2. Interest Flashcards
What is SRA Account Rule 7.1?
‘Your account to clients or Third Parties for a FAIR SUM OF INTEREST on any client money held’
Do firms need to pay interest on small sums of client money held over a short period of time?
No, it is considered fair not to pay any interest at all.
How much interest do firms pay on large sums of Client Money held over a longer period of time?
It depends on whever it is held in a Designated Client Account, or the General Client Account.
- Seperate Designated Client Account
The actual interest earned must be paid (all of it)
- General Client Account
A sum in lieu must be paid. This will be in accordance with the firms interest policy, which must be fair.
What are the 4 rules in relation to a firm paying a sum in lieu of interest on client money?
For the firms interest policy to be fair, the following rules apply:
- Firms should have a written policy on how interest is calculated, and inform clients accordingly
- The Policy should take into account the amount of client money held and the time held for
- When deciding what rights are fair, firms should consider the interest rates offered by banks on instant access accounts (as client money must be available on demand - rule 2.4). They should adopt a middle ground (not the lowest rate, but not the highest)
- Firms are allowed a ‘DE MINIMIS’ Provision, under which they will not pay interest to a client under a certain threshold (usually £20).
What is a seperate designated Client Account?
A Separate Designated Deposit Client Account is an account that is:
- Separate from the general client account
- Designated in the name of an individual client
- is a Deposit account which will earn more interest on the clients money as compared to general client account
- Is labelled as a client account in accordance with Rule 3.2(b)
It is often used when holding large sums of money for that client over a long period of time.
What is the exception to rule 7.1 that a FAIR Sum of client interest must be paid to the client?
The Exception under Rule 7.2
Firms can agree alternative provisions with the client if they:
- Provide Sufficient Information to the client in advance
- The Client agrees in writing
What are the 2 ways that firms can deal (pay) interest on client money to the client?
When are they usually used?
- Transfer the interest into the client account to offset against the firm bill, or to use future disbursements (usually when legal services ongoing)
Or
- Pay the interest directly to the client from the client’s bank account (usually when legal services have come to an end)
Can firms make a profit from interest on client money?
Yes, incases where the client money is held in a general account they can make a profit.
This is because they only have to pay a fair sum in lieu of interest, not the whole amount, and so will be keeping some of the interest.
When a firm pays a sum in lieu of interest, where is this recorded?
This will be recorded on an interest payable ledger as an expense of the firm.
What are the 2 accounting requirement steps with regards to interest on client money held in the general client account?
- Recording Interest payable as business money; and
(Client Ledger and Interest Payable Ledger) - Transferring a sum in lieu of interest from the business account to the client account.
(Client Ledger and Cash Sheet)
How do you record the interest payable as client money when dealing with step 1 of the accounting requirement for interest on client money held in the general client account?
Using the firm’s interest policy, the firm will determine what sum should be paid to the client in lieu of interest. The double entry for the interest payable is then recorded in the ledgers as:
Credit - Client Ledger, Business Account collum
Debit - Interest payable ledger (only has business collums)
What are the required accounting records when dealing with step 2 of the accounting requirements for interest on client money held in the general client account, which is transferring a sum in lieu of interest from the business account to the client account?
As the interest payable is recorded as an expense of the business, the sum in lieu of interest must be transferred from the business account into the client account. This is a business to client cash transfer.
This involves 2 pairs of double entries:
1. Transfer the sum in lieu of interest out of the business account:
Debit - Client Ledger Business Account
Credit - Cash sheet Business Account
- Transfer the Sum in Lieu of interest into the client account
Credit Client Ledger client account
Debit Cash sheet client account
How can client money held in a Separate Designated Deposit Client Account be used?
Most SDDCA do not allow direct payments to be made out of the account. Therefore, when the money in an SDDCA is needed, it is usual for the sums held, plus any interest arising, to be transferred into the general client account.
This money can then be paid out from the general account.
What are the 2 methods for dealing with accounting requirements with interest on client money held in a Separate Designated Deposit Client Account?
They can use 1 of 2 methods:
- Add extra Collums on the existing client ledger and cash sheet for money on the deposit account
- Create separate ledgers for money on deposit accounts.
What are the 3 steps involved when using the extra collum method when dealing with the accounting requirements for interest earned on client money held in the Seperate Designated Deposit Client Account?
- Transfer from the general client account to an SDDCA
Transfer from the General Account DR Client ledger, Client Account collum CR Cash Sheet, Client Account collum Transfer into an SDDCA CR Client ledger, client deposit account collum DR Cash Sheet, Client Deposit account collum - Bank pays interest on funds in an SDDCA
CR Client ledger, Client deposit account collum
DR cash sheet, client deposit account collum - Transfer from an SDDCA (including interest) to the general client account
Transfer From an SDDCA DR client ledger, client deposit account CR cash sheet, client deposit account Transfer into the general client account CR Client ledger, Client account collum DR cash sheet, client account collum
