Common Accounting Entries Flashcards
What is important to note about how law firms must create accounts, given they work with client money + business money?
Accounting entries made by law firms must take account of both bookkeeping principles and the SRA Accounts Rules
Records of client money dealings must be clearly separated from the records of the ordinary business dealings of the firm
- Set A of accounts would be for handling client money
- Set B of accounts would be for ordinary business accounts
They are entirely separate, so a firm cannot enter a debit on one and a credit on the other
Law firms are free to choose their own system to record accounts, as they are all based on double-entry bookkeeping.
What does SRA guidance say about the format of law firm accounts?
- Every client money transaction should be recorded in the client cash book and client ledger
- Transactions should be dated chronologically, with narratives about the transaction + balance should be readily ascertainable
- Ledger accounts should name the client for whom money is held + a description of the matter
- Business account entries in relation to each client + client account entries must be kept up to date
- Contemporaneous and chronological record of inter-ledger transfers must be kept
Given that firms usually have a dual cash account (business and client cash), how are these formatted?
To make it easier for firms, they are usually on the same page next to each other
One set of columns for ‘Date’ and ‘Details’ and then the DR, CR and balance columns for business account, followed by the same for client account
How do firms present their client ledger accounts?
Firms must record dealings with client money on behalf of clients + must record the issue of bills to clients, payments of firm’s own money on behalf of clients + receipts in payments of bills
Firm required to have two separate client ledger accounts, which are usually combined like the two cash accounts
One set of columns for ‘Date’ and ‘Details’ and then the DR, CR and balance columns for client ledger account (business), followed by the same for client ledger account (client)
How are receipts of money presented in the accounts?
1st step for receipt of money – is it business or client money?
- Entry in cash account for a receipt is a DR entry
- Corresponding CR entry is in the ledger account of the client who paid
Receipts of client money are held for relevant client in the client bank account (money on account of costs)
Receipts of business money reduce the indebtedness of the relevant client to the firm (payment of fees)
The balance in the cash account relates to the total funds in the bank, not to one client
Give two examples of how a receipt of money might be presented
1) Example 1 – X owes £100 following issue of a bill + receives £20 from X to reduce the debt (both business money)
- DR entry in cash account of 20, for cash gained (business side)
- CR entry in client ledger account of 20, for income gained (business side)
- DR balance of 100 in client ledger, reduced to 80 DR after £20 paid – represents total debt owed by client
2) Example 2 – Z pays £300 on account of costs (receipt of client money, so would be held in client bank account)
- DR entry in cash account of 300 (in client account section)
- CR entry in client ledger account of 300 (client side)
How are payments of money presented in the accounts?
1st step for payments of money – is the payment made from the business or client bank account?
- Entry on cash account for a payment is a CR entry
- Corresponding DR entry in the ledger account of the client on whose behalf the payment is made
Payment from business account – resulting DR balance on business section of client ledger account will show the client owes the firm money (as a debtor)
Payment from client account – reduces the CR balance on the client section of the client ledger account (reduces amount held for client)
Payments must not be made from a client bank account unless the firm holds sufficient funds for that client; if there are not enough funds, payment is made from the business account
Give an example of how a payment of money might be presented
1) Example – firm holds £500 for X, on account of costs + needs to make a £400 payment for X
- CR entry in cash account of 400 (in client section)
- DR entry in X’s ledger account of 400 (in client section)
- CR balance in X’s ledger account reduced from 500 CR to 100 CR
How are the firm’s professional charges presented in the accounts?
When a firm issues a bill, there is no movement of cash at that stage, so no entry in the cash account
- In client ledger account, there must be recorded DR entries for professional charges and VAT (in the business section, as client owes the firm money)
- Corresponding CR entries are made on an income ledger account and a HMRC account
Income ledger might be called:
- Professional charges or fees
- Profit costs
Balance on profit costs account shows the amount the firm has billed for professional charges each year
Balance on HMRC ledger account shows how much the firm owes HMRC in VAT
When a bill is paid, no entries are necessary on the profit costs account
* CR client ledger + DR cash
Give an example of how professional charges might be presented
1) Example – firm issues a bill for £400 profits costs + £80 VAT to client X
- DR entry of 400 in X ledger account (in business section)
- DR entry of 80 in X ledger account (in business section)
- CR entry of 400 in profits costs account
- CR entry of 80 in HMRC account
What are some points to note about disbursements and billing?
1) Bill will include details of disbursements already paid and, where appropriate, those to be paid in the future
- Common to send an accompanying statement, setting out how much of the client’s money has been used already + whether more will be needed from them for fees or if there is a balance to return
2) No entries are made for disbursements when a bill is sent
- They are recorded when they are paid, as DR from client ledger and CR in cash
3) Money received in payment of the bill will be the firm’s own money and must be paid into the business bank account
Give a summary of how the entries for receipts are presented
The entries for a receipt are:
- CR on client ledger account;
- DR on cash account; and
- in the business or client section as appropriate.
Give a summary of how the entries for payments are presented
The entries for a payment are:
- DR on client ledger account;
- CR on cash account; and
- in the business or client section as appropriate.
Give a summary of how professional charges are presented
When a bill is sent, entries are made:
- to record professional charges with a DR entry in the business section of the client ledger account and a CR entry in the profit costs account; and
- to record VAT with a DR entry in the business section of the client ledger account and a CR entry in the HMRC account.
- No entries are made in relation to disbursements when a bill is sent.
- Disbursements are recorded when they are paid
