Interest Flashcards
What does rule 7.1 of the SRA accounts rules provide?
You must account to clients or third parties for a fair sum ion interest on any client money held by you on their behalf, unless you have reached a separate agreement with your client.
what does rule 7.2 of the SRA accounts rules provide?
You may by written agreement come to a different arrangement with the client or third party for whom money is held as to the payment of interest (but you must) provide the client or third party with sufficient information to enable them to give informed consent.
What are the two possible ways of dealing with interest gained from client money held?
Firms can choose either to:
1) pay money into a general client bank account; or
2) pay money into a separate deposit bank account designated for money of that particular client.
When is a firm likely to opt to open a separate despot bank account for a specific client’s money?
If they are holding a fairly substantial sum for a substantial amount of time and simply want to pass on to the client all of the interest allowed by the bank.
Explain the importance of a firm having a policy on how they deal with interest arising from money held on behalf of clients.
Firm’s have to account for such interest however they are able to keep such interest if they have informed the client of this.
This is usually contained within their policy on how interest is held and calculated.
The policy is therefore important as it will inform the client exactly how such interest id to be dealt with (EG interest under a certain amount will not be accounted for by the firm).
What is the disadvantage to opening separate deposit accounts for each client?
A firm will end up with a large number of different client bank accounts.
What is the advantage to opening separate deposit accounts for each client?
The bank will simply pay the amount of interest for each relevant account.
IF such an account is not opened, the firm has to pay an appropriate amount in lieu of interest from the business bank account.
Explain the recording requirements (in accordance with SRA account rule 8.1) when a firm opens a separate designated deposit bank account for a client.
1) Client ledger account must show receipts and payments of client money dealt with through the separate designated despot bank account. This will require either a separate ledger account for designated despot bank account transactions or separate columns on the ordinary client ledger account;
2) Firm’s cash account must include details of receipts and payments of client money death with through the separate designated despot bank account. this can be a separate cash account for each designated despot bank account or a combined cash account which shows transactions on all the designated deposit bank accounts.
Give the accounting entries which are required when transferring money from the general client bank account into a separate designated deposit bank account.
1) CR Cash Account and DR Client Ledger Account
(client section);
2) CR Client ledger account (or additional deposit column on client ledger account) and DR Deposit Cash Account.
Where a bank pays interest earned into the separate deposit bank account, what are the entries for this receipt of interest?
CR on client’s new ledger account; and
DR on deposit cash account.
Explain the provision of rule 7.1 of the SRA accounts rules.
If a firm decides to hold client money in its general client bank account (ie instead of opening a designated deposit account) it must (based on its policy) calculate a fair sum and allow it to the client.
What is the disadvantage of holding client money (accruing interest) in the general client account?
The firm has to calculate how much interest would have been earned in respect of that specific client’s money (as money will be held in the client account alongside all other client money).
As such the interest accrued from the client account will be the total amount for all client money, and a calculation would be required to work out how much of that is owing to the client in question (based on the amount held for that client).
