Special Account Entries Flashcards
Why can’t a firm deposit a cheque made out to a client or third party into its account?
Because the firm is not the payee, and such a cheque is not considered client money or cash for the firm.
What is a firm’s responsibility upon receiving a cheque for a client or third party?
The firm must forward the cheque to the payee without delay to fulfill its obligation.
Is there a requirement to record a cheque made out to a client or third party in the client ledger?
No, Rule 8.1(a) does not require recording such events, though firms often document them in correspondence files.
What happens if a cheque deposited into a client account is dishonoured?
There is a breach of Rule 5.3 if more money has been taken out of the client account than is available for that client.
What steps must a firm take to correct a breach caused by a dishonoured cheque?
Transfer its own funds into the client bank account immediately to make up the shortfall (Rule 6.1).
When a dishonoured cheque is re-presented, how should the firm manage mixed business and client money?
Either split the cheque amount between accounts or transfer funds promptly under Rule 4.2.
What is an abatement in the context of legal billing?
n abatement is a reduction in a bill, often due to a client complaint about excessive charges
How does HMRC handle VAT on an abated bill?
Output tax charged on the original bill is reduced proportionately when the abatement is recorded.
What accounting entries are reversed during an abatement?
Entries in the profit costs account and HMRC account are partially reversed, and a VAT credit note is issued.
What ledger account is credited when recording an abatement?
The client ledger account (business section) is credited to reflect the reduction in charges and VAT.
When must a firm write off a bad debt?
When it becomes evident that a client will not pay the amount owed, including professional charges and VAT.
What are the key accounting entries for writing off bad debts?
CR the client ledger account (business section) and DR the bad debts account.
What relief is available for VAT on bad debts?
The firm can claim VAT relief from HMRC if the debt remains unpaid for six months after the payment due date.
How is VAT relief on bad debts recorded?
CR the bad debts account and DR the HMRC account with the amount of VAT.
How is a withdrawal for petty cash recorded?
CR Cash (business section) and DR Petty Cash Account.
When petty cash is used for client expenses, how is it recorded?
CR Petty Cash Account and DR the client ledger account (business section).
Why must client-related petty cash expenses be recorded in the business section of the client ledger?
Because petty cash is business money, even when used for client-related expenses.
When can a firm retain insurance commission?
Only if the firm justifies retaining it, informs the client of the amount, and the client consents.
How must a firm account for financial benefits received due to client instructions?
By either paying it to the client, offsetting it against fees, or retaining it with client approval.
What happens if a firm retains commission without proper justification?
It may breach the SRA Code of Conduct, potentially leading to disciplinary action.
What is the implication of retaining commission for regulatory purposes?
Retaining commission may subject the firm to additional regulation by the Financial Reporting Council.
How does an agent firm account for an instructing firm?
it treats the instructing firm as a client and maintains a client ledger account in the instructing firm’s name.
Are professional fees paid to an agent considered disbursements?
No, they are an expense of the instructing firm and not classified as disbursements.
How are the agent’s professional charges recorded by the instructing firm?
CR Cash Account (business section) and DR Agency Expenses Account.
What elements are recorded separately when the instructing firm pays the agent?
Agent’s professional charges, VAT, and any disbursements paid by the agent.
What is an abatement, and how is it recorded in accounting records? Include an example with DR and CR entries.
An abatement occurs when a client queries a bill, and the firm agrees to reduce the charges. It involves adjusting the profit costs and VAT accounts proportionately. The adjustments are recorded in both the business account and respective cost and VAT accounts.
Example:
* On 4 May, the firm sends a bill for £600 (profit costs) plus £120 (VAT) to the client Rana, totaling £720.
- On 6 May, the firm agrees to reduce the bill by £100 plus VAT (£20).
Business section Entries:
4 May
* DR £600 on ledger description- Profit Costs Account under the (Business section).
- DR £120 on the ledger Account (Business section) description vat .
6 May (Reduction due to abatement)
* CR £100 ledger account business section for profit costs (abatement).
- CR £20 for VAT (abatement). on business section ledger account
Profit Costs Account Entries:
4 May
* CR £600 to reflect Rana’s initial costs.
6 May
* DR £100 to reflect the abatement.
VAT Account Entries:
4 May
* CR £120 to record Rana’s VAT.
6 May
* DR £20 to adjust for VAT abatement.
