Double Entry Bookkeeping and SRA Accounts Rules Flashcards
What are ‘accounts?’
Day to day records of financial transactions
What is ‘double-entry bookkeeping?’
1) Process of recording financial transactions in accounts is called bookkeeping
2) Double entry bookkeeping is a system based on the premise that every financial transaction has 2 aspects to it and both aspects need to be recorded
- Each aspect must be recorded in a different account, so there would be one account for cash, one for each type of asset, each type of expense, each person to whom the firm owes money etc
3) Accounts are divided into two sides, with the two aspects of any transaction being recorded on different sides of the two accounts
Give a basic example of double-entry bookkeeping
A law firm pays cash to buy premises
- Aspect 1 – firm has less cash
- Aspect 2 – firm has acquired an asset in the form of premises
What are the basic rules for recording transactions in double-entry bookkeeping?
Left column:
- Expense incurred
- Asset acquired/increased
- Liability reduced/extinguished
- Cash gained
Right column:
* Income earned
* Asset disposed of/reduced
* Liability incurred/increased
* Cash paid
When an individual transaction happens, one aspect appears in the left-hand column and is recorded on the left-hand side of one account
The other aspect appears in the right-hand column and is recorded on the right-hand side of another account
Every transaction has these 2 aspects which must be identified and recorded in 2 separate accounts
What labels/terms are commonly used for the left and right columns, in relation to the rules on double-entry bookkeeping?
Debit (DR) on left hand side
Credit (CR) on right hand side
Which parts of the columns are relevant when money enters client account?
Look at transactions from firm’s point of view, so:
They gain cash if you put it in (DR on cash account) and they incur liability to the client (CR client ledger)
Which parts of the columns are relevant when a bill is issued and later paid?
When a bill is issued, the client’s debt is an asset (DR client ledger business section) and the firm earns income (CR profits costs) + incurs liability to HMRC for VAT (CR VAT account)
- This doesn’t mean they get paid
When the bill is paid, the firm gains cash (DR cash account) and loses the asset (CR client ledger business section)
What are two key points to remember about DRs and CRs + double-entry bookkeeping?
There is always a corresponding CR to a DR and vice versa; cannot have two DRs or two CRs for one transaction
Double entry system records transactions as they occur + makes no judgments about state of the business (if there was a profit for example)
Give a basic example of how a transaction would split into two accounts under double-entry bookkeeping
Example – firm buys office furniture for £20k cash
- Aspect 1 – gaining asset goes in left column of office furniture account
- Aspect 2 – paying cash goes in right column of the cash account
If a business owner puts cash into a business, how would this look under double-entry bookkeeping?
Business is regarded as separate from the owner, so transactions are recorded from the business’ point of view
Owner sets up business
- Aspect 1 – cash gained in left side
- Aspect 2 – liability incurred to owner on right side – liability to repay is called the ‘capital’ of the business
What is an easy way to remember whether to put DR or CR in the client ledger + cash account for a given transaction?
On the client ledger
- DR is money out - firm reduces liability to client
- CR is money in - firm incurs liability to client
On the cash account
- DR is money in – gain cash
- CR is money out – pay cash
What form do accounts take?
Accounts usually presented as tables
- Date entered in ‘date’ column; ‘details’ column has a cross-reference to the name of the account with the other aspect of the double entry is made
- Amount involved entered into either the DR or CR column and ‘balance’ shows the running balance of the account
- If DR entries exceed CR entries, the balance is described as a DR balance and vice versa
Give a basic example of how two account entries might look for an electricity bill, referencing the headings in the accounts
Example – three electricity bills (£1k, £2k, £3k)
- Details – cash (to reference cash account, whose details say ‘electricity’)
- DR – 1000, 2000, 3000; cash account says CR – 1000, 2000, 3000
- Balance – 1000 DR, 3000 DR, 6000 DR; cash account says 1000 CR, 3000 CR, 6000 CR
When a bill is issued to a client and later paid, what entries go where?
When a bill is issued to a client, the 2 aspects are:
- i) Sale of solicitor’s services
- ii) Gain of debt now owed by client to the firm
1) Charges for professional services are recorded as CR on income account (profit costs)
2) Client’s debt is recorded as DR entry on account in the client’s name
3) When the client pays, solicitor will record a receipt of cash and loss of debt owed by client to the firm
4) No entry is made on the profit costs account when client pays their debt; this account just records the bill issued, not whether it has been paid
What is the difference between the cash and petty cash account?
The ‘cash’ account is a record of payments in and out of the bank account
A small amount of actual cash might be held as ‘petty cash,’ recorded in a petty cash account
What are the main principles behind the SRA Accounts Rules?
The purpose is to ensure money belonging to clients is safe and kept separately from money belonging to the firm
Firms can interpret the Rules and apply them appropriately, so need their own policies and procedures
The key principles behind the Accounts Rules are:
- (i) keeping client money separate from the firm’s own money;
- (ii) ensuring client money is returned promptly at the end of a matter;
- (iii) using client money only for its intended purpose; and
- (iv) proportionate requirements for firms to obtain an annual accountant’s report
The 7 broad SRA Principles are also important too
What are the consequences of breaching the SRA Accounts Rules?
Breaching the Accounts Rules is a disciplinary matter for the SRA, but they focus on substantive breaches, not trivial ones
Who do the SRA Accounts Rules apply to?
The Rules apply to most solicitors’ firms, their managers and employees
The authorised body’s managers are jointly and severally responsible for compliance with the Rules by the authorised body, its managers and employees
