Transfers and Mixed Receipts Flashcards
What is a ‘cash transfer’ and when might this occur?
1) Will most often occur where money is withdrawn from the client bank account and paid into the business bank account to pay the firm’s professional charges
- Once a bill has been issued, a firm can transfer money from the client bank account to the business bank account for its own fees + VAT + disbursements listed on bill
2) Other reasons for cash transfers include:
- (a) to advance money to a client or trust where the solicitor needs to make a payment on behalf of the client or trust and insufficient client money is available (once advanced, the money becomes client money);
- (b) to replace money withdrawn in breach of Rule 5.3; and
- (c) to allow the client a sum in lieu of interest
How is a cash transfer recorded on the accounts?
Recording a cash transfer is done in 2 stages:
Stage 1 – record the payment of money from the client bank account
- CR cash account – client section
- DR client’s ledger account – client section
Stage 2 – record the receipt of money into the business bank account
- DR cash account – business section
- CR client’s ledger account – business section
Give a full example of a cash transfer, noting how the cash is initially paid and the bill issued as well
1) Client pays money in, on account of costs
- CR entry on client ledger – client side – client has a positive balance; cash paid
- DR entry on cash account – client side – firm owes the client this money
2) Firm sends client a bill
- DR entry on client ledger – business side – client owes this money to business
- CR entry on profits costs account + HMRC account (they will get VAT)
To satisfy bill, firm transfers money from client account to business account
Stage 1 – record payment from client account
- CR entry on cash account – client side
- DR entry on client ledger – client side – incurred expense in paying money
Stage 2 – record receipt of money into business account
- DR entry on cash account – business side – cash gained on this side
- CR entry on client ledger – business side – client has paid cash to business
What are some key points around billing?
- When a bill is issued, money received as payment will go into the business bank account
- Where the firm is holding client money in the client bank account and issues a bill for professional charges and paid/unpaid disbursements, the whole amount billed can be transferred to the business bank account
- Where the firm is holding client money in the client bank account, money due to the firm for disbursements paid with the firm’s own money cannot be transferred until a bill has been issued or the firm has already made it clear the money was received to be used in this way
- Even if a bill has not been issued, money received for a paid disbursement is the firm’s own money
What are inter-client transfers?
Sometimes, Client A will ask the firm to stop holding money for Client A and hold it for Client B, like where they owe Client B money
- No cash is taken out of the client bank account
The firm must record the change as for whom the money is held, since they need to show receipts and payments for each client
- This is called an ‘inter-client’ transfer
How are inter-client transfers recorded?
No entries made in the cash account, as no money moving in or out
DR entry in client ledger for first client (for whom the money was originally held)
CR entry in client ledger for second client (for whom the money will now be held)
In a probate matter, what inter-client transfer may occur when the estate accounts are approved
If the executors and residuary beneficiary are both the firm’s clients, residuary estate is held for the residuary beneficiary when the estate accounts are approved
If a client wishes to pay for another client’s issued bill, how is this recorded?
DR client ledger client section of client paying
CR client ledger business section of client that is having their bill paid
What are ‘mixed receipts?’
Where a firm receives funds from client that are a mixture of business and client money, the funds must be allocated promptly to the correct bank account
How can splitting cheques resolve the issue of a mixed receipt?
If the bank allows, the firm can split the cheque, so a portion goes into the business account and the other goes to the client account - Banks don’t usually split cheques
- DR business portion to cash account – business section
- DR client portion to cash account – client section
- CR business portion to client ledger account – business section
- CR client portion to client ledger account – client section
How can direct transfers resolve the issue of a mixed receipt?
Firm can choose to pay the whole amount into either business or client account and then allocate it promptly, although firms are more likely to give clients the client bank account details, then transfer it to the business account afterwards
Initially (client account first)
- DR whole amount to cash account – client section
- CR whole amount to client ledger account – client section
Transferring to business account
- CR cash account – client section – cash paid
- DR client ledger account – client section – expense incurred
- DR cash account – business section – cash gained
- CR client ledger account – business section – cash paid
