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SQE1 Volume 1 > Solicitor Accounts > Flashcards

Solicitor Accounts Flashcards

1
Q

To whom do the Solicitors Regulation Account Rules 2019 apply?

A

Authorised bodies
Managers of firms
Employees of firms

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2
Q

Who are authorised bodies?

A

A body that has been authorised by the SRA to practice as a licensed body, recognised body and sole practitioner’s practice

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3
Q

What do the rules require regarding client and business money?

A

They must be kept separate

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4
Q

What is client money?

A

Money held or received for a client or as a trustee plus all other money, which is not business money

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5
Q

What is business money?

A

Money which belongs to the solicitor or the practice

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6
Q

What are examples of client money?

A
  • Relating to regulated services deliver by you to a client
  • On behalf of a third party in relation to regulated services
  • As a trustee or as a holder of a specified office or appointment
  • In respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same
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7
Q

What are regulated services?

A

Legal and professional services provided that are regulated by the SRA and includes where appropriate, acting as trustee or as the holder or a specified office or appointment

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8
Q

Must a firm have a client account?

A

Yes

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9
Q

What are the requirements of a client account?

A

Name must include the name of the firm and the word ‘client’

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10
Q

What are the restrictions on a client account?

A

Must not be used to provide banking facilities to clients or third parties and payments in and out of the account must be in respect of the delivery of regulated services

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11
Q

What must the client account records contain?

A
  • All receipts and payments of client money on the client side of the client ledger account
  • All receipts and payments which are not client money or bills of costs on the business side of the client ledger account
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12
Q

What balances must be maintained?

A

A list of all the balance shown by the client ledger accounts of the liabilities to clients with a running total of the balances.
A cashbook should also be provided showing a running total of all transactions through client accounts held or operated by the solicitor/firm

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13
Q

How often should statements be generated?

A

At least every 5 weeks

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14
Q

What are the requirements regarding periodic reconciliation of accounts?

A

Statements will be obtained from financial institutions where client money is held for all client and business accounts held or operated by the firm.
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 must be signed off by the Compliance Officer for Finance and Administration

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15
Q

Where should a record of billed be kept?

A

At the office and be made readily available

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16
Q

What is the exception to reconciliation of the accounts?

A

When money is held or received jointly with the client and a third party.

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17
Q

When must an accounts report be submitted to the SRA?

A

Within 6 months of the end of the period

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18
Q

What is the consequences if the accountant’s report is not submitted to the SRA in the timescale noted?

A

Breach of the SRA rules as the client money is likely to be placed at risk

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19
Q

When will an accountant’s report not be required to be submitted with the SRA?

A
  • All client money held or received during an accounting period is money received from the Legal Aid Agency
  • In the account period, the total balance of all clients accounts held or operated does not exceed an average of £10,000 and a maximum of £250,000
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20
Q

How long must accounting records be held?

A

At least 6 years

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21
Q

Who must sign the accountant’s report?

A

Must be prepared and signed by an accountant who is a member of one of the chartered accountancy bodies and who is, or works for, a registered auditor

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22
Q

What are the timescales for when client money must be paid in?

A

Promptly

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23
Q

What are the exceptions as to when client money must be paid promptly into a client account?

A
  • Where money is received in relation to unpaid fees or disbursements
  • Any money held for disbursements relates to costs or expenses incurred on behalf of the client and for which the solicitor/firm are liable
  • The solicitor/firm does not for any other reason maintain a client account
  • If the client has been informed in advance of where and how the money will be held
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24
Q

What is meant by ‘promptly’?

A

Not defined in the Rules however it is likely to mean on the day of receipt or next working day

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25
Q

When should client money be available?

A

Immediately on demand unless an alternative arrangement has been agreed in writing with the client

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26
Q

When should client money be returned?

A

When there is no longer property reason to hold the funds.

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27
Q

Is there are requirement for a firm to have a cash account?

A

No but they will have one to record cash received and spent

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28
Q

What method of accountancy is used?

A

Double entry, debit and credit bookkeeping system

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29
Q

What is a DR on the ledger?

A

Debit - money that is owed to the client - the amount of funds the firm is holding for the client

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30
Q

What is CR on the ledger?

A

Any money paid for or on behalf of a client, out of the firm’s cash account - money owed to the firm by the client

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31
Q

What happens with a CR and DR on the ledger?

A

For every DR there must be a CR.

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32
Q

If money is paid out on behalf of a client, how will this show on the ledger?

A

DR entry on their ledger and where it is received there is a CR entry

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33
Q

If money is paid by a client, how will these show on the ledger?

A

DR entry from cash account and CR into the client account

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34
Q

Why is the balance on the cash account not shown on the ledger?

A

As it shows the total account in the cash account for all the firm’s clients

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35
Q

When can money be withdrawn from a client account?

A

For the purpose of which it is being held
Following receipt of instructions from the client
On SRA’s prior written authorisation

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36
Q

Can payments exceed the total held for the client in the client bank account?

A

It shouldn’t and if this does happen the firm must immediately transfer the funds from their business account to cover the costs

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37
Q

Which ledger must profit costs and VAT be recorded?

A

Business side of the client ledger as a DR

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38
Q

What is the corresponding entry for payment of Profit costs and VAT?

A

CR on the Profit Costs account and the HMRC account for the VAT

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39
Q

What is the process when a client pays a bill?

A

The money is taken from the client account and placed in the business account.

40
Q

Why is an entry not made on the profit costs ledger or HMRC ledger when the bill is paid?

A

The ledgers record the sum that has been billed or owed and therefore is moved when the bill is generated not when it is paid

41
Q

What is the process on the ledger when there are abatement of charges?

A

The entries on the business side of the client account must be reduced as well as the entries on the Profit Costs and HMRC ledgers

42
Q

What action must be taken if there is a breach?

A

Must be recorded promptly upon discovery

43
Q

What are the consequences regarding a breach of the rules?

A

Serious consequences including disciplinary action by the SRA or criminal sanctions in more serious cases

44
Q

What happens when a cheque is bounced and disbursements have been taken from the ledger?

A

The client account will go into overdrawn and the firm must immediately transfer the amount by which the client is overdrawn from the business account to the client account

45
Q

What are the exceptions as to when client money does not have to be paid into the client account promptly?

A
  • A solicitor holds the money as a trustee or as the holder of a specified office or appointment and paying the money into the client bank account would conflict with their obligations relating to that office or appointment
  • The client money represents payments received from the Legal Aid Agency
  • An alternative arrangement has been agreed in writing with the client or third party for whom the money is held
46
Q

When can business money be placed into a client account?

A
  • To open the client bank account or to maintain it at an agreed level
  • To provide funds to make a payment on behalf of a client or trust, in excess of funds held for that client or trust
  • To replace any sum which has been incorrectly withdrawn
  • To allow money in lieu of interest on client money
47
Q

What action must a firm make when they receive a payment for both client money and business money?

A

The firm must act promptly to allocate the funds to the correct account

48
Q

What are the 3 ways in which mixed receipts can be dealt with?

A
  1. Split the cheque
  2. Deposit in Client or Business account and transfer
  3. Whole amount to business account
49
Q

What is the method of splitting the cheque when dealign with mixed receipts?

A

The money can be paid directly into more than one account - e.g. £50 to business to cover disbursements and £150 to client as payment on account

50
Q

What are the entries that would be shown on the ledger if a cheque is split and there is mixed receipts?

A

CR - client side of ledger (payment on account)
CR - business side of ledger (disbursement)
DR - client side of cash ledger
DR - business side of cash ledger

51
Q

What is the method of depositing in either client or business account and transferring when dealing with mixed receipts?

A

The entire amount is paid into one account and transfer relevant amounts into the other accounts promptly

52
Q

What are the entries that would show on the ledger if funds were deposited in either client or business account and transfer?

A

CR - client side of client ledger (payment from client)
DR - client side of client ledger (disbursement)
CR - business side of client ledger (disbursement)
DR - client side of cash ledger (payment from client)
CR - client side of cash ledger (disbursement)
DR - business side of cash ledger (disbursement)

53
Q

If a bill has already been sent to a client, where will the funds be sent on receipt?

A

Straight to business account unless funds already have been received then they will be transferred right away.

54
Q

How are inter-client transfers dealt with on the ledger?

A

The client account balance will not change, just the client ledgers are to be amended accurately to record the amount of money being held for each of its clients

55
Q

What is VAT?

A

Value Added Tax - Charged on any supply of goods or services made in the UK, where it is a taxable supply made by a taxable person in the course of furtherance of any business carried on by him

56
Q

When does a person or business become eligible to pay VAT?

A

When the value of its taxable supplies in the preceding 12 months exceeds £85,000

57
Q

What is output tax?

A

Charged by a business to its customers

58
Q

What is input tax?

A

A tax charged to a business by its suppliers of certain goods and services.

59
Q

How do input and output tax link?

A

Generally possible for any input tax to be deducted from any output tax owed to HMRC

60
Q

What is the standard rate of VAT?

A

20%

61
Q

Where a firm has been charged VAT, what will they require?

A

A VAT invoice to prove it has been charged VAT

62
Q

What is a disbursement?

A

Expenses paid on behalf of a client for goods received by the client or services provided to the client.

63
Q

What are the requirements of HMRC as to whether a cost is a disbursement?

A
  • The firm paid the supplier on the client’s behalf and acted as the clients agent
  • The client received, used or had the benefit of the goods or services paid for on their behalf
  • The client was responsible for paying the third party for the goods or services
  • The client authorised the firm to make a payment on its behalf
  • The client is aware that the goods or services were from another supplier, not the firm
64
Q

What have the HMRC confirmed are not disbursements?

A
  • Telephone call charges
  • Travel expenses incurred by the firm whilst working on the client’s matter
  • Postage fees that the firm incurs when sending letters to clients
  • Photocopying charges or even bank transfer incurred when transferring money from client to business account
  • Electronic property search fees
65
Q

What disbursements are not subject to VAT?

A
  • Company search fees
  • Company registration fees
  • Court fees
  • Witness fees
  • Oath fees paid to another solicitor
  • Stamp duty land tax
  • Certain Land Registry fees
66
Q

If an invoice is addressed to a client, how will VAT be dealt with?

A

The supply will simply be treated as having been made to the client. The firm will pay the entire amount of the expense, including VAT, using business of client money and record the total sum in its records. This is also known as the agency method

67
Q

If an invoice is address to the firm, how will VAT be dealt with?

A

The supply is treated as being made directly to the firm. The firm must use business money to cover the invoice as it is addressed to the firm, even if there is enough money in the client account. They would then resupply to their client for the same price.

68
Q

What is the exception as to when an invoice is received in the firm’s name and can be sent to the client?

A

When the invoice is from Legal Counsel.

69
Q

What is the situation of stakeholder?

A

Where the firm is holding a deposit on trust until the transaction is complete.

70
Q

Where should stakeholder money be held?

A

In a separate stakeholder account in the name of both buyer and seller.

71
Q

What are the entries on the ledger for a stakeholder transaction?

A

CR stakeholder (Buyer and Seller) - clients side
DR cash ledger (stakeholder - buyer and seller) - client side
UPON COMPLETION
DR stakeholder ledger (buyer and seller) - client side
Inter-client transfer - no movement on cash account
CR client ledger - client side

72
Q

Where must funds received from a lender be held?

A

In a separate account on a separate ledger. On the day of completion, an inter-client transfer should be made to the Borrower’s ledger

73
Q

What is petty cash?

A

A small amount of money held at the firm’s office as opposed to the bank. MUST come from the business account.

74
Q

What are a firms requirement with regards to interest?

A

Firms must account to clients or third parties for a fair sum of interest on any client money held by them

75
Q

What approach has been taken by the SRA regarding interest?

A

A flexible approach ensuring a fair outcome is achieved for both the firm and the client

76
Q

What is required regarding interest policy?

A

Must be written and presented to the client at the outset of any transaction

77
Q

What is consider when deciding whether the interest policy is fair?

A
  • Firm may adopt a ‘de minimis’ policy
  • If the firm holds client money in a general client account, the firm is allowed to keep any interest earned over and above the amount required to be paid under the rules
  • Should the firm decide to open a separate designated account for a client there is no obligation for the firm to treat the interest paid any differently from funds held in a client account.
78
Q

What are the methods a firm may use to provide the client with interest payments?

A

Offset any interest owed from any amounts owed to the firm for payments of bills
Transfer the sum of interests from the business account to the client account
If the transaction has ended, send interest payment directly to the client.

79
Q

What are the methods a firm may use to provide the client with interest payments?

A

Offset any interest owed from any amounts owed to the firm for payments of bills
Transfer the sum of interests from the business account to the client account
If the transaction has ended, send interest payment directly to the client.

80
Q

A solicitor is working on a conveyance for their client. The client sends the solicitor a cheque for £2,000 to be held on account of costs of the conveyance. What entry will be shown on the client ledger?

A

Debit Cash Account - Client Side; Credit Client ledger - Client Side

81
Q

A solicitor received a cheque from a client for £1,000 to be held on account of costs. The solicitor paid a search fee of £200 on behalf of the client. Two days later, the solicitor’s bank informed them that the cheque has been dishonoured. What must the solicitor do?

A

The solicitor must promptly transfer £200 from the business account to the client account to remedy the breach.

82
Q

A solicitor is attending a property auction representing a client. A week before the auction, the client pays the law firm £250 in cash for auctioneers’ fees, and requests that the solicitor pay the auctioneers’ fees on the day of the auction. How must the solicitor deal with the cheque?

A

The law firm should record the receipt of the money on the client ledger and place the cash in the client bank account.

83
Q

A solicitor receives a £1,500 cheque from a client: £200 for payments the firm made to a surveyor, £800 for work done by the firm, and £500 to be used for future expenses incurred on the client’s behalf. How must the client deal with the mixed receipt cheque?

A

The business money element can be paid into the client account but must be moved into the business account promptly.

84
Q

A solicitor sent his client a bill seven days ago, consisting of £1,500 in Profit Costs, £300 VAT, and £200 for a disbursement that the solicitor has already paid from the business account. The client sends the solicitor a cheque for £2,000. The solicitor records the receipt with a credit entry on the business side of the client’s ledger. What is the corresponding entry on the ledger?

A

Debit Cash Account - Business Side

85
Q

A firm of solicitors acts for a client in relation to a probate matter. On behalf of the client, the firm pays a bill from a valuation expert of £600 plus £120 VAT. The invoice is addressed to the firm. What entry on the ledger should be made?

A

Debit £600 - Business side of Client x’s ledger.

86
Q

A firm of solicitors is acting for a client in the purchase of a property for £400,000 in Essex. The client is putting £200,000 towards the cost of the purchase but requires a mortgage for the remaining £200,000. The institutional lender has agreed to advance the sum of £200,000 to the firm for the client. How must the solicitor hold the funds?

A

The firm must open a separate ledger account for the lender.

87
Q

In a residential property transaction, a solicitor’s client pays £250 in anticipation of search fees. The client telephones the solicitor’s secretary and makes a direct debit payment by telephone. The secretary has not yet ordered the relevant searches. What entries will be made on the ledgers?

A

Credit Client ledger - Client Side; Debit Cash Account - Client Side

88
Q

A firm charges a client £2,500 plus VAT of £500 in profit costs for work carried out in relation to a probate transaction. The client complains that this is too high and not what the client was expecting and refuses to pay. The firm realises there has been an error in its billing and decides to reduce the bill to £2,200 with VAT reduced to £440. What entries will be made onto the ledger?

A

Debit profit costs and HMRC ledgers - Credit Client ledger (business side)

89
Q

Following a trial, a solicitor issues his client company an invoice for profit costs of £1,000 and VAT of £200.

On receipt of the £1,200 from the company, which entries should the solicitor record in his accounts?

A

The solicitor credits £1,200 on the business side of the client ledger and debits the business side of the cash account ledger.

90
Q

A firm has completed the administration of an estate for the personal representatives of a deceased person. The firm must now transfer the residuary estate to the sole beneficiary, who is also a current client of the firm.

How should this transaction be reflected in the respective client ledgers?

A

Debit the deceased client’s ledger - client side; Credit the beneficiary client’s ledger - client side

91
Q

A solicitor receives an invoice from legal counsel for work it has done on a client’s property dispute for £1500, plus £300 VAT, addressed to the firm.

How should the invoice be treated for accounting purposes?

A

The supply is treated as having been made to the client, so the firm will pay the invoice, including the VAT, using client money if available, and if not, business money, on behalf of the client.

92
Q

Your firm acts for a client which is selling a property. Pursuant to the terms of the sale contract, on exchange of contracts the buyer sends a deposit cheque to the firm to be held by the firm as stakeholder.

How should the deposit cheque be dealt with by the firm?

A

The firm should pay the cheque into a separate stakeholder account promptly.

93
Q

A solicitor is working on a series of conveyances for their client. The client sends the solicitor a cheque for £2,000 to be held on account of costs of the conveyances. What interest would be payable to the client in respect of this amount?

A

The solicitor must have a written policy regarding the payment of interest and the policy must account to clients for a fair sum of interest on any client money held by the solicitor.

94
Q

A firm of solicitors acts for a client in a matrimonial matter. The client receives a bill for professional charges of £4,000 plus VAT of £800. The client is dissatisfied with the service provided by the firm and requests a reduction. A partner of the firm decides to reduce the bill by 10%. What entry will be made onto the ledger?

A

Credit £400 client ledger - business side; Credit £80 client ledger - business side

95
Q

A law firm secretary has incorrectly withdrawn a sum of money from a client account to pay a disbursement that has already been paid from the business account, in breach of the SRA Accounts Rules. Who is responsible for remedying the breach?

A

In a private practice, the duty to remedy a breach rests with the person who caused the breach and all the principals in the firm.

96
Q

A firm is acting for a client in the purchase of a property. The client has already sent the firm the sum of £1,000 on account of costs generally in the transaction. A trainee solicitor is given £50 in cash to travel to the purchaser’s solicitor’s office for completion of the purchase. The trainee also needs a cheque for £1,000 to deliver to the surveyors who have been involved in the same transaction in payment of their bill, addressed to the client. The bill has already been sent to the firm and agreed.

How should accounts deal with these transactions?

A

The travel costs should come from the business account and should be recorded in a separate petty cash ledger, and the surveyors’ bill should come from the client account, provided there is sufficient cash left from the payment on the account from the client.

SQE1 Volume 1 (16 decks)

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