Solicitors Accounts Flashcards
Solicitor’s accounts rules
Control how solicitors handle and record money
Rules apply to
- Authorised bodies
- Authorised by SRA
- Licensed body
- Recognised body
- Sole practitioner - Managers
- Employees
Distinction between business money and client money
Client money:
- Held or received
- Relating to regulated services
- On behalf of a third party
- As trustee or by appointment
- Fees and unpaid disbursements
‘Client’ includes current, prospective and former
Client bank account
- Bank or building society in England and Wales
- Firm’s name and client intitle
- For legal services only
Client account ledger
- Record by client name
- Receipts and payment
- Client money and not client money
Double entry bookkeeping
- 2 entries for each transaction
- Debit (DR) and
- Credit (CR)
Cash account/cash sheet
A receipt = debit on cash account and credit client’s ledger
A payment (out) = credit on cash account and debit client’s ledger
Client money must be paid into client account promptly (that day or next working day) EXCEPT if an alternative arrangement agreed in writing BUT must record receipt in ledger
Cannot withdraw more than held for a client
Profit-cost business account
Reflects the firms professional charges
HMRC account
Reflects the VAT tha tmust be accounted
You do not use the cash account when money is not entering or leaving a bank account
Abatement of professional charges
Reverse original entries to extent of reduction
Professional costs:
- Credit client ledger in business account
- Debit on profit-cost account
VAT:
- Credit client ledger in business account
- Debit HMRC account
Dishonoured (bounced) cheques
Reverse entries made on receipt of cheque
- Debit client ledger, client account record
- Credit cash account, client account record
- Debit client ledger in business account
- Credit cash account in business account
- Pay money into client account
Credit = money in
Debit = money out
Cheque to third-party
Cannot be paid into firm’s bank account
Cheque must be forwarded to third-party and no entries are made in the ledger
Mixed receipt
Client money + business money
Dealing with mixed receipts
Option 1 - split the cheque:
1. Client money > client account
- Credit client ledger, client account record
- Debit cash account, client account record
2. Business money > business account
- Credit client ledger, business account
- Debit cash account, business account
Option 2 - deposit and transfer:
- Pay into client or business account
- Transfer promptly
A firm can move money from the client account to the business account if money is owed for costs BUT only after a bill has been sent to the client
Dealing with inter-client transfers
Debit client A, client account record
Credit client B, client account record
Principles of VAT
Output tax: charged by business to customers e.g. legal services and some disbursements
Input tax: charged to business by suppliers
Output tax - input tax = VAT payable to HMRC
VAT is charged at 20% on the supply of legal services
HMRC does not regard disbursements as part of supply of legal services
Determining if an expense is a disbursement
- Firm acted as agent for client when paying supplier
- Client received and used goods received by third-party
- Client responsible for payment to third-party
- Client authorised firm to pay third-party
- Client aware goods are from another supplier
Things not classed as disbursements
Travelling expenses
Phone calls
Postage
Photocopying charges
General overheads of firm and so must charge VAT on these amounts
Disbursements - no VAT charged
- Court fees
- Company search fees
- Compan registration fees
- Witness fees
- Oath fees paid to another solicitor
Treatment of invoices
If a firm pays an invoice on behalf of a client it passes on the whole amount of the invoice including the VAT to the client but it does not add additional VAT on top
Invoice addressed to client - agency method
Agency method
- Pay amount to third party
- Use client account (if enough money)
- Or use business account
- Send invoice to client
Recording
- Debit client ledger
- Credit cash sheet
- In client account (if enough money) or business account
- No entry on HMRC ledger
Invoice addressed to firm - principle method
Principle method
- Use business account
- Send own invoice to client
- Increase VAT amount on bill by the VAT paid to third party
Recording
- Debit client ledger, business account
- Credit cash sheet, business account
- Debit HMRC account with VAT amount
- Credit cash sheet with VAT amount, business account
Professional charges recording
Debit client ledger, business account for profit cost
Credit profit costs, business account,
Debit client ledger with VAT amount
Exception to principle method relating to counsel’s fees
Addressed to law firm
Firm does not need to use principal method which allows firm to cross out their name and replace with client’s name on the invoice and then treat payment as agency payment
Deposits held as agent
On receipt - paid into client account
On exchange credited to seller’s account:
- Debit client ledger, client account
- Credit cash sheet, client account
Deposits held as stakeholder
Open new client ledger in joint names of buyer and seller called a stakeholder account
On receipt - paid into stakeholder’s account
- Credit stakeholder ledger, client account
- Debit cash sheet, client account
On completion - paid into seller’s account (inter account transfer)
- Debit stakeholder ledger, client account
- Credit seller’s ledger, client account
Mortgage advance
On receipt - paid into lender’s account
- Credit lender’s ledger, client account
- Debit cash sheet, client account
On completion - paid into buyer’s account
Petty cash
Always business money
If petty cash is paid on behalf of a client it must always be recorded in the business account even if you hold money in the client account for that client
Recording petty cash:
- Debit client ledger, business account
- Credit petty cash ledger, business account
Accounting for interest
Fair sum on client money held
Unless agreed otherwise
Provide policy to client
