Common Accounting Entries Flashcards
What is the double-entry bookkeeping system, and why is it important for law firms?
- The system requires every financial transaction to have an equal and opposite debit and credit entry.
- It ensures accuracy in financial records and compliance with the SRA Accounts Rules, safeguarding client money and maintaining proper records.
What are the key recording requirements under Rule 8?
- Transactions recorded chronologically with clear narratives.
- Client ledger accounts must include the client’s name and transaction description.
- Inter-ledger transfers must be recorded contemporaneously.
- Regular reconciliations and reviews of credit balances on the business side of client ledgers are required.
What is the purpose of a dual cash account in law firms?
- To separately track:
1. Client money (client bank account transactions).
- Business money (the firm’s own bank account transactions).
- Both accounts are often presented side-by-side on the same page for administrative ease.
How do you differentiate client money from business money?
- Client Money: Held on behalf of the client, e.g., advance payments or funds for disbursements.
- Business Money: Belongs to the firm, e.g., payment of fees or reimbursement of expenses.
Why are dual ledger accounts used in law firms?
- To maintain separate records for:
1. Client money transactions.
2. The firm’s business transactions related to the client. - These accounts are typically displayed side-by-side for clarity.
How are receipts of client money and business money recorded?
first step is to ascertain whether the receipt is of business money or client money.
Client Money Receipt:
* DR: Cash account (client section).
* CR: Client ledger account.
Business Money Receipt:
* DR: Cash account (business section).
* CR: Client ledger account (reduces the client’s debt to the firm).
How would you record a receipt of £300 from a client, Wiseman, on account of costs?
- DR: Cash account (client section), £300.
- CR: Wiseman’s client ledger account, £300.Reasoning:
- The SRA Accounts Rules require client money to be deposited into the client bank account.
- A Debit (DR) entry is made in the cash account (client section) to record the increase in the client bank account balance.
- A corresponding Credit (CR) entry is made in Wiseman’s client ledger account to reflect that the money is held for Wiseman.
How would you record a client paying £20 towards a £100 debt?
DR: Cash account (business section), £20.
CR: Client ledger account, £20.
- Business money received is deposited into the firm’s business bank account and recorded in the cash account (business section) with a Debit (DR) entry to increase the account balance.
- A corresponding Credit (CR) entry is made in the client ledger account, reducing the outstanding balance owed by the client.
How are payments recorded for client and business accounts?
Client Money Payment:
* CR: Cash account (client section).
* DR: Client ledger account.
Business Money Payment: * CR: Cash account (business section). * DR: Client ledger account (creates a debtor balance).
- Payments decrease the balance in the relevant cash account, so a Credit (CR) entry is made in the cash account (client or business section).
- To complete the double entry, a Debit (DR) entry is made in the client ledger account for the client involved.
- Rule 5.3 mandates that payments from the client account can only be made if sufficient funds exist for that client; otherwise, payments must be made from the business account.
What does Rule 5.3 require when making payments from a client account?
- A payment must not be made from the client account unless sufficient funds are held for that specific client.
- If insufficient funds are available, the payment must be made from the firm’s business account.
How would you record a £400 payment for a client, Jenkins, when the firm holds £500 in the client account?
- CR: Cash account (client section), £400.
- DR: Jenkins’ client ledger account, £400.
How are professional charges and VAT recorded when a bill is sent to a client?
When the firm issues a bill to the client, it will include an item for its professional charges and VAT on those Charges.
there is no movement of cash, so no entry is made in the cash account.
Professional Charges:
* DR: Client ledger account (business section).
* CR: Profit costs account.
VAT:
* DR: Client ledger account (business section).
* CR: HMRC account.
How would you record a bill for £400 (profit costs) plus £80 VAT sent to a client, Hale?
- DR: Hale’s client ledger account (business section), £400.
- DR: Hale’s client ledger account (business section), £80.
- CR: Profit costs account, £400.
- CR: HMRC account, £80.The client ledger account (business section) is Debited (DR) to reflect that the client owes the firm £480 (£400 for services + £80 VAT).
- The firm’s profit costs account is Credited (CR) for £400, recording the income earned by the firm.
- The firm’s HMRC account is Credited (CR) for £80, reflecting the VAT liability to HMRC.
- This double-entry system ensures the firm’s accounts accurately track income and liabilities arising from issuing the bill.
When are disbursements recorded in the accounts?
Disbursements are only recorded when they are paid, not when the bill is sent.
How is money received in payment of a bill recorded?
- Such money is treated as business money and must be paid into the business bank account.
- Entries are made in the business section of the accounts.
