How to record firm's legal fees and VAT

Question 1

Where do we start?

Answer 1

Let’s start by looking at how a firm’s professional charges, the fees it charges to a client for carrying out work are recorded

Question 2

1st step - What money it involves?

Answer 2

First thing need to establish is whether this transaction involves business money or client money. The issuing of an invoice or a bill for legal fees will always be a business side transaction

Question 3

2nd step - What ledgers does the double entry need to be recorded in?

Answer 3

When an invoice is sent to a client the entries should record that the client owes the firm that money - no money is actually being paid into or out of the firm’s bank accounts so cash account will not be used.

Question 4

VAT

Answer 4

VAT at 20% will also need to be charged on the legal fees and collected from the client because the supply of legal services is standard-rated

Question 5

HMRC ledger

Answer 5

Firms are able to deduct any input VAT from the output VAT they must pay HMRC and the firm will keep track of the VAT position in the HMRC ledger

Question 6

Example - Invoicing a client - Question

Answer 6

What entries will we need to record an invoice of £1,000 plus VAT being issued to client John Smith

Question 7

Example - Invoicing a client - Answer - Step 1

Answer 7

The legal fees or profit costs will be recorded by first debiting the client’s business ledger with the amount of the legal fees - here £1,000 and making the corresponding credit entry of £1,000 in the profit costs ledger

Question 8

Example - Invoicing a client - Answer - Step 2

Answer 8

Next a debit entry of £200 in respect of the VAT on the legal fees will be made in John Smith’s business ledger and a corresponding credit entry of £200 will be made in the HMRC ledger

Question 9

How to record it when you receive the money for a bill off a client

Answer 9

CR client ledger business section
DR cash account business section