1. General Concepts

Question 1

What are the four things considered client money?

Answer 1

Money held or received:

1. Relating to regulated services delivered to a client
2. On behalf of a third party related to regulated service
3. As trustee or holder of specified office or appointment
4. In respect of fees and unpaid disbursements prior to a bill for these

Question 2

With what institutions in what countries must a client bank account be maintained, and what word should any such account which also contains the name of the firm contain?

Answer 2

Bank or building society in England and Wales.

Account with name of firm must contain the word client.

Question 3

Where are receipts in and payments out if (1) client money and (2) non-client money recorded in the client account?

Answer 3

1. Receipts and payments of client money on the client side of the client account
2. Receipts and payments which are not client money, bills, or costs on the business side of the client account

Question 4

Regarding accounts, what two things should be done at least every five weeks?

Answer 4

1. Statements obtained from financial institutions where client money is held
2. Reconciliation completed of the statement balance with the cash account balance and the client account total

Question 5

What two things trigger the requirement for an accountant’s report?

Answer 5

1. Client money is held or received
2. Solicitor operates a joint account or client’s own account as signatory

Question 6

What triggers the requirement to deliver the accountant’s report to the SRA, and within what time limit of the end of the accounting period must it be delivered?

Answer 6

If the report shows a failure to comply with the SRA rules, risking or causing loss to client money.

Within six months.

Question 7

In what two situations is an accountant’s report not required where it otherwise would be?

Answer 7

1. All of the client money was received from the Legal Aid Agency
2. In an accounting period, the average of total balance £10k or less, and maximum balance $250k or less

Question 8

How soon must client money be paid into a client account?

Answer 8

Promptly

Question 9

Although promptly is not defined in the current rules, what is it likely to mean based on the previous rules?

Answer 9

On the day on receipt or the next working day

Question 10

Unless an alternate arrangement has been agreed in writing, in what state should client money always be?

Answer 10

Available on demand by the client

Question 11

As long as the client has been informed in advance of where and how the money will be held, in what circumstance need money which is technically client money not be held in a client account?

Answer 11

Money relates to unpaid fees or disbursements related to costs or expenses incurred on behalf of the client for the which the solicitor/firm is liable and there is no other reason to maintain a client account

Question 12

In the cash account, where is money received by the firm (from or for the client) recorded, and why?

Answer 12

Debit on the client side, because it is money owed to the client

Question 13

In the cash account, where is money paid by the firm (for or on behalf of the client) recorded, and why?

Answer 13

Credit on the client side, because it is money the firm is owed by the client

Question 14

To make sense of the debit and credit entries, what is the best way to think about the client side of the cash account?

Answer 14

It is a record of the firm’s liability to the client. Client money received is a debit because it represents a liability the firm owes to the client. Money paid on behalf of the client represents a credit because it is money owed to the firm (an asset).

Question 15

To make sense of the debit and credit entries, what is the best way to think about the client side of the client account?

Answer 15

It is a record of the client’s money, expressed as it would be if they were managing the account themselves. Money in is a credit (asset) and money out on their behalf is a debit (liability).

Question 16

Where you make a debit or credit entry on the client side of the cash account, what other entry should you also make and where?

Answer 16

Debit on client side of cash account: Make credit on client side of client account.
Credit on client side of cash account: Make debit on client side of client account.

(The sides stay the same, the entry just inverts)

Question 17

Where the client sends money to the firm in payment of a sum owed to the firm what are the entries, and why?

Answer 17

Split the amount into profit costs and VAT but include both as their own debit on the business side of cash account and credit on the business side of client account because:

• The business side of the cash account is a record of the firm’s liabilities to itself so money paid to the firm is a liability on the cash account, and
• The business side of the client account is a record of the money owed to the firm by the client so money paid to the firm by that client is an asset because it offsets the debit that is owed

Question 18

What are the three reasons money can be withdrawn from a client account?

Answer 18

1. Purpose for which it is held
2. Instruction from the client
3. With SRA’s written authorisation

Question 19

What must a payment made from a client account not exceed?

Answer 19

The total money held for the client in the client bank account

Question 20

What entries must be made when a firm issues a bill, and why?

Answer 20

1. Profit costs and VAT as a debit on the business side of the client account (because the business side of the client account is a record of the client’s liability to the firm, so the charge in the bill is their liability to the business)
2. Profit costs as a credit in the profit costs account, and VAT as a credit in the HMRC/VAT account (because they are the corresponding inverse entries and the fees and VAT parts must be split)

Question 21

Why are no entries made on the profit costs or HMRC VAT accounts when the bill is paid?

Answer 21

Because these effectively function as a total of the tax liability owed to HMRC. When a bill is paid, the entry is a credit on the business side of the client account, to offset the debit created by the issuance of the bill. This is why the full amount plus VAT goes in this first entry.

Question 22

What are the entries when a client disputes the amount of the bill?

Answer 22

Discount given on profit costs and VAT as a credit on the business side of the client account, and the relevant reductions in profit costs and VAT are debits in their relevant accounts

Question 23

What must a solicitor/firm do if a client account becomes overdrawn?

Answer 23

Immediately (not promptly) transfer the amount by which the client account is overdrawn from the business account to the client account