Agent or principal

Question 1

When is the agency method used?

Answer 1

Law firm pays disbursement plus VAT on behalf of a client
- e.g., an invoice which is addressed to the client (not the law firm)

Question 2

How is VAT dealt with for agent method?

Answer 2

VAT amount must be combined with the cost of disbursement and accounting entries are for the total combined figure

• entry is a single figure

E.g., invoice for £500 + VAT
- entered in client ledger client account as £600 (total combined figure)

Question 3

What money is used to pay fee under agency method?

Answer 3

Must use client money, unless the client does not have enough money in the bank account

Question 4

Entries for agency method payment of disbursements

Answer 4

• Debit client ledger client account (total combined figure of fee + VAT)
• Credit cash sheet client account

Question 5

What is the principal method for paying disbursements?

Answer 5

Paying on a principal method means the law firm instructs the third party and is invoiced itself for the disbursement plus VAT

• if an invoice is addressed to the law firm = principal

Question 6

What money is used to pay using the principal method?

Answer 6

Must use non-client money - business account

Question 7

Accounting entries for principal method - how is VAT treated?

Answer 7

VAT account must be kept separate from cost of disbursement and there are separate accounting entires for VAT amount and disbursement

Question 8

Entries for payment of disbursements using principal method

Answer 8

1) Disbursement
- debit client ledger business account (for the disbursement)
- credit cash sheet business account (for the disbursement)

2) VAT
- debit VAT account ledger
- credit cash sheet business account

Question 9

Accounting entries for when the law firm then sends the bill to the client (having used principal method)

Answer 9

• Debit client ledger business account for the VAT
• Credit the VAT account for VAT