Solicitor Accounts

Question 1

Where should a client’s prepaid funds for future services be deposited?

Answer 1

Into the client money bank account, as the funds are still considered client money.

Question 2

What are the entries to record money prepaid by a client for services?

Answer 2

Debit: Cash account/cash sheet client account
Credit: Client ledger client account

Question 3

What happens if a solicitor pays more than the available balance in a client account?

Answer 3

The solicitor must cover the shortfall with their own funds, typically from the business account.

Question 4

What entries are made when a solicitor transfers funds between client accounts?

Answer 4

Debit: Client account from which funds are transferred
Credit: Client account to which funds are transferred

Question 5

How is a bill reduction due to a dispute recorded?

Answer 5

Debit: Profit costs business account (for the reduction amount)
Debit: VAT ledger (for the VAT portion)
Credit: Client ledger (for the total reduction including VAT)

Question 6

How are stakeholder deposits recorded in a conveyancing transaction?

Answer 6

Debit: Stakeholder ledger
Credit: Seller’s ledger

Upon completion, if the funds are transferred to the seller:

Debit: Stakeholder ledger
Credit: Cash account/cash sheet

Question 7

What are the entries for transferring money from the client account to the firm account after earning costs paid on account?

Answer 7

From client account:
Debit: Client ledger client account
Credit: Cash account/cash sheet client account

To firm account:

Debit: Cash account/cash sheet business account
Credit: Client ledger business account

Question 8

What happens when a solicitor receives a mixed cheque containing both client and business funds?

Answer 8

The solicitor may:

Deposit the cheque into the business account and promptly transfer the client funds to the client account.
Deposit the cheque into the client account and promptly transfer the business funds to the business account.

Question 9

How should a solicitor handle VAT if their professional fees include VAT but it wasn’t stated explicitly?

Answer 9

It is presumed that the fee includes VAT, so no additional 20% VAT is owed by the client.

Question 10

What are examples of disbursements where VAT is not charged to the client?

Answer 10

Disbursements include:

Surveyor’s fees
Accountant’s fees
Other third-party fees addressed to the client and paid by the solicitor

Question 11

What are examples of firm expenses where VAT is chargeable?

Answer 11

VAT is chargeable on:

Telephone and photocopying charges
Travel expenses while working on the client matter
Postage fees incurred on the client matter
Bank transfer fees
Property search fees

Question 12

What happens if a solicitor uses petty cash to pay an expense for a client?

Answer 12

Credit: Petty cash account/cash sheet
Debit: Client ledger

Question 13

How is interest calculated on client deposits held by the solicitor?

Answer 13

A “fair amount” of interest must be paid to the client, considering the circumstances. It does not necessarily need to reflect the full interest earned by the solicitor on those funds.

Question 14

How should a solicitor handle lender funds in a conveyancing transaction?

Answer 14

Debit: Client cash account
Credit: Lender’s ledger
The funds will later be transferred to the buyer on the day of completion.

Question 15

What are the consequences of a solicitor withdrawing client funds before a cheque clears?

Answer 15

If a solicitor withdraws funds before the cheque clears, resulting in a shortfall, the solicitor must use their own funds to cover the deficit.

Question 16

What should a solicitor do when a bill includes profit costs and VAT?

Answer 16

Debit: Client ledger in the business account for profit costs.
Debit: VAT ledger for the VAT amount.
Credit: Profit costs ledger in the business account.

Question 17

What happens if the client agrees to a solicitor’s bill and there are sufficient funds in the client account?

Answer 17

The solicitor may transfer the amount owed from the client account to the business account immediately unless the funds are held for another purpose.

Question 18

How should funds be recorded when a solicitor transfers £20,000 from a client’s account to their son’s account?

Answer 18

Debit: Client’s ledger £20,000.
Credit: Son’s ledger £20,000.
This would all be recorded within the client account.

Question 19

What is the treatment of deposits held as a stakeholder in a conveyancing transaction?

Answer 19

The deposit is recorded in a stakeholder ledger under both the buyer’s and seller’s names. On completion, it is transferred:

Debit: Stakeholder ledger.
Credit: Seller client’s ledger.

If paid out to the seller, it would also involve:

Credit: Cash account/cash sheet.
Debit: Seller’s ledger.

Question 20

What are the rules for transferring funds between client accounts?

Answer 20

A solicitor may transfer funds between client accounts by:

Debiting the client account from which the funds are being transferred.
Crediting the client account into which the funds are being transferred.

Question 21

What is the agency method of billing disbursements?

Answer 21

If a third-party invoice is addressed to the client but sent to the solicitor, the solicitor pays the full invoice and bills the client for the entire amount without charging additional VAT.

Question 22

What is the principal method of billing disbursements?

Answer 22

If the invoice is addressed to the solicitor, it is treated as the solicitor’s expense. The solicitor will resupply the service to the client and charge VAT on the resupply.

Question 23

What happens if a solicitor inadvertently overpays a client from the client account?

Answer 23

The solicitor must cover the shortfall using their own funds, typically by transferring money from the business account to the client account.

Question 24

What steps should be taken if a solicitor agrees to reduce a client’s bill?

Answer 24

Debit: Profit costs account for the reduction amount.
Debit: VAT ledger for the VAT portion.
Credit: Client ledger for the total reduction (including VAT).

Question 25

What should a solicitor consider when paying interest on client deposits?

Answer 25

A solicitor must pay a fair amount of interest based on the circumstances. However, in some cases, this may mean zero interest if reasonable.

Question 26

What must exam-takers remember when dealing with interest-related questions?

Answer 26

Pay attention to words like “must,” “should,” or “may” in the question, as they could indicate whether paying interest is mandatory or optional in specific scenarios.

Question 27

How are expenses like travel and photocopying billed to clients?

Answer 27

These are incidental costs to running the firm and are treated as firm expenses, requiring VAT to be charged when billed to the client.

Question 28

What are the ledger entries when a solicitor earns costs paid on account by a client?

Answer 28

To remove money from the client account:
Debit: Client ledger client account.
Credit: Cash account/cash sheet client account.

To record it in the firm account:
Debit: Cash account/cash sheet business account.
Credit: Client ledger business account.

Question 29

What should be done if a solicitor holds a deposit for conveyancing?

Answer 29

The deposit must be recorded in a stakeholder account or client cash account, with corresponding entries in the stakeholder or client ledgers. Transfers are made on completion.

Question 30

How is petty cash used to pay expenses recorded?

Answer 30

Credit: Petty cash account/cash sheet.
Debit: Client ledger.

Question 31

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.

Which one of the following entries would be the most appropriate entry to record this receipt?

Answer 31

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

This receipt is client money so it must be shown as a credit entry on the client side of the client ledger, and the corresponding entry would be a debit on the cash account client side, as it is money that the firm now owes to the client.

Question 32

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.

Which of the following statements is true?

Answer 32

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

A firm must not withdraw more than the money that is held for a client. Doing so is a breach of the SRA Accounts Rules, and as such the firm must promptly, upon discovery, remedy the breach.

Question 33

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.

Which of the following statements describes how the solicitor should deal with the receipt of £250 from its client?

Answer 33

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

The law firm should record the receipt of the money on the client ledger and place the cash in the client bank account. The law firm must treat the cash as client money because it has received the cash a week before the auction fees are due, and the rules require that client money be paid ‘promptly’ into a client account.

Question 34

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.

Answer 34

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

The entire sum can be paid into the client account, but the business element must be transferred out of the client account promptly. Funds received from mixed payments must be allocated promptly to the correct client account or business account.

Question 35

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.

Which one of the following entries would best describe the corresponding entry the solicitor would make to record the receipt?

Answer 35

Debit Cash Account - Business Side

The solicitor would debit the cash account, business side. The money received is business money and it has been paid into the business account.

Question 36

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.

Which of the following entries should the firm make with regard to the payment?

Answer 36

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

The principal method of payment should be used, as the invoice is addressed to the firm. Therefore, the expense is the firm’s expense and business money must be used.

Question 37

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.

Which of the following statements is correct with regard to the transaction?

Answer 37

Upon receipt of the mortgage advance, the firm must open a separate ledger account for the lender.

A solicitor must record client money and show for which client they are holding the money. Here the solicitor can either record it on the borrower’s ledger and note in the details column that it is held for the lender until completion or they can open a separate ledger account for the lender and transfer the mortgage monies to the borrower’s ledger on completion.

Question 38

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.

Which of the following entries would be the most appropriate entry to record this receipt?

Answer 38

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

This receipt remains client money until the disbursement is paid or a bill is raised and it must therefore be shown as a credit entry on the client side of the client ledger

Question 39

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?

Answer 39

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

When a client pays a bill for profit costs, the entire sum is credited to the business side of the client ledger and debited to the business side of the cash account ledger.

Question 40

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?

Answer 40

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

The deceased client’s ledger should be debited, and the beneficiary client’s ledger should be credited, as the funds (residuary estate) must be taken out of the deceased client’s ledger and transferred across and credited to the beneficiary client’s ledger.

Question 41

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?

Answer 41

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.

As this disbursement is from legal counsel, the agency method of payment applies: the firm may cross out its own name and replace it with the client’s name. The firm will pay the entire amount of the expense, including VAT, from client money.

Question 42

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?

Answer 42

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