Accounting entries

Question 1

True or false? The Solicitors Regulation Authority (‘SRA’) Accounts Rules 2019 apply only to sole practitioners?

Answer 1

False, they apply to any body that has been authorised by the SRA to practice as a licensed body, a recognised body, or as a sole practitioner.

Question 2

What are the requirements for a firm’s client bank account?

Answer 2

Must be at a bank in E&W and contain the firm’s name and the word ‘client’

Question 3

What is client money?

Answer 3

Client money is money held or received for a client or as a trustee plus all other money which is not business money

Question 4

When does client money have to be paid into client account?

Answer 4

Promptly, unless an alternative arrangement has been agreed in writing with the client or third party for whom money is held

Question 5

What is business money?

Answer 5

Business money is money which belongs to the solicitor or the practice.

Question 6

When is the accounting report due?

How long do records have to be maintained?

Answer 6

6 months from the end of the accounting period

Records must be retained for at least 6 years

Question 7

Is money received by a solicitor to be

held as stakeholder considered client money?

Answer 7

Yes

Question 8

Before a bill has been issued, money received from the client as payment for fees is client money?

Answer 8

True

Question 9

If a disbursement has not yet been paid by the firm, is money received by the firm on account of costs client money?

Answer 9

Yes - a receipt remains client money until the disbursement is paid by the firm

Question 10

Is a firm required to maintain a separate bank account for each client?

Answer 10

No, it just has to have a client bank account separate from its bank account

Question 11

How often must client accounts be reconciled against bank statements?

Answer 11

Every 5 weeks

Question 12

Can any amount be withdrawn from client account?

Answer 12

No, payments made from the client account must NOT exceed the total held for that client in the client bank account

Question 13

What happens if money is improperly withheld or withdrawn from the client account?

Answer 13

Partners have to use their own personal funds to make up the difference

Question 14

How is money received by the firm from or for the client recorded?

Answer 14

Indira Ghandi

DR Cash account

CR Client account

Question 15

How is money paid out on behalf of a client recorded?

Answer 15

Kraut -

CR Cash ledger; client side

DR Client ledger; client side

Question 16

How is issuing a bill to the client recorded?

Answer 16

Drill the bill (into the client); take issue with the Cash account

DR Client ledger; business side
DR Client ledger; business side (VAT)
CR Profit Costs ledger; business side
CR HMRC; business side

Question 17

A client pays a bill for £1,000 profit costs and £500 VAT, how will the entries be recorded?

Answer 17

When a client pays a bill for profit costs, the entire sum is credited to the business side of the client ledger and debited to the business side of the cash account ledger. There is no movement on the HMRC or profit costs ledger

CR Client account; business side £1500
DR Cash account; business side £1500

OR

If there are sufficient funds in the client account you can use in-house transfer method:

DR Client account; client side £1500
CR Cash account; client side £1500

CR Client account; business side £1500
DR Cash account; business side £1500

Question 18

How is an abatement of professional charges and VAT recorded?

Answer 18

No cash account; money owed to client; CR client ledger - in-house transfer method used

DR Profit Costs; business side

DR HMRC; business side

CR Client ledger; business side

CR Client ledger; business side

Question 19

What happens when there is a bounced check?

Answer 19

The firm must immediately transfer the amount by which the client account is overdrawn from the business account to the client account

Question 20

How is the bounced cheque rectified (if payment has been made and a cheque is dishonoured)?

Answer 20

1. Cheque sent:
   CR Client ledger; client side
   DR Cash account; client side
2. Disbursement paid

DR Client ledger; client side
CR Cash account; client side

3. Cheque dishonoured; reverse the cheque sent entries (the amount of the cheque not amount overdrawn)

DR Client ledger; client side
CR Cash account; client side

4. Rectify the breach (in-house transfer method)

DR Client ledger; business side
CR Cash account; business side

CR Client ledger; client side
DR Cash account; client side

Question 21

When must mixed receipts be placed?

Answer 21

They must be placed promptly in either the client account or business account

Question 22

How are mixed receipts recorded?

Answer 22

1. Split the cheque
   (£150 client money (on account of costs) + £50 to reimburse the firm for funds it paid out)

CR £150 Client ledger; client side
DR £150 Cash account; client side

CR £50 Client ledger; business side
DR £50 Cash ledger; business side

2. Deposit and transfer

CR £200 Client ledger; client side
DR £200 Cash ledger; client side

DR £50 Client ledger; client side
CR £50 Cash ledger; client side

CR £50 Client ledger; business side
DR £50 Cash ledger; business side

Question 23

How may client funds be treated once a bill has been issued?

Answer 23

if a bill has been issued for professional fees and disbursements (whether paid or unpaid) the money received in payment of the bill is business money

if there are sufficient funds in the client account when the bill has been issued, the firm may transfer the whole amount billed to the business account

Question 24

Can a firm transfer money to the business account if a bill has not yet been issued?

Answer 24

No, if a bill has not yet been issued, money cannot be transferred from the client account to the business account

Question 25

How do we record inter-client transfers?

Answer 25

DR Client ledger of Client X CR Client ledger of Client Y

Question 26

What is a disbursement?

Answer 26

- Paid on client's behalf - Client received or used the benefit - Client was responsible for paying the third party - Client authorised the firm to make a payment on its behalf - Client was aware the goods or services were from another firm

Question 27

Does the firm charge VAT to client on the cost of disbursements?

Answer 27

No, the cost of disbursements is passed onto client without any further VAT element

Question 28

What things are not disbursements and are rather overheads of the firm which must be charged to VAT?

Answer 28

``` Telephone call charges Travel expenses Postage fees Photocopying charges Electronic property search fees ``` (all included in overall profit costs)

Question 29

What disbursements are not subject to VAT at all?

Answer 29

``` Company search fees company registration fees Court fees Witness fees Oath fees Stamp duty land tax Land Registry fees ```

Question 30

How do we deal with invoices addressed to the client (agent method)?

Answer 30

Total amount paid from client account. Bill addressed to client for surveyor's fees of £1000 + £400 VAT Entries: DR £1400 Client ledger; client side CR £1400 Cash account; client side

Question 31

What happens if the Invoice addressed to the firm (principal method)

Answer 31

Firm pays using business money and then bills client at the end of the matter for VAT on both the professional charges and VAT on disbursement Entries: DR £1,200 Client ledger; business side CR £1,200 Cash ledger; business side DR £240 HMRC ledger; business side CR £240 Cash ledger; business side

Question 32

What is the one exception to using the principal method where a bill is addressed to a firm?

Answer 32

Counsel fees: firm can cross out its own name and replace it with client's name

Question 33

Where should deposits be held if held as stakeholder?

Answer 33

Deposits should be held in a separate stakeholder account in the name of both buyer and seller Once transaction complete, funds must be transferred to selling client's ledger

Question 34

Where should money be held if there is a mortgage?

Answer 34

Mortgage funds should be credited to a separate ledger account in the name of the lender. On the day of completion, there should be an inter-client transfer to the borrower's account

Question 35

Are petty cash payments made on behalf of a client recorded in the client account?

Answer 35

No, petty cash payments must be made from the business account. If payment is made on behalf of client using petty cash, entries are: DR Client ledger, business side CR Petty cash ledger, business side

Question 36

How much interest must the firm account to the client for?

Answer 36

Firms must account to the client or third parties for a fair sum of interest. They can come to a different arrangement by written agreement Firm MUST have a written policy on the payment of interest

Question 37

True or false - If a bill has been issued, all disbursements (whether paid or unpaid) are treated as business money?

Answer 37

True - any money paid by the client for this bill is business money whether or not the disbursement has been paid yet

Question 38

Who has responsibility for remedying a breach?

Answer 38

All of the principals in the firm and the person who caused the breach

Question 39

If the firm pays a bill for a disbursement and there is enough money in the client account, can the firm reimburse itself before issuing a bill?

Answer 39

Yes, as long as the firm has explained to the client how and when payments will be made and that reimbursement would be taken from the client account.

Question 40

When is the firm's VAT ledger used?

Answer 40

If a firm uses business money to pay VAT on behalf of a client - Debit HMRC ledger If a firm issues bill for VAT - Credit HMRC ledger An abatement of VAT - DR HMRC ledger