Solicitor's Accounts

Question 1

A cheque for £600 from a client generally on account of costs and disbursements.

Answer 1

• DR Cash account – client section
• CR Client ledger account – client section

Question 2

A cheque for £120 from a client in payment of the ULaw LLP’s professional charges and VAT. ULaw LLP has sent a bill

Answer 2

• DR Cash account – business section
• CR Client ledger account – business section

Question 3

raising a bill

Answer 3

• Client ledger, business side > DR (bill amount)
• Profit costs ledger, business side > CR (bill amount)
• VAT ledger, business side > CR (VAT amount)

Question 4

bill has been paid by client

Answer 4

CASH TRANSFER FROM CLIENT TO BUSINESS:
* Client ledger, client side > DR (bill amount)
* Cash ledger, client side > CR (bill amount)
* Client ledger, business side > CR (bill amount)
* Cash ledger, business side > DR (bill amount)

Question 5

which entries if split cheque?

Answer 5

Client ledger, client side > CR £10,000
Cash ledger, client side > DR £10,000

Client ledger, business side > CR £720
Cash ledger, business side > DR £10,000

Question 6

which entries if all into client then transferred to client?

Answer 6

First, record the payment of the cheque into client:

Client ledger, client side (not business) > CR £10,720
Cash ledger, client side > DR £10,720

Second, transfer the money owed to ULaw LLP (includes 2 entries):

Client pays £720 to ULaw LLP:
Client ledger, client side > DR £720
Cash ledger, client side > CR £720

Now record the business receiving it
(remember money is moving so it will stay on the client + cash ledgers)
Client ledger, business side > DR £720
Cash ledger, business side > CR £720

Question 7

what entries if all to business then transfer to client?

Answer 7

First, record the payment of the cheque into business account:

Client ledger, business side > CR £10,720
Cash ledger, business side > DR £10,720

Second, transfer the client’s money into the client account:

Business pays £10,000 to client:
Client ledger, business side > DR £10,000
Cash ledger, business side > CR £10,000

Client receives money:
Client ledger, client side > CR £10,000
Cash ledger, client side > DR £10,000

Question 8

inter-client transfers

Answer 8

DR from one clients ledger account > CR to another clients ledger account

Question 9

summarise the position on dishonoured cheques

Answer 9

• Can keep hold of them on client instructions (IN WRITING) until there are sufficient funds
• If however, payments are made from the client account on the assumption the cheque will clear and it doesn’t, money will have tp be taken from the business account to rectify the shortfall immediately.
• Once the client has moved sufficient funds so the cheque can be re-represented, the represented cheque becomes a mixed receipt because some of it belongs to the client and some belongs to the business (to repay the shortfall they made up).

Question 10

what is the first entry for a dishonoured cheque?

Answer 10

cheque going into client account:
client, client > CR
cash, client > DR
NEED TO REVERSE THIS, SO FIRST ENTRY IS:
client, client side > DR
cash, client side > CR

Question 11

receiving a cheque made out to a third party

Answer 11

• return to payee
• copies of correspondence

Question 12

abatement

Answer 12

• entries on profit costs and HMRC accounts from when bill was raised need to be abated (reduced proportionately)
• must send VAT credit note to client

ALTERNATIVE:
- separate abatement account
- end of the accounting period = the debit balance on the abatements account is transferred to the debit side of the profit costs account

Question 13

bad debts

when is VAT relief available?

Answer 13

• client not going to pay
• write off prof charges, disbursements and VAT
• VAT relief = once debt been outstanding for at least 6 months since payment due

Question 14

what is in the details column of the client ledger?

Answer 14

1. the MIRROR ledger
   (e.g. if money moving the pair is client and cash ledger so entry will be cash)

AND

2. DESCRIPTION
   e.g. on account, court fee, amount due

NOTE > if mirror ledger is VAT + PROFIT costs = no description needed

Question 15

what is in the details column of the cash ledger?

Answer 15

client name + description

Question 16

A solicitor has conducted various business transactions for a client during the past ten years. The solicitor completes the sale of a warehouse on behalf of the client. The proceeds of sale are received into the firm’s client bank account. The solicitor is about to transfer the proceeds of sale to the client when the client instructs the solicitor to pay £10,000 from the proceeds of sale to the client’s daughter to help her with some household expenses.

Should the solicitor make the payment?

Answer 16

No, because it would be an improper use of the client account as a banking facility.

Question 17

A firm is acting for the executors in the administration of an estate. The firm is holding £300,000 in the client bank account for the executors and sends the estate accounts to the residuary beneficiary for approval. The residuary beneficiary approves the estate accounts and asks the firm to hold £220,000 for her and £80,000 for her son, who is buying a house. The firm is acting for the son in his house purchase.

How should the firm record the residuary beneficiary’s instructions in the accounts?

Answer 17

2 inter-client transfers

An inter-client transfer of £300,000 from the executors’ ledger account to a client ledger in the residuary beneficiary’s name.

Followed by an inter-client transfer of £80,000 from residuary beneficiary’s ledger account to the son’s ledger account.

(Although no money will actually move in or out of the client bank account, ledger entries must accurately reflect for whom money is held in the bank client account. An inter-client transfer must first of all be made to the beneficiary. On approval of the estate accounts the money is held for the residuary beneficiary. It is the beneficiary who instructs the firm to then hold some money on behalf of another person. So, two inter-client transfers must be made.)

Question 18

a firm of sols makes a number of cash payments over the course of a month.

for which of the following cash payments would the corresponding double entry reflect the fact that the firm has incurred an expense?

a) staff wages
b) to buy a photocopier
c) new office furniture
d) repayment of a bank loan
e) buy a computer

Answer 18

correct answer = staff wages

they are part of the outgoings of a firm so are an expense

D- the firm has a reduced liability
A, C + E - firm has acquired long term benefit

Question 19

disbursements - are they classed as purely client money?

Answer 19

if disbursements have already been paid or billed = business money

Question 20

disbursements - charge VAT?

Answer 20

• if disbursement = no VAT
• do not qualify as disbursements are those which are normally and necessarily part of the service supplied to the client, for example, telephone charges, postage and photocopying charges
• electronic Land Registry searches aren’t disbursements, so will be part of the firm’s taxable supply.

Question 21

firms providing legal services are required to pay a _____ amount of interest on client money held on their behalf

is this contingent on anything?

Answer 21

• fair amount
• contingent on firm having written agreement with the client or third party as to the payment of interest
• each firm = responsible for own policies about what constitutes fair amount

Question 22

there are two methods available for a firm to fulfil its obligations to pay interest on client money, what are they?

Answer 22

i) Opening a separate designated deposit account in the client’s name
o All interest earned is paid to the client
o Administratively easier as the bank will calculate the real interest earned on the account
o Must do an entry for the interest earned on:
client ledger, client side > CR

ii) Paying interest directly from the firm’s business bank account
o Interest is calculated according to the firm’s policy (ensuring it is a fair sum)
o When money is held in the general client account the interest payment is an expense of the business and will be recorded on an interest payable ledger account
o Paying interest to a client:
interest ledger, business side > DR (firm owes the interest to the client)
client ledger, business side > CR

Question 23

who makes the payment
1. invoice addressed to the firm
2. invoice addressed to the client

Answer 23

1 = principal method + must be paid from business account

2 = agency method + can be either business account or client account (if sufficient funds)
- here the sol is just intermediary and holding money on client’s behalf

Question 24

A taxable person making a taxable supply to another taxable person must, within _____ days after the time of supply (or within such longer period as HMRC allows), provide them with a tax invoice, which includes certain prescribed information

Answer 24

30 days provide client with tax invoice

Question 25

property transactions: a deposit received as a stakeholder is _____ money and must be paid into the _______ account what are the corresponding entries?

Answer 25

- client money + client bank account - Because it is moving money the ledgers will be client and cash, and will be credit (as money coming in) then following two options as to the details: i) leave in SELLER'S ledger account and NOTE it is held as stakeholder for both buyer and seller CR Seller’s ledger account, noting money held as stakeholder DR cash ii) create JOINT STAKEHOLDER ledger account (usually the best) CR Joint stakeholder ledger account DR Cash

Question 26

a firm has received a deposit as a stakeholder, on the day the sale is completed and the deposit becomes the seller's, which entries?

Answer 26

-The firm must make an inter- client transfer to show that the deposit is now held for the seller alone: DR Joint stakeholder ledger account CR Seller’s ledger account

Question 27

what are the two options for where a mortgage advance is received and you are acting on behalf of a lender and a borrower (buyer)? are these the same even if the lender isnt your client?

Answer 27

a) Mortgage advance is credited to borrower’s ledger account - Details column must include the name of the lender + fact it is mortgage advance b) Mortgage advance credited to separate ledger account in the name of the lender - on completion day, funds become available to the borrower > inter client transfer made to borrower’s ledger account - even if the lender isn’t your client, you must still make it clear (either by note or the creation of a separate account) that the mortgage advance monies are for the lender until completion

Question 28

are firms entitled to charge a lender for work done in connection with the mortgage? if so, who pays? what entries?

Answer 28

- yes entitled to charge - buyer usually pays - The costs and VAT are debited (taken from) the account to whom the services were supplied to (usually the lender) - 2 entries need to be made -1 to show the lender has been charged, 2 to show the seller will pay for it: DR lender’s client ledger account business section; CR profit costs and HMRC accounts CR lender’s client ledger account business section; DR seller’s client ledger account business section

Question 29

summarise the basics of sols accounts

Answer 29

1. Which ledger (always going to be client + cash unless bill) * Money moving = client + cash * Bill issued = client + profit costs + HMRC (NO entries on the CASH account) * Client transfer = client + client 2. Each ledger has a business and client side (WHO DOES THE MONEY BELONG TO/ WHO IS OWED THE MONEY) * Who is receiving/paying the money 3. Is the entry DR or CR * CR money coming in * DR money going out

Question 30

what obligations do sols where they are holding money jointly with another in a joint accounts e.g. where a sol is a joint executor of a will with a third party?

Answer 30

- still CLIENT MONEY - not as many rules - statements EVERY 5 WEEKS - keep readily accessible CENTRAL RECORD OF BILLS

Question 31

what obligations does a sol have where they are a signatory for a client's account? e.g. POA on their account will the sol be in breach if they do not obtain

Answer 31

- statements every 5 WEEKS - reconciliations every 5 WEEKS - readily accessible CENTRAL RECORD OF BILLS - if unable to access the above = no breach so long as sol has taken REASONABLE STEPS to satisfy themselves that the client’s money is NOT AT RISK and RECORDED THE POSITION

Question 32

firms are able to enter into agreements with third party managed accounts (TPMA) to hold client money, rather than operating the firm's own client bank account. what are the benefits of this? what must the firm do?

Answer 32

- reduce costs - more secure - TPMA = REGULATED by FCA + AUTHORISED PAYMENT INSTITUTION - before accepting instructions, client must be INFORMED + UNDERSTAND: i) TERMS of the agreement e.g. fees ii) client's right to terminate iii) regulatory differences between SRA and FCA - sols must keep overview of the account + maintain records to evidence this

Question 33

the SRA expects to be notified of the use of a TPMA. what information do they require?

Answer 33

- fill in form 1. SRA number 2. TPMA provider 3. FCA authortisation number 4. 4. The date on which they intend to start using the TPMA provider - if the same provider used for several clients > only inform SRA once

Question 34

most firms are required to generate an accountants report but are only obliged to deliver it to the SRA if it is what? in what timescale must this be delivered to the SRA?

Answer 34

- qualified (client or third party money is, or is likely to be placed, at risk) - within 6 months of the end of the accounting period

Question 35

who does the obligation to submit an accountants report to the SRA lie with?

Answer 35

firm and its managers (not the accountant)

Question 36

when will an accountants report be qualified?

Answer 36

* If there are one or more serious factors > likely to lead to the report being qualified * If there are one or more moderate factors > may lead to qualification depending on the context (including factors such as the number of instances, whether the firm identified the breaches and what corrective action, if any, has been taken as a consequence)

Question 37

what are serious factors (for an accountants report)

Answer 37

o Significant shortfalls o Systematic billing for things not incurred o Evidence of disregard for client’s money safety o Actual or suspected fraud of managers/employees o Failure to provide documentation requested by the accountant o Client bank account reconciliations not carried out o Improper use of client account as a banking facility

Question 38

firms are not required to obtain an accountants report if....

Answer 38

(a) all of the client money held or received = LAA (b) in the accounting period, the total balance of all client accounts plus any joint accounts and clients’ own accounts operated by the firm does not exceed: (i) an average of £10,000; and (ii) a maximum of £250,000, or the equivalent in foreign currency.

Question 39

the SRA can request an accountants report if a firm _________ to practice or it is in the ___________

Answer 39

ceases to practice or it is in the public interest

Question 40

the accountant preparing the accountants report must be a ________________ of a chartered accountancy body

Answer 40

qualified member of a charter accountancy body

Question 41

all accounting records should be stored securely and retained for at least ___ years

Answer 41

6 years

Question 42

when cash is withdrawn from the bank for petty cash

Answer 42

Petty Cash Account > DR Cash Account, Business side > CR (when a payment is being made to buy a roll of sticky tape for example, the above will just be reversed and instead of the cash ledger it will be whatever ledger account they have for whatever they are buying)

Question 43

if the firm makes a payment from petty cash on behalf of the client

Answer 43

Client ledger, business side > DR Petty Cash Account > CR

Question 44

petty cash is always _____________

Answer 44

business money - (will always be on the business side, even if held for the client)

Question 45

A firm sends a client a bill for professional charges of £1,500 plus VAT for work carried out by the firm in setting up a company for the client. The client then sends the firm a cheque for in full payment of the bill and the VAT. what are the entries for: 1. when the bill is raised 2. when the client pays?

Answer 45

DR the Client account, business section; CR the firm’s Profit Costs and HMRC accounts when the bill is issued. DR the firm’s Cash account; CR the Client account, business section when the client pays.

Question 46

A firm of solicitors is acting on behalf of a new client in a property transaction. On 1 February, the firm pays a Land Registry fee of £25. On 4 February, the client sends the firm a cheque for £202,000, made up of the purchase price of £200,000 and £2,000 on account of costs. The firm’s bank does not allow cheques to be split. Which of the following statements best explains the action the firm should take? A) The firm can pay £202,000 into the client bank account. The firm must then transfer £25 from the client bank account to the business bank account promptly. B) The firm can pay £202,000 into the client bank account. The firm may transfer £25 from the client bank account to the business bank account when it has invoiced the client for the Land Registry fee.

Answer 46

A is the correct answer. B is incorrect because the firm does not need to wait to invoice the client before transferring the sum in respect of the paid disbursement.

Question 47

A firm acts for a client in the purchase of a property. The firm sends a bill to the client made up of: £480 for the firm’s professional charges and VAT; and £600 for a surveyor’s fee (the firm has not yet paid the fee). The client sends the firm a cheque for £101,080, comprised of £1,080 in payment of the bill and £100,000 as the balance of the purchase price required to complete the purchase. Which of the following is correct? A) The firm should pay the whole amount into the business bank account and then make a cash transfer of £100,000 into the client bank account. B) The firm should pay the whole amount into the business bank account and then make an inter-client transfer of £100,000

Answer 47

A is correct. The firm should pay the whole amount into the business bank account and then make a cash transfer of £100,000 into the client bank account. This is a mixed receipt and the funds must be allocated to the correct account promptly. This can be achieved by splitting the cheque correctly, or by paying the whole amount into either the client or business bank account and then making a cash transfer of the correct amount. As a bill has been delivered, the money for professional charges and the unpaid surveyor’s fee (a total of £1,080) is not client money. The £100,000 for the balance of the purchase price is client money. Therefore, the firm can pay the whole amount into the business bank account and then make a cash transfer of the £100,000 client money into the client bank account (as an alternative, the firm could pay the whole amount into the client bank account and then make a cash transfer of £1,080 into the business bank account).

Question 48

A solicitor delivers a bill to a client for professional charges of £2,000 plus VAT. The client complains that the bill is too high. The solicitor agrees to reduce the bill by 10%. Which one of the following accurately reflects how the reduction should be recorded on the client ledger? A) CR (Business section) Profit costs – abatement £200. CR (Business section) VAT – abatement £40. B) DR (Business section) Profit costs – abatement £200 DR (Business section) VAT – abatement £40.

Answer 48

A is correct. NOTE THE Q ASKS FOR CLIENT LEDGER. The client is receiving money back. The profit costs and HMRC ledgers will be DR.

Question 49

A firm of solicitors is acting for a client in a litigation matter. At the beginning of the matter the client sent the firm £4,500 on account of costs. This money is currently held in the firm’s client bank account. The firm instructed counsel on behalf of the client. Counsel has now issued their fee note in the sum of £3,300 plus VAT. The fee note is addressed to the firm. The firm’s policy is to use client money to meet disbursements wherever possible. Which of the following best describes how the firm will meet this payment? A) The firm must use its own money to meet counsel’s fees and VAT as the fee note has been addressed to the firm. B) If the firm alters the fee note so that it is addressed to the client, then the firm can use client money to pay counsel’s fees and VAT

Answer 49

Option B is the best answer because a concessionary treatment for counsel’s fees was agreed between HMRC, The Law Society and the Bar. This allows a firm to alter the fee note so that it is addressed to the client. It is then treated on an agency basis and client money may be used to pay the fees.

Question 50

A solicitor delivers a bill to a client for professional charges of £1,000 plus VAT. The client sends the solicitor a cheque, made payable to the firm, in full payment of the bill but the accompanying letter instructs the solicitor not to pay in the cheque until the client confirms that there are sufficient funds in his bank account for the cheque to clear. Which of the following whether or not the solicitor should pay the cheque into the firm’s client bank account? A) No, because the client's instructions have been given in writing. B) No, because this is not client money.

Answer 50

B is correct because money received in payment of a bill is not client money and so cannot be paid into the client bank account - R2.1 and R4.1 WATCH OUT FOR THE ACTUAL STEMS IN SOLS ACCOUNTS.

Question 51

A solicitor has been acting for a client on the sale of a business. The solicitor sends a bill for professional charges to a client. The solicitor receives a cheque from the client in payment of the bill. Which of the following pair of double entries shows how the receipt of the cheque should be recorded? A) CR profit costs account business column. DR client ledger account business column. B) CR client ledger account business column. DR cash account business column.

Answer 51

B is the correct answer. Money received in payment of a bill is the firm’s own money and must be paid into the business bank account. It must therefore be recorded in the business section of the appropriate accounts (meaning that Options D and E are wrong). The firm has received money. The entries for a receipt are CR on the client ledger account and DR on the cash account. No entries on profit costs are necessary when a bill is paid.

Question 52

A firm of solicitors has received money from various clients as follows: -money on account of costs yet to be incurred (no bill having been issued); -money as a cheque made payable to HMRC; -money in respect of disbursements which have been billed to the client but which have not yet been paid by the firm; -money in respect of disbursements which have not yet been billed, but which have already been paid by the firm. Are all these receipts client money? A) No, because the money in respect of disbursements (whether billed or paid) is business money and cheques made payable to third parties cannot be paid into a firm’s accounts at all and must just be sent to the third party. B) No, because the money in respect of the disbursements which have been billed is office money and cheques made payable to third parties cannot be paid into a firm’s accounts at all and must just be sent to the third party.

Answer 52

Option A is correct because once a bill has been issued or the disbursements paid for, any money received for those disbursements is not client money, but belongs to the business. Rule 2.1(d). Cheques made payable to third parties cannot be paid into a firm’s accounts at all and must just be sent on to the third party. The only client money is the money received on account of costs. Rule 2.1(d).

Question 53

A firm of solicitors buys new office equipment for £100,000. What would be the entries on this?

Answer 53

Credit entry cash sheet. Debit entry office equipment account.