional circumstances, the data re- in real estate” means,
ferred to in subsection (3) may be entered by a person
other than the licensee, if the person has signing au- (a) a charge on land given for the purpose of se-
thority on the trust account from which the money will curing the payment of a debt or the perform-
be drawn and is bonded in an amount at least equal to ance of an obligation, including a charge
the maximum balance on deposit during the immedi- under the Land Titles Act and a mortgage, but
ately preceding fiscal year of the licensee in all trust ac- excluding a rent charge, or
counts on which signing authority has been delegated (b) a conveyance of freehold or leasehold land,
to the person. including a deed and a transfer under the
Land Titles Act, but excluding a lease.
Additional requirements relating to conf irmation
(5) Not later than the close of the banking day Withdrawal by electronic transfer: closing funds
immediately after the day on which the confirmation
(2) Despite section 12, closing funds may be
required by paragraph 2 of subsection (2) is sent to a li-
withdrawn from a trust account by electronic transfer
censee, the licensee shall,
in accordance with this section.
(a) produce a printed copy of the confirmation;
When closing funds may be withdrawn
(b) compare the printed copy of the confirma-
tion and the signed electronic trust transfer (3) Closing funds shall not be withdrawn from a
requisition relating to the transfer to verify trust account by electronic transfer unless the following
whether the money was drawn from the trust conditions are met:
account as specified in the signed requisition;
1. The electronic transfer system used by the
(c) indicate on the printed copy of the confirma- licensee must be one to which access is re-
tion the name of the client, the subject mat- stricted by the use of at least one password or
ter of the file and any file number in respect access code.
of which money was drawn from the trust ac-
2. The electronic transfer system used by the li-
count; and
censee must be one that will produce immedi-
(d) after complying with clauses (a) to (c), sign ately after the electronic transfer of funds a
and date the printed copy of the confirmation. confirmation of the transfer.
328
3. The confirmation required by paragraph 2 (c) indicate on the printed copy of the confirma-
must contain, tion the name of the client, the subject mat-
ter of the file and any file number in respect
i. the name of the person or entity in
of which money was drawn from the trust ac-
whose name the account from which
count; and
money is drawn is kept,
(d) after complying with clauses (a) to (c), sign
ii. the number of the trust account from
and date the printed copy of the confirmation.
which money is drawn,
iii. the name of the person or entity in Same
whose name the account to which
(5) In exceptional circumstances, the tasks re-
money is transferred is kept,
quired by subsection (4) may be performed by a person
iv. the number of the account to which other than the licensee, if the person has signing au-
money is transferred, and thority on the trust account from which the money will
be drawn and is bonded in an amount at least equal to
v. the date the transfer is carried out.
the maximum balance on deposit during the immedi-
4. Before the electronic transfer system used by ately preceding fiscal year of the licensee in all trust ac-
the licensee is accessed to carry out an elec- counts on which signing authority has been delegated
tronic transfer of funds, an electronic trust to the person.
transfer requisition must be signed by,
Electronic trust transfer requisition: closing funds
i. the licensee, or
(6) The electronic trust transfer requisition re-
ii. in exceptional circumstances, a person
quired under paragraph 4 of subsection (3) shall be in
who is not the licensee if the person
Form 9C.
has signing authority on the trust ac-
count from which the money will be
Requirement to maintain suff icient balance in trust
drawn and is bonded in an amount at
account
least equal to the maximum balance on
deposit during the immediately preced- 14. Despite any other provision in this Part, a licensee
ing fiscal year of the licensee in all trust shall at all times maintain sufficient balances on depos-
accounts on which signing authority it in his or her trust accounts to meet all his or her obli-
has been delegated to the person. gations with respect to money held in trust for clients.
5. The data entered into the electronic trans-
AUTOMATIC WITHDRAWALS FROM TRUST
fer system describing the details of the elec-
ACCOUNTS
tronic transfer of funds must be as specified
in the electronic trust transfer requisition.
Authorizing Teranet to withdraw money from trust
account
15. (1) Subject to subsection (2), a licensee may au-
(4) Not later than 5 p.m. on the day immediately
thorize Teranet to withdraw from a trust account de-
after the day on which the electronic transfer of funds
scribed in subsection 16(1) money required to pay the
is carried out, the licensee shall,
document registration fees and the land transfer tax, if
(a) produce a printed copy of the confirmation re- any, related to a client’s real estate transaction.
quired by paragraph 2 of subsection (3);
Conditions
(b) compare the printed copy of the confirma-
tion and the signed electronic trust transfer (2) A licensee shall not authorize Teranet to
requisition relating to the transfer to verify withdraw from a trust account described in subsection
whether the money was drawn from the trust 16(1) money required to pay the document registration
account as specified in the signed requisition; fees and the land transfer tax, if any, related to a client’s
real estate transaction unless Teranet agrees to provide
329
LEGAL ACCOUNTING
to the licensee in accordance with subsection (3) a con- money was withdrawn from the trust account
firmation of the withdrawal that contains the informa- by Teranet as authorized by the licensee;
tion mentioned in subsection (4).
(c) indicate on the paper copy of the confirmation
the name of the client and any file number in
Time of receipt of conf irmation
respect of which money was withdrawn from
(3) The confirmation required under subsec- the trust account, if the confirmation does not
tion (2) must be received by the licensee not later than already contain such information; and
5 p.m. on the day immediately after the day on which
(d) after complying with clauses (a) to (c), sign
the withdrawal is authorized by the licensee.
and date the paper copy of the confirmation.
Contents of conf irmation
Special trust account
(4) The confirmation required under subsection
16. (1) The trust account from which Teranet may
(2) must contain,
be authorized by a licensee to withdraw money shall be,
(a) the amount of money withdrawn from the
(a) an account at a chartered bank, provincial sav-
trust account;
ings office, credit union or league to which the
(b) the time and date that the authorization to Credit Unions and Caisses Populaires Act, 1994
withdraw money is received by Teranet; and applies or a registered trust corporation kept
in the name of the licensee or in the name of
(c) the time and date that the confirmation from
the firm of licensees of which the licensee is a
Teranet is sent to the licensee.
partner, through which the licensee practises
law or by which the licensee is employed, and
Written record of authorization
designated as a trust account; and
(5) A licensee who authorizes Teranet to with-
(b) an account into which a licensee shall pay only,
draw from a trust account described in subsection 16(1)
money required to pay the document registration fees and (i) money received in trust for a client for
the land transfer tax, if any, related to a client’s real estate the purposes of paying the document
transaction shall record the authorization in writing. registration fees and the land transfer
tax, if any, related to the client’s real
Same estate transaction; and
(6) The written record of the authorization re- (ii) money properly withdrawn from an-
quired under subsection (5) shall be in Form 9B and other trust account for the purposes of
shall be completed by the licensee before he or she au- paying the document registration fees
thorizes Teranet to withdraw from a trust account de- and the land transfer tax, if any, related
scribed in subsection 16(1) money required to pay the to the client’s real estate transaction.
document registration fees and the land transfer tax, if
any, related to a client’s real estate transaction. One or more special trust accounts
(2) A licensee may keep one or more trust ac-
counts of the kind described in subsection (1).
(7) Not later than 5 p.m. on the day immediately
after the day on which the confirmation required under Payment of money into special trust account
subsection (2) is sent to a licensee, the licensee shall,
(3) A licensee shall not pay into a trust account
(a) produce a paper copy of the confirmation, described in subsection (1) more money than is required
if the confirmation is sent to the licensee by to pay the document registration fees and the land trans-
electronic means; fer tax, if any, related to a client’s real estate transaction,
and if more money is, through inadvertence, paid into
(b) compare the paper copy of the confirmation
the trust account, the licensee shall transfer from the
and the written record of the authorization
trust account described in subsection (1) into another
relating to the withdrawal to verify whether
330
trust account that is not a trust account described in sub- identifier of any document used to disburse
section (1) the excess money. money, the person to whom money is dis-
bursed, the amount of money which is dis-
Time limit on holding money in special trust account bursed, the purpose for which money is
disbursed and the client on whose behalf
(4) A licensee who pays money into a trust ac-
money is disbursed.
count described in subsection (1) shall not keep the
money in that account for more than five days, and if 3. A clients’ trust ledger showing separately for
the money is not properly withdrawn from that account each client for whom money is received in
by Teranet within five days after the day on which it is trust all money received and disbursed and
paid into that account, the licensee shall transfer the any unexpended balance.
money from that account into another trust account
4. A record showing all transfers of money be-
that is not a trust account described in subsection (1).
tween clients’ trust ledger accounts and ex-
plaining the purpose for which each transfer
Interpretation: counting days
is made.
(5) In subsection 16(4), holidays shall not be
5. A book of original entry showing all money re-
counted in determining if money has been kept in a
ceived, other than money received in trust for
trust account described in subsection 16(1) for more
a client, and identifying each date on which
than five days.
money is received, the method by which money
is received, the amount of money which is re-
Application of ss. 9, 11, 12 and 14
ceived and the person from whom money is
17. Sections 9, 11, 12 and 14 apply, with necessary received.
modifications, to a trust account described in subsec-
6. A book of original entry showing all disburse-
tion 16(1).
ments of money, other than money held in
trust for a client, and identifying each date
PART V
on which money is disbursed, the method
RECORD KEEPING REQUIREMENTS
by which money is disbursed, including the
number or a similar identifier of any docu-
REQUIREMENTS
ment used to disburse money, the amount of
money which is disbursed and the person to
Requirement to maintain f inancial records
whom money is disbursed.
18. Every licensee shall maintain financial records to
7. A fees book or a chronological file of cop-
record all money and other property received and dis-
ies of billings, showing all fees charged and
bursed in connection with the licensee’s professional
other billings made to clients and the dates
business, and, as a minimum requirement, every licen-
on which fees are charged and other billings
see shall maintain, in accordance with sections 21, 22
are made to clients and identifying the clients
and 23, the following records:
charged and billed.
1. A book of original entry identifying each date
8. A record showing a comparison made month-
on which money is received in trust for a cli-
ly of the total of balances held in the trust
ent, the method by which money is received,
account or accounts and the total of all unex-
the person from whom money is received,
pended balances of funds held in trust for cli-
the amount of money received, the purpose
ents as they appear from the financial records
for which money is received and the client
together with the reasons for any differences
for whom money is received in trust.
between the totals, and the following records
2. A book of original entry showing all disburse- to support the monthly comparisons:
ments out of money held in trust for a client
i. A detailed listing made monthly show-
and identifying each date on which money
ing the amount of money held in trust
is disbursed, the method by which money is
disbursed, including the number or a similar
331
LEGAL ACCOUNTING
for each client and identifying each cli- Record keeping requirements if mortgages and other
ent for whom money is held in trust. charges held in trust for clients
ii. A detailed reconciliation made monthly 20. Every licensee who holds in trust mortgages or
of each trust bank account. other charges on real property, either directly or in-
directly through a related person or corporation, shall
9. A record showing all property, other than
maintain financial records in addition to those required
money, held in trust for clients, and describ-
under section 18 and, as a minimum additional re-
ing each property and identifying the date on
quirement, shall maintain, in accordance with sections
which the licensee took possession of each
21, 22 and 23, the following records:
property, the person who had possession of
each property immediately before the licensee 1. A mortgage asset ledger showing separately
took possession of the property, the value of for each mortgage or charge,
each property, the client for whom each prop-
i. all funds received and disbursed on
erty is held in trust, the date on which posses-
account of the mortgage or charge,
sion of each property is given away and the
person to whom possession of each property ii. the balance of the principal amount out-
is given. standing for each mortgage or charge,
10. Bank statements or pass books, cashed cheques iii. an abbreviated legal description or the
and detailed duplicate deposit slips for all trust municipal address of the real property,
and general accounts. and
11. Signed electronic trust transfer requisitions iv. the particulars of registration of the
and signed printed confirmations of elec- mortgage or charge.
tronic transfers of trust funds.
2. A mortgage liability ledger showing separ-
12. Signed authorizations of withdrawals by Ter- ately for each person on whose behalf a mort-
anet and signed paper copies of confirma- gage or charge is held in trust,
tions of withdrawals by Teranet.
i. all funds received and disbursed on
account of each mortgage or charge
Record keeping requirements if cash received
held in trust for the person,
19. (1) Every licensee who receives cash shall main-
ii. the balance of the principal amount
tain financial records in addition to those required
invested in each mortgage or charge,
under section 18 and, as a minimum additional re-
quirement, shall maintain, in accordance with sections iii. an abbreviated legal description or the
21, 22 and 23, a book of duplicate receipts, with each municipal address for each mortgaged
receipt identifying the date on which cash is received, or charged real property, and
the person from whom cash is received, the amount of
iv. the particulars of registration of each
cash received, the client for whom cash is received and
mortgage or charge.
any file number in respect of which cash is received
and containing the signature of the licensee or the per- 3. A record showing a comparison made
son authorized by the licensee to receive cash and of monthly of the total of the principal balanc-
the person from whom cash is received. es outstanding on the mortgages or charges
held in trust and the total of all principal bal-
No breach ances held on behalf of the investors as they
appear from the financial records together
(2) A licensee does not breach subsection (1) if
with the reasons for any differences between
a receipt does not contain the signature of the person
the totals, and the following records to sup-
from whom cash is received provided that the licensee
port the monthly comparison:
has made reasonable efforts to obtain the signature of
the person from whom cash is received. i. A detailed listing made monthly iden-
tifying each mortgage or charge and
332
showing for each the balance of the Preservation of f inancial records required under s. 20
principal amount outstanding.
(3) A licensee shall keep the financial records re-
ii. A detailed listing made monthly iden- quired to be maintained under section 20 for at least
tifying each investor and showing the the ten year period immediately preceding the licens-
balance of the principal invested in ee’s most recent fiscal year end.
each mortgage or charge.
Record keeping requirements when acting for lender
Financial records to be permanent
24. (1) Every licensee who acts for or receives money
21. (1) The financial records required to be main- from a lender shall, in addition to maintaining the fi-
tained under sections 18, 19 and 20 may be entered and nancial records required under sections 18 and 20,
posted by hand or by mechanical or electronic means, maintain a file for each charge, containing,
but if the records are entered and posted by hand, they
(a) a completed investment authority, signed by
shall be entered and posted in ink.
each lender before the first advance of money
to or on behalf of the borrower;
Paper copies of f inancial records
(b) a copy of a completed report on the investment;
(2) If a financial record is entered and posted by
mechanical or electronic means, a licensee shall en- (c) if the charge is not held in the name of all the
sure that a paper copy of the record may be produced lenders, an original declaration of trust;
promptly on the Society’s request.
(d) a copy of the registered charge; and
Financial records to be current (e) any supporting documents supplied by the
lender.
22. (1) Subject to subsection (2), the financial rec-
ords required to be maintained under sections 18, 19
Exceptions
and 20 shall be entered and posted so as to be current
at all times. (2) Clauses (1)(a) and (b) do not apply with re-
spect to a lender if,
Exceptions
(a) the lender,
(2) The record required under paragraph 8 of
(i) is a bank listed in Schedule I or II to
section 18 and the record required under paragraph 3
the Bank Act (Canada), a licensed in-
of section 20 shall be created within twenty-five days
surer, a registered loan or trust corpor-
after the last day of the month in respect of which the
ation, a subsidiary of any of them, a
record is being created.
pension fund, or any other entity that
lends money in the ordinary course of
Preservation of f inancial records required under ss. 18
its business,
and 19
(ii) has entered a loan agreement with the
23. (1) Subject to subsection (2), a licensee shall
borrower and has signed a written
keep the financial records required to be maintained
commitment setting out the terms of
under sections 18 and 19 for at least the six year period
the prospective charge, and
immediately preceding the licensee’s most recent fiscal
year end. (iii) has given the licensee a copy of the
written commitment before the ad-
Same vance of money to or on behalf of the
borrower;
(2) A licensee shall keep the financial records re-
quired to be maintained under paragraphs 1, 2, 3, 8, 9, (b) the lender and borrower are not at arm’s length;
10 and 11 of section 18 for at least the ten year period
(c) the borrower is an employee of the lender or
immediately preceding the licensee’s most recent fiscal
of a corporate entity related to the lender;
year end.
333
LEGAL ACCOUNTING
(d) the lender has executed the Investor/Lend- amount of security available to the lender’s
er Disclosure Statement for Brokered Trans- charge.
actions, approved by the Superintendent
3. Releasing collateral or other security held for
under subsection 54(1) of the Mortgage Bro-
the loan.
kerages, Lenders and Administrators Act, 2006,
and has given the licensee written instruc- 4. Releasing a person who is liable under a
tions, relating to the particular transaction, covenant with respect to an obligation in con-
to accept the executed disclosure statement nection with the loan.
as proof of the loan agreement;
New requirement to provide documents to lender
(e) the total amount advanced by the lender does
not exceed $6,000; or (6) Forthwith after completing anew the report
on the investment under subsection (4), the licensee
(f ) the lender is selling real property to the bor-
shall deliver an original of it to each lender.
rower and the charge represents part of the
purchase price.
Requirement to add to f ile maintained under subs. (1):
substitution
Requirement to provide documents to lender
(7) Each time the licensee or any other licensee
(3) Forthwith after the first advance of money to
of the same firm of licensees substitutes for the charge
or on behalf of the borrower, the licensee shall deliver
another security or a financial instrument that is an ac-
to each lender,
knowledgment of indebtedness, the licensee shall add
(a) if clause (1)(b) applies, an original of the re- to the file maintained for the charge the lender’s writ-
port referred to therein; and ten consent to the substitution, obtained before the
substitution is made.
(b) if clause (1)(c) applies, a copy of the declara-
tion of trust.
Exceptions
Requirement to add to f ile maintained under subs. (1) (8) The licensee need not comply with subsec-
tion (4) or (7) with respect to a lender if clause (2)(a),
(4) Each time the licensee or any licensee of the
(b), (c), (e) or (f ) applied to the lender in the original
same firm of licensees does an act described in subsec-
loan transaction.
tion (5), the licensee shall add to the file maintained
for the charge the investment authority referred to in
Investment authority: Form 9D
clause (1)(a), completed anew and signed by each lend-
er before the act is done, and a copy of the report on the (9) The investment authority required under
investment referred to in clause (1)(b), also completed clause (1)(a) shall be in Form 9D.
anew.
Report on investment: Form 9E
Application of subs. (4)
(10) Subject to subsection (11), the report on the
(5) Subsection (4) applies in respect of the fol- investment required under clause (1)(b) shall be in
lowing acts: Form 9E.
1. Making a change in the priority of the charge
Report on investment: alternative to Form 9E
that results in a reduction of the amount of
security available to it. (11) The report on the investment required under
clause (1)(b) may be contained in a reporting letter ad-
2. Making a change to another charge of high-
dressed to the lender or lenders which answers every
er priority that results in a reduction of the
question on Form 9E.
334
Glossary
accountant professional who maintains, inspects, or interprets financial
accounts. The accountant prepares the various reporting and financial
statements required for the business.
accounting cycle process of recording the accounting events of a company.
The cycle begins when a transaction occurs and ends with its inclusion in the
financial statements. The eight steps of the accounting cycle are: (1) journalize
the transaction; (2) post entries; (3) prepare the trial balance; (4) prepare the
worksheet; (5) prepare the adjusted trial balance; (6) prepare the financial
statements; (7) prepare the closing entries; and (8) calculate the post-closing
trial balance. See Figure 3.1.
accounting equation an equation based on the balance sheet accounts
(assets, liabilities, and owner’s equity) in which the left-hand side of the
balance sheet must equal the right-hand side (debits = credits), as follows:
accounting period any monthly, quarterly, or annual period that marks the
beginning and end of financial reporting.
accounting standards a set of principles that govern the reporting of financial
information in a consistent, ethical, and accurate manner. Accounting standards
vary by jurisdiction, but in an increasingly global economy, they are becoming
more and more uniform in their application. In Canada, accounting standards
include generally accepted accounting principles (GAAP); international financial
reporting standards (IFRS); accounting standards for private enterprises (ASPE);
public sector accounting standards (PSAS); and accounting standards for not-for-
profit organizations (ASNPO).
accrual basis of accounting the principle that revenue is recorded when it is earned
regardless of whether or not payment has been received, and expenses are recorded
when incurred. This is the approach used by paralegals as required under the Income
Tax Act; compare cash basis of accounting.
accrued interest expense interest expense on a loan or other debt that has not
yet been paid.
accrued interest revenue interest revenue earned because of an outstanding
debt owed to the business owner by way of an accounts receivable.
335
GLOSSARY
accrued revenues revenues that are earned in a period but not yet billed or paid.
accrued salaries expense salary expenses that occur after the pay period end but before the
end of the reporting period.
accumulated depreciation the total amount that has been written off as an expense against
a particular asset over time. Depreciation is calculated in the contra-asset account.
adjusted trial balance the balance that shows the updated income statement and balance
sheet entries on the worksheet.
adjusting entries updates to accounts made as a result of changes to the account balance
from the last reporting period. For example, when payment is made on accrued expense or
revenue accounts, an adjustment is made to reflect the change to the balance sheet account,
the income statement account, or both. However, the cash or bank account would not be
adjusted; instead, the appropriate account would be adjusted on the opposite balance of that
account. Typical adjustments are prepaid accounts and depreciation.
adjustment a change made to the journal entries and general ledger at the end of an
accounting period after the initial trial balance is prepared. Often, these adjustments have
been accruing over the accounting period because it is more efficient to recognize the
change at the end of the period.
amortization the calculation of the decline in value of an asset from its original value to its
residual or remaining value.
assets all the cash, property, and other valuable items that a business or a person owns or is
entitled to.
bad debt money owed to a company that has not been successfully collected. Also known as
a “write-off” because it is “written off” as a loss.
balance sheet a financial statement showing the assets, liabilities, and capital of a business
at a particular date.
balance sheet account one of two types of general ledger accounts. (Income statement
accounts are the other types.) Balance sheet accounts are used to sort and store transactions
involving assets, liabilities, and owner’s equity.
barter transaction an exchange of goods or services that does not involve money. The
goods or services received could be considered proceeds from a business operation and
must be included in income. Barter transactions may also have GST/HST implications.
billable rate the rate that a professional charges a client; for paralegals, this is typically
based on the amount of time spent working on a file at an hourly rate (e.g., $80/h). The time
billed must be time spent working on the file to move the matter forward, providing legal
advice, researching, drafting, and conducting meetings with clients and third parties
(including telephone calls). If the hourly billable rate changes during the retainer, the client
must be notified or a new retainer agreement should be negotiated.
billable work work performed on a file that will be billed to a client, such as court attendances,
legal document preparation, correspondence, and telephone calls.
book value the historical cost of an asset minus accumulated depreciation.
336
GLOSSARY
bookkeeper person who records the day-to-day transactions of the accounting process.
A bookkeeper is not an accountant, but an accountant may perform some of the tasks
associated with bookkeeping. Having a bookkeeper enter and track data is typically more
cost-effective than having an accountant do so.
bookkeeping the system and tools used to analyze and record the day-to-day and cyclical
financial transactions specific to a business.
business expenses costs that are considered reasonable for a particular type of business and
that are incurred for the purpose of earning income; also known as operating expenses. Business
expenses can be deducted for tax purposes. Non-business-related expenses, which are either
personal in nature or not related to earning business income, are not tax-deductible.
business number (BN) a number that identifies a business to the government for all business
purposes, including remittances of GST/HST, corporate income tax, and payroll.
Canada Revenue Agency (CRA) the agency responsible for administering the tax laws for the
Government of Canada and most of Canada’s provinces and territories.
capital account the investment by the owner in a business. Capital is not always cash; it can be
assets that the owner chooses to invest in the company. The capital account includes the owner’s
beginning investment plus or minus the profits or losses earned by the firm.
capital cost allowance (CCA) the means by which Canadian businesses may claim depreciation
expense for calculating taxable income under the Income Tax Act.
cash basis of accounting the principle that recognizes revenue only when the revenue is
actually received and expenses only when payment has actually been made; compare accrual
basis of accounting.
cash controls internal systems to protect against the loss, misuse, or fraud of cash, including
cash payment and receipt systems. Petty cash is an example of a cash payment and receipt
system that has rules and procedures to safeguard against internal abuse.
cash receipts a book of duplicate receipts maintained as proof of financial transactions; a
requirement for paralegals in accordance with by-law 9, part V, section 19(1) of the Law Society
of Ontario. Cash receipts in this context should not be confused with the cash received and
documented on a general receipts journal, which is a special journal.
cash short and over cash short is an income statement account that records shortages and
overages in petty cash on hand and petty cash disbursements. When cash is short, debit this
account to show the increase in expenses as a result of the shortage. When cash is over, credit
this account to show the increase in income as a result of the overage. Example:
20** Dr. Cr.

Jan. 1 Expense Accounts X
– – – – – – – – – – – – – – – – – – – – – – – – – – – –– – – – –
Jan. 31 Cash Short and Over X (short) X (over)
Jan. 31 General Bank Account X
To replenish the petty cash fund ($100 limit)
337
GLOSSARY
chart of accounts a customized, detailed chart that creates a unique identification number for
each business account, typically used in a firm’s operation over the accounting cycle. This helps
to reduce the number of entries and posting descriptions. New accounts can be added to the
chart, but the chart should be ordered in a logical sequence similar to the balance sheet, the
statement of owner’s equity, and the income statement.
chartered professional accountant designation given to members of the accounting profession
regulated under the Chartered Professional Accountants of Ontario Act, 2017, RSO 2017, c 8
class assets included in a particular account. For example, the account for office furniture will
include desks, chairs, and other types of furniture.
client cost recovery journal journal in which are entered expenses on behalf of clients that are
recoverable from them. Such costs are typically recorded as a disbursements recoverable journal
entry and are included as disbursements on the client invoice and in the fees book. Also, funds can
be transferred from the trust account provided that the expense has been incurred and the client
agrees to the expense (by way of the client’s written authorization or a written retainer agreement).
client general ledger See client ledgers.
client ledgers the records of a firm’s ongoing transactions, organized by client matter or file
number, in respect of all receipts and disbursements made on behalf of or in regard to the firm’s
clients. The client trust ledger records payments taken by the firm for invoices sent to the client;
disbursements paid from the trust account on behalf of the client; and the balance remaining in
trust. The client general ledger records fees and disbursements received from the client; balance
owing; and disbursements paid by the firm on behalf of the client when no trust funds are
available. This ledger is especially useful if you need to report to a client the amounts that have
been received by the firm as payments and those that remain outstanding in respect of funds
that are not held in trust.
client matter the descriptor for each client file, indicating the area of law and the particulars of
the subject matter. Example: Client—Ann Smith, Matter re Small Claims (Smith ats Brown) File
No. 101-0001.
client number identifies the client by assigning a unique number associated with the client’s name
and contact information. Example: Client number 101 (Ann Smith, 123 Avenue Road, Toronto, ON).
client trust ledger See client ledgers.
close the books to “zero out” the income, expense, and withdrawal accounts by transferring
the net amounts to the capital account and starting these accounts at a $0 balance in the new
accounting period. See closing entries.
closing balance the total balance for each account at the end of an accounting period, which
becomes the opening balance for the next period.
closing entries journal entries that record temporary account balances at the end of a reporting
period (revenue, expenses, withdrawals, and income summary accounts) and the transfer of
such balances to the capital account.
compound entry a situation in which there are more than two entries for each transaction, such
as when there are two debit entries and only one credit entry, or vice versa.
conflict of interest an interest, financial or otherwise, that might adversely affect a licensee’s
judgment or loyalty with regard to a client or prospective client, or that would cause a licensee
to prefer a third party’s interests over those of a client or prospective client. (See rule 1.02 of
the Paralegal Rules of Conduct of the Law Society of Ontario.)
338
GLOSSARY
conflict search a search of a firm’s client database or manual list that checks all of the firm’s
current and former clients, files, and vendors against related or opposing parties and former
clients of former firm affiliations to determine whether there are any previous contacts with a
potential client or file that could lead to a conflict of interest.
contra-asset account an account linked to a long-term asset account that tracks and records
the decrease in value of the asset without affecting its original value. It is called “contra”
because although it is shown on the balance sheet as an asset account, and it represents an
“opposite” normal balance for an asset account.
credit (Cr.) an account entry that is found on the right side of a financial statement, journal,
or ledger.
current assets cash, or assets that will be converted into cash within one year. Examples: cash
in bank accounts, accounts receivable, prepaid insurance.
DEAD CLIC a memory device for determining which accounts show a normal debit balance
and which have a normal credit balance—that is, Debit Expenses Assets Drawings; Credit
Liabilities Income Capital.
debit (Dr.) an account entry that is found on the left side of a financial statement, journal,
or ledger.
deposit in transit a deposit made by the firm but not reflected on the bank statement by the
statement cut-off date. To balance the internal records with the bank statement, this deposit
amount (typically an outstanding cheque) would have to be added to the bank balance on the
bank reconciliation statement.
depreciation the calculation of the cost or expense of a long-term asset (such as property,
plant, equipment, or intangibles) over the course of its useful life, representing the asset’s
decline in value.
depreciation expense the periodic write-off of long-term assets.
dormant account funds remaining in trust that are unclaimed by a client for more than two
years. When this occurs, the paralegal can apply to the Law Society of Ontario for permission
to transfer such funds to the LSO. (See section 59.6 of the Law Society Act and by-law 10.)
double-entry bookkeeping an essential component of the accounting system, requiring that
there be a check and balance of debits and credits. Every transaction must have at least two
entries—a debit entry and a credit entry.
drawee the financial institution on which a cheque is drawn.
drawer the person who writes a cheque.
endorsement the signing or stamping of a cheque by the payee (the person to whom a cheque
is made payable), thereby transferring the rights of the cheque to the payee from the payor. See
Figure 10.6.
expanded accounting equation an equation that correlates the balance sheet assets with the
income statement accounts (income and expenses) and the statement of owner’s equity
(increases and decreases to the capital account), as follows:
Assets = Liabilities + Capital – Withdrawals + (Income – Expenses)
See Figure 2.4.
339
GLOSSARY
expense day-to-day, regularly occurring costs, charges, and items that are consumed or used
up; the costs of doing business.
expense account all the expense accounts on the income statement that have a normal debit
balance.
expense recovery reimbursement for expenses incurred on behalf of clients in furtherance of
their legal matters. Such expenses (e.g., photocopy, printing, faxing, courier, and court filing
costs) should be described and disclosed in a retainer agreement. Some expenses are not
subject to GST/HST and some have tax already included. Paralegals should be sure to apply
HST only where required.
external users stakeholders that are interested in a firm’s financial accounting.
fees book the record of a firm’s billings for all clients, including fees for legal services,
disbursements, and GST/HST.
fees journal See fees book.
financial statements a point-in-time reporting of the financial position of a business for
each accounting period (monthly, quarterly, or annually), including the income statement,
the statement of owner’s equity, and the balance sheet.
fiscal period the accounting period over which a firm reports its business or professional
income.
fiscal year any 12-month period selected by a firm to mark the beginning and the end of
its financial reporting and tax reporting year (e.g., January 1 – December 31). For a sole
proprietorship or partnership, the fiscal period is based on the calendar year; for a
corporation, it may be any 12-month period (that coincides with the cycle of its business
operation). The firm usually establishes its fiscal period when it files its first income tax
return or when it registers a business account with the Canada Revenue Agency.
fixed or capital assets assets that have a long life. They may be purchased with cash or
on credit. Examples: land, buildings, equipment, vehicles.
flat rate a charge that is the same in all cases. Paralegals can bill on a flat-fee basis when the
time that will be required is easy to estimate (such as traffic court fines and certain routine or
easy-to-resolve matters). The flat rate is established at the discretion of the paralegal but should
reflect the industry standard in order to be competitive.
general bank account a business bank account used by a firm for general business purposes,
including depositing receipts and paying bills.
general disbursements journal a record of payments from the general bank account by the firm
to a third party. Such expenses may be incurred by the paralegal for the legal services practice or
on behalf of a client, or for any other payment made by the firm to another party.
general journal a record that tracks the day-to-day financial transactions of a firm
chronologically, without any special categorization of the accounts.
general ledger a record that posts journal entries by category in the order shown on the chart
of accounts. The general ledger provides an ending balance after calculating the debits and
credits for each account; this ending balance is used to prepare the trial balance.
340
GLOSSARY
general monetary retainer an amount paid to a lawyer by a client to secure the availability of the
lawyer for a specific period of time. The legal professional who receives a “general retainer” is
not required to account for or to provide services. However, section 8(2)(2) of by-law 9 must be
reviewed with caution in order to ensure that the conditions required by the Law Society of
Ontario are satisfied.
general receipts journal a record of payments received into a firm’s general bank account.
These may include amounts received from the paralegal, a third party, or a client.
generally accepted accounting principles (GAAP) the common set of accounting principles and
procedures that companies use to compile their financial statements. GAAP is a combination of
authoritative standards set by policy boards and the commonly accepted ways of recording and
reporting accounting information.
goods and services tax see GST/HST.
government users government users are interested in tax accounting, and businesses are
required to submit income tax returns annually.
gross pay the total amount of salary received before taxes or other deductions (such as health
insurance) are deducted from it.
GST/HST a tax that is added to most goods and services purchased in Canada. Each province
has its own rate of tax. The HST (harmonized sales tax) is used in provinces where the federal
GST (goods and services tax) and the PST (provincial sales tax) have been combined into a
single value-added sales tax. In Ontario, the HST is 13 percent.
harmonized sales tax see GST/HST.
historical cost the original price paid for an item.
income the amount received by a firm in the sale of its goods or services. Income is reported
for income tax purposes and will also be used to determine the amount of deductions or credits
that apply to the business or the individual; income is sometimes referred to as “revenue.”
income statement a financial statement showing the revenues and expenses for a particular
accounting period; a temporary record that starts at a “zero” balance each new accounting
period.
income statement account one of two types of general ledger accounts. (Balance sheet
accounts are the other type.) Income statement accounts are used to sort and store transactions
involving revenues, expenses, gains, and losses. Debit all credit balances on the income account
(i.e., bringing the balance to $0) and credit it to the income summary account.
income summary account a transitional account into which all income statement revenue
and expense accounts are transferred at the end of an accounting period. The net amount
transferred into the income summary account equals the net profit (a credit balance) or loss
(a debit balance) that the business incurred during the period. The income summary is a
temporary record that must be closed (i.e., bringing the balance to $0).
income tax a federal program that provides the government with revenue collected from
all residents who are required to pay income tax. Income tax revenues are used for various
programs and initiatives of the federal government. The Department of Finance sets the
prescribed basic income tax rates, which vary progressively with the amount of taxable
income. There are rates of tax at both the federal and the provincial levels.
341
GLOSSARY
information return a form filed by employers, trusts, and businesses to report to the Canada
Revenue Agency about their income, source deductions, credits, and other relevant information.
Each form has a number identifying its purpose. Example: Employers prepare a T4 slip for each
employee, who in turn files it with his or her personal income tax form.
input tax credit (ITC) the amount that GST/HST registrants can recover for GST/HST paid
(or payable) or owed on their purchases and expenses related to their business activities.
internal controls internal checks and balances used to create efficiency, to protect and
safeguard the assets of the business, and to prevent fraud and theft. Such controls are
customized for each business and process but typically follow industry standards and best
practices. Example: having at least two signatories on any negotiable instrument, such as
a cheque.
internal users a company’s own stakeholders who are interested in accounting for purposes
of making management decisions, such as those related to profitability or expansion.
international financial reporting standards (IFRS) a set of international accounting rules
imposed on publicly accountable enterprises—for example, corporations whose shares are
listed on a stock exchange, banks, etc.
journal entries a means of tracking and chronologically recording the day-to-day financial
transactions of a firm, without any special categorization of the accounts. Journals document
the source of the transaction and are called books of original entry. Where there is a need to
specify and categorize a journal by account, this is known as a special journal.
Law Foundation of Ontario a non-profit organization, created by statute in 1974, governed by
a five-person volunteer board of trustees and supported by a staff team, which funds legal
programs and initiatives geared toward improving access to justice. The interest collected from
the mixed trust accounts of licensees is used to fund many of these initiatives.
legal accounting software special software designed for general business and trust accounting.
It provides automatic calculations, posts automatically to ledgers, and produces financial and
other reports.
liabilities all the legal debts and obligations that a firm or a person owes to its creditors or
customers.
licensee paralegals and lawyers who are licensed to practise by the Law Society of Ontario
(LSO).
limited liability partnership a form of partnership established by professionals who are
self-governed (e.g., doctors, lawyers, accountants, dentists). An LLP is not a corporation,
but liability can be minimized through professional and other general liability insurance.
loss the situation in which expenses exceed income.
matching principle a basic underlying guideline in accounting that directs a firm to report
an expense on its income statement in the same period as the related revenues.
matter-to-matter trust transfer journal a journal where a record of trust funds moved from
one client’s trust ledger account to another client’s trust ledger account is recorded.
mixed or pooled trust bank account an account that holds funds for the benefit of more than
one client and may be disbursed only by the rendering of an account for services or upon the
authorization and direction of the client. The funds belong to the client and can be refunded or
recovered by the client in the event of termination of the file or services, or where there are
unused funds. (See by-law 9, section 7.)
342
GLOSSARY
monetary retainer an advance payment made by a client, held in trust by a lawyer or

paralegal for future services. In contrast, where services have already been rendered or billed,
or disbursements already incurred on behalf of a client, the payment is not deposited in trust
but is instead deposited into the general bank account. (See by-law 9, sections 7 and 8.)
Monetary retainers are sometimes referred to as “unearned revenue” or “prepaid services.”
multi-discipline practice (MDP) or affiliation an arrangement among licensed legal
professionals and non-licensed professionals who seek to work together through an association
or partnership. MDPs are usually considered where the licensee and the non-licensee have
overlapping practices or disciplines or where there is the prospect of mutual referrals. An
“affiliation” is a more loosely held form of organization and may involve a larger group of
professionals seeking to maximize marketing and professional support. (See by-law 7, part III.)
net income as reported on the income statement, the situation in which income exceeds
expenses, which will cause an increase in a company’s equity.
net loss as reported on the income statement, the situation in which expenses exceed
income, which will cause a decrease in a company’s equity.
non-billable work work performed in relation to a file that is not billed to the client, such
as a free consultation.
normal balance the debit or credit sides of a financial statement, journal, or ledger where
increases are recorded. Some accounts (such as assets) have a normal debit balance, so an entry
on the debit side increases the balance in the account. Other accounts (such as liabilities) have
a normal credit balance, so an entry on the credit side increases the balance in the account.
normal credit balance See normal balance.
normal debit balance See normal balance.
NSF cheque a cheque that is cashed by the payee where there are insufficient funds in the
payor’s account to cover it. An NSF cheque is returned with a service charge. In preparing
the bank reconciliation statement, the payor would credit (subtract from) the internal
records the amount of the NSF cheque and the amount of the related service charge.
office supplies inventory an asset account that reflects the value of the supplies that the
firm has on hand; as office supplies are used up or consumed, this is recognized as an office
supplies expense.
opening balance the total balance for each account at the beginning of the accounting period.
The total is taken from the ending or closing balance of that account from the last period.
outstanding cheque a cheque issued by the payor that has not been cashed by the payee
and therefore appears on the payor’s internal records but not on the bank statement. To
prepare the bank reconciliation, the payor would credit (subtract from) the bank balance the
amount of the outstanding cheque (as if the transaction had been completed and the
cheque paid from payor’s bank account).
owner’s equity the value of assets remaining after all liabilities have been deducted; this
residual value is what is received by the owner or shared by the shareholders or partners. Also
called capital.
partnership a firm managed by two or more persons who share in the profit, loss, and risk of
the business. At least one partner must be a general partner, whose duty it is to manage the
business; the other partners may be passive investors or take a less active role. Liability is
unlimited but shared. (See by-law 7, part I.)
343
GLOSSARY
payee a person to whom money, such as a cheque, is paid or is to be paid.

payor a person who pays, especially in the case of a bill or cheque.
payroll deductions source tax deductions, such as income tax deductions, Canada Pension
Plan (CPP) contributions, and employment insurance (EI) premiums, that are deducted from
an employee’s income and sent regularly to the Canada Revenue Agency. Employers also
contribute to some deductions and make their own CPP and EI contributions.
permanent accounts balance sheet accounts; called “permanent” because their balances carry
over from one fiscal period to the next.
personal deductions income tax deductions that reduce tax for some taxpayers and promote
certain activities considered to be beneficial, such as tuition fees and childcare expenses.
petty cash cash on hand for a business to pay for “petty” or small expenditures such as
postage, office supplies, parking, and other similar expenses. Petty cash is controlled internally
by the establishment of a petty cash fund.
petty cash account an asset account on the balance sheet, established by issuing a cheque
to the custodian of the petty cash account. Each payment from the petty cash account is
represented by a voucher. (See Figure 10.2.) When the petty cash account is reduced or has
a zero balance, the petty cash fund is replenished to bring it back to the petty cash limit
originally established, as follows:
20** Dr. Cr.

Jan. 1 Petty Cash $100
General Bank Account $100
To establish (or increase) the petty cash fund ($100 limit)
20** Dr. Cr.

Jan. 31 Expense Accounts (Postage, Office Supplies, Parking) $72.50
General Bank Account $72.50
To replenish the petty cash fund ($100 limit)
post, posting the process of transferring information from a journal to a ledger.

post-closing trial balance the listing of the balance sheet accounts (assets, liabilities, and
owner’s equity) after all adjustment and closing balances have been reduced to zero from the
temporary accounts and have been transferred to update the capital account (owner’s equity).
post reference (PR) the numerical identifier for each account referenced on a chart of accounts.
The PR makes it easy to cross-reference and identify journal entries.
prepaid expenses expenses for a good or service that are paid in advance of the payment
due date or before the use or consumption of the good or service. Examples: prepaid rent,
prepaid insurance.
professional corporation lawyers or licensed paralegals who carry on the practice of law
or the provision of legal services through an incorporated entity. (See by-law 7, part II.)
profit the situation in which income exceeds expenses.
344
GLOSSARY
reconciliation the comparison of transactions recorded in a firm’s internal records (the general
ledger or bank account ledger) against the transactions reported on the bank statement (e.g.,
deposits, cheques issued, interest, bank charges) and the preparation of a bank reconciliation
statement to confirm that the ending balances for the internal records and the bank statement
are balanced. If the records are not balanced, the bookkeeper/accountant will need to investigate
possible errors either in the firm’s internal records or on the bank’s part. It is good practice to
reconcile both the general bank account ledger, and the trust bank account ledger, against the
general bank account and the trust bank account statements.
records documents that must be maintained by businesses and individuals to verify the
information that is filed with the Canada Revenue Agency, such as account books, sales and
purchase invoices, contracts, bank statements, and cancelled cheques. You must keep records
at your business or residence in Canada for at least six years from the end of the last tax year
to which the records relate, and the CRA must have access to these records if requested.
residual value the estimated value of the asset at the end of its useful life.
retainer an agreement between a client and a legal services provider for the engagement of
legal services, describing the scope of services to be provided, the billing rate, and the billing
practices.
revenue recognition principle a basic guideline in the accrual approach to accounting that
requires revenues to be shown on the income statement in the period in which they are earned,
not in the period when the cash is collected.
separate interest-bearing trust account a bank account that is held for each individual client
who requests it, and who has large sums of money that are to be held for an extended period of
time. The licensee has a duty to account for the interest on the funds in the separate interest-
bearing account; interest accrues to the client. (See paragraph 2(b), “Separate Interest Bearing
Trust Account,” in The Bookkeeping Guide for Paralegals of the Law Society of Ontario.)
service charges fees charged by a bank to manage customers’ bank accounts. These fees may
be regular monthly charges or charges per transaction. Service fees are expenses on the income
statement and reduce the cash account.
shareholder’s equity the equity account in an incorporated company.
signature card a card signed by anyone opening an account at a financial institution. It is kept
on file to confirm the person’s identity.
slide an error resulting from incorrect placement of a decimal point in writing numbers.
small supplier a supplier whose annual revenues from taxable supplies (before expenses)
from all businesses total $30,000 or less. Once annual revenues exceed $30,000, the business
must be registered and must start collecting GST/HST.
sole proprietorship a business managed by a sole owner and operator, in his or her own name
or under another, as authorized by a business name licence; liability is unlimited.
special journal a specific journal, used instead of the general journal, to identify specific
transactions by special categories. A general journal can be used but may not be helpful or
efficient for reporting purposes. Special journals include trust receipts journals, general receipts
journals, trust disbursements journals, general disbursements journals, and fees journals.
stakeholders internal and external parties who rely on the information provided by a business
in making decisions; these may include employees and customers.
345
GLOSSARY
statement of owner’s equity a financial statement used to calculate owner’s equity in the firm
after taking into account any profits or losses of the firm less money withdrawn by the owner;
a permanent record that uses the ending balance of the last accounting period as the opening
balance of the new period.
straight-line amortization method a calculation of depreciation cost or expense at an equal
amount over the life of the asset, so that the allocated monthly, quarterly, or annual costs
are of equal value over time. Example: An asset with an original value of $3,000, a residual
value of $500, and an estimated shelf life of 3 years would have an annual depreciation cost
of $833 ($2,500/3 years). See Figure 8.4.
T-account a tool used to show a particular account according to the debits and credits.
Example of a T-account for an asset account:
Account Name
Debit Credit
(+) increase (–) decrease
tax year the period for which income tax is to be paid, based on either the calendar year or the
elected or designated fiscal period.
taxable benefits benefits—such as money, or the value of goods or services—that an employer
pays or provides to an employee in addition to salary or wages. Examples: employer contributions
to a provincial health insurance plan, life insurance premiums, dental and medical benefits.
temporary accounts income, expense, and withdrawal accounts; called “temporary” at year-end
because a fresh start is needed each year.
time entry and billing a method of tracking the time spent on billable client matters, whether
manually or through the use of a computerized system. For each activity, the time and
description are entered. Best practice: Enter the actual time (in hours and minutes, 00:00) for
appointments, meetings, and telephone calls or matters where a significant amount of time is
spent on an activity together with the calculated time in tenths of an hour. This approach avoids
client complaints and disagreements about billing. Entering time on a daily basis, or as an
activity is completed, is the best way to ensure accuracy.
transposition the accidental reversal of digits in making a journal or ledger entry.
trial balance A list of the closing balances of the general ledger accounts that are arranged
according to the chart of account listings and categorized as either debits or credits. If the debit
entries equal the credit entries, the trial balance is balanced.
trust bank account a bank account in which a law professional (acting as an authorized
custodian) holds money that belongs to clients, not to the firm. Trust funds are used for
specific purposes—for example, to pay court filing fees on behalf of a client.
trust bank journal a record of deposits to and withdrawals from a trust bank account,
representing money belonging to clients and held in trust until services are rendered. Instead of
using a general trust bank journal, a paralegal may wish to set up special journals for reporting
purposes, called the trust receipts journal (records receipts into trust) and the trust
disbursements journal (records disbursements from trust).
346
GLOSSARY
trust bank reconciliation a comparison of the trust bank balance with the trust journal
and trust listing balances. To obtain a reconciled balance, take the ending balance of the
trust bank statement and subtract the amount of the outstanding cheques, then add any
outstanding deposits.
trust comparison a comparison of the reconciled trust bank balance with the client trust
listing total. The two amounts should be equal.
trust control accounts accounts that provide the total of the moneys received in trust from
all clients and the total of moneys owed to clients. The balance sheet includes the trust bank
account (e.g., funds received; an asset account) and trust funds owed (e.g., money owed to
clients; a liability account). The totals in the two accounts should be equal.
undepreciated capital cost (UCC) the balance of the capital cost left for further depreciation
at any given time. The amount of CCA claimed each year will lower the UCC of the property.
valuable property record a record of any property, other than cash, belonging to clients that
is being held in trust or for safekeeping.
withdrawals money taken out of the firm by the owner without regard to the sale of goods or
services, thus reducing the equity value in the business. Money taken out of the business does
not go back into the business but is used for the personal benefit of the owner. Shareholder
withdrawals are known as dividend payments.
work in progress (WIP) an account of work that has not been completed or services that
have been performed in part but are still in progress and, therefore, not yet included as earned
income or revenue. ① The account WIP Accrued (an asset account) has a debit balance; WIP
Professional Fees (an income account) has a credit balance. ② When a bill is prepared, the
journal entry would be: Accounts Receivable (Asset)—Dr.; Fees Earned—Cr. ③ In order to
clear WIP Accrued (as a result of preparing an invoice and billing the client) for a particular
period and bring it to $0 or to a value corresponding to the amount billed, the journal entry
would be a reversing entry: WIP Professional Fees (Income)—Dr.; WIP Accrued (Asset)—Cr.:
Asset Accounts
WIP Accrued Accounts Receivable
500 ① 500 ②
500 ③
Balance 0
Income Accounts
Fees Earned WIP Professional Fees
500 ② 500 ①
500 ③
Balance 0
347
GLOSSARY
worksheet a form of internal reporting of the trial balance, specific adjustment entries,
and adjusted trial balance showing the updated income statement and balance sheet
entries. Additional columns can be used specifically for the income statement and the
balance sheet. The worksheet is usually prepared in columns similar to a spreadsheet.
Example:
Adjusted Income Balance

Account Titles Trial Balance Adjustments Trial Balance Statement Sheet
Office Supplies 50 35 85
Trust Funds Owed 1,000 500 1,500
348
Index
accountants, 2, 228 adjusted trial balance, 43,
accounting, 3, 20, 21-22, 103, 293 199, 200, 206, 210
software, see legal adjusting entries
accounting software checking, 210
accounting cycle, 40, 41-43, 198, 222 in the accounting cycle, 199
accounting equation, 22, 24-25, 44, 48-49, in worksheets, 42-43, 200
see also assets; expanded accounting preparing, 2-3, 204-10
equation; liabilities; owner’s equity for tax purposes, 272
accounting period, 26, 40, 41, 100 types, 201-4
accounting standards for private year-end, 204, 225
enterprises (ASPE), 21 adjustments, see adjusting entries
accounts advertising, 13, 293
asset, 162, 200 affiliation, see multi-discipline practice
balance sheet, 226 amortization, see depreciation
bank, 7-10, 13, 260-66 assets
categories of, 22-23 accounts, 162, 200
contra-asset, 201 class, 201
dormant, 272 current, 22, 256
drawings, 228 defined, 29
expense, 226, 227 fixed or capital, 22
income, 23, 226 in accounting equation, 24-25, 44
income summary, 227-28 in closing entries, 226
liabilities, 161, 162, 200 in general receipts journal, 128
payable, 125 on balance sheet, 100, 106-7
permanent, 226, 229 prepaid, 209
petty cash, 256 purchased, 21
temporary, 43, 226 shift in, 49, 54
titles, 200 trust, 169
trust, see trust bank account value of, 23
withdrawal, 226 audits
accounts receivable, 123, audit trail, 159
124-25, 128, 139, 199 defined, 6
accrual basis of accounting, documentation for, 272
21-22, 103,199, 293 practice audits, 171-72
accrued interest revenue, 204 program, 285
accrued salaries expense, 209 spot audits, 171
349
INDEX
bad debt, 22, 199, 293; see also debts recommendations, 285 conservatism principle, 21
balance sheet, see also reporting to, 46 consistency principle, 21
financial statements requirements, 3, 138, 235, 312 contra-asset account, 201
accounts, 101, 226 tax collection, 5, 299 copying error, 81, 82
column on worksheet, 200, 210-11 tax information, 103, 298 corporation, see professional
example, 169, 224 capital corporation
interpreting, 108-9 account, 26, 27, 45, 100, 105 cost principle, 21
preparing, 106-8 after posting, 229 CPA, see chartered professional
balancing the books, 166, 199 defined, 23, 26 accountant (CPA)
bank, see also financial institutions contribution, see investments CPA Canada Handbook:
charges or credits, 266, 294 gains, 298 Accounting, 21
drafts, 159 capital cost allowance (CCA), CPP, see Canada Pension Plan (CPP)
errors, 263 199, 201, 285, 295 CRA, see Canada Revenue
memos, 263, 269 cash basis of accounting, 22 Agency (CRA)
passbooks, 272 cash controls, 256 credit
service charges, 261 cash short and over, 258-59 balance with debit, 128, 167
statements, 261 chart of accounts, 23, column in worksheet, 200
banking procedures, 259-60 47, 74, 131, 256 entries, 59, 60
barter transactions, 103 chartered professional in the accounting
billable hours, 311 accountant (CPA), 2 equation, 24, 48
billable rate, 309 cheques in client general ledger
billable work, 119, 122 bounced, 261 accounts, 128
billing time, 118-20, 125, cancelled, 260, 261, 267, 272, 292 normal balance, 44, 45, 46
306, 308-10, 312 endorsement, 259-60 recording, 162
blank endorsement, 259 NSF, 261 rules of, 43-46
book of original entry, see outstanding, 261, 263, 267 credit cards, 259
general journal stale-dated, 271 Credit Unions and Caisses
book value, 201 trust, 159, 172, 310 Populaires Act, 1994, 10
bookkeeper, 2, 11, see uncashed, 271 creditors, 23
also bookkeeping class, 201, see also assets
bookkeeping, see also bookkeeper; client cost recovery journal, 312 DEAD CLIC, 47, 210, see also
electronic bookkeeping system client files, 307, 308 assets; capital; credit; debit;
as a paralegal, 3, 311 client ledgers drawings; expenses; income;
double-entry, 24, 26, general, 137-38 liabilities; normal credit balance;
42, 43, 47, 161 in PCLaw®, 174 normal debit balance
legal requirements, 235 trust, 120, 158, 161, 166 debit
process, 118 client matter, 307, see also matter balance with credit, 128, 167
time to complete, 11 client number, 307 cards, 259
business entity principle, 21 client time entries, see time column in worksheet, 200
business money, 159 entries and billing entries, 60
Business Names Act, 4 client trust in the accounting
business number, 11 listing, 166, 167, 269 equation, 24, 48
business organization, 3-6 obligations, 158 in general bank account
closing balance, 26 ledger sheet, 128
calculation error, 81, 82, 210 closing entries, 43, 224, 226-29, 228 memorandum, 261
Canada Pension Plan (CPP), 288 closing the books, 43 normal balance, 44, 45, 162
Canada Revenue Agency (CRA) compound entry, 44, 49, 51 recording, 162
audits, 29, 272, 285 conflict of interest, 308 rules of, 43-46
payments to, 296 conflict search, 308 debts, 22, 25; see also bad debt
350
INDEX
declining balance amortization slide, 82 financial statements, 3, 43, 100,

method, 203; see also depreciation transposition, 82 104, 108-9, 131, 211, 222
deductions, 298 wrong column, 81, 210 fiscal periods, 40, 103
deposits exemptions, 284 fiscal year
in transit, 260-61 expanded accounting equation, adjusting entries, 204-5
to general bank account, 259 26-29, see also accounting equation defined, 40
outstanding, 263, 269 expenses year-end, 40, 43, 199, 209, 229-34
records, 159 accounts, 102, 226, 227 flat rate, 119, 309
slips, 160, 259, 264-65, 310 accrued, 204 float, 258-59
depreciation, see also declining advertising, 293 fraud, 256, 259
balance amortization method business, 104, 287 full endorsement, 259
accumulated, 201 business use of home, 104
defined, 201 calculating, 295 general balance, 260-66
calculating, 199, 202, 208 capital, 294 general bank account
rate, 295 classifying, 29 compared with trust
disbursements computer and other account, 158-59
defined, 120 equipment, 296 defined, 8, 9
journals, 271 convention, 297 ledger sheet, 128, 266
not incurred as agent, 299 debit, 46, 200 records, 271-72
recording, 158, 164, 311-12 depreciation, 199, 201 withdrawals from, 259
trust, 161, 172, 310-11 general office, 259 general disbursements journal,
docketing time, 119-20 insurance, 294 118, 125, 129-30, 263
documents, 46, 138, 272 in expanded accounting general firm funds, 7
dormant accounts, 272 equation, 27 general journal
double-entry bookkeeping, living, 293 closing entries, 226, 227, 228
24, 26, 42, 43, 47, 161 maintenance and repairs, 294 defined, 22, 42
drawee, 260 meals and entertainment, 294 entries, 47, 59, 75, 79, 130,
drawer, 260 motor vehicle, 295 134, 225, 256, 257, 258
drawings, 102, 228, 229, 297 office, 297 bank charges, 266
operating, 201, 293-98 payroll, 291
EI, see employment insurance (EI) personal, 201, 205-7, 293 example, 57
electronic bookkeeping system, 60 prepaid, 293 transaction details, 162
employer’s contributions, 297 recording, 21, 22, 56 uses, 125, 199
employment insurance (EI), 288 recovery, 27, 120 general ledger
end-of-period, 312 reporting, 103 accounts, 74, 80, 120, 128,
ending balance, see closing balance salaries, 297-98 167, 227, 229-34
endorsement, 259-60 telephone and utilities, 298 charts, 82
errors tracking, 6, 258 client’s, 131
bank, 263, 269 travelling, 293 completed, 134-37
calculation, 210 work space in home, 296 defined, 74
detecting, 26 explanation codes, 122, 308, 311 in PCLaw®, 108
in adjusted trial balance, 210 external users, 20 opening balances, 58
in trial balance, 81-82 petty cash, 256, 258
in trust bank journal, 167 fees book, 118, 123-24, 271 posting in, 22, 42, 76
mathematical, 82 fees journal, see fees book general monetary retainer, 7
omission, 82 file number, see client matter general receipts journal,
overdraft, 9 financial institutions, 10, see also 118, 124, 125, 127-28
posting, 82, 269 bank; banking procedures generally accepted accounting
reducing, 259 financial records, 158 principles (GAAP), 20, 21, 199, 203
351
INDEX
GIC, see guaranteed investment deductions, 288 defined, 8

certificate (GIC) payable, 102 trust, 158
going concern principle, 21 reporting, 103 legal accounting software,
goods and services tax (GST), returns, 3, 199, 204, 235 see also PCLaw®
284, see also GST/HST; Income Tax Act, 5, 22, 103, 285, automatization, 286
harmonized sales tax (HST) 287, 312, see also income tax errors, and, 26
government users, 20 incorporated practices, see list of accounts, 24
gross pay, 288, 289 professional corporation uses of, 13, 106, 122, 125, 260
GST, see goods and services tax (GST) “incurred as agent,” 299 using, 306-12
GST/HST, see also goods information return, 292, see legal fees, 293
and services tax (GST); also T4 information return letter of direction, 12
harmonized sales tax (HST) input tax credit (ITC), 284, 285 LFO, see Law Foundation
barter transactions, and, 103 insufficient funds (NSF), 9, 261 of Ontario (LFO)
filing, 292, 296, 298 insurance, 6, 294 liabilities
registering for, 11 interest, 11, 27, 294, 296 accounts, 161, 162, 200
registration number, 285 internal controls, 24 adjusting entries, 199
remitting, 284, 285-87, 288 internal users, 20 defined, 23
report, 311 international financial in accounting equation, 24-25, 44
reporting period, 288 reporting standards, 21 on balance sheet, 100, 106-7
returns, 235, 286, 287 investments, 27 outstanding, 226
to client accounts, 299 invoices trust, 169
guaranteed investment example, 121 licensee, 2, 7, 160
certificate (GIC), 10, 267 preparing, 119-20 limited liability partnership, 4, 6
recording payment, 124, 292 losses, 100, 105, 199
harmonized sales tax (HST), 9, 124, ITC, see input tax credit (ITC) LSO, see Law Society of
130, 284, 299, see also goods and Ontario (LSO)
services tax (GST); GST/HST journal entries, 42
historical cost, 201 maintenance costs, 104
HST, see harmonized sales tax (HST) Law Foundation of Ontario (LFO), 3 management practices, 171
“in the red,” see overdrawn Law Society Act, 2, 6, 11, 171, 272 matching principle, 22, 199, 201
Law Society of Ontario (LSO) mathematical error, 82
income audits, 7 matters, 122, 307, 309
accounts, 23, 226 by-laws, 127, 129 matter-to-matter trust transfer
accrued, 204 by-law 6, 6 journal, 169-70, 272
debits and credits, 46 by-law 9, 2, 7, 9, 13, 123, minutes-to-decimals
defined, 23 159, 160, 161, 162, 168, conversion, 119, 309
other, 103 169, 171, 267, 271, 306 misconduct, 172
reporting, 103 by-law 10, 272 mixed trust
sources of, 26-27, 102 Paralegal Rules of balance, 269
statements, 100-104, 101, Conduct, 299, 308 bank account, 8-10, 9,
105, 108-9, 168, 199, 200, requirements, 2, 168, 11, 158-59, 161
210-11, 222, 223, see also 259, 272, 312 reconciling, 266-71, 267
financial statements Rules of Professional Conduct, 8, 172 monetary retainer, see retainers
summary account, 226, 227-28, 229 trouble with, 270 money handling, 259-60
tracking, 6 law types, 307-8 multi-discipline practice, 4
income tax, see also tax; leasing costs, 296
Income Tax Act ledgers net income, 27, 100, 102, 105, 209
accounting for, 292-98 balances, 48 net loss, 27, 100, 102, 105, 211
collection, 5 client, 161, 172 net profit, 100, 211
352
INDEX
net tax, 287 penalties, 296 electronic, 312

non-billable work, 119, 122 period-end adjustments, 42 financial, 8, 158
normal balance, 23, 210 permanent accounts, 43, 226, 229 general bank, 271-72
normal credit balance, 44, 45, 46 personal deductions, 289 legal requirements for, 235, 292
normal debit balance, 44, 45, 162 personal expenses, 21, 29, 293 maintenance, 6, 13, 271-72,
“not incurred as agent,” 299 personal finances, 29 285
NSF, see insufficient funds (NSF) personal loans, 208 permanent, 292
personal use of business assets, 297 retention, 271-72
office supplies petty cash, 13, 256-59 safeguarding, 60
adjustment, 207 pooled trust bank account, see of transactions, 161
inventory, 199 mixed trust bank account trust bank, 272
omission, 82 post-closing trial balance, 41, remittances, 288, 298
Ontario’s Electronic Registration 229-30 reports, 12
System, see Teraview® post reference (PR), 59, 60, 74, 75 residual value, 201
opening balance, 26, 75 posting restrictive endorsement, 259
opening balance sheet, 26, 48, 58, 59-60 completed, 80 retainer agreement, 119,
opening entries, 58, 60, 76, 307-8 defined, 8 see also retainers
overdraft, 9 errors, 82, 269 retainers, 7, 159, 172, 311, see
overdrawn, 74 from general disbursements also retainer agreement
owner’s equity journal, 130 revenue, see income
accounts, 200 from general receipts journal, 128 revenue recognition
defined, 23 opening entries, 76 principle, 21, 203
expanded accounting from special journals, 131
equation, and, 27 from trust bank journal, 165 salaries, 104, 288, 297-98
in accounting equation, to general ledger, 42, 75-80 separate interest-bearing
24-25, 44, 45 private enterprises, 21-22 trust account, 10
on balance sheet, 100, 107 professional corporation, 4, 5, 8 service charges, 261
statement of, 100, 101, 105-6, professional fees, 204 shareholders, 5
168, 222, 223, see also profit and loss statement, shareholder’s equity, 23
financial statements see income statement signature card, 259
profits, 27, 100, 105, 199 six-year requirement, 235, 285, 293
Paralegal Annual Report, 3 profits and losses, 200 slide, 82
paralegal–client relationship, 7 small supplier, 11, 284
partnership receipts software, see legal
agreement, 5 cash, 160 accounting software
defined, 4 general, 271 sole proprietorship, 3-4, 5, 8,
limited liability, 4, 6 in general receipts journal, 128 21, 102, 104, 199, 209, 284
multi-discipline, 4 keeping, 46, 259, 292 special journals, 118,
recording expenses, 104 recording, 158, 163, 125-30, 131, 128, 312
payee, 129, 260 172-74, 311-12 stakeholders, 20
payments trust, 161, 172, 310-11 statement of owner’s equity, see
for services rendered, 55 reconciliation owner’s equity, statement of
method of, 128 defined, 260 statements
recording, 172-74 general bank, 262 general bank account, 262
payor, see drawer trust bank, 266-71, 272 of revenues and expenses,
payroll, 288-92, 296 records 199
PCLaw®, 13, 24, 58, 83, 108-9, bookkeeping, 21 trust, 129, 121, 268
122, 172-74, 306, 307, see also business, 20 straight-line amortization method,
legal accounting software deposits, 159 202-3, 208, see also depreciation
353
INDEX
T-accounts, 48, 106 trust defined, 7

T4 information return, 40, 292, 298 account, see trust bank account owed, 161, 162, 168
T4 slips, see T4 information return assets, 169 received, 172
tax, see also income tax balance, 260-61, 269 trust receipts and disbursements
business, 294 cheques, 159, 172, 310 journal, see trust bank journal
laws, 3, 5 comparison, 10, 267 trust transfer journal, see matter-
returns, 3, 40, 296 control accounts, 161 to-matter trust transfer journal
year, 293 deposits from, 159
taxable benefits, 292 disbursements, 172 unincorporated practices, see
taxation legislation, see tax, laws journal, see trust bank journal partnership; sole proprietorship
TD1 form, 289 ledger, 131, 162
temporary accounts, 43, 226 liabilities, 169 vacation, 291-92
time dockets, 119 money, 169 valuable property record, 171, 272
time entries and billing, statement, 120, 121, 268 voucher, 257, 292
122, 306, 308-10 withdrawals from, 159 vouchers, 258
time sheets, 122 trust bank account
transactions balance, 167 withdrawals
analyzing, 27, 47, 131-33 defined, 158-59 accounts, 226
entered and totalled, 57 deposit slip, 160 defined, 26, 45, 102
examples, 49-57 in trial balance, 168 from an ATM, 259
in the accounting cycle, 42 reconciliation, 270 from trust, 159
recording, 48-49, 125-30, 161 records, 272 in expanded accounting
source documents, 46 statement, 268 equation, 26-27
transposition, 82 withdrawals from, 259 work in progress, 22, 203, 204
trial balance trust bank journal worksheets
accounts, 209 defined, 125, 161 adjustments in, 207, 208, 209
column in worksheet, 200 entries in, 131 completing, 211-13
defined, 168 example, 268 headings, 200
errors in, 81 in PCLaw®, 173 in the accounting cycle,
example, 101, 139, 205 receipts and disbursements, 42-43, 198
in accounting cycle, 42 310-11 preparing, 199-200
imbalanced, 82 using, 161-67 wrong column error, 81, 210
preparing, 80-83 trust funds
use of, 100 balance of, 310 year-end, see fiscal year
354
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Legal Accounting - Asselin

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Legal Accounting - Asselin

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Jacqueline Asselin & Keri Nisbet

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Copyright © 2019 Emond Montgomery Publications, Toronto, ON.

Toronto, Canada 2019

© 2019 Emond Montgomery Publications. All Rights Reserved.

Library and Archives Canada Cataloguing in Publication

© 2019 Emond Montgomery Publications. All Rights Reserved.

To my family and my dad, David MacPhee

© 2019 Emond Montgomery Publications. All Rights Reserved.

1 Role of the Law Society of Ontario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

3 Keeping Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

4 Posting and Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

5 Preparing Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

6 Special Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

1 Role of the Law Society of Ontario . . . . . . . . . . . . . . . . . . . . . . . . 1

3 Keeping Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

4 Posting and Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

5 Preparing Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Preparing the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

6 Special Journals ............................................ 117

Why Use Special Journals? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Posting from Special Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

7 Trust Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

Difference Between a General Account and a Trust Account . . . . . . . . . . . . . . . 158

8 Adjusting Accounts for Financial Statements . . . . . . . . . . . . 197

Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Adjustment (D): Personal Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

9 Final Steps in the Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . 221

The Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

10 Banking Procedures and Accounting for Cash . . . . . . . . . . . 255

Reconciling the Mixed Trust Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

11 Accounting for GST/HST, Payroll, and Income Tax . . . . . . 283

Goods and Services Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

12 Computerized Time and Money Management . . . . . . . . . . . 305

Getting Started with Legal Accounting Software . . . . . . . . . . . . . . . . . . . . . . . . . 307

Time Entries and Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308

Appendix: By-Law 9, Financial Transactions and Records . . . . . . . . . . . . . . . . . . 321

Potential Paralegal Pitfalls

Put It into Practice

After reading this chapter, you should be able to:

LO2 Requirement for Books and

LO3 Forms of Business Organization

Limited Liability Partnership

Multi-Discipline Practice or Affiliation

4 RSO 1990, c B.17.

TA X TIP Canada first collected federal income tax in

Unincorporated Practices Incorporated Practices

5 RSC 1985, c 1 (5th Supp), as amended.

LO4 Insurance Requirements

Importance of Maintaining Proper Records

Bank Accounts in a Legal Services Firm

General Bank Account

Mixed or Pooled Trust Bank Account

If a legal service provider does not receive retainers

Overdraft in Trust Account

Mixed Trust Account General Account

FIGURE 1.2 Accounts for depositing funds

Separate Interest-Bearing Trust Account