NATIONAL UNIVERSITY OF LESOTHO

Faculty of Law

L3411 – ACCOUNTING FOR LAWYS

2024-2025 Academic Year

1st Semester
Lesson-6

6.0 Welcome Remarks

In this Lesson, we shall:
 Recap on posting
 Learn about a trial balance
 Learn about adjustments

6.1. Recapping on posting

As we saw in Lesson 5 and we will see in the extract from Kaplan (the extract to be
shared with this Lesson):

 the term ‘posting’ means transferring the debit and credit items from the
journals to their respective accounts in the respective ledgers.
 the exact names of accounts used in the journals are carried to the ledgers.
 While ledger posting may be done at any time, it must, however, be
completed before the annual financial statements are prepared.
 In practice, it is advisable to keep the more active accounts posted up-to-date.
That is, the more active accounts like fees account, bank/cash account,
salaries, stationery, clients accounts should be balanced on a monthly basis.
 Posting may further occur from subsidiary ledgers to the general ledger where
only the balances from the subsidiary ledgers are posted to the general
ledger.
 Subsidiary ledgers are opened in respect of transactions that occur at a high
rate of regularity and frequency, such as clients.
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We have also learned about balancing an account. It is the closing balance (c/b),
also commonly referred to as balance brought down (b/d), that is important for
purposes of preparation of a trial balance. (I urge you to practise with exercises in
Kaplan for you to internalise the key concepts. Ask me where you run into problems.)

6.2 Trial balance

A trial balance includes a list of all general ledger account balances. It lists the
balances of all general ledger accounts of a business at a certain point in time. The
accounts reflected on a trial balance are related to all major accounting items,
including assets, liabilities, equity, revenues, expenses, gains, and losses. A trial
balance is primarily used to identify the balance of debits and credits entries from the
transactions recorded in the general ledger at a certain point in time. Most
importantly, a trial balance is commonly prepared as a step before preparation of the
financial statements, that is, the income statement (sometimes called a profit and
loss statement) and the balance sheet. Thus, if financial statements are prepared on
a quarterly basis, the trial balance will be prepared equally too.

As you have seen in the accounting cycle schematic, a trial balance is prepared at
two stages, before adjusting entries, and after adjusting entries. We shall learn about
adjusting entries in short while.

6.2.1 Preparation
A trial balance is prepared by:

 Determining the balances of all accounts in the general ledger

 Listing all account balances in the same order as they appear in the general
ledger (in accounting slang, called GL) in the trial balance, which also has
debit and credit columns
 Transferring debit balances and credit balances from the GL to the debit and
credit columns of the trial balance, respectively.
 Adding the debit column and the credit column
 Comparing the sum of the debit column with that of the credit column.

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6.2.2 Listing of balances in trial balance?
The trial balance accounts are listed in a specific order to help in the preparation of
financial statements. Accounts in a trial balance are listed in the following order:
 Assets
 Liabilities
 Equity
 Revenue
 Expenses
Furthermore, the assets and liabilities have to be listed in order of liquidity, which
refers to how quickly an asset can be converted to cash to pay off liabilities. The
most liquid assets are listed first. This includes cash and short-term accounts
receivables.

6.2.3 Purpose
The purpose of the trial balance is to ensure that the two columns, that is, the debit
and credit columns, tally. Put differently, the total of the debit column and the credit
column of the trial balance must be equal. A business prepares the trial balance to
check the arithmetical accuracy of the accounts. A firm usually prepares a trial
balance at the end of the accounting year. A trial balance is a summary of all the
ledger accounts.

6.2.4 Advantages of trial balance

 Arithmetical accuracy: Given the nature of double entry system, every
transaction will result in two entries of equal and opposite nature. Hence at
any point in time all debit ledger totals will match to credit ledger totals. Since
a trial balance lists all the accounts as on a particular date, the debit total of a
trial balance must match the credit total. In that way, a trial balance is an
indicator of the arithmetical accuracy of the books of accounts.
 Bird’s-eye view: A trial balance is a summary sheet listing all GL balances.
Hence it provides a bird’s eye view of the accounting transactions of a
business on a particular day, usually at the end of the financial year just
before preparation of the financial statements.
 Prerequisite for preparation of Financial statements: A business needs
to know profit or loss and financial position at year end. And thus, to prepare
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 financial statements, a trial balance is prerequisite. All stakeholders also need
this information. It is the first step towards closure of accounts for a particular
period.
 Aids in Audit: Because it gives a list of all ledgers with balances, auditors
analyse it as one of the important tools in checking compliance with the GAAP
(generally accepted accounting principles). For example, if the nature of an
account is debit, such as a fixed asset account, but it holds a credit balance,
then the entire ledger will be scrutinized.

6.2.5 Errors not revealed by trial balance

Although a trial balance tallies, that is not in and of itself conclusive proof of
recording accuracy. It may not reveal the following type of errors which would not
cause a discrepancy in the ultimate totals:

 Omission of a transaction: if a transaction was omitted from books of prime

entry (the journals), the omission will carry through to the GL, and hence to
the trial balance. The trial balance will tally but such error will not be revealed.
 Posting to correct side but wrong account: if the posting from the books of
prime entry is made to the correct side of a ledger account but to a wrong
account. For example, posting stationery as though it is an asset account. We
now know that when expenses increase, they are debited in the same as
assets. So, a purchase of stationery is debited as an expense in the same
way that purchase of an asset is debited. If stationery was posted as though it
was an asset, and not an expense, that error would not be revealed because
at the end of the day the trial balance would tally or balance. The same
applies if posting was made to a debt account of Mohajane, instead of
Moejane. The trial balance would not pick it up.
 Counterbalancing errors: these are errors that typically occur as a result of
violation of the matching principle (the principle that expenses of a particular
period must be recorded against revenues of that period and vice versa). A
counterbalancing error would occur where income which should have been
accounted for in year one is accounted for in year two. That error will
understate revenues for year one and overstate those of year two. The error

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 would typically be discovered in year two where a correcting journal entry
would then be prepared thus:

If a M3,700 fees from a client should have been recorded at the end of 2022
but was recorded in January 2023 and was discovered in 2023, the correcting
journal entry is as follows:

General journal
Date Folio Dr Cr
31 Fees 3,700
Jan Retained earnings 3,700
21 Being correction of fees received

The debit to Fees reverses the incorrect increase to 2023 sales, and the credit
to Retained Earnings increases its beginning balance in 2023. Examples of
counterbalancing errors include failure to record accrued revenues
(income) or expenses and failure to account for prepaid expenses or
unearned income.
 Error of amounts in book of prime entry: If a debit note for M6,320 of fees
in respect of legal services rendered to client M. Mochafo is entered in the
fees journal as M6,230, the trial balance will come out correctly, since the
debit and credit have been recorded consistently but incorrectly as M6,230.
The arithmetical accuracy is there, but in fact there is an error.
 Compensating Errors: If one account in the ledger is debited with M5,000
less and another account in the ledger is credited M5,000 less, these errors
cancel themselves out. That is, one error is neutralised by similar error on the
opposite side.

6.2.6 Locating errors in a trial balance

If the trial balance does not tally, the following steps are typically followed to try to
locate where the errors are:

 Re-add the columns in the trial balance itself. There might have been an error
in addition.
 Check the transfer of the balances from the general ledger (even from the
subsidiary ledgers to the general ledger itself). The checking in that respect is

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 done both in terms of the ledger accounts and computation of the account
balances.
 Re-add the columns (debits and credits) of the ledger accounts and check the
computation or the account balances. In other words, check if your balancing
of the accounts in the ledgers was properly done.
 If still the error is not identified, re-check the postings from the journals (books
of prime entry). The error might have occurred at that stage.
 Check the adding of the columns in all journals.
 Check whether the double entry in respect of each journal is correct, that is, if
each debit entry has a corresponding credit entry.
 Check if the source documents amounts have been corrected reflected in the
journals.

6.2.7 Example of a trial balance

Let us refer back to the balanced ledger accounts in the Exercise 4.0 Solution to
Lesson 4 and prepare a trial balance thereof. Let us first reproduce all those ledger
accounts (as tweaked according to proper balancing of a ledger account as we have
learned) for purposes of convenience:

Dr Bank/Cash Cr
Date Particulars Foli Debit Date Particulars F Credit
o amount ol amount
(M) io (M)
2 Feb Capital: 20,000 2 Feb 21 Rent expense 3,400
21 T. Fako 3 Feb 21 Office equipment 9,000
25 Feb 21 Wages 5,000
28 Feb 21 Balance c/d 2,600
Total 20,000 Total 17,400
28 Feb Balance b/d 2,600
21

Dr Capital: T. Fako Cr

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 Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
(M) (M)
28 Feb Balance c/d 20,000 2 Feb 21 Bank 20,000
2021
Total 20,000 Total 20,000
28 Feb 21 Balance b/d 20,000

Dr Rent Expense Cr
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
2 Feb Bank 3,400 28 Feb 21 Balance c/d 3,400
21
Total 3,400 Total 3,400
28 Feb Balance b/d 3,400
21

Dr Office Equipment Cr
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
3 Feb Bank 9,000 28 Feb 21 Balance c/d 9,000
21
Total 9,000 total 9,000
28 Feb Balance b/d 9,000
21

Dr Debtors/Accounts Receivable Cr
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
15 Feb Fees: T- 5,700 28 Feb Balance c/d 5,700
21 Squared 21
Total 5,700 Total 5,700

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 28 Feb Balance b/d 5,700
21

Dr Fees Cr
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
28 Feb Balance c/d 5,700 15 Feb Debtors: T- 5,700
21 21 Squared
Total 5,700 Total 5,700
28 Feb Balance b/d 5,700
21

Dr Wages Cr
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
25 Feb Bank 5,000 28 Feb Balance c/d 5,000
21 21
Total 5,000 Total 5,000
28 Feb Balance b/d 5,000
21

The trial balance from the above would stand as follows:

Trial balance of Fako & Associates Inc at 28 February 2021

Folio Dr Cr
Bank 2,600
Debtors/accounts receivable 5,700
Office furniture 9,000
Capital: T. Fako 20,000
Fees 5,700
Rent expense 3,400
wages 5,000

25,700 25,700

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Remark:
 The balances from the ledger accounts are listed in terms of the order of
o Assets (starting with the most liquid)
o Liabilities (but in the trial balance above, Fako & Associates Inc, did not
have any liability. If it had, e.g, if it had creditors/accounts payable and
loans, accounts payable would be listed above loans for being most
liquid (more likely to be paid sooner)
o Owner’s equity
o Revenues (fees)
o Expenses

6.3 Adjustments
An adjustment is not a transaction in the sense that it does not involve two parties.
An adjustment relates to the accounting policy of the business in relation to
compliance with the generally accepted accounting principles (GAAP). The GAAP
provides certain rules, sometimes providing options, on treatment of adjustments.
Adjustments are normally made after the trial balance has been drawn up but before
preparation of the final accounts (financial statements). Typical examples of
adjustments concern:

 Depreciation
 Prepaid expenses
 Accrued expenses
 Accrued income
 Income received in advance
 Provision of bad debts

The above are only typical examples but an adjustment may be made in respect of
any non-transaction event. Adjustments are made in the general journal and the
journal description acts as a source document. This is because there is no receipt,
debit note, invoice etc, that acts as a source document for an adjustment because it
the adjustment does not involve a transaction.

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6.3.1 Depreciation
When a business buys a fixed asset (an asset whose useful life extends beyond one
year) such as a motor vehicle or a computer, the cost is treated as an asset, and not
as an expense which deceases the owner’s equity. With use per accounting year,
the asset loses value through wear and tear. This loss in value is allocated to the
financial year in which it occurred, that is, the year in which the asset was used, and
the value of the original cost is accordingly decreased. The process of recording the
loss of value of an asset is called writing off the value of asset by depreciation on a
yearly basis. In the net result, depreciation represents an expense for the loss of
value of an asset on account of use in the year in which the asset has been used.

The basics that underlie allocation of a depreciation expense include the following:

 The asset should be used to generate income in the course of conducting

business in a particular year.
 The depreciation expense should be fairly allocated over the lifetime of the
asset in the business.
 The asset should be fairly presented in the balance sheet, that is, at book
value (the value after having taken into account depreciation over time).
 Depreciation, as an expense, affects the income statement.
 Depreciation is a non-cash item as no exchange of money occurs.

6.3.1.0 Methods of depreciation

There are many ways of computing depreciation, but for our purposes we shall only
consider two dominant methods, namely, the straight-line method and the reducing
balance method.

6.3.1.1 Straight-line method

This method is also known as the cost method or fixed instalment method. With
the straight line depreciation method, the value of an asset is reduced uniformly over
each period of its useful life until it reaches its salvage value ( that is, the amount that
an asset is estimated to be worth at the end of its useful life. It is also known as
scrap value or residual value). Straight line depreciation is the most commonly used
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and straightforward depreciation method for allocating the cost of a capital asset
over its expected useful life. The depreciation to be written off each is calculated as a
fixed percentage of the cost of the asset. Applicable International Accounting
Standards as adopted by the Lesotho Institute of Accountants determine the
calculation of applicable percentages depending on the type of capital asset
involved. Tax legislation also prescribe a method to be used and also the percentage
per types of assets. For the straight-line depreciation method, equal amounts of
deprecation are annually written off against the asset’s original cost over the asset’s
useful life.

Example 1:
Assume that a computer purchased in on 30th March 2020 for M20,000 is estimated
to have a useful life of 5 years. Assume further that the initial cost will be written off
over that period at the rate of 20% per annum based on a straight-line method.

The M20,000 will be multiplied by the rate of annual deprecation, that is 20%, which
is M4,000 per annum (or M333.33 per month) for a business whose accounting
period is from 1st April of a year to 31st March of the following year.

The M4,000 will be written off annually over the period of 5 years against the asset’s
book value. The book value of an asset is the value of a fixed as reflected in the
business’s balance sheet after having accounted for depreciation expense or
accumulated depreciation. You talk of accumulated depreciation where the asset has
been written off for depreciation for more than one year.

The adjustment in the business’s books would be recorded in the general journal
thus:

General journal
Date Folio Dr Cr
31 March 21 Depreciation: Furniture 4,000
Accumulated depreciation: Furniture 4,000
Being depreciation @ 20%

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If we were to post the information above from the general journal to the general
ledger, it would look thus:

Dr Depreciation: Furniture Cr
Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
31 Mar Accumulated 4,000
21 depreciation:
furniture

Dr Accumulated depreciation: Furniture Cr

Date Particulars Foli Debit Date Particulars Fol Credit
o amount io amount
4,000 31 Mar Accumulated 4,000
21 depreciation:
furniture

Remarks:
 Depreciation expense is debited in the general ledger because it is an
expense
 Accumulated depreciation is credited because it represents a reduction in
value of the asset.
 Accumulated depreciation is what called a contra asset account because if
offsets the value of the asset it is paired with.

Contra account: A contra account offsets the balance in another, related account with
which it is paired. Contra accounts appear in the financial statements (income statement and
balance sheet) directly below their paired accounts. (Sometimes the balances in the two
accounts are merged for presentation purposes, so that only a net amount is presented.) If the
related account is an asset account, then a contra asset account is used to offset it with a
credit balance. If the related account is a liability account, then a contra liability account is
used to offset it with a debit balance. Thus, the natural balance of a contra account is always
the opposite of the account with which it is paired. A contra asset account is not classified as
an asset, since it does not represent long-term value, nor is it classified as a liability, since it
does not represent a future obligation; it simply acts to offset the asset or the liability, as the
case may be.
Key points
 A contra account is an account used in a general ledger to reduce the value of a
related account.

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  They are useful to preserve the historical value in a main account while presenting a
decrease or write-down in a separate contra account that nets to the current book
value.
 Contra accounts are presented on the same financial statement as the associated
account, typically appearing directly below it with a third line for the net amount.
 Note that accountants use contra accounts rather than reduce the value of the original
account directly to keep financial accounting records clean.
 Key examples of contra accounts include accumulated deprecation and allowance for
doubtful accounts.

6.3.1.2 Reducing balance method

The reducing balance method, also known as the diminishing balance method,
applies a fixed percentage on the book value over the useful life of a fixed asset.

The reducing balance method is an accelerated method because more depreciation

is written off in the earlier years of the useful life of the fixed asset, with the amount
gradually declining towards the later years of the asset’s useful life.

Example 2:
Assume that furniture purchased late in March 2019 is estimated to have a useful life
of 5 years. It was purchased for M12,000. Depreciation on a declining balance is at
the rate of 20%. The business’s accounting period starts from April 1 to March 31.
The calculation is as follows:

Year 1
Book value on 1 April 2019 M12,000
Depreciation on 31 March 2020 @ 20% M 2,400

Year 2
Book value on 1 April 2020 M 9,600
Depreciation on 31 March 2021 @ 20% M 1,920

Remarks:

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  For Year 1, the book value is equivalent to the cost of the fixed asset, hence
we have the original value of the furniture at M12,000.
 The next step is to apply the rate of depreciation to the book value (in Year 1,
the original cost.
 For Year 2, the book value is taken account of, and represents the value after
subtracting, the depreciation expense of Year 1.

Example 3
The following information was extracted from the trial balance of Tiro Chambers as
at March 2021.
Vehicles M120,000
Accumulated depreciation on vehicles M 30,000
Equipment M 70,000
Accumulated depreciation of equipment M 42,000
Adjustments:
1. Depreciation on equipment must be provided for at 10% per annum using
the straight-line method
2. Depreciation on vehicles must be provided for at 15% per annum using the
reducing balance method.

Required:
Calculate the balances on the following accounts in the trial balance as at 31 st
March 2021 after taking the above adjustments into account:
 Accumulated depreciation on equipment
 Accumulated depreciation on vehicles
 Deprecation

Solution:
Workings:
1. Calculation of depreciation on equipment
Cost = M70,000
Depreciation = M70,000 x 10%
= M7,000

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Calculation of revised accumulated depreciation on equipment
Accumulated depreciation + depreciation for the period
= M42,000 + M7,000
= M49,000

2. Calculation of depreciation on vehicles

Book value = cost – accumulated depreciation on vehicles
= M120,000 – M30,000
Depreciation = Book value x 15%
= M90,000 x 15%
= M13,500

Calculation of revised accumulated depreciation on vehicles

Accumulated depreciation + depreciation for the period
= M30,000 + M13,500
= M43,500

Total depreciation for the period is: M7,000 + M13,500 = M20,500

Adjusted Trial balance Tiro Chambers as at 31 March 2021

Folio Dr Cr
Accumulated depreciation on equipment 49,000
Accumulated depreciation on vehicles 43,500
Depreciation 20,500

Remarks:
 Take note that the instruction did not require you to add up the balances in the
trial balance; it only required you to calculate the balances after having taken
into account the adjustments in question.
 The accumulated depreciation on equipment and vehicles in the balance
sheet would be reflected against equipment and vehicles, respectively, as

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 contra assets. This is how they could look like, depending on the format
followed:

Balance sheet of Tiro Chambers as at 31st March 2021

Assets
Noncurrent assets Cost Accumulated depreciation Book value
Equipment 70,000 49,000 21,000
Vehicles 120,000 43,500 76,500

The last thing you must look for always is whether the asset is to be depreciated for
the full year – if the asset was purchased during the year, then you need to calculate
how many months you can depreciate it for. For example, if it was purchased on 1 st
July and the financial year ended on 31 st March, then you only had the asset for 9
months – so you can only claim 9/12ths of the year’s depreciation – or in this case ¾
because that is what 9/12ths equals.

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