Solicitors Accounts: Double Entry Book Keeping (SQE1 only)

Question 1

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

Answer 1

• Cash sheet client account = bank account in which all client money is held (balance shows total of all individual client ledgers)
• Cash sheet business account = bank account for authorised body’s money

Question 2

What is the difference between a client ledger client account and client ledger business account?

Answer 2

Client ledger…

• …client account = balance shows how much client money the authorised body holds on behalf of particular client (i.e. a bank statement for the client)
• …business account = balance shows how much money client owes authorised body

Should always go to client ledger first and then corresponding ledger (either cash sheet client account or cash sheet business account)

Question 3

Will all a client’s matters be on the same ledger?

Answer 3

No - several different matters will have separate client ledgers for each matter for that client

Each ledger identifies (in name) the matter + client to which it relate

Question 4

What is the double entry principle?

Answer 4

For every transaction - two entries (one debit, one credit) will be made and mirror each other
* Credit = in
* Debit = out

Question 5

What should the balances on the client and business sides on client ledger always be (providing rules have been complied with)?

Answer 5

• Client side = 0 or credit balances
• Business side = 0 or debit balances

Question 6

Are the only transactions that need to be recorded those that involve the receipt in or payment out of money?

Answer 6

No - e.g. where bill of costs is issued, a debt is created but this won’t be recorded in business account - will instead be recorded in a profit costs account

I.e. does not need to be a transfer of money to record

Question 7

What must be obtained every 5 weeks?

Answer 7

Statements from banks, building societies and other financial institutions for all client accounts and business accounts held and operated by you

Question 8

What must be completed every 5 weeks?

Answer 8

A reconcilliation of the bank or building society statement balance with cash book balance and client ledger total
* Signed off by compliance officer / manager of firm
* Any differences shown should be promptly investigated and resolved

Question 9

What must be kept readily accessible?

Answer 9

A central record of all bills or other written notifications of costs (may be called profits costs account)

Question 10

What are the entries for client money received and client money paid out?

Answer 10

Client money received (e.g. cheque received on account of costs)…
* Credit client ledger client account
* Debit cash sheet client account

Client money paid out (payment out of account on behalf of client)…
* Debit client ledger client account
* Credit cash sheet client account

Question 11

What are the entries for non-client money received and non-client money paid out?

Answer 11

Non-client money received (e.g. payment of bill of costs)…
* Credit client ledger business account
* Debit cash sheet business account

Non-client money paid out (e.g. client has not sent in money on account of costs)…
* Debit client ledger business account
* Credit cash sheet business account

Question 12

What account does a cheque received by an authorised body relating to their client but not their work go into?

Answer 12

No account - it is not client money because it does not relate to regulated services - simply needs to forward cheque on to client

Good practice to make note in client’s ledger client side recording receipt and handing over of cheque

Question 13

If a cheque is received on behalf of a client and you forward it on, should no record at all be made?

Answer 13

Good practice to make note in client’s ledger client side recording receipt and handing over of cheque

Question 14

What is petty cash? Will it be client money?

Answer 14

Payments that are more convenient to pay in cash than by cheque transfer - will be non-client money and withdrawn from authorised body’s business account

Question 15

What account is used to record initial payment into petty cash? Is it the same as a business cash book?

Answer 15

• Is not an account but a record (cash sheet petty cash account or petty cash cash book)
• Operates in same was as business cash book but is a separate pool of money

Payments in/out of it are separate from records for business account

Question 16

What are the entires to record an authorised body making a payment out of petty cash of non-clinet money on behalf of client?

Answer 16

• Debit client ledger business account
• Credit cash sheet petty cash account

Client now owes authorised body money - would have a debt in client ledger business account to show this

Question 17

When client repays petty cash (reimburses), will that be paid into the petty cash account? What is the entry for it?

Answer 17

No there is no petty cash bank account! It will be paid into the business account as it is non-client money

Question 18

So when is money ever received into the petty cash account?

Answer 18

When business makes initial payment of non-client money from business account and tops it up

Debit in cash sheet petty cash account

Question 19

What are the rules when client money is used to pay your costs?

Answer 19

• Bill of costs/written notification must be given to client/paying party before transfer
• Any payment must be for specific sum in bill/notification and covered by the amount held by client

Question 20

What will a debt balance in the client ledger client account indicate?

Answer 20

That money was taken on behalf of client when they actually had no money in client account (a breach!)

If money was improperly withdrawn, the authorised body would transfer money belonging to them (non-client money) from their business account and pay it into the client account to cover the amount wrongly withdrawn

Question 21

Because the transfer is between one bank account and another (client account to business account) what does it involve?

Answer 21

A 2-step process: money must first be taken out of one bank account (debit and credit) and paid into a different bank account (credit and debit)

Question 22

What are the two steps involved for the transfer of money from client account to business account?

Answer 22

Withdrawal money from client account:
1. Debit client ledger client account
2. Credit cash sheet client account

Pay money into business account:
1. Credit client ledger business account
2. Debit cash sheet business account

Question 23

What are the two steps involved for the transfer of money from business account to client account?

Answer 23

Withdrawal money from business account:
1. Debit client ledger business account
2. Credit cash sheet business account

Pay money into client account:
1. Credit client ledger client account
2. Debit cash sheet client account

Question 24

What are the 2 steps involved for splitting mixed payments?

Recall - funds from mixed payments must be allocated promptly to correct client account or business account - may involve putting the entirety of the money into one account then transferring the relevant element out and into correct account

Answer 24

Payment into client account:
1. Credit client ledger client account
2. Debit cash sheet client account

Payment into business account:
1. Credit client ledger business account
2. Debit cash sheet business account

Question 25

How many steps does a transfer of money from one client to the other need? Why?

I.e. both clients for whom you are acting

Answer 25

One! Because client money being transferred is already in authorised body’s client account (no need to take money out of client account and pay it back into same account!)

Question 26

What are the entries to show client money has been transferred and is now held by authorised body on behalf of a different client?

Answer 26

1. Debit client ledger client account of the transferor client
2. Credit client ledger client account of the transferee client

Question 27

What happens to the cash sheet client account when money is transferred between clients?

Answer 27

The cash sheet client account is unaffected as the money has not been withdrawn or paid into the client account - it is already there and has remained there

Question 28

What are the entries for a deposit received from buyer client by solicitor?

Property transactions

Answer 28

1. Credit client ledger client account
2. Debit cash sheet client account

This is as an ‘agent’ - solicitor stakeholder is later on…

Question 29

What are the entries for a deposit paid by buyer’s solicitor to seller’s solicitor?

Answer 29

1. Debit client ledger client account
2. Credit cash sheet client account

Usual ones for payment out of money

Question 30

In the context of a solicitor (acting for seller client) receiving the deposit from buyer’s solicitor - and so receiving money on behalf of TP - what does it mean if the seller’s solicitor is acting as a stakeholder?

Answer 30

• Stakeholder = seller’s solicitor holds deposit on trust for both buyer and seller until completion date, so deposit money cannot be handed over/back to one party without consent of other or until sale completes
• I.e. deposit money cannot be allocated to the seller as this would indicate it belongs to them and they can use freely

Question 31

Where the seller’s solicitor is acting as a stakeholder and cannot allocate the deposit money to the seller, what account is used to record the receipt of deposit?

Answer 31

A separate client legder called ‘stakeholder’ - deposit money not credited to seller client’s own client ledger client account until completion date

Question 32

What are the entries for the exchange of contracts (seller’s solicitor receives deposit as stakeholder) and completion of property sale (deposit money transferred from stakeholder ledger to seller’s client ledger client account)?

Answer 32

Exchange of contracts
1. Credit client ledger stakeholder (ledger)
2. Debit cash sheet client account

Completion of sale
1. Debit client ledger stakeholder (ledger)
2. Creit client ledger client account

For completion of sale - cash sheet client account not included as money already in there - transfer is instead from stakeholder to client account

Question 33

Where mortgage money is received from lender by solicitor, what type of money is it and who does it belong to?

Answer 33

• Is client money
• Belongs to lender until completion of property when transferred to buyer

Question 34

Upon receiving mortgage funds, what are the entries where solicitor does not open a separate ledger for lender?

Answer 34

• Credit client ledger client account (for buyer client)
• Debit cash sheet client account

Question 35

Upon receiving mortgage funds and then moving them from lender’s client ledger to buyer’s client ledger, what are the two sets of entries where solicitor does open a separate ledger for lender?

Answer 35

Receipt of mortgage funds from lender accounted for in lender’s client ledger:
1. Credit client ledger client account (for lender client)
2. Debit cash sheet client account

Mortgage funds then moved from lender’s client ledger to buyer’s client ledger on competion:
1. Debit client legder client account (for lender)
2. Credit client ledger client account (for buyer

Question 36

When a mortgage is redeemed, what are the entries where solicitor does not open a separate ledger for lender?

Answer 36

• Debit client ledger client account (for seller client)
• Credit cash sheet client account

Question 37

When a mortgage is redeemed and redemption money is sent to lender, what are the two entries where solicitor does open a separate ledger for lender?

Answer 37

Money moved from seller’s client ledger to lender’s client ledger
1. Debit client ledger client account (for seller)
2. Credit client ledger client account (for buyer)

Redemption money then sent to lender
1. Debit client ledger client account (for lender)
2. Credit cash sheet client account

Question 38

What are the entries for receipt of interest by client account (in the main/general account)?

Answer 38

1. Credit interest receivable ledger
2. Debit cash sheet business account

this is the money that all client money has earned, which is then added to the business account [for some reason]

Question 39

What are the two sets of entries for paying a sum of interest to the client?

a set amount of money [owed to particular client from the money all client money has made] is now being moved from the business account and put into a client’s own account

Answer 39

Record withdrawing of interest from business account
1. Debit interest payable ledger
2. Credit cash sheet business account

Recording receipt of interest into client account
1. Credit client ledger client account
2. Debit cash sheet client account

Question 40

When would a separate designated client account be opened to hold an individual client’s money in?

Answer 40

Where body holds a significant amount of money for client (for some time)

Must also set up separate designated client ledger for that client

Transactions involving the receipt/payment of client money into/out of separate designated client account will therefore be recorded in the record for
* the separate designated client account (the cash sheet separate designated client account) (the separate designated version of cash sheet client account) and
* the client ledger for the separate designated client account (which only has a client side): the client ledger separate designated client account (the separate designated version of client ledger client account)

Question 41

What are the entires for money being paid into or out of the separate designated client account?

Answer 41

Separate designated client money received
1. Credit client ledger separate designated client account
2. Debit cash sheet separate designated client account

Separate designated client money paid out
1. Debit client ledger separate designated client account
2. Credit cash sheet separate designated client account

Question 42

What are the entries for a transfer into a separate designated client account (from the main client account)?

E.g. taking a client’s money out of the general/main client account and transferring it to a separate designated client account

Answer 42

Withdraw money from general/main client account
1. Debit client ledger client account (for that client)
2. Credit cash sheet client account

Pay money into other separate designated client account
1. Credit client ledger separate designated account
2. Debit cash sheet separate designated client account

Question 43

What are the entries for a transfer into the main client account from a separate designated client account?

E.g. taking a client’s money out of the separate designated client acocunt for that client and transferring it into the general/main client account

Answer 43

Withdraw money from separate designated client account
1. Debit client ledger separate designated client account (for that client)
2. Credit cash sheet separate designated client account

Pay money into the main client account
1. Credit client ledger client account
2. Debit cash sheet client account

Question 44

What are the entries for payment of interest on a separate designated client account?

Answer 44

In practice, most bodies pay interest earned on separate designated account directly to client, so accounting entries are…
1. Credit client ledger separate designated client account for client
2. Debit cash sheet separate designated client account

Question 45

Are transactions only recorded if they involve the receipt in or payment out of money?

Whether client or non-client

Answer 45

No - e.g. issuing a bill needs to be recorded because it creates a debt that client now owes authorised body

Question 46

What are the entries for issuing a bill?

Answer 46

1. Debit client ledger business account
2. Credit profit costs account (authorised body’s central record of bills/other written notification of costs)

Question 47

What are the entires for VAT on the bill?

An authorised body registered with VAT must pay it on supplies of their legal services it makes to client - is chargeable on supply of legal services at the point when bill of costs/invoice is issued to client

Answer 47

1. Debit client ledger business account
2. Credit VAT account ledger (body’s record of VAT paid/charged by authorised body)

Question 48

What are the 2 sets of entries made for issuing a bill plus VAT?

Answer 48

For bill of costs
1. Debit client ledger business account
2. Credit profit costs account

For VAT
1. Debit client ledger business account
2. Credit VAT account ledger

The two entries cannot be combined - must be separate entries as each has its own half of its pair entry

Question 49

Can the accounting entries for issuing a bill and VAT simply be reversed for payment of bill by client?

Answer 49

No - profit costs account and VAT account ledger are not bank accounts

Question 50

What are the entries to record the receipt of payment of bill and VAT?

Answer 50

1. Credit client ledger business account
2. Debit cash sheet business account

Question 51

If the client pays more than the amount of bill and VAT, what happens to the extra money?

Answer 51

The extra money is client money and is a mixed payment - two double entries are:
1. Record receipt of non-client money amount
2. Record receipt of client money amount

Question 52

What are the two sets of entries for when a client pays a bill by transferring money from client account to business account?

If client has money in client account = can ask authorised body to pay bill plus VAT by transferring money from client account

Answer 52

Taking of money out of client account
1. Debit client ledger client account
2. Credit cash sheet client account

Paying money into business account
1. Credit client ledger business account
2. Debit cash sheet business account

Question 53

When can money be taken from client account to make a payment for bill of costs?

Answer 53

After a bill of costs/written notification has been given to client

Question 54

Where client is buying a property with a mortgage/selling and redeeming a mortgage, what are the 2 options in which lender’s bill could be recorded in accounts where the solicitor also acts for the lender?

Answer 54

1. Recorded in lender’s separate client ledger (if set up)
2. Recorded in borrower client’s client ledger (if no separate client ledger set up)

Is usual for there to be a term in loan agreement that borrower will pay lender’s legal fees plus VAT
If lender’s bill plus VAT has been recorded in lender’s separate client ledger, the debt will be need to be transferred to the borrower client’s client ledger first before they can pay it

Question 55

What are the 2 entries for billing a lender where there is no separate ledger for the lender?

Answer 55

Same as sending a bill + VAT to borrower - but details added to state bill for lender

For costs
1. Debit client ledger business account (for borrower) with amount of profit costs charged to lender
2. Credit profit costs (account) with amount of profit costs charged to lender

For VAT
1. Debit client ledger business account (for borrower) with amount of VAT charged to lender
2. Credit VAT account (ledger) with amount of VAT charged to lender

Remember to not combine the two client ledger business account entries - one is for profit costs amount and other for VAT amount and each has own separate paired entry (in profit costs/VAT account)

Question 56

What are the 2 entries for billing a lender where there is a separate ledger for the lender?

Answer 56

Same as sending a bill + VAT to borrower or any other client ledger

For costs
1. Debit client ledger business account (for lender) with amount of profit costs charged to lender
2. Credit profit costs (account) with amount of profit costs charged to lender

For VAT
1. Debit client ledger business account (for lender) with amount of VAT charged to lender
2. Credit VAT account (ledger) with amount of VAT charged to lender

Question 57

Where there is no separate ledger for the lender, what are the 2 ways its bill will be paid?

Answer 57

1. Receipt of non-client money from borrower client (borrower sends money to pay lender’s bill and VAT)
2. Transfer is made of borrower’s money from client account to business account

Question 58

What are the entries for the receipt of non-client money from borrower client?

Borrower sends money to pay lender’s bill plus VAT

Answer 58

Usual ones to record receipt of non-client money:
1. Credit client ledger business account
2. Debit cash sheet business account

NB (as above) if client sends a total amount of money which is more than amount of bill and VAT - extra money is client money and this is a mixed payment

Question 59

What are the entries for transfer of borrower’s money from client account to business account?

Borrower instructs law firm to use money in client account

Answer 59

Taking of money out of client account
1. Debit client ledger client account
2. Credit cash sheet client account

Paying money into business account
1. Credit client ledger client account
2. Debit cash sheet business account

Question 60

Where the lender does have a separate ledger (and bill + VAT recorded there), what must be transferred before the borrower pays it?

Answer 60

The debt owed to law firm needs to be transferred to borrower’s client ledger (so it is owed by borrower to law firm)

Question 61

What are the entries for transferring costs (a bill) from one client’s ledger to another?

Answer 61

1. Debit client ledger business account (of borrower) for total amount of profit costs and VAT
2. Credit client ledger business account (of lender) for total amount of profit costs and VAT

No money is moving - these entries are just:
1. removing the debt from the lender’s client ledger (business side); and
1. reallocating it to the borrower’s client ledger (business side)

…which is why the debit is in the borrower’s client ledger business account - as the amount the borrower owes the authorised body has increased

This transfer of costs reallocates them from lender to borrower and following this: they can be paid in the same two ways as borrower paid its own bill plus VAT - receipt of non-client money from borrower or transfer of the borrower’s money from client account to business account

Question 62

What does abating a bill mean? What are the 2 entries made?

Answer 62

• Reducing a bill that has been sent to the client
• 2 entries made = one profit costs reduction, one VAT reduction

Question 63

What are the entries for abating a bill?

Answer 63

Profit costs
1. Credit client ledger business account (for amount profit costs being reduced by)
1. Debit the profit costs account

VAT
1. Credit client ledger business account (for amount of VAT being reduced by)
1. Debit the VAT account

I.e. both the profit costs and VAT charged to client have been reduced - amount the client owes the authorised body (shown in the client ledger business account) is reduced

Question 64

What are bad debts?

Answer 64

Where client fails to pay amount due and authorised body decides some/all money will never be collected

Question 65

Can the firm receover the VAT element of a bad debt?

Answer 65

If it is at least 6 months old

Question 66

What are the two sets of entries for writing off net amount and VAT on bad debt?

Answer 66

Write off of the net amount:
1. Credit client ledger business account (with amount of debt being written off excluding VAT)
1. Debit bad and doubtful debts (account)

Write off of the VAT on the bad debt
1. Credit client ledger business account (amount of VAT in respect of the unpaid debt)
1. Debit VAT account

I.e. client ledger business account shows how much money client owes authorised body - as both debt and VAT client owed are being written off: credit client ledger business account to effectively wipe out debt showing there as being owed by the client

Question 67

Where a cheque is dishonoured, what happens to the account entries that recorded the original receipt of money?

Answer 67

They are reversed

Question 68

Where dishonoured cheque causes the client side of client ledger to be overdrawn by creating a debt balance, what must solicitor do immediately?

Answer 68

Transfer non-client money across from firm’s business account to the client account to bring the balance of client side of client ledger up to 0

Question 69

What are disbursements?

Answer 69

Costs/expenses law firm pays to TPs on behalf of clients

Question 70

When will disbursements have VAT charged on top?

Answer 70

Where third party being paid is a VAT-registered business making a taxable supply of goods and services (invoice/bill indicates whether this is the case)

Question 71

What is the difference between paying VAT on disbursements as agent and as principal?

Answer 71

• Paying as agent = law firm had nothing to do with relationship but is paying invoice on client’s behalf (TP invoices client and client asks you to pay money using money in client account)
• Paying as principal = law firm is invoiced for the disbursement plus VAT so law firm is paying for itself

Question 72

What are the entries if paying disbursement plus VAT as agent?

Answer 72

1. Debit client ledger client account
2. Credit cash sheet client account

The amount debited and credited is the combined total of the disbursement and VAT

The VAT amount must be combined with cost of disbursement and accounting entries are for total combined figure
You should use client money to make payment unless client does not have enough money in their clinent account (if not, non-client money must be used)

Question 73

What are the 2 steps when paying disbursement plus VAT as principal?

Answer 73

1. Disbursement and VAT paid by law firm
2. Law firm sends bill to a client

Question 74

What are the entries for step 1 when paying as principal (disbursement plus VAT paid by law firm)?

Answer 74

1. Debit client ledger business account for disbursement
2. Credit cash sheet business account for disbursement

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1. Debit VAT account ledger for VAT
2. Credit cash sheet business account for VAT

Question 75

What are the entries for step 2 when paying as principal (law firm sends bill to client)?

Answer 75

1. Debit client ledger business account for VAT
2. Credit VAT account ledger for VAT