Interest Flashcards
When should interest be paid to clients?
When a firm holds a large sum of money for a client over a long period of time (e.g where money is kept in a separate designated deposit client account). If a firm provides sufficient information to the client in advance, it can agree alternative arrangements with the client in respect of interest. Such agreement must be in writing.
What rate is considered fair?
Nothing in the rules to explain what is considered fair however:
Firms should have a written policy on how interest is calculated on client money and must inform their clients accordingly.
The policy should take account of both the amount of client money held for any client and the length of period for which it is held.
Firm should consider rates being offered by banks on instant access accounts.
Firms will usually have a de minimus position under which they will not pay interest to clients
If a large sum of client money is being held over a long period of time, what should you check first?
that there is a justifiable purpose for holding the money that is related to the provision of legal services or otherwise return the money to the client
If a client is eligible how should you deal with it?
Transfer the interest to the client account to offset against the firm’s bill or use towards future disbursements or
Transfer directly to the client after the end of the legal matter from the business bank account.
Can transfers be made between the general client account and any SDDCAs?
Yes
If interest is paid on the general client account who does it belong to?
Technically the firm, it is a source of income for the firm and is paid into the business bank account. However the firm must then pay sums in lieu of interest to certain clients that it’s policy determines that it’s fair to do so. Such sums are treated as expenses and recorded on an interest payable ledger.
How is interest recorded as business money?
- CR client ledger business account
- DR interest payable expense ledger
What entries would be made in the ledgers transferring a sum in lieu of interest from the business account to the client account?
DR client ledger business account and CR cash sheet business account
CR client ledger client account and DR cash sheet client account
What interest should be paid to a client on a SDDCA?
All of it. Although most SDSCAs do not allow direct payments to be made out of it so sums held, plus interest, will be transferred to the general client account.
What are the three steps and entries required when making a transfer from general client account to SDDCA? Using the extra columns method.
Step 1 - Transfer from the general client account SDDCA. DR client ledger client account, CR cash sheet client account. CR client ledger client deposit account, DR cash sheet client deposit account.
Step 2 - bank pays interest on funds in SDDCA. CR client ledger client deposit account, DR cash sheet client deposit account.
Step 3 - transfer from SDDCA to the general client account. DR client ledger client deposit account, CR cash sheet client deposit account. CR client ledger client account, DR cash sheet client account.
What are the three steps and entries required when making a transfer from general client account to SDDCA? Using the extra ledgers method.
Step 1 - Transfer from the general client account SDDCA. DR client ledger client account, CR cash sheet client account. CR deposit client ledger client account, DR deposit cash sheet client account.
Step 2 - bank pays interest on funds in SDDCA. CR deposit ledger client deposit account, DR deposit cash sheet client account.
Step 3 - transfer from SDDCA to the general client account. DR deposit client ledger client account, CR deposit cash sheet client account. CR client ledger client account, DR cash sheet client account.
