Solicitor's Accounts - Fundamentals

Question 1

Assets =

Answer 1

Liabilities + Equity

Question 2

Equity means…

Answer 2

The owner’s personal investment into the business and the firm’s income.

Question 3

The three types of debit (DR) transactions are those that:

Answer 3

1. Increase assets
2. Decrease Liability
3. Decrease owner’s equity

Question 4

A firm buys a photocopier for £5000. How is this recorded?

Answer 4

DR Property account: It increased in assets.
CR Cash account: It decreased in assets.

Question 5

Every financial transaction has two aspects to it. Provide the two aspects of the following transactions:

(a) The firm pays cash to buy premises
(b) The firm pays cash to pay staff wages.
(c) The firm bills a client for work done
(d) The client pays the firm for money owed to the firm.

Answer 5

(a) The firm pays cash to buy premises

DR property account: It increased in assets.
CR cash account: It decreased in assets

(b) The firm pays cash to pay staff wages.

DR expenses account: It incurred an expense, thereby decreasing the owner’s equity.
CR cash account: It decreased in assets.

(c) The firm bills a client for work done

DR Client Account: It increased in assets (cash owed by client).
CR Profit Costs Account: It increased in income = increase in owner’s equity.

(d) The client pays the firm for money owed to the firm.

DR Cash account: It increased in assets.
CR Client accont: It decreased in assets.

Question 6

The three types of credit (CR) transactions are those that:

Answer 6

1. Decrease assets
2. Increase liabilities
3. Increase owner’s equity

Question 7

Miriam puts £10,000 cash into her business. How is this recorded?

Answer 7

DR Cash Account - Increase in assets
CR Capital Account - Liability to Miriam

Question 8

A business pays rent of £1000. How is this recorded?

Answer 8

DR Expense Account: It incurred an expense, meaning owner’s equity/firm’s income decreased.
CR Cash Account: It decreased in assets.

Question 9

A firm receives £300 from a client, Wiseman, on account of costs. How is this recorded?

Answer 9

DR Cash account - it increases in assets.
CR Client Ledger - it decreases in assets.

I think you have to consider that the client will have paid e.g. £1000 into the Client Ledger Account before engaging with the firm.

Question 10

Client money is:

Answer 10

Any money that a law firm receives/holds that doesn’t belong to the firm.

It is held for clients or third parties while the firm provides legal services.

Question 11

What are the four categories of client money?

Answer 11

1. Money held on behalf of clients.
2. Money held on behalf of third parties.
3. Money held by solicitors acting in certain specified roles.
4. Money held on account of costs and unpaid disbursements prior to delivery of a bill.

Question 12

What is a client account?

Answer 12

A bank account in which a firm holds client money.