1. Double Entry Bookkeeping and the SRA Accounts Rules

Question 1

Debt: which side

Answer 1

Debit: Label for the left-hand side (DR)

Question 2

Credit: which side

Answer 2

Credit: label for the right-hand side (CR)

Question 3

What is entered in the ‘details’ column of the account

Answer 3

Cross-reference of corresponding account where other entry is going, with details of what the transaction relates to

Question 4

Which accounts are ‘ledger accounts’

Answer 4

All except for cash (and petty cash, if it exists)

Question 5

Who do the SRA Accounts rules apply to?

Answer 5

The rules apply to authorised bodies, their managers and employees

• The authorised body’s managers are jointly and severally responsible for compliance with the rules by the authorised body, its managers and employees
• for licensed bodies, the rules only apply to activities regulated by the SRA in accordance with the terms of its license

Question 6

Left hand side entries (1-4)

Answer 6

1. Expense Incurred
2. Asset Acquired / increased
3. Liability reduced
4. Cash Gained

Question 7

Right hand side entries (1-4)

Answer 7

1. Income Earned
2. Asset disposed of / reduced
3. Liability increased
4. Cash Paid

Question 8

Who is bound by the SRA Accounts Rules

Answer 8

• Solicitors
• Authorised bodies (their managers and employees)
• To regulated SRA activities in licensed bodies (in accordance with the terms of its license)

Question 9

Definition of client money

Answer 9

Client money is money held or received by a firm:

1. relating to regulated services delivered by you to a client
2. on behalf of a third party in relation to regulated services delivered by you (ie. money held as agent or stakeholder)
3. as a trustee or as the holder of a specified office of appointment, such as donee of a power of attorney, Court of Protection deputy or trustee of an occupational pension scheme
4. in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same

Question 10

Availability of client Money: SRA Accounts Rules

Answer 10

Rule 2.4 requires firms to ensure that client money is available on demand unless an alternative arrangement is agreed in writing with the client or the third party for whom the money is held - so firms should not ‘tie up’ client money in accounts which require notice periods

Question 11

When can client money be held OUTSIDE Of a client bank account?

Answer 11

1. Client money is held as a trustee / holder of specific office / appointment and paying into a client bank account would conflict with obligations relating to that appointment
2. client money represents payments received from LAA for the firm’s costs or
3. Firm reaches an alternative arrangement in WRITING with the client or third party for whom the money is held
4. If money is for fees and unpaid disbursements received prior to delivery of a bill and (1) firm has made disbursements (ie. instructed council) and (2) does not have a client bank account for any other reason
   - THEN client money can be held outside but firm must inform client in advance/ explain
   - WILL NOT APPLY if firm received any other types of client money

Question 12

SRA Accounts Rules: Returning Client Money

Answer 12

Rule 2.5 requires client money to be returned promptly to the client or the third party for whom the money is held as soon as there is no longer any proper reason to hold those funds.
- ie. no pending further transaction / instructions

Question 13

SRA Accounts Rules: Mixed receipts

Answer 13

General Rule: When, as is often the case, a firm receives a mixed payment containing, for example, client money plus money to pay the firm’s bill, Rule 4.2 states that the firm must ‘allocate funds promptly’ to the correct bank account.

Question 14

Bills including future disbursements (ie. SDLT bill yet to be paid) SRA Accounts Rules

Answer 14

• If a firm is holding money in the client bank account on account of costs and issues a bill, it should transfer the money promptly
• If the bill includes an item for a future disbursements (eg. SDLT bill), this should not be moved until it is due as holding it in the business account puts the client at risk if the firm becomes insolvent

Question 15

Billings for anticipated fees and disbursements: When can firms do this

Answer 15

You have an ongoing duty to safeguard money and assets that have been entrusted to you and not prefer your own interests, for example in maintaining cashflow, over those of your clients. The obligation to safeguard money entrusted to you is not limited to only that money which is held in a client account.

You will need to think very carefully about the reasons why you are billing for these sums in advance and the risks to your client in your paying these monies into your firm’s business account.
- It is important to remember that the sending of a bill in these circumstances does not mean that this money is no longer a client’s money and it does not need to be safeguarded because it does not sit in a client account.

Question 16

Can a firm transfer client money from the account to pay for disbursements / payments already made, WITHOUT issuing a bill to a client?

Answer 16

Rule 5: permits money to be withdrawn from the client bank account ‘for the purpose for which it is being held’
- If the firm has made it clear to the client that the client money may be used to reimburse the firm for payments made, it can do so without issuing a bill or notification of costs under rule 5
- Location of explanation: Client care letter, firm’s terms of engagement or in other communication with the client

Question 17

If a disbursement needs to be paid for and the balance in the client’s client account is insufficient

Answer 17

payment can be made from firm’s business account (client money cannot partially reimburse and firm unless a bill is issued or the client is aware that this will happen)

firm can advance its own money to the client in such cases (useful when there is almost enough money) - the advance becomes client money and subject to the rules applying to client money

Question 18

What is a residual client account balance

Answer 18

Definition: A residual client account balance is money that the firm has not returned to the client at the end of the retainer and it has become difficult to return (potentially, because client has died and executors are unknown)

Question 19

When can a firm withdraw money from a client account: Residual client account balances

Answer 19

Money can be withdrawn from residual client balance of 500 or less on any one client matter provided the money is then paid to charity (so long as firm has taken reasonable steps to return the money to the client and to keep proper records of what has been done)

Question 20

If a firm has not returned certain money to the client at the end of the retainer and the client has since become impossible to trace / return (ie. because client has died and executors unknown) - when must they apply to the SRA for authorisation to make a withdrawal

Answer 20

If balance is over 500, firm must apply to the SRA for authorisation to make the withdrawal

Question 21

Using a client bank account as a banking facility

Answer 21

General Rule: Rule 3.3 provides that the client bank account must not be used to provide banking facilities for clients or third parties. Payments into and transfers / withdrawals from the client account must relate to the provision of regulated services

Question 22

If a firm is practicing under an exclusion or exemption in FSMA 2000 - when might their management of the account cause them to lose the benefit of this?

Answer 22

If a solicitor takes a deposit in circumstances which do not form a part of regulated services - like when clients use their accounts as personal banking facilities

Question 23

Separate Cash book for client accounts :SRA Rules

Answer 23

rule 8.1(c) requires firms to have a separate cash book which shows all transactions through client bank accounts. No requirements to maintain a cash book to show dealings in firm’s own money but firms will generally choose to do so.

Question 24

Monitoring Accounts Systems Rules

Answer 24

Rule 8.2 requires firms to obtain bank statements for all client bank accounts and for the firm’s own business bank accounts at least every five weeks

Rule 8.3 requires the firm to prepare bank reconciliation statements for the client bank accounts
- Figures on the bank statement must be adjusted to reflect things such as cheques written by clients which will not appear on the bank statement until the cheque is presented to the bank for payment (but appears instantly on the firm’s accounting records)
- Any discrepancies revealed here must be investigated promptly

Rule 8.4 requires a central record of bills and other written notifications of costs to be kept in a readily accessible form

Question 25

Which cheques does a firm not need to record receipt of on the client ledger?

Answer 25

Those made out to the client / third party - as they are the only ones which can cash them

But firms should keep a written record that they have sent the cheque on

Question 26

Can a firm draw against a cheque paid into the client account but which has not cleared yet?

Answer 26

Yes - BUT if the cheque is dishonoured there will be a breach of Rule 5.3 ( other clients money will have been used ) and firm will have to transfer its own money into the client account immediately