Transfers and Mixed receipts

Question 1

What is a cash transfer and when might it occur?

Answer 1

A cash transfer is the movement of money from the client bank account to the business bank account.
The most common reason for a cash transfer is to pay the firm’s professional charges once a bill (or other written notification) has been issued.
The firm can transfer money from the client bank account to cover its professional fees, including VAT and any disbursements included on the bill.

Question 2

How is a cash transfer recorded in a law firm’s accounting records?

Answer 2

Recording a transfer from the client bank account to the business bank account involves two stages:
1.
Record the payment of money from the client bank account: Credit (CR) Cash account – Client section Debit (DR) Client’s ledger account
2.
Record the receipt of money into the business bank account: Debit (DR) Cash account – Business section Credit (CR) Client’s ledger account

Question 3

What is an inter-client transfer and when might it occur?

Answer 3

An inter-client transfer, also known as a paper transfer, occurs when a firm that is holding money in the client bank account for Client A stops holding that money for Client A and starts holding it for Client B.
For example, this could happen when Client A owes Client B money and asks the firm to hold the money for Client B.
While no money is taken out of the client bank account, the firm must update its internal accounts to reflect the change in ownership to comply with Rule 8 (showing receipts and payments made for each client).

Question 4

How is an inter-client transfer recorded in a law firm’s accounting records?

Answer 4

No entries are made on the cash account because no money is moving in or out of a bank account.
The following entries are made in the client section of the ledger accounts:
● Debit (DR) Client ledger account of the first client (Client A)
● Credit (CR) Client ledger account of the second client (Client B)

Question 5

What is a mixed receipt?

Answer 5

A mixed receipt refers to funds received from clients that include both business and client money.
Rule 4.2 requires such funds to be allocated to the correct bank account promptly.

Question 6

How should a law firm deal with mixed receipts?

Answer 6

The source describes two methods for dealing with mixed receipts:
● Split Cheques: If the bank permits it, the firm can split the check by depositing the different portions into the correct bank accounts. However, this method is not common because it creates administrative problems for the bank.
● Direct Transfers: Firms commonly deposit the entire amount into one bank account (usually the client bank account) and then transfer the business portion to the business bank account.

Question 7

How are mixed receipts recorded in a law firm’s accounting records?

Answer 7

The accounting entries for mixed receipts depend on the method used.
Split Cheques:
● Debit (DR) Business portion to Cash account – Business section
● Debit (DR) Client portion to Cash account – Client section
● Credit (CR) Business portion to Client ledger account – Business section
● Credit (CR) Client portion to Client ledger account – Client section
Direct Transfers:1213
● Debit (DR) whole amount to Cash account – Client section
● Credit (CR) whole amount to Client ledger account
When transferring the business portion:
● Credit (CR) Cash account – Client section
● Debit (DR) Client ledger account
● Debit (DR) Cash account – Business section
●Credit (CR) Client ledger account