Double Entry Bookkeeping and The SRA Account Rules

Question 1

Why is client money handling crucial in law firms?

Answer 1

• Law firms often hold money belonging to clients.
• Public trust and confidence depend on proper handling of such funds.
• Solicitors must follow professional conduct rules, including the SRA Accounts Rules.
• Proper accounting ensures money is dealt with appropriately and ethically.

Question 2

What are the key aspects of double entry bookkeeping?

Answer 2

• Records two aspects of every financial transaction.
• Developed by Venetian traders in the 15th century; still widely used.
• Ensures accurate tracking of assets, liabilities, income, and expenses.
• Each aspect is recorded in separate accounts to maintain a balance.

Question 3

How does double entry bookkeeping handle financial transactions?

Answer 3

Example 1: Buying premises:
* Debit (DR): Increase in asset (premises).

• Credit(CR): Decrease in cash (CR- Cash Paid)

Example 2: Paying wages:
Debit (DR) : Expense incurred.
Credit(CR): Decrease in cash.

Example 3: Billing a client:
* (CR): Income earned.
* (DR) receivable (debt).

Example 4: Client payment:
*	Debit: Cash Gained
*	Credit: Cash Paid

Question 4

What are the main categories for accounts in double entry bookkeeping?

Answer 4

Debit (DR) right side:
* Expense incurred.
* Asset acquired or increased.
* Liability reduced or extinguished.
* Cash gained.

Credit (CR) side: *	Income earned. *	Asset disposed of or reduced. *	Liability incurred or increased. *	Cash paid.

Question 5

What is the process of recording transactions in double entry bookkeeping?

Answer 5

1. Identify the two aspects of the transaction.
2. Record one aspect on the debit (DR) side of one account.
3. Record the other aspect on the credit (CR) side of another account.
4. Maintain balance between debits and credits to ensure accuracy.

Question 6

How are charges for professional services and client payments recorded in double entry bookkeeping?

Answer 6

Charging for services:
* Credit (CR): Income account (often called profit costs).
* Debit (DR): Client’s account (records client’s debt).

When client pays:
* Debit (DR): Cash account (receipt of payment).
* Credit (CR): Client’s account (removal of debt).

• Key point:
• No entry is made in the profit costs account when the client pays.
• The profit costs account only records the bill issued, not the payment status.

Question 7

How are financial transactions recorded in double entry bookkeeping using examples?

Answer 7

1. Example (a): Firm buys office furniture for £20,000 cash:
   * Debit (DR): Asset acquired (furniture account).
   * Credit (CR): Cash paid (cash account).
2. Example (b): Firm rents out part of its premises, and tenant pays rent:
   * Debit (DR): Cash gained (cash account).

• Credit (CR): Income earned (rent account).

3. Example (c): Firm pays electricity bill:
   * Debit (DR): Expense incurred (electricity account).
   * Credit (CR): Cash paid (cash account).

Question 8

How is the business owner treated in double entry bookkeeping, and what happens when they contribute cash to the business?

Answer 8

• The business is treated as separate from its owner.
• Owner’s cash contribution is recorded from the business’s perspective:
• Debit (DR): Cash account (the business gains cash).
• Credit (CR): Capital account (the business incurs a liability to repay the owner).
• This liability to the owner is referred to as the capital of the business.

Question 9

What do the terms ‘Debit’ (DR) and ‘Credit’ (CR) represent in double entry bookkeeping?

Answer 9

• Debit (DR): Refers to the left-hand side of an account.
• Credit (CR): Refers to the right-hand side of an account.
• Labels are applied to indicate which side of the account is affected by a transaction.
• Abbreviated as ‘DR’ (Debit) and ‘CR’ (Credit).

Question 10

How would a transaction for buying a photocopier for £5,000 be recorded in double entry bookkeeping?

Answer 10

1. Debit (DR): Photocopier account (to record the acquisition of an asset).
2. Credit (CR): Cash account (to record the reduction of cash).
3. Additional details recorded in the account:
   * Date column: The transaction date is entered.
   * Details column: Cross-reference to the other account involved (e.g., “Cash account” or “Photocopier account”) and a brief transaction description.
   * Amount column: £5,000 recorded under DR (left) for the asset account and under CR (right) for the cash account.
   * Balance column: Running balance is updated to reflect the transaction.

Question 11

How does the balance of an account work in double entry bookkeeping

Answer 11

• Debit (DR) balance: Occurs when DR entries (left-hand side) exceed CR entries (right-hand side).
• Credit (CR) balance: Occurs when CR entries (right-hand side) exceed DR entries (left-hand side).
• Each transaction updates the running balance, which is shown in the Balance column of the account.

Question 12

What details are included in a transaction entry in double entry bookkeeping?

Answer 12

1. Date column: Date of the transaction.
2. Details column:
   * Name of the account where the other part of the entry is recorded.
   * Brief description of the nature of the transaction.
3. Amount column:
   * Amount entered on the Debit (DR) or Credit (CR) side, as appropriate.
4. Balance column: Reflects the updated running balance after the transaction.

Question 13

What is the key principle of double entry bookkeeping regarding the owner’s transactions?

Answer 13

• Owner’s transactions are treated as external to the business.
• Example: If the owner injects cash into the business:
• Debit (DR): Cash account (asset acquired).
• Credit (CR): Capital account (liability to the owner).

Question 14

How is the purchase of an asset and payment recorded in double entry bookkeeping?

Answer 14

• When an asset is purchased, two entries are made:
• Debit (DR): Asset account (reflecting the acquisition of an asset).
• Credit (CR): Cash account (reflecting the reduction of cash).
• Both entries ensure that the transaction is accurately recorded in line with the accounting equation.

Question 15

How are electricity payments recorded in double entry bookkeeping?

Answer 15

• Electricity Account:
• Debit (DR): Electricity account to reflect the expense incurred.
• Example:
• 1st payment: £1,000 DR (Balance: £1,000 DR).
• 2nd payment: £2,000 DR (Balance: £3,000 DR).
• 3rd payment: £3,000 DR (Balance: £6,000 DR).Cash Account:
• Credit (CR): Cash account to reflect the reduction in cash.
• Example:
  
  • 1st payment: £1,000 CR (Balance: £1,000 CR).
• 2nd payment: £2,000 CR (Balance: £3,000 CR).
• 3rd payment: £3,000 CR (Balance: £6,000 CR).
• This process ensures both sides of the transaction are recorded in line with the accounting equation.

Question 16

How is the transaction recorded when Miriam starts a business and contributes £10,000 cash?

Answer 16

• Two aspects of the transaction:
• Business gains cash.
• Business incurs a liability to Miriam.

Entries:
* Debit (DR): Cash account (£10,000) to record the cash received.

• Credit (CR): Capital account (£10,000) to record the liability to Miriam.

Question 17

How is the purchase of a computer for £2,000 recorded in double entry bookkeeping?

Answer 17

• Two aspects of the transaction:
• Business pays cash.
• Business gains an asset (computer).Entries:
• Debit (DR): Computer account (£2,000) to record the asset gained.
• Credit (CR): Cash account (£2,000) to record the reduction in cash.

Question 18

How is the payment of £1,000 rent recorded in double entry bookkeeping?

Answer 18

• Two aspects of the transaction:
• Business incurs an expense (rent).
• Business pays cash.Entries:
• Debit (DR): Rent expense account (£1,000) to record the expense.
• Credit (CR): Cash account (£1,000) to record the reduction in cash.

Question 19

What accounts are required to record the initial financial transactions of Miriam’s business?

Answer 19

1. Capital account: To record the owner’s contributions and liabilities.
2. Cash account: To record cash inflows and outflows.
3. Asset account (computer): To record purchases of assets like the computer.
4. Expense account (rent): To record business expenses like rent.

Question 20

How do you summarize the series of transactions in Miriam’s business?

Answer 20

1. 1 June: Miriam contributes £10,000:
   * DR: Cash account (£10,000).
   * CR: Capital account (£10,000).
2. 2 June: Business buys a computer for £2,000:
   * DR: Computer account (£2,000).
   * CR: Cash account (£2,000).
3. 4 June: Business pays rent of £1,000:
   * DR: Rent expense account (£1,000).
   * CR: Cash account (£1,000).

This ensures all transactions are recorded with corresponding DR and CR entries.

Question 21

What are the corresponding balances after each transaction in Miriam’s business accounts?

Answer 21

1. 1 June: Miriam contributes £10,000:
   * DR: Cash account (£10,000).
   * CR: Capital account (£10,000).
2. 2 June: Business buys a computer for £2,000:
   * DR: Computer account (£2,000).
   * CR: Cash account (£2,000).
3. 4 June: Business pays rent of £1,000:
   * DR: Rent expense account (£1,000).
   * CR: Cash account (£1,000).

• Final balances:
• Cash account: £7,000 DR.
• Capital account: £10,000 CR.
• Computer account: £2,000 DR.
• Rent expense account: £1,000 DR..

Question 22

On 4 June, a business pays £1,000 rent for its office. What are the two aspects of this transaction, and how should it be recorded in the accounts?

Answer 22

Two aspects of the transaction:
1. The business pays cash (£1,000).
2. The business incurs an expense (rent).

Entries in the accounts:
* Cash account:
* Credit (CR): £1,000 to record the cash paid.
* Updated balance: £7,000 DR.

Rent account:
* Debit (DR): £1,000 to record the rent expense incurred.
* Updated balance: £1,000 DR.

Explanation: *	The cash account shows the reduction in available cash due to the payment.

• The rent account reflects the cost incurred for the rent expense.

Question 23

What is the purpose and function of the cash account in a law firm?

Answer 23

Purpose:
* To record receipts and payments associated with the firm’s bank account.
Function:
Tracks all transactions, often referred to as the ‘cash sheet’ or ‘cash book.’

Primarily records electronic payments and cheques rather than actual cash.

Petty Cash: *	Used for small, day-to-day expenses in the office.

• A petty cash account records periodic cash withdrawals from the bank and petty cash payments.

Question 24

How has bookkeeping terminology evolved in relation to ledger and cash accounts?

Answer 24

Traditional System:
* All accounts were kept in a bound book called the ‘ledger.’
* The cash account was kept in a separate book due to its high activity.

Modern System: *	All accounts, including cash and petty cash, are now referred to as ‘ledger accounts.’

• This is due to the shift to computerized bookkeeping systems, making physical distinctions irrelevant.

Question 25

What are the SRA Accounts Rules, and why are they critical for law firms?

Answer 25

Purpose:
* Ensure client money is kept safe and separate from the firm’s money.

• Reduce the risk of both accidental and deliberate misuse of client funds.
• Protect clients from potential mishandling of their money.

Unique Aspect:
* Law firms frequently hold client money (e.g., funds for property purchases), unlike most businesses.

• Strict compliance is essential to maintain professional integrity and public trust.

Question 26

What are the SRA Accounts Rules’ specific objectives as introduced on 25 November 2019?

Answer 26

1. Segregation of funds: Keep client money separate from the firm’s own money.
2. Prompt returns: Ensure client money is returned promptly when a matter concludes.
3. Proper usage: Use client money only for its intended purpose.
4. Reporting requirements: Ensure firms obtain an annual accountant’s report in a proportionate manner.

Question 27

What are the key principles governing the SRA Accounts Rules?

Answer 27

• Fundamental ethical and professional standards:
• Act in a way that:

1. Upholds the rule of law and the administration of justice.
2. Maintains public trust and confidence in solicitors and legal services.
3. Ensures independence in practice.
4. Demonstrates honesty and integrity.
5. Promotes equality, diversity, and inclusion.
6. Acts in the best interests of each client.

Question 28

Who is bound by the SRA Accounts Rules, and how is compliance ensured?

Answer 28

• Authorised bodies, including firms of solicitors and sole practitioners.
• Managers and employees of these authorised bodies.
• Compliance responsibilities:
• Managers are jointly and severally responsible for compliance by the body and its employees.
• Licensed bodies:
• Rules apply only to activities regulated by the SRA under the terms of the licence.