COURSE NOTES

Accounting is the process by which the money value of transactions in a practice is

being recorded according to International Financial Reporting Standards IFRS.

A Firstly EVERY transaction must be recorded in a BOOK OF PRIME ENTRY

(CASH BOOK/JOURNAL).

The following 3 questions must be asked about every transaction:

(a) Is it a TRUST or a BUSINESS transaction?

(b) Is it a CASH or a NON-CASH transaction?

(c) In which BOOK OF PRIME ENTRY must the transaction be recorded?

BOOKS OF PRIME ENTRY FOR CASH AND NON – CASH TRANSACTIONS

TRUST
(Consists of Assets & Liabilities)

Cash Transactions Non-cash Transactions

Sec 86(2) Trust Bank Account
Dr(+) Trust Cash Book (TCB) Cr(-) Trust Journal
PAYMENTS RECEIVED PAYMENTS MADE
MONEY COMING IN MONEY COING OUT
Transfer Journal
Trust Asset (from Trust to Business)

BUSINESS
(Consists of Assets, Expenses, Liabilities, Income & Owner’s Equity)

Cash Transactions Non-cash transactions

Business Bank Account
Dr(+) Business Cash Book (BCB) Cr(-) Fees Journal
PAYMENTS RECEIVED PAYMENTS MADE
MONEY COMING IN MONEY GOING OUT
Business Journal
Business Asset
Transfer Journal
(from Business to Trust)

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B THEN that SAME transaction must be posted (recorded) to the Books of

Secondary Entry in a LEDGER ACCOUNT.

Book of Secondary Entry

LEDGER
Dr Clients’ ledger account Cr
PAYMENTS MADE PAYMENTS RECEIVED
MONEY GOING OUT MONEY COMING IN

C THUS the DOUBLE ENTRY PRINCIPLE is applicable.

Payments received (money coming in) must be recorded on the DEBIT SIDE (DR-side)
of a cash book (Book of Prime Entry) and then POSTED TO the CREDIT SIDE (CR-
side) of a clients’ account in the LEDGER (Book of Secondary Entry).

and

Payments made (money going out) must be recorded on the CREDIT SIDE (CR-side) of
a cash book (Book of Prime Entry) and then POSTED TO the DEBIT SIDE (DR-side) of
a clients’ account in the LEDGER (Book of Secondary Entry).

EXAMPLE of the DOUBLE ENTRY principle:

BOOK OF PRIME ENTRY Book of Secondary Entry

LEDGER
Dr(+) Cash Book Cr(-) Dr Clients’ ledger account Cr
Payments Payments Payments Payments
received made made received
(Money coming (Money going
in) out)

ASSET

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D Cash books must be written up daily. At the end of every month the cash
book and ledger accounts must be balanced, and a balance determined.

Example: To write up and balance a BUSINESS CASH BOOK

01.02.19 Balance (favourable) R15 000

01.02.19 Interest received – Business Bank Account 150
06.02.19 Receive cash from Mr A - settlement of account 10 000
23.02.19 Pay 1st installment to STANNIC – motor vehicle 1 000
25.02.19 Pay Juta – Textbook 800
28.02.19 Pay Salaries 10 000
28.02.19 Pay Rental – deposit 3 500
28.02.19 Pay Telephone 1 650
28.02.19 Bank charges – Business Bank Account 200
Bank charges – TRUST Bank Account 500

Dr(+) BUSINESS CASH BOOK (BCB) for February 2019 Cr(-)

ASSET

Method: How to write up a CASH BOOK

1 Start with a balance.

2 If balance is FAVOURABLE: record on Debit (Dr)-side of Cash book.
If balance is OVERDRAWN: record on Credit (Cr)-side of Cash book.
3 Payments received (Cash / EFT): record on Debit (Dr)-side of Cash book.
Payments made (EFT): record on Credit (Cr)-side of Cash book

How to CALCULATE a BALANCE

4 Add up the Debit (Dr)-side and the Credit (Cr)-side separately.
5 The TOTAL of the BIGGER side becomes the TOTAL on both sides.
6 Subtract the total of the SMALLER side from this TOTAL.
7 This amount is the BALANCE.

How to write up and to balance a TRUST CASH BOOK – SEE QUESTION 1

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BANK RECONCILIATION
Purpose of a Bank reconciliation
At the end of every month, you will receive bank statements for your TRUST and
BUSINESS BANK ACCOUNTS. You will notice that the balances on the bank
statements differ from the balances in your respective Cash Books. To clear the
differences a procedure should be followed. This procedure is called bank reconciliation
and should be prepared monthly by way of a Supplementary Cash Book and Bank
Reconciliation Statement.

There are numerous reasons for these differences:

There will be transactions (entries) in a cash book that will not appear on the
bank statement, and
There will be transactions (entries) on your bank statement that will not be
recorded in a cash book.
These missing transactions (entries) cause the difference in the balances.

ENTRIES IN THE CASH BOOK BUT NOT ON THE BANK STATEMENT will be:

 An EFT payment to a client is recorded in the Cash Book, but not effected by the
bank. It should be reversed in the Supplementary Cash Book.
 Outstanding deposit. This deposit is received, recorded in the Cash Book but not
immediately deposited into the bank account. Therefore, it should be recorded in
the reconciliation statement as an Outstanding deposit.

ENTRIES ON THE BANKSTATEMENT BUT NOT IN THE CASH BOOK will be and
should be dealt with in the Supplementary Cash Book.

 Bank (service) charges.

 Interest received on a favourable balance.
 Interest paid on an overdraft balance.
 Direct deposits made by clients at a branch of your bank.
 An electronic fund transfer (EFT) by/from a client.
 Stop/debit orders paid by the bank on your behalf.

ERRORS
 Bank Errors. Errors made by the bank on the bank statement will be dealt with in
the Bank Reconciliation Statement.
 Firm Errors. Errors made by the firm in the Cash Book will be dealt with in the
Supplementary Cash Book.

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Example of the Bank Reconciliation statement

FAVOURABLE

Bank reconciliation statement as at …………….

Bank statement balance is GIVEN. Bank statement balance NOT GIVEN

Balance as per Bank Statement ……. Balance as per Suppl Cash Book ……

Less: Bank Error: EFT payment made Add: Bank Error: EFT payment made
by bank from incorrect account by bank from incorrect account
Sub-total ……… Sub-total ……….
Add: Outstanding deposit Less: Outstanding deposit
Sub-total ……… Sub-total ……….
Less: Bank Error: Deposit credited Add: Bank Error: Deposit credited
on incorrect bank account. on incorrect bank account

Balance as per Cash Book …………. Balance as per Bank Statement ……

OVERDRAWN

Bank reconciliation statement as at …………….

Bank statement balance is GIVEN. Bank statement balance NOT GIVEN

Balance as per Bank Statement (…….) Balance as per Suppl Cash Book
(Overdrawn) ………

Add: Bank Error: EFT payment made Less: Bank Error: EFT payment made
by bank from incorrect account. by bank from incorrect account.
Total (…….) Total ………
Less: Outstanding deposit Add: Outstanding deposit
Total (…….) Total ………
Add: Bank Error: Deposit credited Less: Bank Error: Deposit credited
on incorrect bank account. on incorrect bank account.

Balance as per Cash Book (…….) Balance as per Bank Statement.

(Overdrawn) ………

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Example of a Supplementary Cash Book

Dr Supplementary Cash Book for Cr

PAYMENTS RECEIVED PAYMENTS MADE

Balance (favourable/debit) (TRUST) Balance (overdrawn)

Interest received Interest paid

Direct deposit by/from a client Bank/service charges

Electronic transfer (EFT) by / from Stop/debit orders paid

a client

EFT payment to a client has been Stop order received has been
entered in the Cash Book but not returned by the bank.
effected by the bank.

Firm Errors Firm Errors

Process that should be followed -

(a) TO IDENTIFY THE DIFFERENCES

(1) Compare all the reconciling items in the previous month’s

reconciliation statement with the current month’s bank statement.
Encircle any items still not presented to the bank. Mark off similarities.
Identify firm errors.

(2) Mark off all the deposits in the cash book against the deposits on the
bank statement. Encircle the differences and outstanding items. Mark off
similarities. Identify bank and firm errors.

(3) Mark off all the EFT payments to clients in the cash book against the
EFT payments to clients on the bank statement. Encircle the differences
and outstanding items. Mark off similarities. Identify bank and firm errors.

(4) Encircle the outstanding items on the bank statement.

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(b) TO PREPARE THE BANK RECONCILIATION STATEMENT AND

SUPPLEMENTARY CASH BOOK.

(i) Start the supplementary cash book with the cash book balance.

(ii) Start the bank reconciliation statement with the balance on the bank
statement.

(iii) Items appearing in the cash book but not yet on the bank statement
will be shown in the bank reconciliation statement.

(iv) Items appearing on the bank statement but not yet in the cash book
will be recorded in the supplementary cash book.

(v) Errors made by the bank will be rectified in the bank reconciliation
statement.

(vi) Errors made by the firm must be rectified in the supplementary

cash book.

Three ways of asking a bank reconciliation statement and supplementary cash

book question in the exam:

(1) Theory (Study pages 6 and 7 of these notes)

(2) Where the differences should be identified first before the reconciliation
statement and supplementary cash book can be prepared.

(3) Where the differences are being identified and only the reconciliation
statement and supplementary cash book should be prepared.

QUESTIONS 2 – 6

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RECEIVING INSTRUCTIONS: You will be the instructed

attorney and do the work.

There are two (2) types of RECEIVING INSTRUCTIONS

A Instructions received from a CLIENT – client is not an attorney, and

B Instructions received from an ATTORNEY – attorney your client and

correspondent. See page 25.

A INSTRUCTIONS RECEIVED FROM A CLIENT

An attorney receives instructions on various matters – i.e. Conveyancing-, Divorce-,

Criminal related matters, Company/Trust registrations and Debt Collections – from
clients.

INSTRUCTIONS RECEIVED (CONVEYANCING AND OTHER MATTERS)

When receiving instructions from clients, which you will attend to, the following 5
principles are applicable. Four of the 5 principles are explained by way of –

 QUESTION 7

General principle 1: How to record TRUST MONEY received.

Money received from a client pending the happening of a future event, is received in
Trust and should be handled according to the client’s instructions.

Examples of Trust Money

- Deposit on property
- Deposit for services to be rendered.
- Payment of transfer costs and bond costs
- Interest received on Section 86(3) and 86(4) investments
- Receipt of bank guarantee (bond) from financial institution.

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When TRUST MONEY is received, the following entries should ALWAYS be made:

Book of Prime Entry Book of Secondary Entry

Sec 86(2) Trust Bank Account Trust Ledger
Dr(+) Trust Cash Book (TCB) Cr(-) Dr(-)Purchaser Trust L Acc Creditor Cr(+)
Payments received ‘ Payments received

DEPOSIT 100 000 From TCB 100 000

To PURCHASER (T) DEPOSIT

Bigger Side Bigger Side

TRUST ASSET TRUST LIABILITY

(Not to be in DEBIT)

After the recording of Trust money received, the client is known as a Trust Creditor.

General principle 2: How to INVEST TRUST MONEY

Trust money is deposited in the Trust Bank Account opened ito Sec 86(2). From the
Sec 86(2) Trust Bank Account trust money can be invested in a trust investment
account in terms of either Section 86(3) or Section 86(4).

2.1 SECTION 86(4) INVESTMENTS

These investments are made on mandate of the client (thus for his benefit) in a trust
savings or other interest-bearing account with a bank. Written confirmation of the
investment must be obtained from the client as soon as possible.

The interest earned on this investment will accrue to the client with the proviso that 5%
of the interest earned vests in terms of section 86(5)(b) in the LPFF (Legal Practitioners’
Fidelity Fund). The 5% interest accrued during a calendar month shall be paid to the
LPFF on or before the last day of the succeeding calendar month.

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2.2 SECTION 86(3) INVESTMENTS

A practitioner is authorised to invest surplus trust money which will not immediately be
used for any particular purpose, in a separate trust savings or other interest-bearing
account at an approved bank. (Not on the stock exchange or on unit trusts)

This investment is made through the practitioner’s own initiative. The Legal
Practitioners’ Fidelity Fund (LPFF) is the beneficiary of the entire interest earned on the
investment.

Interest accrued on this investment in respect of any period ending on the last day of
February in each year, shall on or before the last day of May in that year be paid to the
LPFF.

2.1 SECTION 86(4) INVESTMENTS

The day the investment is made, the trust money is withdrawn from the Sec 86(2) Trust
Bank Account (money is going out) and invested in the Sec 86(4)-investment account.

The transaction should always be recorded in the accounting books as follows:

(NB: You will never debit the Trust Ledger Account of the client)

Book of Prime Entry Book of Secondary Entry

Sec 86(2) Trust Bank Account Trust Ledger
Dr(+) Trust Cash Book (TCB) Cr(-) Dr(+)Sec 86(4)invest Purchaser/Bank Cr(-)
Payments made Investment made Withdrawal of Investment

SEC 86(4) 100 000 From TCB 100 000

INVESTMENT Investment made
PURCHASER/BANK

Bigger Side

TRUST ASSET TRUST ASSET

To identify an investment as one in terms of sec 86(4) it can be phrased as follows:

 You are instructed to invest …

 You are mandated to invest …
 Your client requires you to invest …

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 You are authorised to invest …

 You receive a payment of which an amount should be invested.
 You invest an amount for the benefit of your client

2.2 SECTION 86(3) INVESTMENTS

The principles that are applicable to the section 86(4) investments are applicable to this
investment.

The day the investment is made, the transaction should be recorded as explained
under the section 86(4) investments.

To identify an investment as one in terms of sec 86(3) it can be phrased as follows:

 You decide to invest …

 You invest an amount.

Book of Prime Entry Book of Secondary Entry

Sec 86(2) Trust Bank Account Trust Ledger
Dr Trust Cash Book (TCB) Cr Dr Sec 86(3)invest LPFF/Nedbank Cr
Payments made Investment made Withdrawal of Investment

Sec 86(3) 75 000 From TCB 75 000

Investment Investment made
LPFF/BANK
BIGGER SIDE

TRUST ASSET TRUST ASSET

The day of withdrawal of the investment and receiving of interest, the amount
invested plus the interest earned are recorded in the Trust Cash Book and posted to the
credit side of the section 86(3) investment account. Thereafter, the interest earned is
recorded on the debit side of the investment account and posted to the credit side of the
LPFF interest on sec 86(3) investment account. To effect the payment thereof to the
LPFF, the Trust Cash Book will be credited and the LPFF interest on sec 86(3)
investment account debited.

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General principle 3: DISBURSEMENTS to be paid on behalf OF A CLIENT, e.g.

Transfer Duty, Counsel, Estate Agent.

Rule: A deposit on property forms part of the purchase price and may not be
used for any another purpose.

Disbursements to be paid on behalf of a client should be made on one of the following

basis:

a. You did not receive a payment from the client prior to the payment of the
disbursement.

The payment should be effected from the Business Bank Account as follows:

Book of Prime Entry Book of Secondary Entry

Business Bank Account Business & General Ledger
Dr(+) Business Cash Book(BCB) Cr(-) Dr Criminal - Business L Acc Debtor Cr
COUNSEL 2 300 From BCB 2 300
To CRIMINAL (B) COUNSEL

Bigger Side
(Client is a Business Debtor)

b. You received a payment from the client prior to the payment of the disbursement.

The payment should be effected from the Trust Bank Account as follows:

Book of Prime Entry Book of Secondary Entry

Sec 86(2) Trust Bank Account Trust Ledger
Dr(+) Trust Cash Book (TCB) Cr(-) Dr(-) Purchaser Trust L Acc Creditor Cr(+)
TRANSFER 30 000 From TCB 30 000
DUTY TRANSFER
To Purchaser (T) DUTY

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General principle 4 THE RECORDING OF A NON-CASH BUSINESS

TRANSACTION FOR SERVICES RENDERED BY A BUSINESS CREDITOR TO A
CLIENT OF THE PRACTICE = Business Liability
(See Chapter 4 on Journals – LEAD Manual)

If Counsel,

Sheriff, or

Correspondent

rendered a service to a client of the practice and it is NOT REQUIRED TO PAY

for the services rendered, you should use a BUSINESS JOURNAL to record the
transaction in your Business accounting records.

Once the transaction is recorded Counsel, Sheriff or Correspondent will be

known as a BUSINESS CREDITOR.

General principle 5 RECEIVING OF PAYMENT FROM A CLIENT AFTER A

DISBURSEMENT HAD BEEN PAID OUT OF BUSINESS.
(Mixed Money)

Should a disbursement already been paid out of business on behalf of a client (client is
a business debtor) and the client reimburses you, the transaction should be recorded on
one of the following basis -

FORM OF PAYMENT

(1) CASH (consists of mixed money = Trust and Business money)

You receive the amount equal to what the client owes in the Business
Account and the balance in the Trust Account.

(2) EFT (consists of mixed money = Trust & Business money) is more than
business debt.

You receive the full amount in the Trust Account because part of the amount
is still Trust money.

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STEPS THAT SHOULD BE FOLLOWED TO FINALISE A MATTER.

A CONVEYANCING MATTER - ON DAY OF REGISTRATION OR THE DAY
THEREAFTER.

STEP 1
WITHDRAWAL OF SEC 86(4) – INVESTMENT AND RECEIVING THE
INTEREST EARNED THEREON.

In terms of section 86(5)(b) the interest earned on a section 86(4) investment is to be

paid to the client with the proviso that 5% of the interest accrues to the LPFF and vests
in the Fund.

The recording of interest earned on a section 86(4) investment to a client and the LPFF
should be recorded as follows:

Book of Prime Entry Book of Secondary Entry

Sec 86(2) Trust Banking Account Trust Ledger
Dr Trust Cash Book (TCB) Cr Dr Purchaser Trust L Acc Creditor Cr
WITHDRAWAL Sec 86(4) investment
Sec 86(4) 110 000 INTEREST 9 500
INVESTMENT
CAPITAL plus
INTEREST

Dr Sec 86(4) investment Purchaser Cr

From TCB
WITHDRAWAL
CAPITAL 110 000
INTEREST TO 9 500 Plus INTEREST
PURCHASER
INTEREST TO 500
LPFF

Dr LPFF interest earned sec 86(4) investment Cr

investment 500
Purchaser

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STEP 2

RECEIVE THE BANK GUARANTEE (THE BOND)

The bank that approved the Purchasers’ bond will effect an EFT. The transaction should
be recorded as follows:

Book of Prime Entry Book of Secondary Entry

Sec 86(2) Trust Bank Account Trust Ledger
Dr(+) Trust Cash Book (TCB) Cr(-) Dr(-) Purchaser Trust L Acc Creditor Cr(+)
BANK 650 000 From TCB 650 000
GUARANTEE BANK GUARANTEE
To PURCHASER (T)

(Take note: When a CASH BOOK is used to record a transaction only one Ledger
Account is involved)

STEP 3

DEBIT (INVOICE) CLIENT WITH FEES = make him a business debtor

Fees are always a non-cash BUSINESS transaction because it is the amount you
debit the client with for professional services rendered. Remember a client always owes
you money on business.

A Fees Journal should be used as a Book of Prime Entry before the transaction can be
posted to the Business & General Ledger.

BOOK OF PRIME ENTRY (Non-Cash BUSINESS Transaction)

Fees Journal
Date Particulars Dr Cr

Dr Purchaser – Business L Acc 20 250

Cr Fees 20 250

Fees debited for -

Registration of Transfer R10 000
Registration of Bond R10 000
Investment R250
______________________________________________________________________

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Once the transaction is recorded in the Fees Journal it must be posted to the Business
& General Ledger.

Book of Secondary Entry

Business & General Ledger
Dr Purchaser Business L Acc - Debtor Cr
To FEES 20 250

Dr Fees (Income) Cr
From PURCHASER (B) 20 250

(Take note: When a JOURNAL is used more than one Ledger Account is involved)

STEP 4

TRANSFER FROM ONE CLIENTS’ TRUST ACCOUNT TO ANOTHER

CLIENTS’ TRUST ACCOUNT.

When dealing with a conveyancing matter this step should be done to transfer the full
purchase price from the PURCHASERS’ Trust Account (one client) to the SELLERS’
Trust Account (another client). This step is a non-cash Trust transaction.

A Trust Journal should be used as Book of Prime Entry to move the purchase price from
the Purchaser Trust Ledger Account to the Seller Trust Ledger Account.

BOOK OF PRIME ENTRY (Non-Cash TRUST Transaction)

Trust Journal
Date Particulars Dr Cr

Dr Purchaser – Trust L Account 750 000

Cr Seller – Trust L Account 750 000

Transfer purchase price

______________________________________________________________ _______

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Thereafter the transaction is recorded as follows in the Trust Ledger

Book of Secondary Entry

Trust Ledger
Dr(-) Purchaser Trust L Acc - Creditor Cr(+)
To SELLER (T) 750 000
(Purchase price)

Dr(-) Seller Trust L Account - Creditor Cr(+)

From PURCHASER (T) 750 000
(Purchase price)

(Take note: When a Journal is used more than one Ledger Account is involved)

STEP 5 PAY OUTSTANDING DISBURSEMENTS: i.e. the Estate Agent

STEP 6 A TRUST TRANSFER consists of –

STEP 6(a) = AN INTER-LEDGER TRANSFER.

Also known as the VALUE STEP and is a NON-CASH Transaction.

TRANSFER FROM A CLIENTS’ TRUST LEDGER ACCOUNT (CREDITOR) TO THAT

SAME CLIENTS’ BUSINESS LEDGER ACCOUNT (DEBTOR).

On completion of a mandate, you are entitled to do a Trust Transfer. The purpose of a

Trust Transfer is to transfer Trust funds from a clients’ TRUST LEDGER Account
(Creditor) to that same clients’ BUSINESS LEDGER Account (Debtor) to settle the
business debt.

You must determine if the client has Trust Funds available to settle his Business Debt.
The procedure to calculate how much a client owes you on Business and if he has
sufficient Trust funds available to settle the BUSINESS debt is as follows:

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Balance the clients’ Business Ledger Account (Debtor)

(1) Start by adding up the Debits (Dr-side) of the client’s Business Account
(2) Subtract all the Credits (Cr-side), if any, of the client’s Business Account
(3) The amount you will get, after subtracting the Credits, is the amount the
client owes you on Business

OR

In layman’s terms the calculation is done as follows:

Business & General Ledger

CLIENT = BUSINESS DEBTOR

Bigger side Debit (Dr): R
Less: Smaller side Credit (Cr):

Amount client owes (debit) on Business = R

Balance the Clients’ Trust Ledger Account (Creditor)

(1) Start by adding up the Credits (Cr-side) of the client’s Trust Account
(2) Subtract all the Debits (Dr-side), if any, of the client’s Trust Account
(3) The amount you will get, after subtracting the Debits, is the amount
the client has on TRUST.

OR

In layman’s terms it is calculated as follows:

Trust Ledger

CLIENT = TRUST CREDITOR

Bigger side Credit (Cr): R
Less: Smaller side Debit (Dr):

Amount available (credit) on Trust = R

Once it is determined the client has trust funds available to settle his business debt a
TRANSFER JOURNAL should be used as a Book of Prime Entry to transfer the value
of the debt amount from the Trust Ledger Account to the Business Ledger Account of
the client.

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TRANSFER JOURNAL
Dr Purchaser – Trust L Account 20 250
Cr Purchaser – Business L Account 20 250

Transfer amount owed to Business - value

Thereafter the debt amount must be transferred (moved) from the clients’ Trust Ledger
Account (Creditor) to his Business Ledger Account (Debtor).

Book for Secondary Entry

Trust Ledger
Dr Client – Trust L Acc – Creditor Cr
To Client (B) 20 250
Amount owed

Business & General Ledger

Dr Client – Bus L Acc – Debtor Cr
From Client (T) 20 250
Amount owed

(Take note: When a Journal is used more than one Ledger Account is involved)

STEP 6(b) = INTER-BANKING TRANSFER

The purpose of this step is to effect payment of the amount under step 6(a) from the
Sec 86(2) Trust Bank Account to the Business Bank Account.

Book of Prime Entry

Sec 86(2) Trust Bank Account
Dr(+) Trust Cash Book (TCB) Cr(-)
Payments made

To BCB 20 250
Amount owed by Purchaser

Debt amount is going out of the

sec 86(2) Trust Bank Account
Books of Prime Entry
Business Bank Account
Dr(+) Business Cash Book (BCB) Cr(-)
Payments received

From TCB 20 250

Amount owed by Purchas

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STEP 7

ACCOUNT TO CLIENT(S)

If step 6 was applicable and the client settled his business debt, there might be a credit
available in his trust ledger account. This trust credit is the amount the practice owes
the client (Trust Liability) and ACCOUNT TO THE CLIENT.

If step 6 was not applicable, the amount owed to the client should be calculated by
subtracting the Trust Debits from the Trust Credits.

Book of Prime Entry Book of Secondary Entry

Sec 86(2) Trust Banking Account Trust Ledgers
Dr(+) Trust Cash Book (TCB) Cr(-) Dr(-) Seller Trust Acc – Creditor Cr(+)
from
PURCHASER (T) 750 000
step 4
step 5
Estate Agent 15 000 from TCB 15 000
To SELLER (T) Estate Agent

Step 7
Account to 735 000 from TCB 735 000
Seller(T) Account to
__

750 000 750 000

VALUE ADDED TAX (VAT)

All persons carrying on an enterprise rendering taxable supplies more than R1million
per annum are required to register with the South African Revenue Service as vendors
for VAT purposes.

In practice you get:

A OUTPUT VAT

The tax that is required to be charged by practitioners on all taxable fees is referred to
as OUTPUT VAT. The standard VAT rate is 15%.

Example: An attorney charges a fee of R300 plus VAT @ 15%

The formula where provision should be made for VAT @ 15% is:
15 x 300
100
= R45

The client must be debited with the fee of R300 plus the VAT of R45 = R345

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The transaction is recorded as follows:

A FEES JOURNAL should be used as Book of Prime Entry.

BOOK OF PRIME ENTRY

Fees Journal
________________________________________________________________

Dr Client – Business L Account 345

Cr Fees 300
VAT – output 45

Fees + VAT debited

________________________________________________________________

The transaction is posted to the Business & General Ledger as follows:

Book of Secondary Entry

Business & General Ledger
Dr Client Business L Account - Debtor Cr
TO FEES + VAT 345

Dr Fees Cr
From CLIENT (B) 300

Input VAT Output .

From CLIENT (B) 45

B INPUT VAT

The VAT payable by a practioner to a registered VAT vendor in respect of taxable

supplies purchased i.e. textbook from JUTA, is called INPUT VAT.

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Example: An attorney pays JUTA R345 for a textbook which includes VAT @ 15%.

In the example the VAT is included. Therefore, the VAT must be

calculated.

The formula to calculate the VAT is:

15 x 345
115

= R45

A business payment is effected in the amount of R345 and recorded in the accounting
records as follows:

Book of Prime Entry Book of Secondary Entry

Business Bank Account Business & General Ledger
Dr(+) Business Cash Book (BCB) Cr(-) Dr(+) LIBRARY Cr(-)
JUTA 345 From BCB 300
To LIBRARY Textbook

ASSET ASSET
Input VAT Output
FROM BCB 45

Input VAT is denied:

 Where the appropriate tax invoice in respect of the purchase is not retained for
presentation to the South African Revenue Service on inspection.

 On amounts expended for entertainment, staff refreshments, meals,

tea, coffee, social club membership etc.

 On the purchase of motor vehicles.

Payment of VAT

An attorney must pay VAT from the Business Bank Account to the South African
Revenue Service on or before the 25th day of the month following the end of the month
of the tax period. The attorney is entitled to subtract the INPUT VAT paid to another
VAT vendor from the OUTPUT VAT (the VAT he charged on his fees). The balance is
the amount owing to South African Revenue Service (SARS).

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COLLECTION COMMISSION is a FEE

When an attorney is instructed to recover/collect debt, he is entitled to debit a FEE for
receiving the debt amount/instalment from the DEBTOR. This fee is known as
Collection Commission.

Collection commission amounts to 10% of the debt/instalment paid with a maximum of

R1 500 per payment/instalment.

Examples: (a) Debt amount collected is R10 000

An attorney is entitled to 10% collection commission plus VAT if he is
registered as a VAT vendor.

The collection commission + VAT will amount to: R1 000 + 150 = R1 150

(b) Debt amount collected is R18 000

An attorney is entitled to 10% collection commission plus VAT but the
maximum he is entitled to, is R1 500 + 225 (VAT) = R1 725

(c) Debt amount to be collected is R18 000

The Debtor is prepared to settle the debt by way of 3 instalments of
R6 000 each.

1st installment of R6 000: R600 + 90(VAT) = R690

2nd installment of R6 000: R600 + 90(VAT) = R690
3rd installment of R6 000: R600 + 90(VAT) = R690

NB! Collection Commission is not applicable on disbursements/costs.

A Fees Journal should be used as a Book of Prime Entry to debit collection

commission.
Book of Prime Entry
Fees Journal

Dr Client – Business L Account 1 150

Cr Fees 1 000
VAT – Output 150

Collection Commission + VAT debited

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Thereafter the collection commission must be recorded in the Business & General
Ledger as follows:

Book of Secondary Entry

Business & General Ledger
Dr Client Business Ledger Account - Debtor Cr
COLLECTION 1 150
COMMISSION + VAT

Dr Fees Cr
FROM CLIENT (B) 1 000

Input VAT Output

FROM CLIENT (B) 150

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B. RECEIVING INSTRUCTIONS FROM AN ATTORNEY / CONVEYANCER / NOTARY.

The latter is known as your CORRESPONDENT.
EXAMPLES

1. Client in UPINGTON instructed an Attorney in UPINGTON to attend to a debt collection matter.

The fact that the Debtor does not reside in UPINGTON, but in JOHANNESBURG the Attorney in
UPINGTON instructs an Attorney in JOHANNESBURG to attend to the matter.
The Attorney in UPINGTON is known as the Instructing Attorney and the Attorney in
JOHANNESBURG as the INSTRUCTED ATTORNEY

2. Client in UPINGTON sold his apartment in SEA POINT, CAPE TOWN to a purchaser. He
instructs an Attorney/Conveyancer in UPINGTON to attend to the Transfer of Ownership. The fact
that the immovable property is situated within the jurisdiction of the Deeds Office, CAPE TOWN
the Attorney/Conveyancer in UPINGTON must instruct a Conveyancer in CAPE TOWN to attend
to the Transfer of Ownership.
The Attorney/Conveyancer in UPINGTON is known as the Instructing Conveyancer and the
Conveyancer in CAPE TOWN as the INSTRUCTED CONVEYANCER.

Apply general principles 1 – 5 and the 7 steps to record and finalise Receiving Instructions from a
Correspondent. The only exception is Step 3. Use a Fees Journal to debit your Fees and another Fees
Journal to share your Fees with your Correspondent.

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If an attorney debits a fee/collection commission of R300 + VAT a Fees Journal should

be used as a Book of Prime Entry.

Book of Prime Entry

Fees Journal

Dr Correspondent – Business L Account 345

Cr Fees 300
VAT – Output 45

Fees + VAT debited

If the attorneys agreed to share fees another Fees Journal should be used.

Fees Journal
Dr Fees (300 ÷ 3) 100
VAT – Input (45 ÷ 3) 15
Cr Correspondent - Business L Account (345 ÷ 3) 115

Sharing of Fees + VAT: 33⅓% (⅓)

The transaction is recorded in the Business & General Ledger as follows:

Book of Secondary Entry

Business & General Ledger
Dr Correspondent Business L Account Debtor Cr
FEES + VAT 345 Sharing of Fees + VAT 115

Dr Fees Cr
To CORRESPONDENT (B) 100 From CORRESPONDENT (B) 300

Input VAT Output

To CORRESPONDENT (B) 15 From CORRESPONDENT (B) 45

SEE QUESTIONS 16 – 19

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GIVING INSTRUCTIONS TO A CORRESPONDENT. There is a reason

why you could not attend to and finalise the matter.
Three principles are applicable:

(a) You are the instructing attorney.

(b) The instructed attorney will become your correspondent and do the work.
He/she may share his/her FEES + VAT with you.

(c) Your client remains your client.

The instructing attorney will receive an accounting statement from the instructed
attorney. The following steps should be followed to record the contents of the
accounting statement in your books of account.

Steps Key word(s) Questions Dr Cr Guideline

________________________________________________________________ .

Step 1 EFT payment EFT payment TCB Corresp Trust

received received from Trust L money
whom? Acc
(1st column) Correspondent

Step 2 Amount(s) Who collected/ Corresp Client non-cash

collected/ received the Trust L Trust L Use a
received by amount(s)? Acc Acc Trust
Corresp. Journal

(2nd column) Corresp

Step 3 Costs of cor= Who is liable Client Corresp non-cash

respondent. to pay the Trust L Trust L Use a
(disbursements costs? Acc Acc Trust
paid, Fees + Journal
VAT debited) Client and if
necessary
(Add up 1st Client Corresp Use a
column) Bus L Bus L Business
Acc Acc Journal

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Step 4 FEES + VAT Who shared Corresp FEES non-cash

he/she FEES + Bus L + Use a
shared with VAT with Acc VAT Fees
you you? Output Journal
(2nd column) Correspon
dent

Step 5 Value step See step 6(a): non-cash

Conveyancing Use a
Transfer
Journal
Cash step See step 6(b):
Conveyancing

Step 6 Account to See step 7:

Conveyancing

The aforementioned steps and guidelines are contained in:

SEE QUESTIONS 20 – 23

MISCELLANEOUS TRANSACTIONS
A Business-, General and Trust transactions

SEE QUESTIONS 8 – 10 and 13 – 15. Also TUKS LAW SCHOOL QUESTIONS

B Trust transactions, an extract of Trust Account Balances and to determine if there

are sufficient Trust funds available to cover your liability towards your trust creditors.
(Set out trust position / Prepare Trust Reconciliation)

SEE QUESTION 11 & 12

C How to pay Bail / Fine on behalf of a client; and

a client in CASH if client does not have a bank account.

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