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[CS] SQE1 > Solicitor's Account Rules > Flashcards

Solicitor's Account Rules Flashcards

1
Q

Cash sheet client account

A

all money of each individual client. Money received from the firm’s clients

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2
Q

Client ledger

A

how much of the client account money belongs to the client / how much the client has sent to the firm, i.e. how much the firm owes the client

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3
Q

Business account

A

Business money held by the firm

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4
Q

Client Business ledger

A

Business ledger for each client. Business money in the client ledger, i.e. money the client owes the firm

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5
Q

Debit (DR)

A

Increases assets (like cash) or decreases liabilities.

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6
Q

Credit (CR)

A

Increases liabilities (what you owe) or decreases assets.

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7
Q

When should a law firm (registered for VAT) charge VAT?

A

The firm must charge VAT on any supply made in the course of its business, not just on its supply of legal services. e.g. even if the firm is refurbishing its offices. As part of that process the firm sells some items of redundant office furniture. The buyer is not registered for VAT purposes.

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8
Q

What is the double entry bookkeeping system?

A

A system that records two aspects of every transaction with one DR (debit) entry and one CR (credit) entry.

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9
Q

Q: Why do law firms use the double entry bookkeeping system?

A

A: To accurately record day-to-day financial transactions.

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10
Q

What is the correct double entry for buying office premises for £1 million?

A

A: DR Premises account and CR Cash account, as the firm gains an asset and loses cash.

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11
Q

What do the SRA Accounts Rules require law firms to do?

A

Handle client money properly, keep strict accounting records, and comply with specific rules for separating client and firm money.

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12
Q

How should a payment for staff wages be recorded in double entry bookkeeping?

A

A: As a DR entry in the expense account and a CR entry in the cash account, because wages are an expense.

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13
Q

Q: What is client money?

A

A: Money held by a law firm on behalf of a client or third party, including funds for regulated services, unpaid disbursements before billing, or held in trust.

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14
Q

Q: Where must client money be kept?

A

A: In a separate client bank account.

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15
Q

Q: Can a client account be used as a banking facility?

A

A: No, Rule 3.3 prohibits using client accounts for purposes unrelated to the legal work.

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16
Q

Q: What is the correct action when a solicitor receives a mixed payment (e.g., client money and business money)?

A

A: Pay the entire sum into the client bank account and transfer the business money portion promptly to the business account.

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17
Q

Q: Why can’t solicitors use a client account to pay a client’s unrelated personal expenses (e.g., school fees)?

A

A: It breaches Rule 3.3, which prohibits improper use of the client account.

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18
Q

How should a receipt of client money be recorded in the accounts?

A

CR on the client ledger account.
DR on the client section of the cash account.

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19
Q

What happens when a solicitor sends a bill for professional charges?

A

DR entry in the business section of the client ledger account.
CR entry in the profit costs account.

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20
Q

How are VAT entries recorded when sending a bill?

A

DR entry in the business section of the client ledger account.
CR entry in the HMRC account.

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21
Q

What happens when a solicitor pays a court fee using client money?

A

The firm holds less money on the client’s behalf (e.g., £700 if £300 is paid from £1,000 client funds).

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22
Q

A firm buys a computer for £3,000. How should the payment be recorded in double entry bookkeeping?

A

DR Computer (asset) account and CR Cash account, as the firm acquires an asset.

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23
Q

A solicitor receives £40,500 for a house deposit (£40,000) and on account of costs (£500). Where should the funds be paid?

A

Entirely into the client account, as both amounts qualify as client money under Rule 2.1.

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24
Q

A firm issues a bill for professional charges. What is the correct corresponding double entry?

A

DR client account and CR profit costs account, as the firm earns income.

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24
Q

A solicitor receives a cheque for £200 for an unpaid disbursement. Is this client money or business money?

A

Client money, as it relates to a disbursement not yet paid.

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25
Q

When interest is paid to a client for money held in the firm’s general client account, how should it be recorded?

A

DR Interest payable ledger account (Business section)
CR Client ledger account (Business section)

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25
Q

Why is the interest on money held in the firm’s general client account recorded as an expense in the business section?

A

Because the firm is paying the interest as a business expense, reducing the firm’s income and recording a liability (amount owed to the client).

25
Q

When interest is earned on client money held in a separate designated deposit bank account, where is it recorded?

A

The interest is recorded in the deposit section of the client’s ledger account.

25
Q

A solicitor pays school fees of £10,000 from proceeds of sale held in a client account. Is this permissible?

A

No, it breaches Rule 3.3, as it is an improper use of the client account.

26
Q

Why is interest earned on a client’s designated deposit account recorded in the client’s ledger and not the business ledger?

A

Because the interest belongs to the client, not the firm, and must be recorded as part of the client’s funds.

27
Q

When is an interest payable ledger account used?

A

It is used when the firm pays interest in lieu of interest earned on client money held in the general client account.

28
Q

Why are options involving instructing the bank to transfer interest to the business ledger or client ledger wrong?

A

The bank has no control over the firm’s ledgers; recording interest is an internal accounting process managed by the firm.

29
Q

What is the difference between “business section” and “deposit section” in a client ledger?

A

Business section: Tracks amounts the firm owes or earns as part of its operations.
Deposit section: Tracks funds belonging to the client, including interest earned on designated deposits.

30
Q

What are the key double-entry rules for recording interest in client money scenarios?

A

For interest paid by the firm (general client account):

DR Interest payable ledger account (Business section)
CR Client ledger account (Business section)
For interest earned on client-designated deposits:

Recorded in the deposit section of the client’s ledger account.

31
Q

Why is “CR Client ledger account (Business section)” correct for interest payable?

A

It reflects a credit entry because the firm owes the interest to the client as a liability.

32
Q

Why is “Record interest on an interest payable ledger account” wrong for client-designated deposits?

A

An interest payable ledger account is only used for firm-paid interest, not interest earned directly on client money.

33
Q

How are inter-client transfers recorded?

A

As a DR entry in the transferor’s ledger account and a CR entry in the transferee’s ledger account, with no actual movement of cash.

34
Q

What must be done when a mixed receipt contains both business and client money?

A

The money must either be split between the business and client bank accounts or transferred promptly to the correct account.

35
Q

What happens if a mixed receipt is paid entirely into the client bank account?

A

The business money must be promptly transferred to the business bank account.

35
Q

What happens if a mixed receipt is paid entirely into the business bank account?

A

The client money must be promptly transferred to the client bank account.

36
Q

How should a firm handle cheques not made payable to the firm?

A

The cheque must be forwarded to the payee without delay, and no ledger entries are required as the firm is not dealing with client money.

37
Q

What is the risk of drawing against a cheque that has not cleared?

A

If the cheque is dishonoured, the firm will breach Rule 5.3 and must promptly transfer its own money to cover the shortfall.

38
Q

How is VAT affected if a firm reduces profit costs on a bill?

A

The VAT amount is reduced proportionately to the profit cost reduction.

39
Q

How should disbursements paid using petty cash be recorded?

A

As a payment of business money since petty cash is considered business money.

40
Q

How should a firm record a client’s instructions to split £300,000 held for an estate into £220,000 for a beneficiary and £80,000 for her son?

A

Make an inter-client transfer of £300,000 to the beneficiary’s ledger account, followed by an inter-client transfer of £80,000 to the son’s ledger account.

40
Q

How should professional charges of an agent firm instructed by another firm be treated?

A

As a business expense of the instructing firm, which will increase its own charges to cover the cost.

41
Q

What should a firm do with a mixed receipt of £101,080 that includes £1,080 for costs and £100,000 for a property purchase balance?

A

Pay the entire amount into the business bank account and promptly transfer £100,000 to the client bank account.

42
Q

How should the reduction of a £1,000 bill by 10% be recorded?

A

CR (Business section) Profit costs – abatement £100. CR (Business section) VAT – abatement £20.

43
Q

A client promises to send £500 but hasn’t, and the firm needs to pay a court fee of £100. Which account should the payment come from?

A

The business bank account, as there are no funds held for the client in the client account (Rule 5.3).

44
Q

Should a cheque of £1,200 sent for a bill be paid into the client account if the client has instructed the firm not to bank it yet?

A

No, because the cheque may be dishonoured, and the client’s instructions must be followed.

45
Q

What VAT rate applies to taxable supplies of goods and services made in the course or furtherance of business?

A

Zero, standard, or reduced rate.

46
Q

Can businesses making only exempt supplies recover VAT charged to them?

A

No, they cannot charge VAT to customers/clients or recover VAT charged to the business.

47
Q

When must a solicitor charge VAT on disbursements?

A

If the payment is for an item required by the solicitor to provide legal services, the item is part of the solicitor’s fee, and VAT must be charged.

48
Q

What determines whether a disbursement is treated on an agency or principal basis?

A

Whether the invoice is addressed to the client (agency basis) or to the solicitor (principal basis).

49
Q

How is a disbursement handled on the agency basis?

A

The whole payment is recorded on the cash account and client ledger account without distinguishing the VAT.
The firm may use client money if sufficient funds are available.
The client must receive the original supplier’s invoice if VAT-registered.

50
Q

How is a disbursement handled on the principal basis?

A

The VAT is recorded on the HMRC account, and the VAT-exclusive amount is recorded on the client ledger.
The firm uses its own money to make the payment.
The client is charged VAT when billed, and a VAT invoice covering all charges is provided.

51
Q

In what circumstances can a firm handle counsel’s fee notes as an agency transaction?

A

If the invoice is addressed to the firm, the firm may cross out its name, add the client’s, and treat it as an agency transaction.

52
Q

A firm bills clients £400,000 plus VAT of £80,000 and buys a computer for £10,000 plus VAT of £2,000. How much VAT must the firm pay to HMRC?

A

£78,000 (Output VAT of £80,000 – Input VAT of £2,000).

53
Q

What is Rule 7.1 regarding interest on client money?
A: Firms must account to clients and third parties for a fair sum of interest on client money, unless otherwise agreed in writing.

A
54
Q

What are the two methods for paying interest on client money?

A

Open a separate designated deposit bank account (SDDBA) and account for all interest earned.
Pay interest from the business bank account according to the firm’s policy.

Debit: Interest payable ledger (business section).
Credit: Client ledger account (business section).

55
Q

How is interest on money held in a general client account recorded?

A

It is treated as a business expense:

56
Q

A firm earns £100 interest on client money in an SDDBA. Where is the interest recorded?

A

On the deposit section of the client ledger account.

57
Q

How must a firm handle a deposit received as stakeholder?

A

The deposit is client money and must be paid into the client bank account.
It is credited to a joint ledger account (or the seller’s ledger account, with a note identifying it as stakeholder money held jointly).

57
Q

What are the rules for interest on stakeholder deposits?

A

Interest earned on stakeholder deposits must be accounted for according to the terms of the stakeholder agreement or statutory requirements.

58
Q

What must a firm do when transferring client money to a different client?

A

Open a new client ledger account for the transferee and record an inter-client transfer of the money.

59
Q

How should a firm handle a deposit received as stakeholder for a buyer and seller?

A

Pay it into the client bank account and credit it to a joint ledger account.

[CS] SQE1 (3 decks)

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