Transfers and mixed receipts

Question 1

What are the distinctions between cash transfers and inter-client transfers?

Answer 1

1. Cash Transfers:
   * Movement of money from a client bank account to a business bank account.

• Commonly occurs to pay the firm’s professional charges, VAT, or disbursements included on a bill.
• Actual money is moved between accounts.

2. Inter-client Transfers:

• Reallocation of money in a client bank account from one client to another.
• No money moves in or out of the bank account; only internal records are updated.
• Necessary to comply with Rule 8, which requires tracking receipts and payments for each client.

Question 2

What is the definition and purpose of an inter-client transfer?

Answer 2

• Definition: Reallocating money held in a client account from one client to another without moving money out of the account.
• Purpose: To comply with Rule 8, which requires recording for whom the money is held.
• Example: When Client A owes Client B money, and the firm is instructed to hold the funds for Client B, an inter-client transfer is recorded.

Question 3

What are the accounting entries required , to record payment from the client bank account and to record recepit into the business bank account

Answer 3

1. To record payment from the client bank account:
   * CR: Cash account (Client section) – Decreases funds in the client account.

• DR: Client’s ledger account – Reflects reduced liability for the client.

2. To record receipt into the business bank account:

• DR: Cash account (Business section) – Increases funds in the business account.
• CR: Client’s ledger account – Tracks the transfer in the client’s records.
• Importance: These entries ensure transparency and compliance with financial regulations.

Question 4

What are the accounting entries required for an inter-client transfer?

Answer 4

• DR: Client ledger account of the first client (money is no longer held for this client).
• CR: Client ledger account of the second client (money is now held for this client).
• Key Point: No entries are made in the cash account, as the money stays in the client bank account.

Question 5

How should a firm handle mixed receipts, and what does Rule 4.2 require?

Answer 5

• Definition: Funds that include both business money and client money.
• Rule 4.2: Mixed receipts must be allocated promptly to the correct bank accounts.

1. If the bank allows split cheques:
   • Deposit the business portion directly into the business bank account.

• Deposit the client portion into the client bank account.

2. If split cheques are not allowed:

• Deposit the entire amount into one account (typically the client account).
• Transfer the appropriate portion to the other account promptly.

Question 6

What are the steps for handling mixed receipts if they are deposited into the client bank account first?

Answer 6

1. Record the full amount in the client bank account:

• DR: Cash account (Client section).
• CR: Client ledger account.

2. Transfer the business portion later:
   * From the client account:
   * CR: Cash account (Client section).
   * DR: Client ledger account.
   * Into the business account:
   * DR: Cash account (Business section).
   * CR: Client ledger account.

Question 7

What are the key points about inter-client transfers?

Answer 7

• What it is: A reallocation of funds held in the client bank account between clients without physical movement of money.Entries required:
• DR: Ledger of the first client.
• CR: Ledger of the second client.Compliance:
• Ensures adherence to Rule 8 by maintaining accurate records of money held for each client.
• No entries in the cash account as money does not leave the client account.
• Example:
• In estate administration, funds may transfer from the executor to the residuary beneficiary’s ledger.

Question 8

How do firms determine which account to deposit mixed receipts into?

Answer 8

1. Fixed Policy: Deposit all mixed receipts into the client account, regardless of the proportions.
2. Flexible Policy:
   * Deposit based on the proportion of client and business money:

• For example, a cheque with 90% client money may go into the client account.
• A cheque with 90% business money may go into the business account.

3. Practicality: Most firms give clients only the client account details for simplicity.

Question 9

How does Rule 8 apply to both cash transfers and inter-client transfers?

Answer 9

1. Cash Transfers:
   * Rule 8.1(a): Requires recording all receipts and payments in the client ledger and business ledger appropriately.
2. Inter-Client Transfers:
   * Rule 8: Ensures accurate tracking of money reallocated between clients, even when no physical transfer occurs.