NATIONAL UNIVERSITY OF LESOTHO

Faculty of Law

L3411 – ACCOUNTING FOR LAWYS

2024-2025 Academic Year

2nd Semester
Lesson-1

1.0 Welcome Remarks

Welcome to the first class of L3411, that is, Accounting for Lawyers. This is a one-
semester course which is intended to introduce you as law students to the discipline
of accounting in general but in particular as a preparatory course to those who might
wish to enter the attorneys’ stream of Lesotho’s dual legal profession. Under the
Legal Practitioners Act (see your Course Outline), an intending attorney must serve
articles of clerkship under a practising attorney and pass practical examinations set
by the Chief Justice. The examinations cover, inter alia, a studious separation of the
accounts of the firm, on the one hand, and of trust accounts, on the other. There are
rigorous rules that must be complied with especially in relation to trust accounts. We
shall in this course study some core principles of those rules.

1.1 OBJECTIVES
After going through this lesson, you will be able to-
 Understand the meaning and nature of accounting.
 Differentiate between various types of accounting.
 Know development of accounting principles.
 Explain the importance of accounting.

1.2 INTRODUCTION
Accounting is a system meant for measuring business activities, processing of
information into reports and making the findings available to decision-makers. The

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documents, which communicate these findings about the performance of an
organisation in monetary terms, are called financial statements.

Usually, accounting is understood as the Language of Business. This is, however, a

limited view of a business as business may have a lot of aspects which may not be
of financial nature. As such, a better way to understand accounting could be to call it
‘The Language of Financial Decisions.’ The better the understanding of the
language, the better is the management of financial aspects of a business or indeed
living in general. Many aspects of our lives are based on accounting, personal
financial planning, investments, income tax, loans, etc. We have different roles to
perform in life: the role of a student, of a family head, of a manager, of an investor,
etc. The knowledge of accounting is an added advantage in performing different
roles. However, we shall limit our scope of discussion to a business organisation, in
particular, a law firm, and the various financial aspects of such an organisation.

When we focus our thoughts on a business organisation, many questions arise,

including: is our business profitable, should a new product line be introduced, is our
service up to scratch in relation to comparable competition, should we diversify our
service offerings, or should we develop into a boutique legal services outfit for a
defined niche market, should we inject more capital into the business, should we
borrow money from the bank? etc. To answer questions of such nature, we need to
have information generated through the accounting process. The people who take
policy decisions and frame business plans use such information.

All business organisations work in an ever-changing dynamic environment. Any new

programme of the organisation or of its competitor will affect the business.
Accounting serves as an effective tool for measuring the financial pulse rate of the
company. It is a continuous cycle of measurement of results and reporting of results
to decision- makers.

Just like arithmetic is a procedural element of mathematics, bookkeeping is the

procedural element of accounting. Accordig to Liorngren, Harrison and Robinson,
Financial and Management Accounting, Prentice Hall, New Jersey, 1994, Figure 1

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below shows how an accounting system operates in business and how the flow of
information occurs.

People make decisions

Business transactions occur

Business transactions occur

Accountants prepare reports to

show results business
operations

This paints a symbiotic relationship between business transactions or operations,

business results as reflected in accounting reports and the decisions made by a host
of stakeholders like business managers, shareholders, investors etc.

1.3 DEVELOPMENT OF ACCOUNTING DISCIPLINE

The history of accounting is traceable back to ancient times. According to some
beliefs, the very art of writing originated in order to record accounting information.
While the truth about this assertion may not be known, there is no denying the fact
that accounting has a long history. Accounting records can be traced back to the
ancient civilizations of China, Babylonia, Greece and Egypt. Accounting was used to
keep records regarding the cost of labour and materials used in building great
structures like the Pyramids.

During 1400s, accounting grew further because the needs for information of
merchants in the Venice City of Italy increased. In 1458 Benedetto Cotrugli invented
the time-honoured double-entry accounting system, which revolutionized accounting.
Double-entry accounting is defined as any bookkeeping system that involves a debit
and credit entry for transactions. But the man who took the discipline of accounting
to a status of prominence was Lucas Pacioli in his treatise, Summa de Arithmetica,
Geometria, Proportioni et Proportionalita ("The Collected Knowledge of Arithmetic,
Geometry, Proportion, and Proportionality"), published in 1494.
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The onset of the industrial revolution then necessitated the development of more
sophisticated accounting systems, rather than pricing the goods based on guesses
about the costs. The increase in competition and mass production of goods led to
the rise of accounting as a formal branch of study. The first professional
organizations for accountants were established in Scotland in 1854, starting with the
Edinburgh Society of Accountants and the Glasgow Institute of Accountants and
Actuaries.

With the passage of time, the corporate world grew. In the nineteenth century,
companies came up in many areas of infrastructure development like the railways,
steel, communication, etc. It led to a rapid growth in accounting. As the complexities
of business grew, ownership and management of business was divorced. As such,
managers had to come up with well-defined, structured systems of accounting to
report the performance of the business to its owners.

Government also has had a lot to do with more accounting developments. The
income tax brought about the concept of ‘income’. Government takes a host of other
decisions, relating to education, health, economic planning, for which it needs
accurate and reliable information. As such, government demands stringent
accountability in the corporate sector, which forces the accounting process to be as
objective and formal as possible. The accounting profession in Lesotho is regulated
in terms of the Accountants Act No. 9 of 1977. Accounting and the accounting
profession play a critical role in cleanliness in public financial accountability,
management and governance. See Bellis, Mary. "History of Accounting from Ancient
Times to Today." ThoughtCo, Aug. 27, 2020, www.thoughtco.com/history-of-
accounting-1991228.

1.4 UTILITY OF ACCOUNTING

Effective decisions require accurate, reliable and timely information. The need for
quantity and quality of information varies with the importance of the decision that has
to be taken on the basis of that information. Individuals may use accounting
information to manage their routine affairs like operating and managing their bank
accounts, to evaluate the worthwhileness of a job in an organization, to invest
money, to rent a house, etc. Business managers have to set goals, evaluate
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progress and initiate corrective action in case of unfavourable deviation from the
planned course of action. Accounting information is required for many such decisions
as purchasing equipment, maintenance of inventory, borrowing and lending, etc.
Investors and creditors are keen to evaluate the profitability and solvency of a
company before they decide to provide money to the organisation. Therefore, they
are interested to obtain financial information about the company in which they are
contemplating an investment. Financial statements are the principal source of
information to them which are published in annual reports of a company.

Government and regulatory agencies are charged with the responsibility of guiding
the socio-economic system of a country in such a way that it promotes the common
good. For example, the Companies Act 2011 makes it mandatory for a company to
disclose certain financial information in annual reports and lodge same with the
Registrar of Companies for inspection by the investing public. The government’s task
of managing the industrial economy becomes simple if the accounting information
such as profits, costs, taxes, etc. is presented in a uniform manner without any
manipulation or ‘window- dressing’, hence a particular format is followed in
preparation of a company’s financial information, that is, it must be in accordance
with financial standards published by the Lesotho Institute of Accountants.

Governments levy various taxes. The taxation authorities, therefore, need to know
the income of a company or business enterprise to calculate the amount of tax that
the company or enterprise would have to pay. The information generated by
accounting helps them in such computations and also to detect any attempts of tax
evasion and unacceptable tax avoidance.

Employees and trade unions use the accounting information to settle various issues
related to wages, bonuses, profit sharing, etc. Consumers and general public are
also interested in knowing the amount of income earned by various business
houses. Accounting information helps in finding whether or not a company is over
charging or exploiting the customers, whether or not companies are showing
improved business performance, whether or not the country is emerging from some
economic recession, etc. All such aspects draw heavily on accounting information
and are closely related to our standard of living.
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1.5 BENEFITS OF ACCOUNTING APPRECIATION TO LAWYERS
The issue of why lawyers have to have some basic understanding of accounting can
be looked at from three different perspectives, namely, the financial health of a law
firm, compliance with trust accounting regulations, and the enhancement of the
lawyer’s knowledge and skills toolkit.

Accounting is a world of numbers, that is, financial numbers. For the law firm,
accounting means keeping track of money flowing in and out of the practice, an
activity that lawyers seem to have little time for. However, in reality, the importance
of keeping proper accounting procedures cannot be overemphasised. An
understanding of basic accounting can positively impact the internal operation of the
firm and allow a lawyer to:

 Design and request management reports that are important for helping with
proper management and operation of the practice more efficiently and
effectively. For example, the accounting system may be designed in such a
way that the lawyer may pull out a debtors’ report to see who are owing the
firm and for how much and for how long. In that way, ways and means could
be put in place to collect outstanding moneys and thereby minimise the risk of
bad debts. The longer a debt is owing, the higher the risk of its non-payment,
hence bad debt. There may be a whole host of reports that a lawyer can
demand even if the accounting process is not kept internally through a
dedicated accountant but is kept and maintained externally through some
accounting firm.
 Understand, question and utilise financial reports and information presented
to him or her.
 Make changes in the future course of the firm based on an accurate
interpretation of the reports and financial information.

Knowledge of basic accounting may help the lawyer to:

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  Speak the language of business, which is essential if one is seeking corporate
clients. In an evolving economy that is increasingly becoming complex in
terms of the transactions that clients enter into, a corporate lawyer needs to
be conversant with the language of business and to appreciate the
complexities that characterise modern industrial economy to be able to advise
effectively and serve the best interests of his or her clients.
 Understand and empathise with corporate or individual clients when they
complain that business is slow or that the cost of doing busines is rising etc.
 Examine or cross-examine documents and experts where financial
information is significant to the successful pursuit of a client’s matter or
litigation.

1.6 TYPES OF ACCOUNTING

The financial literature classifies accounting into two broad categories, viz, Financial
Accounting and Management Accounting. Financial accounting is primarily
concerned with the preparation of financial statements whereas management
accounting covers areas such as interpretation of financial statements, cost
accounting, etc. Both these types of accounting are examined below.

1.6.1 Financial accounting

Financial accounting deals with the preparation of financial statements for the basic
purpose of providing information to various interested groups like creditors, banks,
shareholders, financial institutions, government, consumers, etc. Financial
statements, i.e. the income statement and the balance sheet, indicate the way in
which the activities of the business have been conducted during a given period of
time. Such period may be quarterly but often annually.

Financial accounting is charged with the primary responsibility of external reporting.

The users of information generated by financial accounting, like bankers, financial
institutions, regulatory authorities, government, investors, etc. want the accounting
information to be consistent so as to facilitate comparison. Therefore, financial
accounting is based on certain concepts and conventions which include separate
business entity, going concern concept, money measurement concept, cost concept,
dual aspect concept, accounting period concept, matching concept, realization

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concept and conventions of conservatism, disclosure, consistency, etc. We shall
learn these concepts and conventions in the course of this Course.

The significance of financial accounting lies in the fact that it aids management in
directing and controlling the activities of the firm and to frame relevant managerial
policies related to areas like production, sales, financing, etc. However, it suffers
from certain drawbacks, such as the following:
 The information provided by financial accounting is consolidated in nature. It
does not indicate a break-up for different departments, processes, products
and jobs. As such, it becomes difficult to evaluate the performance of different
sub-units of the organisation.
 Financial accounting does not help in knowing the cost behaviour as it does
not distinguish between fixed and variable costs.
 The information provided by financial accounting is historical in nature and as
such the predictability of such information is limited.

The management of a company has to solve certain ticklish questions like

expansion of business, making or buying a component, adding or deleting a
product line, deciding on alternative methods of production, etc. The financial
accounting information is of little help in answering these questions.

The limitations of financial accounting, however, should not lead one to believe
that it is of no use. It is the basic foundation on which other branches and tools of
accounting analysis are based. It is the source of information, which can be
further analysed and interpreted according to the tailor-made requirements of
decision-makers.

1.6.2 Management accounting

Management accounting is ‘tailor-made’ accounting. It is tailor-made in the sense
that each firm can design it to suit its purposes. It facilitates the management
(that is, the managers of the company or business enterprise) by providing
accounting information in such a way so that it is conducive for policy making and
running the day-to-day operations of the business. Its basic purpose is to
communicate the facts according to the specific needs of decision-makers by
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 presenting the information in a systematic and meaningful manner. Management
accounting, therefore, specifically helps in planning and control. It helps in setting
standards and in case of variances between planned and actual performances, it
helps in deciding the corrective action.
An important characteristic of management accounting is that it is forward looking. Its
basic focus is one future activity to be performed and not what has already
happened in the past. Since management accounting caters to the specific decision
needs, it does not rest upon any well-defined and set principles. The reports
generated by a management accountant can be of any duration – short or long,
depending on the purpose to be served. Further, the reports can be prepared for the
organisation as a whole as well as its segments.

1.6.3 Cost accounting

One important variant of management accounting is the cost analysis. Cost
accounting makes elaborate cost records regarding various products, operations and
functions. It is the process of determining and accumulating the cost of a particular
product or activity. Any product, function, job or process for which costs are
determined and accumulated, are called cost centres.

The basic purpose of cost accounting is to provide a detailed break-up of cost of

different departments, processes, jobs, products, sales territories, etc., so that
effective cost control can be exercised.

Cost accounting also helps in making revenue decisions such as those related to
pricing, product-mix, profit-volume decisions, expansion of business, replacement
decisions, etc.

The objectives of cost accounting, therefore, can be summarized in the form of three
important statements, viz, to determine costs, to facilitate planning and control of
business activities and to supply information for short- and long-term decisions. Cost
accounting has certain distinct advantages over financial accounting. The cost
accounting system provides data about profitable and non-profitable products and
activities, thus prompting corrective measures. It is easier to segregate and analyse
individual cost items and to minimize losses and wastages arising from the
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manufacturing process. Production methods can be varied so as to minimize costs
and increase profits. Cost accounting helps in making realistic pricing decisions in
times of low demand, competitive conditions, technology changes, etc.

Various alternative courses of action can be properly evaluated with the help of data
generated by cost accounting. It would not be an exaggeration if it is said that a cost
accounting system ensures maximum utilization of physical and human resources. It
checks frauds and manipulations and directs the employer and employees towards
achieving the organisational goal.

1.6.4 Distinction between financial and management accounting

Financial and management accounting can be distinguished on a variety of basis
like, users of information, criterion for decision making, behavioural implications, time
frame, type of reports.

Table 1 presents a summary of distinctions between financial and management

accounting.

TABLE 1: FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING

Basis of distinction Financial accounting Management
accounting
1 Primary user Outside parties and managers Business
of the business
managers

2 Decision criterion Accounts are based on Comparison of

generally accepted accounting costs and benefits
principles of proposed action

3 Behavioural implications Concern about adequacy of Concern about

disclosure. Behavioural how reports will
implications are secondary affect employees
behaviour

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 4 Time focus Past orientation Future orientation

5 Reports Summary reports regarding the Detailed reports on

whole entity the different parts
of the entity

6 Frequency of reports Reports must be produced at Reports are

least once a year produced on a
need basis, that is,
when management
needs them
7 Content of reports Only information that can be May contain
quantified in monetary terms financial and
nonfinancial
information e.g.
measures of
physical quantities
of stock

See Horngren, Harrison and Robinson, Financial and Management Accounting,

Prentice Hall, New Jersey, 1994.

1.6 SUMMARY
Accounting can be understood as the language of financial decisions. It is an
ongoing process of performance measurement and reporting the results to decision-
makers. The discipline of accounting can be traced back to very early times of
human civilization. With the advancement of industry, modern day accounting has
become formalized and structured. A person who maintains accounts is known as
the accountant. He is engaged in multifarious activities like preparing financial
statements, facilitating the control process, tax planning, auditing and information
management. The information generated by accountant is used by various groups
like, individuals, managers, investors, creditors, government, regulatory agencies,
taxation authorities, employees, trade unions, consumers and general public.

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Depending upon purpose and method, accounting can be of broadly two types of
financial accounting and management accounting. Financial accounting is primarily
concerned with the preparation of financial statements mainly for outsiders. It is
based on certain well-defined concepts and conventions and helps in framing broad
financial policies. However, it suffers from certain limitations which are taken care of
by the other branch of accounting, viz.; management accounting. Management
accounting is meant to help in decision-making by analysing and interpreting the
information generated by financial accounting. As such, management accounting is
futuristic and decision-oriented. The methods of management accounting are not
very exact as they have to be varied according to the requirements of the decision
for which accounting information is needed. Cost accounting is an important aspect
of management accounting. It emphasises on cost determination, aiding the planning
and control process and supplying information for short- and long-run decisions. The
basic differences between financial and management accounting arises due to
differences in users of information, differences in time frame and type of reports
generated. The criterion for decision making and the behavioural implications of both
types of accounting are also different.

1.7 KEYWORDS AND CONCEPTS

The focus of this course is on financial accounting, and not management accounting.
There are certain concepts that are vital for you to be familiar with and which are
utilised throughout the Course. The following are some of those concepts:

1.7.1 Assets
Assets are resources controlled by a person/business resulting from past events out
which future economic benefits will flow. They are classified into two categories:

1.7.1.1 Noncurrent assets

A noncurrent asset is an item of value with a lifespan (the period that the item
continues to be of economic value to the business) of more than one year. Examples
include buildings, equipment and plant, and motor vehicles. They are used in a
business for a period that is longer than one year. In other words, their value to the
business in terms of creating future flows of economic value extends for a period

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longer than a year. A motor vehicle may continue to be used in a business for about
five years or more.

1.7.1.2 Current assets

A current asset is an item of value with a lifespan of less than one year, which is
easily converted to cash, for example, cash at bank or stationery.

1.7.2 Liabilities
Liabilities are present obligations resulting from past events, the settlement of which
leads to decreases in economic benefits to the business. They are of two types.

1.7.2.1 Noncurrent liabilities

These are obligations of the business which are payable over a period of more than
one year, for example, a mortgage bond from a bank secured to construct the office
of the firm. That may take upwards of 10 years to pay.

1.7.2.2 Current liabilities

These are obligations by the business which are payable within one year, for
example, bank overdraft, taxes, declared dividends (for a company), etc

1.7.3 Owner’s equity

This is the interest of the owner in the business, for example, capital contribution and
drawings made by the owner for personal use from the resources of the business.
The International Financial Reporting Standards Conceptual Framework for Financial
Reporting defines owner’s equity as follows:

Equity is the residual interest in the assets of the entity after deducting all the liabilities. Thus,
the net owner’s equity is represented by assets less liabilities. Another way of determining
owner’s equity, being the interest of the owner in the entity, is to start with the capital
contributed by the owner. This is reduced by drawings (withdrawals) made by the owner.
Owner’s equity then also increases by net profits or decreases by losses
Accordingly, Owner’s Equity = Assets - Liabilities

In the net result, Owner’s Equity comprises:

(a) Owner’s capital contribution
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 (b) Net profit (which increases it) (Income – expenses = Net profit)
(c) Net loss (which decreases it) (Expenses – income = Net loss)
(d) Drawings (which decreases it) (All assets of the Entity used by
the Owner for private consumption and not the business’s sake).

The net profit belongs to the owner of the business and so also falls under owner’s
equity.

1.7.3.1 Income
Income consists of receipts by a business for its normal operations, for example,
sales, fees earned, rent received, interest received etc. The key thing about these
receipts is that they increase economic benefit to the business within a current year.

1.7.3.2 Expenses
Expenses are amounts spent by a business during its normal operations (but
excluding capital expenses, that is, payments by a business to buy or improve long-
term capital assets), for example, rent paid, fuel for motor vehicles used in the
business, maintenance costs of the motor vehicles, advertising, salaries and
insurance premiums. Their economic benefit to the business expires within a current
year.

Activity 1
Classify each of the following items as noncurrent asset (NCA), current asset (CA);
noncurrent liability (NCL; current liability (CL); owner’s equity (OE); income (I); or
expense (E)
NCA CA NCL CL OE I E
(a) Capital
(b) delivery vehicle
(c) weekly wages
(d) fees
(e) trading stock
(f) mortgage loan
(g) data subscription account

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 (h) laptop computer
(i) interest received
(j) interest paid
(k) bank charges
(l) Messenger’s motorbike
(m) photocopying machine
(n) printing paper
(o) discount allowed
(p) discount received
(q) prepayment of fees by a client
(r) prepayment of electricity
(r) library fittings (shelves and other
related stuff)
(s) books
(t) depreciation
(u) fuel
(v) petty cash on hand

Capital lease vs operational lease

Capital lease = a lease in which the lessor only finances the leased property, and all
other rights transfer to the lessee. Or option to buy after payment of at least 75% of
the capital value of the loan. Mainly for longer-term assets and give lessee
ownership rights or at least the option of ownership rights. Interest payments are
expensed and the lessee is entitled to depreciation. The loan amount is accounted
under liabilities in the Balance Sheet.

Operating lease = a lease in terms of which the lessee is permitted the use of the
leased property but does not transfer ownership. Mainly for short-term leasing of
assets and are essentially renting. Periodic lease payments are treated as operating
expenses and are expensed on the Income Statement. It has impact on the
operating as well as net income. The lessee cannot take depreciation because the
property does not belong to him or her.

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