Double Entry Book Keeping pt.1 Flashcards
**Topic: Double Entry book keeping** - Introduction - Basic client ledger entries - Transfer entries: transfers from client to business - Transfer entries: transfers between clients - Deposit accounting entries for property transactions - Mortgage accounting entries for property transactions
What three things does Rule 8.1 require a law firm to keep records of?
a) Client ledgers
b) List of all balances and running total of the balances
c) Cash booking showing running total of all transactions
What must be recorded in the ‘client ledger account’ according to Rule 8.1?
i) all client money receipts and payments on client side of ledger account
ii) all non-client money receipts and payments on business side of client ledger account
What does all non-client money receipts and payments on business side of client ledger account include in the client ledger records?
Transactions through authorised body’s accounts
What two things does an authorised body [i.e., law firm] require in its double entry accounting system for client money?
- Client account cash book/cash sheet client account
- this records receipts into and payments out of client account/client money (i.e., running total of transactions through client account) - Client ledger account/client ledger
- this records transactions involving client money for each client
What two things does an authorised body [i.e., law firm] require in its double entry accounting system for non-client money (money that belongs to the authorised body?
- Business account cash book/cash sheet business account
- Separate bank from client account - Client ledger business account for each client
- e.g., ‘Mr Adams’ business account ledger’
- records non-client money for each client, including payments out of non-client money and issuing bills of costs
What does the balance of the client ledger business account [for each client] show?
How much money that particular client owes the authorised body
What are the four things an authorised body must record in its double entry book keeping system, including client money and non-client money??
- Client cash book account/cash sheet client account
- Client ledger account/client ledger
- Business account cash book/cash sheet business account
- Client ledger business account
How does an authorised body keep tab on multiple different matters for the same client?
They will maintain separate client ledgers for each of that client’s matters
by identifying its name and particular matter to which it relates to
What does the SRA Guidance on keeping accurate client accounting records say about the ‘double-entry principle’?
Every transaction relating to client money should be recorded in at least
1. Client cash book account/cash sheet client account
2. Client ledger account/client ledger
What does the ‘double entry principle’ mean for every transaction in practise?
One record will be a credit (CR)
and the other a debit (DR)
What are the two sides in a client’s client ledger account/client ledger?
- Business side (non-client money)
- Client account side (client money)
What is the second transaction, according to the ‘double-entry book principle’, when a client pays client money into the client side of the client ledger account?
A debit will be made in the client cash book side to record the money being paid into the client account
What does the balance on the client side of the client’s ledger account show?
How much of the money in the client account belongs to that client
or how much money the authorised body holds for the client
What must the balance of the client cash book account/cash sheet client account be, given it records the total amount of client money held on the behalf of the client by the authorised body?
Must equal the total balances on all of the individual client ledgers together
What should the balances on the client side of an individuals client’s ledger account be and why?
£0
Because the authorised body either holds £0 for that client or holds money for them
What should the balances on the business side of an individuals client’s ledger account be and why?
£0
Because the client owes the authorised body £0 or owes the body money
What is an example of a transaction that does not need to be recorded as it does not involve the receipt in or payment out of client or non-client money?
Bill of costs - issuing a bill doesn’t entail receiving or payment of money
What is the ‘central record of all bills or other written notifications of costs’ in Rule 8.4 referred to?
Profit costs account or similar
Why would the issuing of a bill of costs not comply with the principle of ‘double entry book-keeping’?
Because the principle requires you to enter two entries of transactions
Issuing of bills only requires one
Where would the transaction of issuing a bill be shown in the double entry book keeping system, despite it only needing one entry?
In the business side of the client ledger account (client ledger business account)
How often must an authorised body obtain statements from financial institutions, such as banks and building societies, for all client and business accounts held or operated by the body?
At least every 5 weeks
What is meant by the obligation of ‘reconciliation’ in Rule 8.3?
Where the authorised body reconcile statement for client accounts with:
- cash book/cash sheet balance [how much money held in your client acc] and
- client ledger total [total of all balances on client side of ledger account/how much body holds for each client]
How often must a body comply with Rule 8.3 and ‘reconcile’?
At least every five weeks
Why can money paid from a third party for a client to the authorised body not pay the money into their client’s account?
Because it is not client money if it does not relate to regulated services delivered by the authorised body
Can a cheque payable to the client and sent to the law firm be credited into the client account?
No as the cheque is not payable to the firm
How are petty cash records recorded in relation to business cash sheet accounts??
Separately, despite the cash being withdrawn from the authorised body’s business account
Is petty cash client or non-client money?
Non-client money, withdrawn from the authorised body’s business account
What does a ‘petty cash cash book’ keep record of?
Records:
- initial payment into petty cash
- payments out of petty cash
What is petty cash?
What is petty cash used for?
Petty cash is small amount of cash
Used to deal with payments more convenient that cheque or electronic transfer e.g., taxi fare
How does ‘petty cash’ operate in respect of the double entry book keeping system?
As if it was coming directly out of the business cash book
but is represented as a separate pool of money when non-client money in or out of it are separate from records for the business account
What are the two entries if a non-client money is withdrawn from the petty cash account?
Debit client ledger business acc
Credit cash sheet petty cash acc
What is the reimbursement of petty cash in the double entry book keeping system?
What is the explanation behind this?
Paid back into business account
Because there is no petty cash back account
How many steps are required for the transfer of client or non-client money into the other account?
- Taking money out of one account
- Paying of money into another account
What are the transfers that usuallly happen between client and business account?
- Issuing a bill
- Other written notification of costs
What are the three rules under Rule 4.3 that must be satisfied when transferring client money to business account?
a) bill of costs/written notification of costs to be given to client
b) ^ done before transfer of client money
c) payment must be for specific sum in the bill/written notification and covered by the amount held for that particular client (i.e., the client must have enough held)
What part of the money must be moved if mixed payment was paid entirely into the business account?
Client money should be taken out of business account and paid into client account
What part of the money must be moved if mixed payment was paid entirely into the client account?
Non client money should be taken out of client and paid into business account
What does Rule 6.1 and SRA Account Rules instruct where there has been an improper withdrawal of client money?
To be replaced immediately
What money would an authorised body replaced improperly withdrawn client money with?
Non-client money from their business account
and pay this into the
What are the two entries for withdrawing money from client account?
Debit client ledger client account for the client
Credit the cash sheet client account
What are the two entries for paying money into the business account?
Credit business ledger account
Debit cash sheet business account
What are the two entries for withdrawing money from business account?
Debit the client ledger business account
Credit the cash sheet business account
What are the two entries for paying money into the client account?
Credit the client ledger account
Debit the cash sheet client account
What are the two steps involved for having to ‘split’ a mixed payment?
- Payment into the client account
- Payment into the business account
What step is required when transferring client money from one client to the other?
From the authorised body’s client account to the necessary client account
What are the two entries made when transferring money from one client to another client?
Debit the client ledger account of client transferring
Credit the client ledger account of client whom the money is being transferred to
When do the exchange of contracts occur?
At the dating of the contract
When are parties legally bound to complete the sale/purchase of property of a later date?
At the point of the exchange of contracts
What is the ‘completion date’?
Th date when sale/purhcase of property is to be completed
What happens on the ‘completion date’ of the sale/purchase of the property?
- Remainder of purchase price [i.e., completion monies] is paid
- Legal ownership of property is transferred to buyer
When does the buyer pay a deposit for purchase of property?
At exchange
Who pays who when paying the deposit?
Buyers solicitor pays deposit to seller’s solicitor
Why is a deposit received by the seller’s solicitor from the buyer’s solicitor on behalf of third party client money?
Because it is money in relation to regulated services delivered by the seller’s solicitors
What is a stakeholder arrangement?
A type of trust where seller’s solicitor holds deposit on trust for the seller and buyer until completion date, when deposit funds can be paid to seller
What conditions can the deposit funds under a stakeholder arrangement be handed over to a party?
- Until sale of property completes
- Consent of both party the funds aren’t being given to (i.e., both parties need to be aware)
Why can’t the deposit money be allocated to the seller [i.e., shown as credit in client’s ledger account]?
Because it indicates it can be used freely by the seller, even though it’s not really theirs yet
How is the receipt of deposit for the sale of a property recorded?
In a separate client ledger called ‘stakeholder’
When is the deposit money credited to the seller’s client ledger account?
Completion date
What is the double entry book keeping entry on completion of property sale of deposit money?
Debit stakeholder ledger
Credit client ledger account for [seller] client
What is the double entry book keeping entry on record of receipt of deposit?
Credit client ledger stakeholder account/stakeholder ledger
Debit cash sheet client accont
What alternative capacity can the solicitor act in when holding deposit for the seller?
Can hold deposit as agent
How does the seller’s solicitor holding of the deposit as agent work?
The seller’s solicitor can hand money to seller before completion without needing the agreement/consent of the buyer
Who does the deposit belong to at the point of exchange when the seller’s solicitor holds the deposit money as agent?
Deposit belongs to the seller
How does the seller’s solicitor, holding deposit funds as agent, record the receipt of the deposit at exchange?
Usual accounting entries for receipt of client money
Credit client ledger account for [seller] client
Debit cash sheet client account
When do the entries of stakeholder agreement apply?
To a solicitor acting on behalf of the seller
Who does mortgage money belong to until the completion of the property [when transferred to buyer]?
To the lender
What may the buyer’s solicitor do when in a transaction including a mortgage?
They may open a separate client ledger for the lender
but it is not needed according to SRA Account Rules - as long as there is adequately described narratives in the entries
Who does the solicitor acting for the buyer also act for at the same time?
The lender
What are the two entries for the solicitor acting for the buyer and the lender when received mortgage funds but doesn’t open a separate ledger for the lender?
Credit client ledger account for the [buyer] client
Debit cash sheet client account
What are the four entries for the solicitor acting for the buyer and the lender when received mortgage funds but does open a separate ledger for the lender?
Client money received
Credit client ledger client account for [lender] client
Debit cash sheet client account
Transfer mortgage funds between clients
Debit client ledger client account for [lender] client
Credit client ledger client account for [buyer] client
What are the two entries for the solicitor acting for the buyer and the lender when repaying a mortgage [mortgage redemption] but doesn’t open a separate ledger for the lender?
Client money paid out
Debit client ledger client ledger account for [seller] client
Credit cash sheet client account
What are the four entries for the solicitor acting for the buyer and the lender when repaying a mortgage [mortgage redemption] but does open a separate ledger for the lender?
Transfer of mortgage redemption monies between clients
Debit client ledger account for [seller] client
Credit client ledger client account for [lender] client
Client money paid out
Debit client ledger client account for [lender] client
Credit cash sheet client account
Who may the solicitor acting for a seller of property also act for when repaying mortgage?
Seller’s existing mortgage lender when repaying mortgage back
Which accounts will the transfer of private loan monies impact if an authorised body has the two clients having a transfer between?
The two clients ledger client accounts only, as the money is in the client account and will stay there
What would the two entries for the transfer of loan monies between clients be?
Debit client ledger client account for the client loaning the money
Credit client ledger account for the client receiving the money
