Interest Flashcards
1
Q
Under what circumstances is a client entitled to interest on client money?
A
- SRA Rule 7.1: Solicitors must account for a fair sum of interest unless there is a separate written agreement with the client.
- SRA Principles 5 and 7: Obligates solicitors to act with integrity and prioritize the client’s best interests.
- Reasonableness: Interest is due when it is fair and exceeds the firm’s policy threshold (e.g., £20).
- Policy Communication: The firm’s interest policy must be explained at the start of the engagement unless inappropriate (e.g., continuous client relationships).
- Duration and Amount: Prolonged periods and significant amounts of money increase the likelihood of entitlement to interest.
2
Q
What are the two methods for accounting for interest on client money, and how do they operate?
A
- Separate Designated Deposit Client Account:
- A specific account opened in the client’s or third party’s name.
- Interest is earned directly by the account and passed to the client.
- Suitable for significant sums held for extended periods.
- General Client Bank Account:
* Client money is pooled in one account.
- The interest payment is an expense of the business and will be recorded on an interest payable ledger account.
- The firm calculates a fair interest amount to pay the client, drawing from the business bank account if necessary.
- Suitable for smaller sums or shorter holding periods.
3
Q
What are the advantages and disadvantages of using a Separate Designated Deposit Client Account?
A
Advantages:
* Transparency: All interest earned is paid directly to the client.
- Client Satisfaction: Aligns with the best interest obligations under SRA Rules.
- Ease of Calculation: The bank calculates and credits interest.
Disadvantages:
- Administrative Burden: Requires opening and managing a large number of accounts.
- Opportunity Loss: The firm cannot retain any interest earned on client money.
- Variable Rates: Interest rates may be lower for small balances, reducing efficiency.
4
Q
What are the advantages and disadvantages of using a General Client Bank Account?
A
Advantages:
* Efficiency: Easier administration with fewer accounts.
- Interest Benefits: Firms can earn higher interest by pooling funds and depositing them collectively.
- Business Support: Retained interest can offset business expenses.
Disadvantages:
- Fairness Calculation: Firms must calculate and justify fair interest payments for each client, increasing complexity.
- Client Expectations: Risk of disputes if clients believe the interest is insufficient.
- Liquidity Management: Firms must ensure sufficient funds are available for daily transactions.
5
Q
How is interest calculated for client money?
A
- Firm’s Policy: The interest calculation must comply with the firm’s documented policy.
- Factors Considered:
- Principal Amount: The sum of money held for the client.
* Time: Duration for which the funds are held.
* Applicable Rates: Interest rates based on market or bank policies.
* Threshold: Minimum sum (e.g., £20) below which interest is not paid.
3. Example Calculation: - Amount: £2,200.
- Held for: 5 weeks (35 days).
- Interest Rate: 1.5% annually.
- Interest = £2,200 × (1.5% ÷ 365) × 35 ≈ £18.
- Principal Amount: The sum of money held for the client.
6
Q
What are the accounting entries for managing client money in a Separate Designated Deposit Bank Account, using the example of Dash Ltd?
A
- April 3: Money received into the General Client Bank Account
- Credit (CR) Dash Ltd (Debt Collection Ledger Account) – Client Section: £2,200
- Debit (DR) Cash Account – General Client Bank Account: £2,200
- April 4: Money transferred from General Client Bank Account to Separate Designated Deposit Bank Account
- Credit (CR) Cash Account – General Client Bank Account: £2,200
- Debit (DR) Dash Ltd (Debt Collection Ledger Account) – Client Section: £2,200
- Debit (DR) Deposit Cash Account (DCA): £2,200
- Credit (CR) Dash Ltd (Money Held on Deposit Ledger Account): £2,200
- May 9: Interest earned in Separate Designated Deposit Account
- Debit (DR) Deposit Cash Account (DCA): £18 (Interest Earned)
- Credit (CR) Dash Ltd (Money Held on Deposit Ledger Account): £18
- May 9: Total funds (principal + interest) transferred back to General Client Bank Account
- Credit (CR) Deposit Cash Account (DCA): £2,218
- Debit (DR) Dash Ltd (Money Held on Deposit Ledger Account): £2,218
- Debit (DR) Cash Account – General Client Bank Account: £2,218
- Credit (CR) Dash Ltd (Debt Collection Ledger Account) – Client Section: £2,218
- May 9: Payment made to the client (Dash Ltd)
- Credit (CR) Cash Account – General Client Bank Account: £2,218
- Debit (DR) Dash Ltd (Debt Collection Ledger Account) – Client Section: £2,218
7
Q
What are the accounting entries for paying a client £18 interest and £2,200 principal from a General Client Bank Account, and how can this be done?
A
- April 3: Money Received into the General Client Bank Account
- CR Dash Ltd (Debt Collection Ledger Account) – Client Section: £2,200
- DR Cash Account (General Client Bank Account): £2,200
- May 9: The Firm Allows £18 Interest and Pays the Client £2,218
- Method 1: Two Cheques (Separate for Principal and Interest)
a) To record £18 owed in interest:
* DR Interest Payable Ledger Account – Business Section: £18
- CR Dash Ltd Ledger Account – Business Section: £18
b) To pay £18 interest from business bank account:
* DR Dash Ltd Ledger Account – Business Section: £18 * CR Cash Account (Business Bank Account): £18
c) To pay £2,200 principal from the client account:
* DR Dash Ltd Ledger Account – Client Section: £2,200 * CR Cash Account (General Client Bank Account): £2,200
- Method 2: One Cheque (Combined Payment)
a) To transfer £18 from business to client account: - DR Business Bank Account:£18
- CR General Client Bank Account: £18
- CR Dash Ltd Ledger Account – Business Section: £18
- DR Dash Ltd Ledger Account – Client Section: £18
b) To pay £2,218 total to the client:
- DR Dash Ltd Ledger Account – Client Section: £2,218
- CR Cash Account (General Client Bank Account): £2,218
8
Q
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