Solicitors Accounts - Unit 1 - Chp 1

Question 1

What is double entry bookkeeping?

Answer 1

Double entry bookkeeping is a system of recording financial dealings built upon a series of rules.

Based on the premise that every financial transaction has 2 aspects to it and both need to be recorded.

Question 2

What are some examples of the double entry principle?

Answer 2

1) The firm pays cash to buy premises.
Aspect 1: The firm has less cash.
Aspect 2: The firm has acquired an asset in the form of premises.

2) The firm pays staff wages.
Aspect 1: The firm has less cash.
Aspect 2: The firm has incurred an expense.

3) The firm bills a client for work done.
Aspect 1: The firm has earned income.
Aspect 2: The firm has a debt (the amount of the bill owing to it).

4) The client pays the firm the money owed:
Aspect 1: The firm has lost the debt that was owing to it.
Aspect 2: The firm has more cash.

Both aspects of a transaction are recorded in the books. But must be recorded in a separate account e.g. one for cash, one account for each type of asset, each type of expense, one for each person to whom the firm owns money, one for each debtor that owes money to the firm.

Question 3

What are the rules for recording transactions?

Answer 3

See textbook, can’t insert pics

Question 4

What is the rule about the business owner?

Answer 4

The business owner is regarded as COMPLETELY SEPARATE from its owner or proprietor.

So when a proprietor sets up a business and puts in cash, the transaction has to be recorded from the POV of the business.

E.g. left hand side - gaining cash and right hand side - incurring a liability (as it now owes money to the proprietor).

This liability to repay its proprietor is normally referred to as the ‘capital’ of the business.

Question 5

What is debit and credit for the two sides of the account?

Answer 5

Debit used on the left hand side (DR) and credit used on the right (CR).

Question 6

How does making entries work?

Answer 6

Need to have different accounts for each entry e.g. a capital account, a cash account, an asset account for the computer, an expense account for rent.

Question 7

What is a cash account?

Answer 7

A record of receipts into and payments out of the bank account.

Question 8

What is petty cash?

Answer 8

Petty cash is a small amount of cash kept in the office to cover small, day to day expenses.

A petty cash account is required to record the periodic receipts of cash from the bank and the various payments made from petty cash.

Question 9

What are the ledger accounts?

Answer 9

The ledger accounts are all of the accounts apart from the cash accounts and, where there is one, the petty cash account.

Question 10

How are the SRA account rules different?

Answer 10

Law firms frequently hold money that belongs to other people.

Question 11

What is the purpose of the SRA account rules?

Answer 11

To ensure that money belonging to the client is safe and kept separately from money belonging to the firm.

Designed to reduce the risk of accidental or deliberate misuse of clients’ money and

To protect clients from the risks of accidental and deliberate mishandling of their money,

Question 12

The SRA Rules adopt a risk-based approach. What does this mean?

Answer 12

This means the rules are more prescriptive in the areas where the risk to clients’ money is higher.

Question 13

What are the consequences for breaching the SRA Accounts Rules?

Answer 13

This is a disciplinary matter which may result in the SRA taking actions against individuals and/or firms in accordance with its Enforcement Strategy.

Takes a proportionate approach to disciplinary matters, focusing on substantial breaches. - E.g. dishonesty or misuse of the client money being very serious.

Question 14

What are the key principles of the current rules?

Answer 14

Keeping client money safe by:

1) Keeping it separate from the firm’s own money
2) Ensuring client money is promptly returned at the end of a matter
3) Using client money only for its intended purpose and
4) Proportionate requirements for firms to obtain an annual accountant’s report.

Question 15

What are the principles that must be adhered to when following the Rules?

Answer 15

Acting in a way that:
1) Upholds the constitutional principle of the rule of law and proper administration of justice
2) Upholds public trust and confidence in the profession and in legal services
3) With independence
4) With honesty
5) With integrity
6) In a way that encourages EDI
7) In the best interests of each client.

Question 16

Who is bound by the Rules?

Answer 16

Authorised bodies, their managers, employees.

The authorised bodies’ managers are joint and severally responsible for compliance with the Rules by the authorised body, managers and employees.

However, in relation to a licensed body, the Rules apply only in respect of activities regulated by the SRA in accordance with the terms of its license.

Question 17

What is the rule linked to client money?

Answer 17

It must be kept separate from the money belonging to the firm (usually in a separate client bank account).

However, client money means money held/received by a firm:

1) Relating to regulated services delivered by you to a client

2) On behalf of a 3rd party relating to regulated services delivered by you (such as money held as agent, stakeholder or held to the sender’s order)

3) As a trustee or as the holder of a specified office or appointment

4) In respect of your fees and any unpaid disbursements if held or received prior to the delivery of a bill for the same.

A solicitor has a duty to clarify any ambiguity as to whom client money is held for.

Question 18

What must be done with money received for all fees and disbursements (payments to third parties) paid to the firm?

Answer 18

It is considered client money UNLESS AND UNTIL BILLED so must be held in a client bank account - called money ‘generally on account of costs’.

Question 19

Is money received for disbursements which have already been paid considered client money?

Answer 19

No as it’s already been paid so should be called ‘business money’ by the firm and paid into a business bank account.

Question 20

Where should money received for unbilled fees and disbursements be paid into?

Answer 20

Can be put into the firm’s business account but firms need to be cautious about billing for future items.

Question 21

What is a client bank account and what requirements need to be followed regarding it?

Answer 21

A client bank account is one opened by the firm IN THE NAME OF THE FIRM but used for client money.

Must be at a bank or building society in England and Wales and must include the word ‘client’ in its title to distinguish it from the firm’s business accounts.

Including the word client means a bank doesn’t have any right against money in a client bank account in respect of any liability of the solicitor to the bank.

Firms must ensure that client money is available on demand unless an alternative arrangement is agreed IN WRITING with the client/third party. Means firms shouldn’t tie up client money in deposit accounts which have extended notice periods.

Question 22

What is the rule about paying client money into the client bank account?

Answer 22

That it is must be paid PROMPTLY into the client bank account.

No official definition so this will depend on the particular circumstances of the matter and the nature of the firm.

However should act in the client’s best interests - meaning the need to act quickly is important.

In many instances, the expectation is that payment must happen immediately.

Question 23

What are 3 exceptions to the general rule that client money must be paid promptly into the client account?

Answer 23

1) If the client money is held as a trustee/holder of a specified office or appointment and paying it into a client bank account would conflict with the obligations of the specified office or appointment.

2) The client money represents payments received from LAA (Legal Aid Agency) for the firm’s costs - firms can instead hold this in their own business bank accounts

3) The firm agrees an alternative arrangement in writing with the client/third party for whom the money is held.

Question 24

What does the exception for legal aid payments allow firms to do and what are the limitations to this?

Answer 24

1) Allows firms to receive legal aid payments directly into their bank accounts, even if these payments include advance amounts for services from third parties.

However, while there is no strict time limit for paying these parties, firms mustn’t delay payments in a way that negatively impacts the client’s matter.

Failure to pay promptly could breach SRA rules including the requirement to act with integrity & in the client’s best interests.

Question 25

What is the limited exception in Rule 2.2 regarding client money and what conditions must be met for this exception to apply?

Answer 25

It allows firms to hold client money for fees and unpaid disbursements received before billing outside a client bank account but only if:

1) The firm is liable for the disbursement.
2) The firm doesn’t have a client bank account for any other reason.
3) The firm informs the client in advance about where and how the money will be held.

This cannot apply if the firm receives any other types of client money e.g. funds to complete the purchase of property or funds held for the beneficiaries of a trust or estate.

Question 26

What is the rule about returning client money?

Answer 26

Needs to be returned promptly to the client/third party for whom the money is held as soon as there is no proper reason to hold those funds.

Shouldn’t delay this.

Question 27

What should solicitors do in the case of aborted transactions? (E.g. when a solicitor holds funds for a client, their purchase falls through and the client asks them to hold onto the money whilst they look for a new purchase)

Answer 27

To avoid breach, it will usually be advisable to return the money to the client unless the new transaction is actively being put into place or there are other factors e.g. client history which would justify the solicitor continuing to hold the funds.

Question 28

What is the rule on mixed receipts? What is this and how should this be dealt with?

Answer 28

Mixed receipts are when a firm contains a mixed payment e.g. client money & money to pay the firm’s bill.

The firm must allocate funds promptly to the correct bank account.

(Usually, this will be made more difficult by the fact it is paid by one cheque or one online payment transfer. If this happens, the money will be paid into one account and the firm will need to transfer funds out promptly. Doesn’t matter whether it’s initially paid into the firm’s client or business bank account).