SQE 1: Solicitors Accounts Flashcards
What the the rules related to how a client account should be held?
- must be in branch of bank/building society in England or Wales
- must include the name of the firm and the word “client”
What processes must firm do regularly for client account?
- Statement from bank every 5 weeks
- Reconcile client account against bank statements every 5 weeks (signed of by COFA)
- Deliver accounting reports to SRA within 6 months of accounting period if total balance of all accounts exceeds: 1. 10k on average or £250k at any time (only if qualified)
When does an accounting report have to produced and what is deadline? Who should produce this?
Produced and sent within 6 months of accounting period if:
- firm deals with client money at exceeds 1. 10k on average or £250k at any time
- it is qualified (report shows that money belonging to client/3rd party is/ has been, or is likely to be placed at risk)
Produced by:
- Report must be prepared and signed by an accountant who is part of chartered bodies, and
- Who is/works for a registered auditor
- must be kept for 6 years
When must client money relieved be paid into client account?
Must be paid promptly into client account
- On day or day after receipt
Exceptions
- Firm holds money as trustee/holder of specified office and this would conflict with those obligations.
- The client money is received from the legal aid agency for firms costs
- An alternative arrangement has been agreed in writing with the client or 3rd party for whom the money is held
How long should a firm hold client money in client account?
Should be available on demand
- Unless alternative arrangement agreed in writing
Should be returned promptly as soon as there is no longer any proper reason to hold the funds
When does money not have to be held in client account?
Where client money held/received is in relation to unpaid fees or disbursements and:
- any money held for disbursements relates to costs or expenses incurred on behalf of client and for which firm is liable; and
- firm does not for any other reason maintain client account
However:
- client has to have been informed in advance of where and how money is held
When can money be withdrawn from client account?
Money can be withdrawn only:
- for purpose for which it is being held;
- following receipt of instruction from client; or
- on SRA’s prior written authorisation
Also cannot exceed total amount held for that client
Entries for client money received
- Credit in client ledger (client side)
- Debit in cash account (client side)
Entries for client money spent by firm
- Debit client ledger
- Credit cash account
Entries on issue of bill to client
- Debit Profit Costs on business side of client ledger
- Debit VAT on business side of client ledger
- Credit on Profit Cost Account (for profit cost)
- Credit on HMRC Account (for VAT)
Entries when client pays bill
Option 1
- Credit total sum on business side of client ledger
- Debit business side of cash account
Option 2: where enough funds in client account to pay bill
Taking from Client Account
- Debit client account
- Credit cash account
Into Firm bank account
- Credit client ledger
- Debit cash account
Entries if a client bill is lowered after issuing bill
- Debit Profit Cost Account (amount of bill reduced)
- Debit HMRC Account (VAT Reduced by)
- Credit Client Ledger (business side) amount bill reduced
- Credit client ledger (business side) VAT reduced
How to rectify situation where money is improperly withheld/withdrawn from client account? What are possible disciplinary consequences?
- Must be returned even if partners must use personal funds
Consequences might include
- Disciplinary action by SRA
- Criminal sanctions in more serious cases
Consequences of a firm drawing on cheques before it has cleared?
Trick question, this is allowed
However, if cheque then bounces client account may become overdrawn and must be rectified.
Response if cheque a firm drew upon subsequently bounces?
- Firm must immediately reverse original entries
- Firm must immediately transfer the amount by which client account is overdrawn from business account to client account
Response if cheque a firm drew upon subsequently bounces entires. FULL SEQUENCE
Client sends Cheque (£1000)
- Credit client ledger (client side) £1000
- Debit cash account (client side) £1000
Firm uses cheque to pay for something (£800)
- Debit client ledger (client side) £800
- Credit cash account (client side) £800
Cheque bounces (firm reverses original entries of £1000)
- Debit client ledger (client side) £1000
- Credit cash account £1000
Firm rectifies breach (if this example ledger is overdrawn by £800)
- Debit client ledger (business side) £800
- Credit cash account (business side) £800
- Credit client ledger (client side) £800
- Debit cash account (client side) £800
In what situations may business money be placed in client account?
- To open the client bank account
- To maintain client account at an agreed level (with bank presumably)
- To replace any sum which has been incorrectly withdrawn
- To allow money in lieu of interest on client money
- Under Rule 4 (dealing with mixed cheques)
How should a firm deal with mixed receipts?
Can choose one of the below
- split the cheque
- deposit in either client or business account and transfer
- If bill or other written notification of cost has been sent to client can immediately transfer client money to business account
Entires for splitting cheque
Only if bank agrees to split cheque
- Credit client ledger (client side) – with client money part of cheque
- Credit client ledger (business side) – with business money part of cheque
- Debit Cash Ledger (client side) – with client money part of cheque
- Debit cash ledger (business side) – with business money part of cheque
Entires/rules for mixed cheque deposit in either client or business account and transfer
Money in wrong account must then be transferred promptly to correct account (if client > business = 14 days // business > client = same/next working day)
If to client account first
- Credit client ledger (client side) – whole amount
- Debit cash ledger (client side) – whole amount
- Debit client ledger (client side) – business money part of cheque
- Credit cash ledger (client side) - business money part of cheque
- Credit client ledger (business side) - business money part of cheque
- Debit cash ledger (business side) - business money part of cheque
When can firm use client money to pay for bills or disbursements?
If bill or other written notification of cost has been sent to client.
- If firm is already holding enough client money when it issues the bill then whole amount billed can be transferred to business bank account
- If firm has paid for disbursements themselves it can reimburse itself from client account (as would be for intended purpose)
Firm must explain to client how and when payments are being made and that reimbursement would be taken form client account
Entries for inter client transfer
- Debit client ledger (client side) of Client X (one giving money)
- Credit client ledger (client side) of Client Y (receiving the money)
What are 1. output VAT and 2. input VAT?
Output VAT
- charged by business to its customer
Input VAT
- charged to a business by its suppliers
What are the rules for accounting to HMRC for VAT?
- Generally possible to deduct any input tax charged to the firm from amount that which it must account for to HMRC
- Will only account for difference between input and output tax to HMRC (output – input)
- HMRC will hold the firm liable for accountable amount regardless of whether clients have paid them
