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SQE 1 Flashcards > Professional Conduct: Solicitor Accounts > Flashcards

Professional Conduct: Solicitor Accounts Flashcards

1
Q

When must you obtain and deliver an accountant report?

Rule 12.1

Account Rule

A
  • If during the accounting period you
  • held or recieved client money
    ….
    You must obtain an accountant report for the period within 6 months of the end of the period; and deliver it to the SRA.
    ….

Exemptions whereby no report is needed:

  • All client money is from the Legal Aid Agency
  • The average balance on client accounts does not exceed £10,000 and the maximum balance does not exceed £250,000
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2
Q

When can the SRA require an authorised body to obtain an accountatn report on reasonable notice?

Rule 12.4

A
  1. If the authoriused body has ceased to operate as an authorised body and to hold or operate a client account (i.e a final report); or
  2. If it is in the public interest
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3
Q

For how long must you retain and store all accounting records?

Rule 13.1

A

At least 6 years

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4
Q

What is a joint account?

Rule 9.1

A

Joint accounts allow solicitors to operate/manage the account and money along with another person (e.g. another law firm, the client, a third party)

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5
Q

For the purpose of record keeping and SRA Accounts, what is the impact of using a Joint Account?

Rule 9.1

A
  • A joint account is not a client account. However, the money held in a joint account is still client money.
  • Always note that since someone else will have equal access, the risks are higher than if kept in a client account. Therefore, action needs to be taken to mitigate risks.
  • The SRA Account Rules that (a) you must obtain every 5 weeks statements from the banks; and (b) to keep an accessible central record of all bills, applies to Joint Accounts too.
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6
Q

What if you operate the client’s own account as opposed to a law firm client account?

Rule 10.1

A

As with joint accounts, if you operate the clients own account, you must obtain bank statements every 5 weeks.

You additionally have to complete (every five weeks) a reconciliation of the bank statement balance with the cash book and client ledger.

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7
Q

What are Third Party Managed Accounts (TPMA)?

Rule 11.1

A

Accounts at banks and building societies held in names of third parties who are authorised payment institutions regulated by the FCA and operate as an escrow payment service where the third party recieves and pays money on the client and/or authorised body’s behalf.

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8
Q

Is money held in a TPMA client money?

Rule 11.1

A

No. It is not client money because it is not held or recieved by the authorised body,

However, the authorised body must ensure the client is informed and understands the contractual arranegements regarding the TPMA (e.g. right to terminate) and ensure they obtain regular statements from the TPM

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9
Q

What is the main rule when it comes to storage of client money?

SRA Account Rule 4.1

A

Keep client money separate from money belonging to the authorised body (law firm)

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10
Q

What is client money?

A

Client money is money held or received by a law firm:

  • For regulated services delivered by you
  • On behalf of a third party in relation to regulated services
  • As a trustee or the holder of an office eg donee of power of attorney or trustee of pension scheme
  • In respect of fees and unpaid disbursements if held or received prior to delivery of a bill
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11
Q

What is a client has paid a bill (disbursment) - is that client money?

A

No. Client money is that recieved in respect of unpaid disbursments.

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12
Q

What is the bank account called used to seperate client and firm money?

A

Client Account

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13
Q

What are the rules surrounding the details of a client account?

Rule 3.1

A
  • Bank or Building Society in England and Wales
  • Name of the account must include (i) name of the firm; and (ii) the word ‘client’

For example, ‘Northfields LLP Client Account’

Remember, client account is a bank account belonging to the law firm in which it puts client money in. The account itself does not belong to the clients.

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14
Q

What payments can be made into/out of a client account?

Rule 3.3

A

Any payments, withdrawals or transfers must be made in respect of the delivery of legal services to the client

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15
Q

What is the main rule when it comes to timing of client money?

SRA Account Rule 2.3

A

You ensure that client money is paid promptly into a client account.

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16
Q

What are the three exceptions to needing to pay client money into a client account ?

A
  1. Money held as a trustee or as the holder of a specified office (e.g Court of Protection Deputy) does not need to be paid into the client account if to do so would conflict with regulations regarding the office
  2. If the client money represents payments from the Legal Aid Agency for your costs
  3. If you agree an alternative arrangment in writing with the client, or third party, for whome the money is held not to hold it in the client account
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17
Q

What if the authorised body (law firm) does not have a client account?

Rule 2.2

A

If…

  • The client money is only advance payments for fees and unpaid disbursements for which you are liable (e.g. counsel fees, but not disbursments for which the client is liable such as SDLT); and
  • The client has been properly advised,

…. the money need not be held in a client account. However….

  • The client money needs to be returned promptly as soon as there is no reason to hold the money
  • The authorised body must have given the client a bill; and
  • The body should keep records showing receipt and payments of client money in the client ledger
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18
Q

What happens if client money is improperly witheld?

Rule 6.1

A

If money is improperly withehld, money must be immediately paid into the client account.

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19
Q

What about interest on the client account?

Rule 7.1

A

You must account to clients for a fair sum of interest on any client money held on their behalf

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20
Q

How should money from mixed payments comprising both client and non-client money be dealt with?

Rule 4.2

A

The money needs to be split and allocated either to the client account or the business account used to hold non-client money belonging to the authorised body.

However, if mixed money is paid into the business account, you must promptly move the client money into the client account. Likewise, vice versa. However, this is not a breach because mixed money is allowed to be temporarily mixed. so long as rectification is prompt!

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21
Q

Where is non-client money paid?

A

Business Account

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22
Q

When can you withdraw money from a client account?

Rule 5.1 and .3

A

Only…
* For the purpose for which it is being held; or
* Following receipt of instructions from client or third party for whom the money is held; or
* On the SRAs prior written authorisation

Further, money can only be withdrawn if that particular client has sufficient funds within the client account for the withdrawal, since otherwise you would be withdrawing another client’s money

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23
Q

Imagine the client account has 500k in. Client X only has 20k in the client account. Can you make a withdrawl of 25k for Xs purpose?

A

No. Withdrawing 25k from the client account would mean that you are using 5k from another client in violation of Rule 5.3

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24
Q

What must you do if there is no longer any reason to hold client money?

Rule 2.5

A

Return it promptly to the client

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25
Q

How to transfer from client account to pay a bill of costs?

A

If money in the client account is to be used to pay a bill of costs, then provided the bill has been given to the client before transfer, the money can be transfered to the business account so long as only the specific sum identified in the bill is transferred, and provided the client has sufficient money in the client account.

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26
Q

What is double entry principle?

Rule 8.1

A

Each transaction involves two entries into the account.

  • One must be a debit entry
  • One must be a credit entry

For client money in/out of the client account, it will be recorded in the:
* Client Ledger Client Account
* Cash Sheet Client Account

For non-client money in/out business account, it will be recorded in the:
* Business Account
* Client Ledger Business Account

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27
Q

What does the client ledger client account record?

A

Transactions of client money into/out of the client account

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28
Q

What does the Client Ledger Business Account record?

A

Transactions of non-client money into/out of the business account

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29
Q

What does the Cash Sheet Client Account record?

A

Money paid into or taken out of the client account

Always remember, this is from the law firm perspective.

If we credit the client side ledger, we debit the cash sheet slient account.

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30
Q

What does the Cash Sheet Business Account record?

A

Bills of costs issued to clients and any reductions in those bills

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31
Q

What entries are made when we receive client money?

A
  • Credit Client Ledger Client Account
  • Debit Cash Sheet Client Account

The client is in credit for sending money so we add credit to the ledger. We then debit the CSCA.

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32
Q

Why, when client money is recieved, is the cash sheet client account debitted?

A

A debit represents an increase in assets. The firm now holds more cash.

The debit reflects this increase in the firm’s resources held on behalf of the client.

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33
Q

What entries are made when we PAY OUT client money?

A
  • Debit the client ledger client account
  • Credit the cash sheet client account

Money comes out of the client account (debit the ledger so that there is ‘less credit’ and then since the assets held by the firm have decreased, we credit the cash sheet client account.

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34
Q

What entries are made when we recieve non-client money?

A
  • Credit client ledger busiess account
  • Debit cash sheet business account
35
Q

What entries are made when we pay out non-client money?

A
  • Debit client ledger business account
  • Credit cash sheet business account
36
Q

How are balances discovered?

A
  • The balance on the client side of a client’s client ledger account shows how much money in the client account belongs to that client.
  • The client cash book balance should equal the bank statement for the client account showing how much in total is in the client account and should equal the total balances on all the client ledgers (client side).
37
Q

When money is transferred between accounts, how many entries are needed?

A

2 sets of double entries (4)

One set to withdraw the money from one account

One set to pay the money into the other account.

38
Q

How do we record a transfer from client account to business account?

A
  • Debit client ledger client account for that client
  • Credit cash sheet client account

and

  • Credit client ledger business account for that client
  • Debit cash sheet business account

Try to remember we debit the cash sheet when the firm/account increase assets. It makes sebse the business account is debitted because money is coming into the business account

39
Q

How do we record a transfer from a business account to client account

A
  • Debit the client ledger business account
  • Credit cash sheet business account

and

  • Credit the client ledger client account
  • Debit cash sheet client account
40
Q

How do we transfer client money from the client account to a separate designated client account?

A
  • Debit client ledger client account
  • Credit cash sheet client account

AND

  • Credit client ledger separate designated account
  • Debit cash sheet seperate designated client account
41
Q

How do we transfer client money from a separate designated client account to the client account

A
  • Debit client ledger seperate designated account
  • Credit cash sheet seperate designated account

AND

  • Credit client ledger client account
  • Debit cash sheet client account
42
Q

How do we transfer money remaining in the client account between two clients?

A

If you act for two clients and a transfer of client money is being made from one client to the other, the client money being transferred is already in the firm’s client account

There is no need to take the money out of the client account and then pay it back into the same account. You can transfer money between two clients of the firm in one step.

  • Debit client ledger client account for tranferring client
  • Credit client ledger client account for the client to whom money is being transferred
43
Q

How do we split mixed payments?

A

The same as the usual rules but we need to do it twice once the cheque is split…

For the client money….
* Credit client ledger client account
* Debit cash sheet client account

For the non-client money…
* Credit client ledger business acount
* Debit cash sheet business account

44
Q

How do we record deposit monies received by buyer’s solicitor from buyer?

A

The usual client money recieved entry:

  • Credit client ledger client account for that (buyer) client
  • Debit cash sheet client account
45
Q

How do we record deposit monies paid out by buyer’s solicitor to seller’s solicitor?

A

The usual client money out entry:
* Debit client ledger client account for that (buyer) client
* Credit cash sheet client account

46
Q

How do we record receipt of deposit monies by seller’s solicitor to be held as stakeholder at exchange?

A

The money recieved by the seller’s solicitor is money recieved is client money that is paid into the client account.

When acting as stakeholder, the deposit money cannot be handed over until the sale completes. However, the deposit cannot be allocated to the shareholder as this would indicate they can do whatever they wish with the money.

Therefore, we create a seperate ‘staeholder ledger’ > Deposit money is not credited to the seller’s client’s own client ledger client account until completion day.

Upon Receipt:
* Credit stakeholder ledger
* Debit cash sheet client account

Upon Completion
* Debit stakeholder ledger
* Credit client ledger cash account

47
Q

If a solicitor is acting for both lender and borrower, and does not open a seperate ledger for a morgage lender, where are the morgage funds recorded?

Whatare the entries?

A

Client Ledger of the Buyer Client

Usual client money recieved:

  • Credit Client Ledger Client Account for the Buyer
  • Debit cash sheet client account
48
Q

Paul is purchasing a flat wrth £350,000

Paul has saved £35,000 and is borrowing £315,000 from a bak.

The LLP is acting for both Paul and the Bank.

When the Bank sends the LLP the money, how is it recorded if there is no seperate morgage ledger?

A
  • Credit Paul’s Client Ledger with £315,000
  • Debit cash sheet client account of £315,000
49
Q

If a solicitor is acting for both lender and borrower, and opens a seperate ledger for a morgage lender, where are the morgage funds recorded?

What are the entries?

A

If the morgage lender has a seperate ledger….

Step 1: The receipt of the funds would be first accounted to the lenders client ledger

  • Credit Client Ledger for lender
  • Debit Cash Sheet Client Account

Step 2: The funds would then be moved to the buyer’s client ledger at completion.

  • Debit client ledger for the lender
  • Credit client ledger for the buyer
50
Q

Paul is purchasing a flat wrth £350,000

Paul has saved £35,000 and is borrowing £315,000 from a bak.

The LLP is acting for both Paul and the Bank.

When the Bank sends the LLP the money, how is it recorded if there is a seperate morgage ledger?

A

The £315,000 is first accounted for in the lenders ledger

  • Credit Client Ledger Lenders Account
  • Debit Cash Sheet Client Account

Upon completion, the money will be shown to be transferred to Pauls ledger:

  • Debit Client Lesger Lender Account
  • Credit Client Ledger for Paul (Buyer)
51
Q

If a solicitor is acting for a seller of a property and is also acting for the morgage lender in relation to redemption (paying back) the property sold, how are the transactions recorded if there is no seperate ledger for the lender?

A

The accounting entries follow the usual ones for client money paid out….

  • Debit client ledger client account for the seller
  • Credit cash sheet client account
52
Q

If a solicitor is acting for a seller of a property and is also acting for the morgage lender in relation to redemption (paying back) the property sold, how are the transactions recorded if there is a seperate ledger for the lender?

A

Step 1: Move the redemption money from the seller’s client ledger to the lender’s client ledger to show that the money held in the cleint account is held for the lender:

  • Debit client ledger client account for seller
  • Credit client ledger client account for lender

Step 2: Once the redemption money is sent to the lender, use the standard accounting entries for client money paid out

  • Debit client ledger client account for the lender
  • Credit cash sheet client account
53
Q

What are the account entries if two clients of an authorised body arrange a private loan?

A

This would involve a transfer from one client to another….

  • Debit client ledger client account for the client loaning money
  • Credit client ledger client account for the client recieveing the money

The written authority of both the lender and borrower should be obtained and retaine on the file

54
Q

Must law firms account to clients for interest, and how?

A

Yes, you must account to clients or third parties for a fair sum of interest on any client money held on their behalf.

Rule 7.2 allows you to come to a different arranegment with tour client by written agreement.

The general position is as follows…

  • Interest is paid on the money held in the general client account
  • Since this money is ‘non-client money’ you need to arrange for the bank to pau the interest earned on the general client account into the authorised business account.
  • From the authorised business account, a fair sum of interest should be paid to each client

Interest on General Client Account > Paid into Business Account > Fair Sum to each client

55
Q

When a ‘fair sum’ of interest is paid out of the business account, what ledgers are used to record it?

A
  • Interest Recievable Ledger
  • Interest Payable Ledger
56
Q

How do you record a sum of interest paid into the business account?

A
  • Credit interest receivables ledger
  • Debit Cash sheet business account
57
Q

How do you record a sum of interest paid to a client from the business account

A

Step 1: Withdraw interest from business account

  • Debit interest payable ledger
  • Credit cash sheet business account

Step 2: Record the reciept of the interest into the client account

  • Credit client ledger client account being paid the interest
  • Debit cash sheet client account
58
Q

What is a seperate designated client account?

A

Usually firms have one client accoutn sued for all clients.

However, some bodies may open multiple, each holding an individual clients money in.

This is not very practical if there are a significant amount of clients, but is sometimes used if they hold a significant amount of money for one client.

For such an account, it must be with an bank/building society branch in England and Wales and it must include both the name of the firm and include the wod ‘client account’ - same as usual.

If it has a seperate designated client account, it must keep a seperate designated client ledger.

59
Q

How to record transfers of money out of the main client account and into a seperate designated client account?

A

Step 1: Withdraw from one bank account
* Debit client ledger client account for the client
* Credit cash sheet ledger

Step 2: Pay money into the other bank account
* Credit clieent ledger seperate designated client accouint
* Debit cash sheet seperate designated client account for the client

60
Q

What are the accounting entries doe payment of interest earnt by a seperate designated client account if it is paid to the business account?

A
  • Credit client ledger seperate designated client account for the client
  • Debit cash sheet seperate designated client account for the client
61
Q

What is the Interest payable ledger?

A

The record of the interest paid out by the firm

If the money is being paid out, that is a debit (not credit) in the interest payable ledger.

62
Q

What is the Interest receivable ledger?

A

The record of the interest received by the firm.

63
Q

What is the Client ledger separate designated client account?

A

The client ledger set up by a firm to record transactions affecting the separate designated client account opened by a firm to hold an individual client’s money.

64
Q

What is the Cash sheet separate designated client account?

A

The record of money received into or paid out of the separate designated bank account opened by a firm to hold an individual client’s money.

65
Q

Can a firm of solicitors agree with a client that it will never pay interest on their client money whilst it is in the firm’s client account?

A

Yes, provided that a written agreement is entered into with the client as to interest not being paid and provided that sufficient information has been provided to the client to enable them to give informed consent.

66
Q

If a law firms sends a bill of costs to a client, what are the entries?

A
  • Debit Client Ledger Business Account
  • Credit Profit Costs Account
67
Q

What is a profit costs account?

A

The authorised body’s central record of bills and written notifications of costs

68
Q

What is the VAT Ledger?

A

Authorised bodies must pay VAT at 20%

It is important to tell the client the fees are +VAT or otherwise they will be deemed inclusive of VAT.

The record kept of VAT Paid and Charged if the VAT Account Ledger

69
Q

If an authorised body sends a bill of costs + VAT to a client, what are the two entries to record the VAT Charged?

A
  • Debit client ledger business account for the client
  • Credit VAT account (Ledger)
70
Q

A solicitor at a law firm reimburses an employee £25 from petty cash for purchasing office supplies that the employee initially paid for with personal funds.

What are the correct bookkeeping entries for this reimbursement transaction?

Why?

A
  • Debit the office expenses account
  • Credit the cash sheet petty cash account

This is because reimbursing the employee for a business expense they covered out-of-pocket is recorded as a business expense (office expenses account), which is debited.

The corresponding credit entry is made in the cash sheet petty cash account to record the reduction in petty cash.

71
Q

If a client is buying a property with a morgage or selling a property and redeeimg an existing morgage, and the authorised body is ALSO acting for the lender, what are the two ways to issue a vill to a lender>

A

Method 1: If the lender has a seperate client ledher, record it in the seperate client ledger for the lender.

Method 2: If there is no seperate client ledger for the lender, record it in the borrwer client client ledger.

72
Q

How to issue a bill + VAT to a lender who does not have a seperate client ledger?

Note, the entries are made in the borrower client ledger.

A
  • Debit client ledger business account for the borrowers
  • Credit profit costs account with the amount of profit charged to the lender
  • Debit client ledger business account for the borrower
  • Credit VAT account ledger with amount of VAT charged
73
Q

How to record receipt of payment of a bill + VAT by a borrower?

A

Credit client ledger business account for the borrower

Debit cash sheet business account

74
Q

What is abating a bill?

A

A client may dispute a bill issued to them.

The firm may agree to reduce (abate) the dees (profit costs)

This also reduced VAT payable.

Any abatement needs to show in the records

75
Q

What are the rules for recording abatement of bills?

A
  • Credit client ledger business account with the amount being reduced
  • Debit profit costs account with the amount profit costs are being reduced
  • Credit client ledger business account for that client with VAT Reduction
  • Debit VAT Account with reduction in VAT
76
Q

What is a bad debt?

A

Debts that will not be paid.

This amount may be written off by the authorised body.

When bad debt is written off, the authorised body can recover VAT of the debt if it is at least 6 months old.

77
Q

How do you record writing off a bad debt + VAT?

A
  • Credit client ledger account with the amount of the debt being written off (excluding VAT)
  • Debit bad and doubtful debt account with the amount being written off (excluding VAT)
  • Credit client ledger business account for the client with the amount of VAT in respect of the unpaid debt
  • Debit VAT account ledger with amount of VAT in respect of the unpaid debt.
78
Q

An engineering company is purchasing an office block. Several surveys have been carried out on the property by a company instructed by the acting solicitor. The solicitor has £50,000 on account for this client and she receives an invoice from the surveyors for £10,000 plus VAT addressed to the firm.

How should the solicitor deal with the invoice?

A

As the invoice is addressed to the firm, the solicitor must pay the invoice using business funds held in the business account.

The solicitor will then recoup the expense when she issues the tax invoice to cover both the surveyor’s fees and her own professional charges plus VAT.

79
Q
A
80
Q

Brights LLP, has a petty cash fund used for small expenses.

One of the firm’s clients, Mrs. Cheung, has not yet sent any money on account of costs.

On 12 March, the firm uses £50 from the petty cash fund to pay for a courier service on behalf of Mrs. Cheung.

What entries?

A

Debit the client ledger business account for Mrs. Cheung

Credit the cash sheet petty cash account

This is because…
* We debit the client ledger business account to show that Mrs. Cheung now owes the firm £50
* We credit the cash sheet petty cash account to record the reduction of petty cash by £50.

81
Q

When the law firm is invoiced directly for the disbursement, in what capacity is it acting?

A

It acts as a principal.

Non-client money must be used when acting as a principal

82
Q

When the law firm is invoiced directly for A disbursement plus VAT, how is VAT accounted for?

A

The VAT must be accounted for separately.

83
Q

When is a law firm exempt from obtaining an accountant’s report?

A

If the average balance on its client account(s) does not exceed £10,000 and the maximum balance does not exceed £250,000 during the accounting period.

84
Q

Can tenants in common sell their share without the consent of the other tenants in common?

A

Yes

SQE 1 Flashcards (58 decks)

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