Double Entry Book Keeping

Question 1

How does a law firm keep and maintain accurate contemporaneous and chronological records?

Answer 1

• record in client ledgers: all receipts and payments which are client money on the client side of the client ledger account; all receipts and payments which are not client money and bills of costs including transactions authorised through business side of the account ledger
• maintain list of all balances shows by client ledger accounts of liability to clients with a running total of balances
• provide a cash book showing a running total of all transactions through client accounts

Question 2

Where are entries for transactions involving client money recorded?

Answer 2

• client account cash book (cash sheet client account): records receipts into and payments out of the client account - running total of the transactions through the client account
• client ledger [account] for each individual client which has a client side (client ledger client account) - client ledger/record for transactions involving client account for that particular client: records the receipts in of client money and payments out of client money for that particular client. Will show how much is held for a particular client.

Question 3

Where will entries for transactions involving non-client money be recorded?

Answer 3

• business account cash book (cash sheet business account): receipts into and payments out of the business account
• client ledger [account] for each individual - business side. Client ledger business account. records the receipts in of non-client money, payments out of non-client money and issuing of bills costs. Balance shows how much money that particular client owes the authorised body.

Question 4

What if the client has more than one matter running at the same time?

Answer 4

There should be a separate client ledger for each matter for the client. Each ledger will identify in its name the particular matter to which it relates.

Question 5

What is the double entry principle?

Answer 5

For every transaction there will be two records/entries made.

One record will be a Credit (CR) and one will be debit (DR).

E.g. client money being received in will mean there is a record in:

• the client ledger client account (client side) (CR)
• cash sheet client account (DR)

Question 6

Which side is CR and which is DR?

Answer 6

The ledger is the one that makes sense i.e. client money coming in will be CR on the ledger.

DR on cash sheet: cash sheet is from the perspective of the client.

Question 7

What does the balance on an individual client ledger (client side) show?

Answer 7

It will show how much of the money in the client account belongs to that individual client. (or how much the authorised body holds for that client)

Question 8

What does the client cash book show?

Answer 8

Records total amount of money held on behalf of the authorised body’s clients in the client account.

It’s balance must equal the balances (totalled up) on all of the individual client ledgers.

Question 9

What does the balance of the business side of an individual client ledger account show?

Answer 9

How much that individual owes the authorised body.

Question 10

Where do bills of costs need to be recorded?

Answer 10

On the business side of the client ledger account.

But issuing the bill would not be recorded in the business account because simply issuing a bill does not entail receipt in or payment out of money.

The other record for the issuing of the bill would be recorded in the profit costs account or similar to record issuing the bill.

Must also keep a central record of all bills or other written notifications of costs given to you.

Question 11

What is reconciliation?

Answer 11

Means making sure the statement for the client account balances/fits with the cash book balance and the client ledger total.

This must be done at least every 5 weeks.

Question 12

How is the receipt of client money recorded?

Answer 12

CR Client ledger (client side)

DR Client cash sheet account

Question 13

How is the payment of client money (out of account) recorded?

Answer 13

DR Client ledger (client side)

CR Client cash sheet account

Question 14

How is the receipt of non-client money recorded?

Answer 14

CR Client ledger (business side)

DR Business cash sheet

Question 15

How is the payment of non-client money (out of account) recorded?

Answer 15

DR Client ledger (business side)

CR Business cash sheet

Question 16

How is petty cash recorded?

Answer 16

Petty cash will be withdrawn from the authorised body’s business account and will be non-client money.

Separate record: cash sheet petty cash account/book - used to record initial payments into petty cash or out of petty cash.

Question 17

What if an authorised body makes a payment out of their petty cash of non-client money on behalf of their client?

Answer 17

DR client ledger business account

CR cash sheet petty cash [account]

If client repays petty cash the money will be paid into the business account.

Question 18

How should entries for a transfer from the client account to the business account be recorded?

Answer 18

Two steps:

1) withdraw money from the client account
DR client ledger client account
CR cash sheet client account

2) Pay the money into the business account
CR client ledger business account
DR cash sheet business account

Question 19

How should entries for a transfer from the business account to the client account be recorded?

Answer 19

1) Withdraw money from the business account
DR client ledger business account
CR cash sheet business account

2) Pay the money into the client account
CR client ledger client account
DR cash sheet client account

Question 20

How is an entry for a transfer between clients shown?

Answer 20

DR client ledger client account (of the client who is transferring the money)

CR the client ledger client account (of the client receiving the money)

No change on the cash sheet.

Question 21

Where will deposit entires for deposits received by solicitor from buyer client?

Answer 21

Buyer will usually send the deposit money to their solicitor to hold ready for exchange of contracts.

CR client ledger client account for that client
DR cash sheet client account

Question 22

Where will deposit entires for deposits paid by buyer’s (client) solicitor to seller’s solicitor?

Answer 22

DR client ledger client account
CR cash sheet client account

Client money should be used, only use business money where there is insufficient client money - in practice most firms won’t allow this.

Question 23

How does the seller’s solicitor hold the deposit money after receipt?

Answer 23

It will be considered client money so will be paid into the client account BUT the ledger used will depend on whether the deposit is held as agent or stakeholder.

Agent: can hand to client so recorded in client ledger

Stakeholder: deposit money cannot be allocated to the seller so needs to be recorded in a separate client ledger called ‘stakeholder’ - deposit money is not credited to the seller client until completion date.

Question 24

How are entries for deposit received by seller’s solicitor to be held as stakeholder recorded?

Answer 24

After receipt of deposit:
CR client ledger stakeholder
DR cash sheet client account

On completion:
DR stakeholder ledger
CR client ledger client account

Question 25

How are entries for deposit received by seller’s solicitor to be held as agent recorded?

Answer 25

CR client ledger client account

DR cash sheet client account

Question 26

How are mortgage funds - receipt of funds for buying a property - recorded?

Answer 26

• Mortgage funds are client money.
  May open separate ledger for the lender:

1) money received
CR client ledger client account for lender
DR cash sheet client account

2) mortgage funds would then be moved from the lender’s client ledger to the buyer’s client ledger at completion
DR client ledger account for lender client
CR client ledger account for buyer client

OR may be recorded in the buyer’s client ledger:

CR client ledger client account for the buyer
DR cash sheet client account

Question 27

How is mortgage redemption recorded?

Answer 27

Solicitor acting for the seller of the 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 being paid out.

DR client ledger client account (seller)
CR cash sheet client account

1) If separate account for the lender, the redemption money would first be moved from the seller’s client ledger to the lender’s client ledger:

DR client ledger client account (seller)
CR client ledger client account (lender)

2) the redemption money would be sent to the lender

DR client ledger client account (lender)
CR cash sheet client account

Question 28

Private loans between clients

Answer 28

Allowed, must have written authority of both lender and borrower on file.

DR client ledger client account for the client loaning money
CR client ledger client account for the client receiving the money

Question 29

How is interest collected and distributed to clients?

Answer 29

Any interest earned on money in the general/main client account is non-client money.

Any interest earned on the client account should therefore be paid into the business account.

A fair sum of that interest should be paid to each client.

Interest received and then paid out is recorded on the interest receivable and interest payable ledgers.

Question 30

How is the receipt of interest earned by the client account and then paid into the business account recorded?

Answer 30

CR interest receivable ledger
DR cash sheet business account

Question 31

How is interest paid to the client recorded?

Answer 31

Two steps

1) Recording the withdrawing from the business account:

DR interests payable ledger
CR cash sheet business account

2) Recording the receipt of the interest into the client account

CR client ledger client account
DR cash sheet client account

Question 32

What is a separate designated client account?

Answer 32

A separate client bank account to hold an individuals client’s money in. This will be in addition to the client’s client ledger

It therefore has its own:
- client ledger separate designated client account (only has a client side)
- cash sheet separate designated client account

Question 33

How are entries for a separate designated client account recorded?

Answer 33

Money received:

CR client ledger separate designated client account for that client
DR cash sheet separate designated client account for that client

Note: this is also how interest is recorded for SDCAs

Money paid out:

DR client ledger separate designated client account for that client
CR cash sheet separate designated client account for that client

Question 34

How are transfers into and out of separate designated client accounts recorded between main client account?

Answer 34

Because separate accounts and have separate cash sheets, will involve two steps and each step will involve a double entry.

1) to withdraw money from one bank account; and
DR client ledger client account
CR cash sheet client account

2) to pay money into the other bank account
CR client ledger separate designated client account
DR cash sheet separate designated client account for the client

and vice versa

Question 35

Can a firm of solicitors agree with a client that it will never pay interest on their client money whilst it is in the firm’s client account?

Answer 35

Yes, provided that a written agreement is entered into with the client as to interest not being paid and provided that sufficient information has been provided to the client to enable them to give informed consent.

Question 36

Where will entries for issuing a bill be recorded?

Answer 36

If an authorised body sends a bill of costs to a client it will be recorded like this:

DR the client ledger business account
CR the profit costs [account]

Note: need to also understand VAT on a bill

Question 37

VAT on bills

Answer 37

IF VAT registered, the authorised body must pay VAT to HMRC on the supplies of legal services. This is at 20%. Charged when invoice is sent to the client.

So if billing £1000 for legal services, will also charge VAT, so the amount due from the client is £1200.

Important to tell a client if the their fees are plus VAT. If no mention, it will be deemed inclusive of VAT.

Record kept of VAT paid or charged by the authorised body is often referred to as the VAT account [ledger].

Question 38

How is VAT recorded if law firm sends a bill of costs plus VAT?

Answer 38

DR client ledger business account
CR VAT account [ledger]

Question 39

How is it recorded when issuing a bill plus VAT?

Answer 39

Two sets of double entry, one for the bill of costs and the other for the VAT.

1) Bill of costs
DR client ledger business account with amount of profit costs
CR profit costs [account] with amount of profit costs

2) VAT
DR debit client ledger business account with amount of VAT
CR VAT account [ledger] with the amount of the VAT

There must NOT be combined.
Note: these are not bank accounts so when bill is paid it will be different (not reverse of this)

Question 40

What is the entry to record the receipt of the payment of the bill and VAT?

Answer 40

CR client ledger business account for the client
DR cash sheet business account

This is non-client money as it in payment of a bill.

Question 41

What is the VAT account?

Answer 41

The record of VAT charged by a law firm

Question 42

What is the profit costs account?

Answer 42

The record of bills of costs (or profit costs) issued by a law firm.

Question 43

Billing a lender

Answer 43

If a client is buying a property (with a mortgage)/selling a property (and redeeming an existing mortgage) and the authorised body is also acting for their lender there are two ways in which the lender’s bill could be recorded:

Lender’s bill plus VAT will:
- either be recorded in the lender’s separate client ledger (of one exists); or
- it will recorded in the borrower client’s client ledger (if no separate ledger)

• Normal for there to be a term in a loan agreement that the borrower will pay the lender’s legal fees plus VAT
• If the lender’s bill plus VAT has been recorded in the lender’s separate client ledger the debt will need to be transferred to the borrower client’s client ledger first before they can pay it

Question 44

How a lender is billed where there is no separate ledger for the lender?

Answer 44

The entries for the bill and VAT are made in the borrower’s client ledger and are the same as for sending a bill plus VAT to the borrower itself.
Two separate transactions:

1) DR client ledger business account (for borrower) with the amount of the profit costs charged to the lender
CR profit costs [account] with the amount of the profit costs charged to the lender

2) DR client ledger business account (for borrower) for amount of VAT
CR VAT account [ledger] with amount to VAT

Question 45

How is the payment of lender’s costs made by the borrower when the lender does not have a separate ledger?

Answer 45

It will be paid in one of the same two ways as the borrower pays its own bill plus VAT:

1) either receipt of non-client money from the borrower client;

CR client ledger business account
DR cash sheet business account

2) a transfer is made of the borrower’s money from the client account to business account

DR client ledger client account
CR cash sheet client account

CR client ledger business account
DR cash sheet business account

Question 46

How a lender is billed where there is no separate ledger for the lender?

Answer 46

The lenders bill plus VAT will be recorded in the lender’s own client ledger.

DR client ledger business account for the lender with the amount of the profits costs
CR profit costs account with the amount of profit costs

DR client ledger business account for the lender with the amount of VAT
CR VAT account with the amount of VAT

Question 47

How is a lender’s costs paid by the borrower where the lender does have a separate ledger?

Answer 47

The debt that is owed needs to be transferred to the borrower’s client ledger before the borrower can pay it.

Note: this is the case for any client’s bill (not just a lender’s) if another client has agreed to pay it.

DR client ledger business account (of the borrower) for the total amount of the profit costs and VAT
CR client ledger business account (of the lender) for the total amount of the profit costs and VAT

Then debt will be paid by borrower either directly of from their client account.

Question 48

Where will the entries for abating a bill be recorded?

Answer 48

The entries for abating (reducing) a bill are made in the same records as the entries for issuing the bill.

Two entries will need to be made: 1) profit costs reduction, 2) separate one for the VAT reduction (4 total)

Profit costs:
CR the client ledger business account by how much the profit costs are reduced
DR the profit costs account by reduction

VAT:
CR client ledger business account for reduction in VAT
DR the VAT account for the reduction

Question 49

How is a bad debt treated?

Answer 49

Bad debt: firm decides to ‘write off’ the debt.

IF it is at least six months old it can recover the VAT element of the debt.

Two double entries to be made:
1) reflecting the write off of the net amount (excluding VAT)
CR client ledger business account for the client with the amount of the debt being written off; and
DR the bad and doubtful debts [account]

2) write off of the VAT on the bad debt (20% of the written off amount)
CR client ledger business account for the client with the amount of VAT
DR VAT account [ledger]

Question 50

What happens if a cheque is dishonoured?

Answer 50

The accounting entries that recorded the original receipt of the money are reversed.

If this causes the client side to be overdraw by creating a debit balance, then the solicitor must immediately transfer non-client money across from the firm’s business account to the client account to bring the balance of the client side up to zero.

Question 51

Disbursements: agent or principle

Answer 51

If VAT is chargeable on top of a disbursement (it will tell you), it is necessary to work out if it is being paid as an agent or principal - different double entries.

Paying as an agent: where the law firm pays a disbursement plus VAT on behalf of a client. Key is “addressed to the client”

Paying as a principal: law firm instructs third party and is invoiced itself for the disbursement plus VAT - law firm is paying for it itself. “law firm which incurred”

Question 52

Accounting entries if paying a disbursement plus VAT as an agent.

Answer 52

2 Key points: 1) VAT must be combined with cost of the disbursement - accounting entries are for the total combined figure. 2) should use client money to make the payment (unless client does not have enough in the account)

Accounting entries:
DR client ledger client account
CR the cash sheet client account

Question 53

What are the accounting entries if paying a disbursement plus VAT as principal?

Answer 53

• VAT amount must be kept separate from the cost of the disbursement
• Must use non-client money

Stage 1: Disbursement and VAT are paid by the law firm

DR the client ledger business account for the disbursement
CR the cash sheet business account for the disbursement

DR the VAT account [ledger]
CR cash sheet business account for the VAT

Stage 2: law firm sends a bill to the client

DR the client ledger business account for the VAT
CR the VAT account [ledger] for the VAT