INTRODUCTION TO SOLICITORS’ ACCOUNTS Flashcards

1
Q

DISTINCTION BETWEEN BUSINESS MONEYAND CLIENT MONEY

A

The Rules require solicitors to keep client money separate from money belonging to the solicitor or to the practice.
Thus, the solicitor must be able to distinguish between client money and business money.
Client money **is money held or received for a client or as a trustee plus all other money which is not business money.
**
Business money
is money which belongs to the solicitor or the practice.

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2
Q

2

Client Account

A
  1. A client account must be maintained at a branch (or the head office) of a bank or a building society in England and Wales.
  2. The name of any client account must include the name of the firm and the word ‘client’ to distinguish it from any other type of account held or operated by the firm.
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3
Q

4

‘Client money’ is money held or received:

A

*Relating to regulated services delivered by you to a client;
*On behalf of a third party in relation to regulated services (such as money held as agent or stakeholder or held to the sender’s order);
*As a trustee or as the holder of a specifed office or appointment, such as donee of a power of attorney, Court of Protection deputy, or trustee of an occupational pension scheme; or
*In respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same.

‘Regulated services’ means the legal and other profes-sional services provided that are regulated by the SRA and includes, where appropriate, acting as a trustee or as the holder of a specifed office or appointment.

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4
Q

Client Account Systems and Controls

A

a.Periodic Statements and Reconciliation Required At least every five weeks
b.Records Should Be Recorded Centrally and Readily Available
A central record of all bills or other written notifcations of costs given should be kept and be made readily accessible.
c.Exception When Money Held or Received Jointly with Client and Third Party
Where money is held or received jointly with the client and a third party, the rules above do not apply save for the requirement to obtain statements and to keep a record of bills.

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5
Q

Periodic Statements and Reconciliation

A
  1. Statements should be obtained from financial institutionswhere client money is held for all client accounts and business accounts held or operated by the solicitor/frm; and
  2. For all client accounts held or operated, a reconciliation should be completed of the statement balance with the cash book balance and the client ledger total, a record of which must be signed of by the Compliance Officer for Finance and Administration (‘COFA’) or a manager of the firm.
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6
Q

Accounting Records

A
  1. If at any time during an accounting period client money is held or received, or the solicitor operates a joint account or a client’s own account as signatory, an accountant’s report must be received for that accounting period **within six months **of the end of the period.
  2. The report must be deliv-ered to the SRA within six months of the end of the accounting period if the accountant’s report is qualifed to show a failure to comply with the SRA’s rules
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7
Q

2

Exceptions
An accountant’s report is not required if:

A

*All client money held or received during an accounting period is money received from the Legal Aid Agency; or
*In the accounting period, the total balance of all client accounts held or operated does not exceed an average of £10,000 and a maximum of £250,000.

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8
Q

Client Money Must Be Paid Promptly into a Client Account

A

‘Promptly’ is not defned in the Rules and the SRA has not **yet issued guidance on what time limits should be followed. However, based on the previous version of the rules, it is like-ly that ‘promptly’ means either on the day of receipt or on the next working day

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9
Q

When Client Money Need Not Be Held in a Client
Account

A

In circumstances in which the only client money held or received is in relation to unpaid fees or disbursements, and:
*Any money held for disbursements relates to costs or expenses incurred on behalf of the client and for which the solicitor/firm are liable; and
*The solicitor/firm does not for any other reason maintain a client account,

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10
Q

Cash Accounts

A

All dealings with client money must be appropriately record-ed in a client cash account [Rule 8] (sometimes referred to as the cash sheet). There is no requirement for the law firm to have a separate business cash account to record dealings with its own money, but the frm will keep one to record cash received and spent.

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11
Q

Double Entry Accounting

A
  1. Law firms have various methods of recording client funds, but they are all based on the traditional double entry, debit and credit bookkeeping system, whereby every transaction must be recorded twice.
  2. it is common for law firms to show two cash accounts, usually shown side by side, on the same cash sheet.
  3. Equally, the firm will have two client ledger accounts, again shown side by side, one detailing transactions carried out on behalf of the client using business money, and the other to show dealings using client money.
  4. The essential point to understand here is that any money received by the firm (from or for a client) into its cash account will be a debit (‘DR’) entry, as it is money that is owed to the
    client. It represents the amount of funds the firm is holding for the client.
  5. Any money that is paid for or on behalf of a client, out of the firm’s cash account, is a **credit (‘CR’) **entry; it is money that is now owed to the firm by the client.
  6. For every credit entry there must be a debit entry and vice versa.client account ledger, for example, will show the oppos-ing entry from the cash account ledger. Where money is paid out on behalf of that client, it is a debit entry on their ledger, and where it is received, it is a credit entry.
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12
Q

3

Subject to exceptions, money can be withdrawn from a client account only:

A

*For the purpose for which it is being held;
*Following receipt of instruction from the client; or
*On the SRA’s prior written authorisation.

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13
Q

4

Issuing a Bill for Professional Charges

A
  1. When a firm issues a bill to a client, it will include what is referred to as the firm’s Professional Charges/Fees, more commonly known as Profit Costs, with VAT.
  2. The firm’s Proft Costs illustrate how much the firm is owed at that time, and it is at that point the client becomes a debtor to the firm.
  3. Therefore, when the firm issues its bill, there is no movement on the
    cash account. The Proft Costs and VAT must be recorded on the client ledger in the business account.
  4. The corresponding entry is **a credit **on the Profit Costs account and the HMRC account for the VAT.
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14
Q

Sometimes, clients have given their solicitor funds in advance to be used to pay bills the client incurs. In that case, the mon-ey held in the client account is transferred to the business
account. This requires two sets of entries:

A
  1. First, the entries to show we removed money from the client
    account:
    *£360 debit client ledger (Mr Durrell) client account
    *£360 credit cash sheet client account
    Then the entry to show we’re putting money into the business account
    *£360 debit cash sheet business account
    *£360 credit client ledger (Mr Durrell) business account
    No entries are made on the Proft Costs ledger or the HMRC (VAT) ledger in the business account record when the bill is paid, as these ledgers simply act as a record of the total sum that has either been billed by the firm or is owed to HMRC.
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15
Q

ABATEMENT OF PROFESSIONAL CHARGES

A

On occasion, a client will dispute the amount of a bill that the frm has delivered to them. If the firm is in agreement with the client, it must abate (reduce) its bill, and this includes the VAT. As a result of this, the entries on client’s ledger on the business account record must be reduced, as well as the entries on the Profit Costs and HMRC ledgers.

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16
Q

BREACH OF RULES

A

Any breach of the accounts rules can result in serious consequences for the firm in question, including disciplinary
action by the SRA or criminal sanctions in more serious cases.

17
Q

Dishonoured (‘Bounced’) Cheques

A

An example of an accounting breach that might typically occur in a frm is when it receives a cheque from a client that is dishonoured by the bank, in other words, one that
has ‘bounced’. if this should occur, there is a possibility that the client account may become overdrawn, which is a clear breach of Rule 5.3. The frm must immediately transfer the amount by which the client account is overdrawn from
the business account to the client account.