Double Entry Book-Keeping Flashcards
Where will the entries for transactions involving client money be recorded?
An authorised body’s double entry accounting system therefore needs:
For client money:
(Rule 8.1(c)) a client [account] cash book which is often referred to as the cash sheet client account – i.e. the record for the client account - which records the receipts into and payments out of the client account (the bank account in which the authorised body holds client money) i.e. a running total of the transactions through the client account.
(Rule 8.1(a)(i)) a client ledger [account] for each individual client which has a client side which is often referred to as client ledger client account – i.e. the client ledger or record for transactions involving client money and the client account for that particular client – or could also be referred to as e.g. Mr Adams’ client account ledger. This records the receipts in of client money and payments out of client money for that particular client. Its balance shows how much client money the authorised body holds on behalf of that particular client.
Where will the entries for transactions involving non-client money be recorded?
For non-client money (money belonging to the authorised body):
a bank account for the authorised body’s money. This is called a business account and is a separate bank account from the client account (Rule 4.1 – client money must be kept separate from money belonging to the authorised body). The record maintained by the authorised body representing the receipts into and payments out of this account, the business [account] cash book is often referred to as the cash sheet business account.
(Rule 8.1(a)(ii)) a client ledger [account] for each individual client which has a business side which is often referred to as client ledger business account or could also be referred to as e.g. Mr Adams’ business account ledger. This records the receipts in of non-client money, payments out of non-client money and issuing of bills of costs. Its balance shows how much money that particular client owes the authorised body.
If a client has more than one matter running at the same time
Both Rule 8.1 and the SRA Guidance: ‘Helping you keep accurate accounting records’ state that each client ledger should include the client’s name and a description of the matter or transaction. Therefore, e.g. a firm acting on several different matters for the same client will maintain separate client ledgers for that client for each matter and each client ledger will identify in its name the particular matter to which it relates (as well as each one identifying the client’s name).
SRA guidance on accounting records
The SRA guidance on the SRA Accounts Rules entitled ‘Helping you keep accurate client accounting records’ (available on the SRA’s website under Standards and Regulations resources by selecting the Accounts rules tab) contains some pertinent guidance advising (amongst other things):
your books should be maintained on the double entry principle. This means that every transaction relating to client money should be recorded in at least the client cash book and the client ledger;
…the current balance … on the client ledger account should be readily ascertainable;
…entries should be made in chronological order …;
ledger accounts should include the name of the client (or other person or trust) for whom the money is held and contain a heading which provides a description of the matter or transaction…; and
business account entries (which reflect, for example, money due to your firm for costs) in relation to each client or trust matter are kept up to date as well as the client account entries…
The double entry principle
What the double-entry principle means is that for every transaction e.g. the receipt in of client money from Mr Singh, two records/entries are made.
One record will be a CREDIT (CR) and one will be a DEBIT (DR).
In our example, the two records of Mr Singh’s client money being received by the authorised body will be made in:
the client ledger client account for Mr Singh; and
the cash sheet client account (which is the record of money going into and coming out of the client account).
Credit or Debit
For double entry book-keeping, each transaction has two records/entries. One is a credit (CR) and the other a debit (DR). These two entries will be mirror images of each other – equal (in amount eg both for £20) but opposite (one a credit and the other a debit).
For many transactions one of the two entries will need to be made in the client’s client ledger (either the business side of the client ledger account or the client account side). The entry made in the client ledger (whether credit or debit) will probably look logical to you because it works as a bank statement (which we are used to seeing for our own personal bank accounts) does.
So, if client money is sent by the client and received by the authorised body, there will be a credit in the client’s client ledger (client side) to record that. The client is in credit with the authorised body (who holds the money received from the client). This is likely to look logical to you as you will probably put yourself in the position of the client when looking at the client ledger.
Credit or Debit
However, there must also be a debit entry and that will be made, in our example of client money being received by the authorised body, in the client cash book (the record for the client account) to record the money being paid into the client account.
That might look confusing (why is it a debit when money is being paid into a bank account?) but the client cash book does not work as your bank statement does – it is not from the perspective of the client but the authorised body. The authorised body’s client cash book is the equivalent of your bank’s client cash book (which you do not see) in the same way that the authorised body’s client ledger for a client is the equivalent of your bank’s statement for your account.
When learning the accounting entries required for different transactions, if the client ledger entries (where credit is used for money paid in and debit is used for money paid out or a debt being created) look logical to you then it may help you learn the accounting entries as you should be able to work out whether any client ledger entry for the transaction is a credit or a debit and then simply do the opposite in the other entry.
Transactions not involving money
Not all transactions which need to be recorded involve the receipt in or payment out of money (whether that’s client money into/out of the client account or non-client money (money belonging to the authorised body) into/out of the business account).
For example, bills of costs are mentioned in Rule 8.1(a)(ii) as needing to be recorded on the business side of the client ledger account. The issuing of a bill would not however also be recorded in the business account because simply issuing a bill does not entail receipt in or payment out of money from the business account. Instead, what has happened is that a debt has been created and the client now owes that money set out in the bill of costs to the authorised body. Double entry book-keeping entails that every transaction has two entries relating to it. So where is the second entry going to be made if not in the business account?
Rule 8.4 states that you keep a central record of all bills or other written notifications of costs given by you. This record might be referred to as a profit costs account or similar. An entry would be made in it to record the issuing of a bill as well as an entry being made in the client ledger business account of the particular client who has been billed.
Rule 8 – reconciliation
In addition to Rule 8.1 which details the obligation to keep and maintain accurate, contemporaneous and chronological records in client ledgers and the client cash book (which we have looked at in detail in this element), Rules 8.2 and 8.3 set out your obligations with regard to obtaining statements and carrying out reconciliations:
Rule 8.2 states that you obtain, at least every five weeks, statements from banks, building societies and other financial institutions for all client accounts and business accounts held or operated by you.
Rule 8 – reconciliation
Rule 8.3 then states:
Rule 8.3 you complete at least every five weeks, for all client accounts held or operated by you, a reconciliation of the bank or building society statement balance with the cash book balance and the client ledger total, a record of which must be signed off by the compliance officer for finance and administration or a manager of the firm. You should promptly investigate and resolve any differences shown by the reconciliation.
So, Rule 8.3 requires you to reconcile the statement for your client account(s), that you have obtained in accordance with Rule 8.2, with the cash book balance (the record of how much client money is held in your client account) and the client ledger total (client side) (the total of all the balances on the client side of the individual client ledgers – which show how much client money you hold for each of those clients). You must do this reconciliation at least every five weeks.
Rule 8 – records of bills
As we have already mentioned in this element, a record must be kept of all bills or other written notifications of costs given by you. This obligation is in Rule 8.4 and the record of bills within the authorised body may, for example, be called profit costs [account].
Rule 8.4 states that you keep readily accessible a central record of all bills or other written notifications of costs given by you.
Transfers between two clients
A transfer between one bank account and another eg a transfer from the authorised body’s client account to their business account or vice versa involves two steps because the money must first be taken out of one bank account (involving both a debit entry and a credit entry) and then paid into a different bank account (involving both a credit entry and a debit entry).
If you act for two clients however and a transfer of client money is being made from one client to the other, this only involves ONE step.
This is because the client money being transferred is already in the authorised body’s client account. There is no need to take the money out of the client account and then pay it back into the same account.
SRA Guidance: ‘Helping you keep accurate client accounting records’ says that where transfers between different clients of the authorised body arise as a result ofloans between clients, the written authority of both the lender and borrower should be obtained and retained on the file.
Entries for transfers between two clients
To show that the client money has been transferred and is now held by the authorised body on behalf of a different client, the following entries are made:
Debit the client ledger client account of the client who is transferring the money; and
Credit the client ledger client account of the client to whom the money is being transferred.
Where will the entries for transactions involving client money be recorded?
The receipt or payment of client money will be recorded in the following two places:
- (Rule 8.1(c)) a client [account] cash book which is often referred to as the cash sheet client account records the receipts into and payments out of the client account (the bank account in which the authorised body holds client money) i.e. a running total of the transactions through the client account.
- (Rule 8.1(a)(i)) the client side of the client ledger [account] for the individual client which is often referred to as client ledger client account records the receipts in of client money and payments out of client money for that particular client. Its balance shows how much client money the authorised body holds on behalf of that particular client.
Reminder of basic client ledger entries
Client money received
Credit client ledger client account for that client
Debit cash sheet client account
Client money paid out
Debit client ledger client account for that client
Credit cash sheet client account
Non-client money received
Credit client ledger business account for that client
Debit cash sheet business account
Non-client money paid out
Debit client ledger business account for that client
Credit cash sheet business account
Deposit – entries for deposit received by solicitor from buyer client
Where a client is buying a property, they will generally be required to pay a deposit of 10% of the purchase price to the seller upon exchange of contracts.
The buyer will send the deposit money to their solicitor to hold ready for exchange of contracts (when the deposit is sent to the seller’s solicitor).
Rule 2.1(a) of the SRA Accounts Rules stipulates this is client money.
The accounting entries are the usual ones for receiving client money:
Client money received
Credit client ledger client account for that (buyer) client
Debit cash sheet client account
Deposit –entries for deposit paid by buyer’s solicitor to seller’s solicitor
When contracts for the property purchase are exchanged, the buyer’s solicitor will pay the deposit to the seller’s solicitor.
Client money should be used where possible. Office money should only be used if the client has insufficient funds in client account. You should note that, in practice, most firms will only allow the use of office money for these purposes in very limited circumstances, as the firm is effectively lending money to the client. This is why the buyer’s solicitor usually asks the buyer to send the deposit to them before exchange, so they have received the money from the client.
The accounting entries are the usual ones for payment out of client money:
Client money paid out
Debit client ledger client account for that (buyer) client
Credit cash sheet client account
Deposit - received by seller’s solicitor to be held as stakeholder
A stakeholder arrangement is a kind of trust under which the seller’s solicitor holds the deposit on trust for both the buyer and the seller until the completion date, when the money can be paid to the seller.
When a solicitor acts as stakeholder, the deposit money cannot be handed over (or back) to one party without the consent of the other or until the sale of the property completes.
However, the deposit money cannot be ‘allocated’ to the seller (i.e. shown as a credit in the seller’s client ledger client account), as this would indicate that the deposit money belongs to the seller and can be used freely by him or her.
Instead, a separate client ledger called ‘stakeholder’ is used to record the receipt of the deposit.
The deposit money is not credited to the seller client’s own client ledger client account until the completion date.
Deposit - entries for deposit received by seller’s solicitor to be held as stakeholder
· At exchange of contracts the seller’s solicitor records the receipt of the deposit to be held as stakeholder with these entries:
Credit client ledger stakeholder (often referred to as stakeholder ledger)
Debit cash sheet client account
· On completion of the property sale, the deposit money is transferred from the stakeholder ledger to the seller’s client ledger (client side) as follows:
Debit stakeholder ledger
Credit client ledger client account for that (seller) client
Deposit –entries for deposit received by seller’s solicitor to be held as agent
When a seller’s solicitor holds a deposit as agent for the seller, the agent (solicitor) can hand the money over to the seller before completion. The agreement of the buyer is not required to enable the solicitor to do this.
So, the deposit belongs to the seller from exchange and the seller’s solicitor just records receipt of the deposit at exchange with the usual accounting entries for receipt of client money.
Client money received
Credit client ledger client account for that (seller) client
Debit cash sheet client account
Receiving mortgage funds
Method One: Solicitor does not open a separate ledger for the lender
If the solicitor (acting for the buyer and the lender) does not open a separate ledger for the lender, all transactions involving the lender’s mortgage will have to be recorded in the client ledger of the buyer client.
The accounting entries would simply be the usual ones for client money received and the details would state that the mortgage funds have come from the lender.
Client money received
Credit client ledger client account for the (buyer) client
Debit cash sheet client account
Receiving mortgage funds
Method Two: Solicitor does open a separate ledger for the lender
If the solicitor has a separate client ledger for the lender then the receipt of the mortgage funds from the lender would first be accounted for in the lender’s client ledger using the usual accounting entries for client money received.
Client money received
Credit client ledger client account for the (lender) client
Debit cash sheet client account
The mortgage funds would then be moved from the lender’s client ledger to the buyer’s client ledger at completion (to show the money already held in the client account is now held for the buyer instead of the lender) with these entries:
Transfer of mortgage funds between clients
Debit client ledger client account for the (lender) client
Credit client ledger client account for the (buyer) client
Mortgage redemption (repaying a mortgage)
Method One: Solicitor does not open a separate ledger for the lender
A solicitor acting for a seller of property may also act for the seller’s existing mortgage lender in connection with the redemption (paying back) of the mortgage when the property is sold.
If the seller’s and lender’s solicitor records transactions involving the lender’s mortgage funds in the client ledger of the seller client, the accounting entries would simply be the usual ones for client money paid out and the details would state that the redemption money has been sent to the lender to redeem the seller’s mortgage:
Client money paid out
Debit client ledger client account for the (seller) client
Credit cash sheet client account
