Solicitors' Accounts

Question 1

3 categories of client money?

Answer 1

Money held or received
1. Relating to REGULATED SERVICES delivered by you
2. As a TRUSTEE or OFFICE-HOLDER (e.g. under POA)
3. In respect of your FEES and UNPAID DISBURSEMENTS

Question 2

3 basic rules for the treatment of client money?

Answer 2

1. Client money must be kept SEPARATE from firm money
2. Solicitor must promptly allocate MIXED PAYMENTS into the correct client or business account
3. Only maintain a client account at a UK BANK OFFICE including both: (i) the word “client” and (ii) the name of the authorised body

Question 3

In one exceptional case, client money may be held without a client account. Name the 4 requirements.

Answer 3

1. Money is held in respect of fees and unpaid disbursements PRIOR TO DELIVERING A BILL for the same
2. Money held for disbursements relates to costs incurred: (i) ON BEHALF OF THE CLIENT (ii) FOR WHICH THE FIRM IS LIABLE
3. Firm DOES NOT MAINTAIN a client account
4. Client is INFORMED IN ADVANCE of the arrangement, and where and how the money is held

Question 4

2 situations when client money must be returned?

Answer 4

1. On DEMAND (unless alternative arrangement is agreed in writing)
2. Return promptly if there is NO LONGER A PROPER REASON to hold the funds

Question 5

What 2 precautions must be taken when using client money to pay your costs?

Answer 5

1. Must deliver the BILL OF COSTS before transferring money to the business account.
2. Transfer must be for the SPECIFIC SUM BILLED and COVERED by the amount held for that client

Question 6

What obligation does a solicitor have with respect to interest on client money?

Answer 6

Must account for a FAIR SUM OF INTEREST on any client balance held on the client or 3P’s behalf, unless the client gives INFORMED CONSENT to any WRITTEN ALTERNATIVE AGREEMENT

Question 7

4 ledgers that must be maintained for client monies?

Answer 7

1. Client side of client ledger
2. Business side of client ledger
3. All balances of all ledgers with running total
4. Cash book balance with running total of all transactions though client accounts held or operated by solicitor

Question 8

How often must a solicitor obtain bank and reconciliation statements?

Answer 8

Every five weeks

Question 9

What is the advantage of using a Third-Party Managed Account to hold client funds?

Answer 9

Since the money paid into these accounts is not held or received by the solicitor, it is NOT CONSIDERED CLIENT MONEY

Question 10

3 requirements for solicitor to use TPMA to make or receive payments on the client’s behalf?

Answer 10

1. Does not result in solicitor receiving or holding client money
2. Solicitor takes reasonable steps to ensure the client understands: (i) the TPMA contractual terms (including any fees payable) and (ii) the client’s right to terminate the agreement or dispute the solicitor’s payment requests
3. Solicitor obtains regular account statements and ensures these are accurate

Question 11

Deadline for solicitor to obtain accountant report for an account containing client monies? Must this be delivered to the SRA?

Answer 11

Six months from the end of the accounting period

Only needs to be delivered to the SRA if it is qualified (shows a failure to comply with SRA Accounts Rules)

Question 12

How long must solicitor retain client accounting records?

Answer 12

Six years

Question 13

2 exceptions where an accountant’s report is not required?

Answer 13

1. All client money is received from the LEGAL AID AGENCY
2. The statement balance of ALL CLIENT MONEY does not exceed: (i) an average of 10,000 or (ii) a maximum of 250,000

Question 14

What does a debit entry record?

Answer 14

1. Decrease in the value of a liability OR
2. Increase in the value of an asset

Simple terms: GOOD FOR THE FIRM

Question 15

What does a credit entry record?

Answer 15

1. Increase in the value of a liability OR
2. Decrease in the value of an asset

Simple terms: BAD FOR THE FIRM

Question 16

2 secrets to remembering the debit/credit system?

Answer 16

1. The ledger is always prepared from THE BUSINESS’ POV.*
2. When the account receives money it is DEBITED and when the account pays out money it is CREDITED.

Thus in your bank statement, credit is GOOD FOR YOU and BAD FOR THE BANK

Question 17

4-step analysis for separate bookkeeping?

Answer 17

1. Client or firm money?
2. Receiving or paying money?
3. Which side of the ledger (client or business)?
4. Which ledger is credited and which is debited?

Question 18

When do costs paid by the client in advance become client money?

Answer 18

When they are SUBSEQUENTLY BILLED by the firm.

Question 19

What info is recorded in the client section of the client ledger? What kind of balance does this section show?

Answer 19

1. Client money RECEIVED OR PAID for the client
2. Money FIRM OWES to the client

Must be a CREDIT balance (you owe client money).

Question 20

What info is recorded in the business section of the client ledger? What kind of balance does this section show?

Answer 20

1. Firm money PAID ON BEHALF OF a client.
2. Money CLIENT OWES to the firm

Must be a DEBIT balance (client owes you money).

Question 21

If you deliver a bill of costs to the client but the client has not been paid, how should this be reflected?

Answer 21

DR client’s ledger account, business section (client owes you money).

CR profit costs account, business section (income).

Question 22

How should a fixed fee payment be treated before issuing a bill of costs?

Answer 22

It is client money and must be paid into the client bank account.

Question 23

How should a payment on account of costs be treated before issuing a bill of costs?

Answer 23

It is client money and must be paid into the client bank account.

Question 24

How should a cheque made payable to the client be treated in your ledger?

What about a cheque payable to the solicitor but endorsed to a third party?

Answer 24

A cheque payable to the client is not client money at all. You should deliver the cheque to the client directly.

A cheque payable to the solicitor and endorsed to a 3P is still client money and should be recorded accordingly.

Question 25

When you have to advance money on behalf of the client, how should this be reflected?

Answer 25

CR cash account, business section (income owed by the client)

DR client ledger account, business section (client owes business money)

Question 26

What is unusual about making payments on behalf of the client from the firm’s petty cash account? What ledger entries should be made?

Answer 26

Even if the client account has sufficient money, these expenses are still paid from the business bank account.

DR client ledger account, business section (client owes firm money)
CR petty cash account, business section (record debt owed by the client)

Question 27

What are profit costs?

Answer 27

Professional fees or charges for the legal services provided

Question 28

What is the difference between the cash sheet and the client account?

Answer 28

Cash sheet records ALL payments in and out of the firm’s bank accounts.

Client account simply records ledger entries in and out of the client bank account.

Question 29

Why must the balance of every bank account always show a DEBIT?

Answer 29

A CR balance means the account is overdrawn, which is in breach of the rules. DR balance means the account is ENCASHED

Question 30

What double entries should be made when the firm pays VAT to HMRC?

Answer 30

DR HMRC account, business section (money transferred into HMRC account)

CR cash account, business section (money transferred out of firm accounts)

Question 31

What are the two ways to deal with VAT on disbursements (e.g. expert fees)?

Answer 31

Agency method and principal method

Question 32

Describe the agency method of addressing VAT (3 points).

Answer 32

1. Invoice is addressed to the client and from an accounting POV, the service is provided to the client directly, with no input from solicitor
2. Client must deal with any tax rebates to which he is entitled
3. The ledger will record only the overall amounts paid out by the firm, without a separate VAT entry

Question 33

Describe the principal method of addressing VAT (3 points).

Answer 33

1. Invoice is addressed to the solicitor and from an accounting POV, service is provided to the solicitor
2. Solicitor can claim a rebate from HMRC for the VAT
3. The ledger wlll record only the net sum paid, EXCLUDING VAT which must be subject to a separate entry in both the ledger and the bill of costs

Question 34

What is a key difference between the agency and principal method when it comes to PAYING INVOICES?

Answer 34

Agency method - invoice can be paid from either the business or client account.

Principal method - invoice can only be paid from the business account (since it is addressed to the solicitor).

Question 35

What special principle applies to VAT on counsel’s fees?

Answer 35

HMRC permits solicitors to CROSS OUT THEIR NAME on the receipt and replace it with the client’s name, so that solicitors need not make any VAT entries and it is up to the client to claim any rebates needed

Question 36

What is an abatement of fees?

Answer 36

Issuing a CREDIT NOTE that reduces the bill delivered to the client.

Question 37

Important consideration when issuing an abatement of fees?

Answer 37

Must remember to reduce the VAT amount accordingly and amend the accounting records

Question 38

Why do firms maintain a bad debt ledger?

Answer 38

In order to claim VAT relief on bad debts, HMRC requires a separate bad debt ledger to be maintained

Question 39

When can VAT relief be claimed on bad debt?

Answer 39

When the bad debt is at least 6 months old, but NOT OLDER than 4 years and 6 months

Question 40

How do you reflect VAT relief on a bad debt that has already been written off?

Answer 40

1. Credit VAT sum into bad debts ledger
2. Debit VAT sum into HMRC ledger