Chapter 1: Introduction to Solicitors' Accounts

Question 1

What is client money?

Answer 1

• Money held or received on behalf of clients or third parties
• Includes money held or received which is intended to cover the firm’s fees before bill has been delivered or expenses before they have been paid out

Question 2

What is business money?

Answer 2

Money belonging to law firm rather than its clients

Question 3

Where must a client account be held?

Answer 3

In a bank or building society in England and Wales

Question 4

What should the name of a client account include?

Answer 4

• The name of the firm
• The word ‘client’

Question 5

When must a solicitor deliver an accounting report to the SRA?

Answer 5

Within six months of the end of the solicitor’s accounting period if the total balance of all client accounts held exceeds an average of £10,000 for the period or £250,000 at any time during the period

Question 6

How often must a firm reconcile client accounts against bank statements?

Answer 6

At least once every five weeks

Question 7

For how long should accounting records be retained?

Answer 7

At least 6 years

Question 8

What is the cash account?

Answer 8

• Also known as the cash sheet or cash book
• Records payments into and out of the firm’s bank accounts
• Records payments and receipts of both business and client money

Question 9

What does the cash account look like?

Answer 9

The cash account is usually comprised of two columns: business and client columns showed side by side

Question 10

From whose perspective are ledgers drawn up?

Answer 10

From the perspective of the business and NOT the client

Question 11

How will money received by the firm into is cash account be recorded?

Answer 11

Debit entry as it is money owed to the client

Question 12

How will money paid out by the firm on or on behalf of a client be recorded?

Answer 12

Credit entry as it is money that is now owed to the firm by the client

Question 13

A firm sends Mr Durrell - a client - a bill for £300 profit costs and £60 VAT. How would this be recorded?

Answer 13

Debit client ledger (Mr Durrell) £300 (profit costs) business account

Credit profit costs ledger £300

Debit client ledger (Mr Durrell) £60 VAT (business account)

Credit HMRC ledger £60

Question 14

A firm sends Mr Durrell - a client - a bill for £300 profit costs and £60 VAT.

Once Mr Durrell pays the bill, how would this be recorded?

Answer 14

£360 credit client ledger (Mr Durrell) business account

£360 debit cash sheet business account

Question 15

A firm sends Mr Durrell - a client - a bill for £300 profit costs and £60 VAT.

If there is already money in the client account, how would this be recorded?

Answer 15

PART 1 - showing money removed from client account

£360 debit client ledger (Mr Durrell) client account
£360 credit cash sheet client account

PART 2 - showing money entering business account

£360 debit cash sheet business account
£360 credit client ledger (Mr Durrell) business account

Question 16

A firm sends Mr Durrell - a client - a bill for £300 profit costs and £60 VAT.

Mr Durrell thinks that £360 is too high and the firm decides to reduce his bill by £50 to £250 with VAT reduced to £50.

How would this abatement be recorded?

Answer 16

Debit profit costs £50 (the reduction amount)
Debit HMRC ledger £10 (the vat reduction amount)
Credit client ledger (Mr Durrell) £50
Credit client ledger (Mr Durrell) £10

Question 17

What must be done if there is a breach of the rules?

Answer 17

Any breach must be rectified promptly upon discovery, even if partners have to use their own personal funds.

Question 18

Can a firm draw upon a cheque before it has cleared?

Answer 18

Yes, but this would be unwise as the cheque may bounce

Question 19

Mr Durrell sends the firm a cheque for £1,000 to be held on account for costs and the firm pays a surveyor £800 on behalf of Mr Durrell. The firm later discovers that the cheque has been dishonoured and they have used £800 of other clients’ funds.

The firm must rectify the breach. How would this be recorded?

Answer 19

Mr Durrell sends the cheque
Credit client ledger (Mr Durrell) £1,000 client account
Debit cash sheet £1,000 client account

Firm pays surveyor
Debit client ledger (Mr Durrell) £800 client account
Credit cash sheet £800 client account

Cheque is dishonoured - entries reversed
Debit client ledger (Mr Durrell) £1,000 client account
Credit cash sheet £1,000 client account

The firm must now rectify the breach:

Debit client ledger (Mr Durrell) £800 business account
Credit cash sheet £800 business account
Credit client ledger (Mr Durrell) £800 client account
Debit cash sheet £800 client account