Account Entries

Question 1

Transfer entries: transfers between clients

Answer 1

Only involves one step

• debit client ledger client account of client who is transferring
• credit client ledger client account of client to whom money is being transferred

Record of the transfer is kept in firm’s transfer journal

Question 2

Receipt of deposit by seller’s solicitor

Answer 2

• Deposit received by seller’s solicitor from buyer’s solicitor is client money
• deposit is always paid into client account

Question 3

How is the receipt of the deposit held for the seller client as stakeholder recorded?

Answer 3

• Credit client ledger stakeholder
• debit cash sheet client account
• separate client ledger called ‘stakeholder’
• deposit money is not credited to seller client’s own client ledger account until completion date

On completion of the property sale, deposit money is transferred to client ledger
- debit client ledger stakeholder
- credit client ledger client account (seller client)

Question 4

Accounting entries for deposit received by seller’s solicitor to be held as agent

Answer 4

When seller’s solicitor holds deposit as agent, the solicitor can hand the money to the seller before completion
- this means the deposit belongs to the seller from exchange

Record as client money received
- credit client ledger client account (seller)
- debit cash sheet client account

Question 5

Account entries for client money received

Answer 5

• credit client ledger client account
• debit cash sheet client account

Question 6

Account entries for client money paid out

Answer 6

• debit client ledger client account
• credit cash sheet client account

Question 7

Non-client money received

Answer 7

• credit client ledger business account
• debit cash sheet business account

Question 8

Non-client money paid out

Answer 8

• debit client ledger business account
• credit cash sheet business account

Question 9

Transfer entries: transfer from client to business

Answer 9

1) Withdraw money from client account
- debit client ledger client account
- credit cash sheet client account

2) Pay money into business account
- credit client ledger business account
- debit cash sheet business account

(Reverse entries if transfer from business to client account)

Question 10

When would transfer of costs from a client to business account take place?

Answer 10

Only after issuing a bill or other written notification
- take money out of client account
- pay money into business account

Question 11

Mixed payments - instruct the bank to split the cheque

Answer 11

1. Payment into client account (of client money element of payment)
   * Credit client ledger client account
   * Debit cash sheet client account
2. Payment into business account (of non-client money)
   * Credit client ledger business account
   * Debit cash sheet business account

Question 12

Deposit accounting entries for property transactions

Sequence of deposit payments

Answer 12

Deposit and completion monies are paid by buyer’s solicitor to seller’s solicitor

1. Deposit monies received by buyer’s solicitor from buyer
2. Deposit monies paid out by buyer’s solicitor to seller’s solicitor
3. Receipt of deposit monies by seller’s solicitor as either stakeholder or agent

Question 13

Entries for deposit received by solicitor from buyer client

Answer 13

At exchange of contracts
- deposit is client money
- entries are usual for receiving client money

• credit client ledger client account
• debit cash sheet client account

Question 14

Mortgage accounting entries

Answer 14

Transactions involve client money

If acting for buyer and lender:
- need to determine if the firm operates a policy of opening separate ledgers for the lender client

Question 15

Receiving mortgage funds: solicitor does not open separate ledger for lender

Remember - only relevant if the lender is also the client

Answer 15

All transactions involving lender’s mortgage funds are recorded in client ledger of BUYER client (as there is no separate ledger for the lender)

Mortgage funds received:
- credit client ledger client account for the buyer
- debit cash sheet client account

Question 16

Receiving mortgage funds: solicitor does open separate ledger for the lender

Answer 16

TWO steps
a) receipt of mortgage must first be accounted for in lender’s client ledger
- credit client ledger client account for lender client
- debit cash sheet client account

b) mortgage funds transferred to from lender to buyer’s client ledger
- debit client ledger client account for the lender
- credit client ledger client account for the buyer

Question 17

Mortgage redemption - repaying a mortgage

Answer 17

Solicitor acting for the seller may also act for seller’s existing mortgage lender in connection with redemption of the mortgage

1. Solicitor does not open separate ledger for the lender - client money paid out entries
   - debit client ledger client account for seller
   - credit cash sheet client account
2. Does open separate ledger for lender
   TWO steps
   a) move money from seller’s ledger to lender:
   - debit client ledger client account for seller
   - credit client ledger client account for lender

b) redemption money is sent to lender
- debit client ledger client account for the lender
- credit cash sheet client account

Question 18

Payment of interest on client accounts

Answer 18

SRA Accounts Rules - must pay a fair sum of interest on any client money held by firm on their behalf

Question 19

General/main client account - payment of interest

Answer 19

• Interest earnt on money in the general client account is non-client money
• interest received and then paid out is recorded on interest receivable and interest payable ledgers

Non-client money = business account

Question 20

Entries for payment of interest on general client account

Two steps: receipt of interest; pay sum of interest to clients

Answer 20

1. Receipt of interest earnt
   - credit interest receivable ledger
   - debit cash sheet business account

Pay sum of interest
1. withdraw interest from business account
- debit interest payable ledger
- credit cash sheet business account

2. recording receipt of interest to client account
   - credit client ledger client account
   - debit cash sheet client account

Remember debit = payout
Debit interest payables

Question 21

Issuing and paying a bill

Answer 21

• issuing a bill creates a debt that the client owes
• bills of costs are recorded on business side of client ledger account (client ledger business account)

Question 22

Entries for issuing a bill

Answer 22

Send a bill of costs to a client
- debit client ledger business account
- credit profit costs account (law firm’s record of bills)

Question 23

VAT on the bill

Answer 23

• Standard rate of 20% VAT applies
• Record is kept in VAT account ledger

Entries for VAT when issuing bill:
- debit client ledger business account
- credit VAT account ledger

Question 24

Entries for bills plus VAT

Answer 24

Two sets of double entries
1. one for bill of costs
2. one for VAT

1. • Debit client ledger business account [for the client with the amount of profit costs] (e.g., £1,000)
   • Credit profit costs account [with amount of profit costs, e.g., £1,000]
2. • Debit client ledger business account for the amount of VAT (e.g., £200 - as 20% of £1,000 bill)
   • Credit VAT account ledger with amount of VAT

Question 25

Abatement of bills

Answer 25

Entries for abating a bill - record needs to be reduced (reduction in bill) Profit costs * Credit client ledger business account (for that client for the amount the profit costs are being reduced by) * Debit profit costs account (for the amount the profit costs are being reduced by) VAT * Credit client ledger business account (for that client for the reduction in VAT) * Debit VAT account Reverse entries for issuing a bill

Question 26

Bad debts

Answer 26

When a law firm writes off a bad debt - it can recover the VAT element of the debt if it is at least six months old Two entries: 1. Write off bad debt * Credit client ledger business account (for amount of debt being written off) * Debit the bad and doubtful debts account 2. Write off the VAT * Credit client ledger business account (with amount of VAT due) * Debit VAT account

Question 27

Paying as agent: on behalf of a client

Answer 27

1. VAT is combined = total combined figure - debit client ledger client account - credit cash sheet client account | Usual accounting entries for client money paid out

Question 28

Paying as principal

Answer 28

Principal: law firm instructs the third party and is invoiced itself for disbursement and VAT - look for wording that the bill 'is addressed to the firm' - VAT must be kept separate from cost of disbursement (separate VAT entry) - Must use non-client money --> BUSINESS ACCOUNT

Question 29

Accounting entries for paying as principal

Answer 29

1. Disbursement and VAT are paid by the law firm (separate entries): * Debit the client ledger business account for the disbursement * Credit cash sheet business account for the disbursement * Debit the VAT account ledger for the VAT * Credit cash sheet business account for the VAT 2. The law firm sends the bill to the client - debit client ledger business account for VAT - credit VAT account for VAT