Double Entry Book Keeping pt.2 Flashcards
**Topic: Double Entry Book Keeping** - Payment of interest on client accounts - Issuing and paying a bill - Issuing and paying a bill - lender client - Bad debts and abatement of bills
What category does the money that is interest earned on client money fall into?
Non-client money which belongs to the authorised body
What must the authorised body do when claiming the interest to ensure client money is kept separate from non-client money?
Arrange with its bank for all interest earned on main client account to be paid into authorised body’s business account
What is the name of the ledger where interest is received by the authorised body?
Interest receivable payable ledger
What is the name of the ledger where interest is paid out by the authorised body?
Interest payable ledger
What does Rule 7.1 say regarding the paying of interest to each client?
A fair some of interest should be paid to each client
What are the entries used for the receipt of interest earnt by the client account in the authorised body’s business account?
Credit interest receivable ledger
Debit cash sheet business account
What are the four entries used when paying a sum of interest to a client?
Recording withdrawal of interest from business account
Debit interest payable ledger
Credit cash sheet business account
Recording the receipt of the interest into the client account
Credit client ledger client account for client [whom is being paid the interest]
Debit cash sheet client account
What must the authorised body ensure is available if they have decided to open a separate designated client account to keep an individual’s client’s client money in?
- Separate designated client ledger
- Cash sheet separate designated client account
What are the steps needed for the transfer of money between the separate designated client account and authorised body’s business account?
Two steps, with both include a double entry
- To withdraw money from one bank account
- One credit entry
- One debit entry - To pay the money into the other bank account
- One credit entry
- One debit entry
What do most authorised bodies do when it comes to interest earnt on a separate designated client account in practice?
Pay all interest directly to the relevant client
What are the entries inputted when paying interest earnt by a separate designated account?
Credit client ledger separate designated client account for the client
Debit cash sheet separate designated client account for the client
Can a firm of solicitors agree with a client that they will never pay interest on client money whilst in the firm’s client account?
Though Rule 7.1 provides a fair sum must be paid,
Rule 7.2 allows the firm to come to a different arrangement as long as written agreement with sufficient information to enable client to give informed consent
What are the names for the two places where the entries for issuing a bill will be recorded?
- Rule 8.1 - business side of the client ledger account
- Profit costs account
What are the two entries for when an authorised body sends a bill of costs to a client?
Debit the client ledger business account for that client
Credit the profits costs account
What is the profits costs account?
The authorised body’s central record of bills or other written notification of costs
What’s the standard rate of VAT that an VAT registered authorised bodies subject to pay on the supply of legal services it makes to clients?
20%
How is VAT charged on authorised body’s that are VAT registered?
Charged on top of fees for the authorised body’s services
e.g., services (£1k) +vat (£200)
What is the name of the record kept by the authorised body of VAT paid or charged by them?
The VAT account [ledger]
What are the entries for sending a bill of costs plus VAT to a client?
Debit the client ledger business account for that client
Credit VAT account ledger
What does the client ledger business account show?
How much money that client owes the authorised body
What are the four entries an authorised body must record when issuing a bill plus VAT?
Debit client ledger business account
Credit profit costs account
Debit client ledger business account
Credit VAT account ledger with amount of VAT
What money is the money paid by the client when paying a bill plus VAT?
Non-client money that belongs to the authorised body
What is important to take note of when the client pays the bill plus VAT?
Not to simply reverse the accounting entries for issuing the bill plus VAT because the
a) Profit Costs account
b) VAT account ledger
are not bank accounts
Their bill must be paid into business accounts and client ledger business accounts belonging to the authorised body
What are the entries the the receipt of payment of bill and VAT?
Credit client ledger business account
Debit cash sheet business account
What must be done if a client pays the bill plus VAT (non-client money) and money on account of costs (client money)?
Must be separated as it is a mixed payment
First entry to record non client money
Second entry to record client money into client account and client ledger
What will the four entries be if the client requests that their bill plus VAT is to be paid/transferred from their existing client account and there is sufficient money in there?
Withdraw money from client account
Debit client ledger client account
Credit cash sheet client account
Pay money into business account
Credit the client ledger business account
Debit the cash sheet business account
What is the figure of the money paid from the client when paying a bill plus VAT?
It is one figure inclusive of VAT
What are the two ways an authorised body acting for a client either:
a) buying a property with a mortgage or
b) selling a property and redeeming an existing mortgage
and acting for their lender record the lender’s bill in the double entry book keeping accounting system?
Recorded in either
a) Lender’s separate ledger if authorised body has set one up
b) Borrower’s client ledger if they body hasn’t set a separate on for the lender
What is a common term in a loan agreement between the borrower and lender?
That the borrower will pay the lender’s legal fees plus VAT
What would need to happen if the lender’s bill plus VAT has been recorded in the lender’s separate client ledger and they agree with their borrower that the borrow pays their legal fees plus VAT?
The debt will need to be transferred to the borrower’s client ledger first before the borrow can pay it to the authorised body
What entries and details would need to be inputted into the accounting system when sending a bill to a lender where there is no separate ledger for the lender?
Debit client ledger business account (for borrower) with amount of profit costs [bill]
Credit profit costs account with amount of profit costs [bill]
Debit client ledge business account (for borrower) with amount of VAT charged to lender
Credit VAT account ledger with amount of VAT charged to lender
What entries and details would need to be inputted into the accounting system when sending a bill to a lender where there is a separate ledger for the lender?
Debit client ledger business account (for lender) with amount of profit costs [bill]
Credit profit costs account with amount of profit costs [bill]
Debit client ledge business account (for lender) with amount of VAT charged to lender
Credit VAT account ledger with amount of VAT charged to lender
What are the two ways a lender’s costs of bill plus VAT can be paid to the authorised body when the lender does not have a separate ledger?
a) Authorised body receives non-client money from borrower client
b) borrower client money is transferred from client account to business account
Is money sent to pay a lender’s bill plus VAT client money or non-client money?
Non client money
What are the two steps and four entries involved in a borrower client transferring funds from their client account to the authorised body’s business account?
Withdraw money from borrower client account
Debit client ledger client account (for borrower client)
Credit cash sheet client account
Pay money into business account
Credit client ledger business account (for borrower client
Debit cash sheet business account
What is the amount that will be transferred when the lender’s bill plus VAT is being paid?
Total bill, plus VAT as one figure
Why will the debt owed to the law firm that is recorded in the lender’s own client ledger need to be transferred to the borrower’s client ledger?
Needs to be done before the borrower can pay it, as usually the borrower agrees to pay the fees of the lender
What are the entries inputted when transferring the debt of the lender to the borrower before the debt [bill plus VAT] is paid?
Debit client ledger business account (of borrower)
Credit client ledger business account (of lender)
- No money has moved; just a reallocation of the debt
Why is the entry for transferring the debt of the lender to the borrower before the debt [bill plus VAT] is paid a debit on the side of the borrower?
Because the amount the borrower owes the authorised body has increased
What may fees also be known as?
Profit costs
What may an authorised body agree to do if a client disputes a bill that has been issued to them?
Abate the fees that were recorded when the bill was sent out
What happens when the fees/profit costs of a client abate?
There is a reduction in both the
- Profit costs/fees
- VAT payable
What are the two transactions and four debit and credit entries for abating a bill?
Reduce profit costs/fees
Credit client ledger business account for the client for the amount the profit costs/fees are being reduced by (if you’ve agreed £400, you reduce by £400)
Debit the profit costs account for the amount the profit costs are being reduced by (if you’ve agreed £400, you reduce by £400)
Reduce payable VAT
Credit client ledger business account for client for VAT reduction (if you’ve agreed £400, you reduce by £80)
Debit VAT account ledger (if you’ve agreed £400, you reduce by £80)
What will be the total reduction of costs if you agree to reduced/abate clients fees by £400 plus VAT?
£480
£400 fees and £80 VAT
When may an authorised body ‘write off’ bad debts?
When they decide that some or all of the money will never be collected
What can a firm do when they write off bad debt with respect to VAT?
They can write it off if it is at least 6 months old
How many entries are there when writing off bad debts?
Two double entries (x2 credit and x2 debit transactions)
What do the double entries for writing off bad debt look like?
Write off back debt
Credit client ledger business account for client with amount of debt being written off (Excluding VAT)
Debit the bad and doubtful debts account
Write off VAT
Credit client ledger business account for client with amount of VAT in respect of unpaid debt
Debit VAT account ledger
What happens to the accounting entries if a cheque is dishonoured?
They are reversed
What happens if a dishonoured cheque causes the client side of the client ledger to be overdrawn?
Solicitor must transfer non-client money from the business account to the client account to bring up balance to zero
What are ‘disbursements’ defined as?
Provide examples
Costs or expenses paid to a third party on behalf of client
E.g., court fee
When will a disbursement have a VAT charged on top?
If the third party whom the disbursement is being paid on behalf of, is a VAT registered business making a taxable supply of goods and services
How will you know that a disbursement is VAT payable on top?
The invoice or bill will state ‘plus VAT’
If there is no wording, that
What is the standard rate of VAT for disbursements?
20%
Why does it matter whether you are paying the disbursement and VAT on top as a law firm in the capacity of an agent or principal?
Because both use different double entries
How do you know if you are a law firm paying a disbursement and VAT as an agent?
When the invoice is addressed to the client (paying it on behalf of client is on an agency)
The law firm has nothing to do with the relationship
What is important to note when paying a disbursement and VAT on top as agent?
VAT is combined with the cost of the disbursement
Accounting entries are for the total combined figure
What money should be used when paying a disbursement plus VAT as agent?
Client money, unless client doesn’t have sufficient funds in client bank account
What are the accounting entries for paying a disbursement plus VAT as agent?
Debit the client ledger client account (total sum of disbursement plus VAT)
Credit cash sheet client account (total sum of disbursement plus VAT)
What raises paying a disbursement plus VAT as principal?
When the law firm instructs the third party and is invoiced itself for the disbursement plus VAT
What is a common example of needing to make a payment as principal?
Environmental search fees for a report on title for their client
What money is used to pay for payments as principal?
Non-client money
What is important to note when paying a disbursement and VAT on top as principal?
VAT amount must be kept separate from the cost of the disbursement
There are separate accounting entries for the VAT
What are the two stages when paying disbursement plus VAT when paying as principal?
- Paying
- Law firm sending bill to client for the VAT you paid on the disbursements, on top of their own profit costs/fees and VAT
What are the two entries when paying disbursement plus VAT when paying as principal?
Debit client ledger business account for disbursement
Credit cash sheet business account for disbursement
Debit VAT account ledger for VAT
Credit the cash sheet business account for VAT
What are the accounting entries for the law firm sends a bill to the client?
Debit client ledger business account for the VAT
Credit VAT account ledger for VAT
What money is ‘account of costs’?
Client money, that client is asking you to spend on their behalf
What money should you use when paying disbursements preferably when paying as agent?
Client money
What type of transaction is sending out a bill?
A business transaction that never involves client money
Sending out a bill doesn’t move any more
If it’s client money…
It’s a client transaction
