2 - Double Entry Book Keeping Flashcards
What does the SRA Guidance say about maintaining client accounting records?
The SRA Guidance advises that accounts should be maintained using the double entry principle, where each transaction has a credit (CR) and a debit (DR) entry.
Client ledger records and business account entries must be kept up to date (SRA Accounts Rule 8.1).
What records must be maintained according to SRA Accounts Rules?
Records must include:
- Client ledger records: For receipts and payments of client money.
- Business ledger records: For receipts and payments of non-client money and issuing bills.
- Client Account Cash book: Showing transactions through the client account and business account. (SRA Accounts Rule 8.1(c)).
How is the double entry system used for transactions involving client money?
For each transaction involving client money:
Client money received and paid into the client account:
- Credit the client ledger client account: Client POV.
- Debit the cash sheet client account: Firm POV.
Client money paid out from the client account:
- Debit the client ledger client account.
- Credit the cash sheet client account.
How is the double entry system used for transactions involving non-client money?
For each transaction involving non-client money:
Non-client money received and paid into the business account:
- Credit the client ledger business account.
- Debit the cash sheet business account.
Non-client money paid out from the business account:
- Debit the client ledger business account.
- Credit the cash sheet business account.
How should client money be recorded when received and paid into the client account?
Received:
Credit the client ledger client account (to reflect money paid in, which increases liability for the firm as money they hold on behalf of client increases).
Debit the cash sheet client account (reflect the increase in the clients account balance).
Paid out:
Debit the client ledger client account (reflecting a decrease in the funds that the firm holds on behalf of the client).
Credit the cash sheet client account (indicating a reduction in the money held in the bank on behalf of the client).
How should non-client money be recorded when received and paid into the business account?
Received:
Credit the client ledger business account.
Debit the cash sheet business account.
Paid out:
Debit the client ledger business account. (increasing the amount owed by the client)
Credit the cash sheet business account. (decreases the firms cash balance, reflecting the payment made on behalf of the client).
How are cheques payable to the client handled?
Cheques made payable to the client are not deposited into the client account.
Instead, they should be forwarded to the client. Note the receipt and forwarding in the client’s ledger.
If your client, Mr Singh, sends you a cheque on account of costs (client money under Rule 2.1) which you pay into the client account (Rule 2.3), the two entries to record this receipt of client money into the client account are:
Credit the client ledger client account for Mr Singh; and
Debit the cash sheet client account (which is the record of money going into and coming out of the client account).
What is petty cash and how is it recorded?
Petty cash is used for small payments like taxi fares. It is maintained separately from the business account.
Payment into petty cash:
- Debit petty cash account.
- Credit business account.
Payments out of petty cash:
- Debit relevant expense account.
- Credit petty cash account.
What should you remember about terminology related to client and business accounts?
Client ledger client/business Account: Contains the client’s transactions with the firm, including client and non-client money.
The client ledger client account shows money held for the client (client’s funds), while the client ledger business account shows money the client owes to the firm (firm’s income).
Business account: Records non-client money and bills issued to clients.
Cash Sheet Client Account: Tracks the client’s money that is physically held in the client account.
What is a client ledger client account?
Purpose: This record tracks the transactions involving client money. It shows how much money the law firm holds on behalf of each client.
What It Includes:
Client money received (e.g., payments from the client for legal services or on account of costs).
Client money paid out (e.g., payments made from the client’s account to cover costs or refunds).
Example: If Mr. Singh sends $1,000 to the firm for legal work, the entry in Mr. Singh’s client ledger client account would reflect this $1,000 as a credit, showing an increase in the funds held for Mr. Singh.
What is a client ledger business account?
Purpose: This record tracks non-client money transactions. It shows the money the client owes the law firm (usually as a result of billed costs).
What It Includes:
Non-client money received (e.g., payments for invoices or costs).
Non-client money paid out (e.g., money spent on behalf of the client, which the client needs to reimburse).
Example: If Dr. Patel pays a bill, this payment is recorded in the client ledger business account under Dr. Patel as a credit, reducing the amount Dr. Patel owes the firm.
What does it mean to debit or credit a Client Ledger Account/Client Ledger Business Account?
Debit (DR):
Client Ledger Client Account: Debit when money is paid out from the client account (reduces the client’s balance). (Think of it from the client’s perspective—money is leaving their account, so the balance decreases.)
Petty Cash: Debit when money is spent from petty cash, showing an expense has occurred.
Credit (CR):
Client Ledger Client Account: Credit when money is received into the client account (increases the client’s balance). (From the client’s perspective, money is being deposited, so their balance increases.)
Business Account: Credit when money is deposited into the firm’s business account (increases the firm’s funds).
Overview: Credit is used for money paid in, debit is used for money paid out or debt being created. The cash sheet client account is viewed from the firms perspective.
What does Rule 8.1 require from a firms client accounting systems?
Maintain accurate, contemporaneous, and chronological records of dealings with client money.
Client Ledgers: Record all receipts and payments of client money on the client side of the ledger. Record non-client money and bills of costs on the business side of the ledger.
Liabilities List: Maintain a list showing all balances of liabilities to clients and third parties, with a running total.
Cash Book: Provide a cash book showing a running total of all transactions through client accounts.
Where will the entries for transactions involving client money be recorded?
Client Account Cash Book/ Cash Sheet Client Account: Rule 8.1(c) - Record transactions involving client money in a client account cash book, also known as the cash sheet client account. This maintains a running total of transactions through the client account.
Client Ledger Account: Rule 8.1(a)(i) - Maintain a client ledger account for each individual client, referred to as the client ledger client account. This ledger records receipts and payments of client money and shows the balance of client money held on behalf of the client by the authorised body.
Where will the entries for transactions involving non-client money be recorded?
Business Account: Record non-client money transactions in a business account, separate from the client account. This account is maintained with a business [account] cash book or cash sheet business account (Rule 4.1).
Client Ledger Business Account: Record non-client money transactions related to individual clients in the business side of the client ledger. This ledger tracks receipts of non-client money, payments, and bills of costs, showing how much each client owes the authorised body (Rule 8.1(a)(ii)).
