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SQE1: Solicitors' Accounts > Solicitors' Accounts > Flashcards

Solicitors' Accounts Flashcards

1
Q

Can a firm pay in a cheque made out to the client or a third party?

A

No - if cheque not made out to firm, can’t be paid into firm’s bank account

→ Should forward cheque to payee immediately (no accounting records needed)

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2
Q

What should the firm do if any money is improperly withdrawn from a client account?

A

Must be immediately replaced (firm will have to transfer its own money to the client bank account)

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3
Q

Can the firm draw against a cheque which has been paid into the client bank account but not yet cleared?

A

Yes - but if the cheque is then dishonoured, money will have been improperly withdrawn & must be immediately replaced

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4
Q

What are the accounting entries for a bad debt?

A

Firm must write off amount owing for its professional charges, VAT & any disbursements:

Bad debts account - DR (with whole amount)
Client ledger - CR (with whole amount) (business section)

VAT relief available once debt outstanding for at least 6 months → refund from HMRC:

Bad debts account - CR (amount of VAT)
HMRC account - DR (amount of VAT)

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5
Q

What kind of entry will money coming in always be in the cash account?

A

DR entry!

MoneyInDRCAsh
MoneyInCRLedge

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6
Q

What entry are the following in a cash account:

  • Expense incurred
  • Asset acquired/increased
  • Liability reduced/extinguished
  • Cash gained
A

DR

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7
Q

What entry are the following in a cash account:

  • Income earned
  • Asset disposed of/reduced
  • Liability incurred/increased
  • Cash paid
A

CR

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8
Q

What is ‘client money’?

A

Money held or received by a firm

a) Relating to regulated services delivered by you to a client

b) On behalf of a third party in relation to regulated services delivered by you (eg. as agent)

c) As a trustee or holder of a specified office or appointment

d) In respect of fees & any unpaid disbursements pre-bill

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9
Q

What are the rules about the name of a client account?

A

The client bank account must be at a bank or building soc in England & Wales + include the word ‘client’ in its title

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10
Q

When should client money be paid into the client bank account?

A

‘Promptly’

4 exceptions:

  • Where money held as trustee & paying into client account would conflict with obligations
  • If money received from LAA
  • If agree alternative with client in writing
  • Where firm only receives fees & unpaid disbursements pre-bill & does not have a client account
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11
Q

What are the 4 exceptions to the rule that client money must be paid ‘promptly’ into a client bank account?

A
  • Where money held as trustee & paying into client account would conflict with obligations
  • If money received from LAA
  • If agree alternative with client in writing
  • Where firm only receives fees & unpaid disbursements pre-bill & does not have a client account nb. must inform client in advance where & how held
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12
Q

When a firm is holding client money & some of that money will be used to pay the firm’s costs, what must be done?

A

Must give a bill of costs to the client / paying party

  • Must be done before you transfer any client money to make the payment
  • Any such payment must be for the specific sum in the bill
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13
Q

Does the firm have to issue a bill if they want to transfer money from the client bank account to reimburse for disbursements already paid on behalf of the client?

A

No, so long as have made it clear to the client that the client money may be used to reimburse the firm for payments made

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14
Q

What are the 3 circumstances in which client money can be withdrawn?

A

(a) For the purposes for which it is being held; or

(b) Following receipt of instructions from client / TP for whom the money is held; or

(c) On the SRA’s prior written authorisation

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15
Q

What should a firm do if a withdrawal should be made from the client bank account but there are not sufficient funds in the account for that client?

A

(Should not make the payment in the first place)

Either make the payment from the firm’s business bank account or advance its own money to the client

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16
Q

What is a residual client account balance and can it be withdrawn?

A

Money not returned to the client at the end of the retainer which is now difficult to return (eg. can’t trace client)

Can be withdrawn if less than £500 on any one client matter & money then paid to charity

For balance of more than £500, must apply to SRA for authorisation

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17
Q

Can a client bank account be used to provide banking facilities for clients or third parties?

A

Absolutely not (r3.3)

Payments into & transfers or withdrawals from, a client account must relate to the provision of regulated services

ie. can hold money for purpose of facilitating legal transactions, not for client’s convenience

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18
Q

What 3 things must the client ledge account for each client show?

A

i. All receipts & payments of client money

ii. Any payments made on behalf of the client from the firm’s own money

iii. Bills issued to the client

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19
Q

How often should firms obtain bank statements for all accounts?

A

At least every 5 weeks

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20
Q

What accounts should firms prepare reconciliation statements for?

A

Client accounts

Any discrepancies revealed by the reconciliation must be investigated promptly

21
Q

How is the receipt of money recorded?

A

(Is it business money or client money?)

Cash: DR

Ledger: CR

Client money held in client bank account; business money reduces indebtedness of relevant client to the firm

22
Q

How is the payment of money recorded?

A

Is it from the business account or the client account - must record in appropriate cash account

Cash - CR

Ledger - DR

23
Q

What accounting entries are made when a firm issues a bill?

A

No entry in the cash account

Client ledger - DR (2 separate entries for professional charges & VAT in business section)

Profit costs - CR

HMRC account - CR

24
Q

How is a cash transfer recorded?

A

Cash transfer: money withdrawn from client account & paid into business account

1 Record payment from client bank account
Cash - CR client section
Ledger - DR client section

2 Record receipt into business bank account
Cash - DR business section
Ledger - CR business section

25
Q

How is an inter-client transfer recorded?

A

No entries made on cash account

DR in the client section of ledger of paying client

CR in client section of ledger of receiving client

26
Q

What are the 2 options for a firm for mixed receipts, and how are they recorded?

A

Option 1: Split cheque

Business portion:
Cash - DR business section
Ledger - CR business section

Client portion:
Cash - DR client section
Ledger - CR client section

Option 2: Direct Transfer

  1. Pay all into business/client account
    -Cash - DR client section
    -Ledger - CR client section
  2. Transfer to client/business account
    -Cash - CR client section
    -Ledger - DR client section
    -Cash - DR business section
    -Ledger - CR business section
27
Q

How is an abatement recorded?

A

If firm abates (ie. reduces costs, output tax charged on bill also reduced proportionately

Entries when bill sent reversed to extent of abatement:

  • Profit costs account - DR (with reduction)
  • HMRC account - DR (with reduction)
  • Ledger - CR (with reduction) business section

& send client a VAT credit note

28
Q

How is cash withdrawn from the bank for petty cash recorded?

A

Cash - CR business section

Petty cash account - DR

29
Q

How is payment of petty cash to acquire something recorded?

A

Petty cash account - CR

Ledger (eg. ‘sundries’) - DR

30
Q

How is payment of petty cash made on behalf of a client recorded?

A

Petty cash account - CR

Client ledger - DR business section

31
Q

If a law firm decides to use an agent, how is this recorded?

A

Agent’s professional charges:
* Cash - CR
* Agency expenses account - DR

Agent’s VAT
* Cash - CR
* HMRC account - DR

Agent’s disbursements
* Cash - CR
* Client ledger - DR

All business section

32
Q

Is it a disbursement?

A

Payment made to third party for goods / services, where lawyer is the authorised representative of client in paying that third party

(acting as agent when pay the third party)

Examples of disbursements include:

  • IHT & CGT
  • SDLT
  • Estate agents’ fees
  • Counsel’s fees
  • Land Reg fees for registration of title
  • Court fees
33
Q

What are the two kinds of disbursements?

A

Non-taxable → can pay out of client acct (if sufficient money)

Taxable (TP service provider has made taxable supply, eg. counsel fees) → depends to whom invoice is addressed

  • Addressed to client = agency method
  • Addressed to firm = principal method
34
Q

If a taxable disbursement is addressed to the client, what method is used?

A

Addressed to client = agency method: paid from client bank account (if sufficient funds)

  • Supplier’s fee & VAT are not separated in the accounting records (just total paid)
  • No entries made on firm’s HMRC ledger account
  • Must give client original invoice if client registered for VAT

Cash account - CR (client section) whole payment

Client ledger - DR whole payment

35
Q

If a taxable disbursement invoice is addressed to the firm, what method is used?

A

Addressed to firm = principal method: firm must use own money

  • Whole payment recorded on cash + VAT on HMRC + VAT-exclusive amount on client ledger
  • VAT charged to client when firm bills
  • Firm must give client VAT invoice of VAT on firm’s charges + VAT disbursements

Cash (business section) - CR (disbursement + VAT)

HMRC ledger - DR (VAT)

Client ledger (business section) - DR (VAT-exclusive amount)

36
Q

What is the concessionary arrangement currently in place re counsel’s fees notes as agency v principal?

A

Usually addressed to firm, so would have to be treated on principal basis → but firms are allowed to alter fee note so addressed to client & then treated on agency basis

Law Soc have confirmed still stands but is considering whether should be withdrawn

37
Q

What are the SRA Accounts Rules on interest?

A

Money held in client bank account will earn interest → SRA Accounts Rules require solicitors to:

a. Account to client for a fair sum of interest (ie. pay proportion earned on client account to client)

or

b. Agree in writing a different arrangement provided that sufficient information has been given to enable informed consent

38
Q

What are the two possible methods for dealing with interest?

A

1 - Firm pay client money into general client bank account

2 - Firm pays client money into separate designated deposit bank account for that particular client (easier to account for interest)

39
Q

How is interest earned on the general client account recorded?

A

Interest earned on client money held in general client account is business money

Step 1: bank pays interest earned into the firm bank account

Interest received ledger - CR

Cash (business section) - DR

Step 2: fair sum of interest is sent to client account

Payment out of business account:
Interest payable ledger - DR
Cash (business section) - CR

Payment into client account:
Client ledger - CR
Cash (client section) - DR

40
Q

What are the accounting entries for the payment of interest where money held in separate designated client account?

A

Interest earned on this money is paid directly into the separate designated client account:

Separate designated client ledger - CR

Separate designated client cash - DR

41
Q

When acting for the seller of a property, how do you account for the deposit received?

A

Held by firm as stakeholder: deposit is client money but held by firm jointly for buyer & seller (because deposit only becomes property of seller at completion):

1-On receipt of deposit:

Cash - DR [client section]
Joint stakeholder ledger account - CR [client section]

2-On completion, make inter-client transfer

Joint stakeholder ledger account - DR [client section]
Seller ledger account - CR [client section]

Held as agent: belongs to seller alone -
Cash - DR [client section]
Seller’s ledger account [client section]

42
Q

If acting for buyer & lender in a property transaction, what are the accounting entries for a mortgage advance?

A

£ received from lender normally held until day of completion:

Method 1: mortgage advance is CR to borrower’s ledger account when received

Method 2: mortgage advance is CR to lender’s ledger account → on day of completion, make inter-client transfer to borrower’s ledger

43
Q

If acting for lender & seller, what are the account entries for redeeming the seller’s mortgage?

A

Step 1: Transfer amount required to redeem mortgage from seller to lender

Seller client ledger - DR

Lender client ledger - CR

Step 2: Pay out redemption monies to lender-client

Cash - CR [client section]

Lender client ledger - DR

44
Q

Can a firm open a joint account with a client or third party?

A

Yes → is not a client account (because not in name of firm alone) but money held in it is client money

  • Must get statements at least every 5 weeks
  • Must keep readily accessible central record of bills & other notifs of costs
45
Q

What are third party managed accounts?

A

TPMA used to hold client money, rather than operating firm’s own client bank account → money not held by firm, ie not client money

Requirements:

  1. Provider must be
    a. An authorised payment institution or
    b. A small payment institution which has voluntarily adopted safeguarding arrangements to same standard as authorised payment institution
  2. Client must understand how money held in TPMA - must ensure client informed of terms, right to terminate, how any fees will be paid
  3. Firm should notify SRA it is using TPMA provider
46
Q

What are the SRA Account Rules re accountants reports?

A

Must obtain accountant report for accounting period within 6 months, which will confirm (or not) compliance with the Rules

Exception: not required to obtain accountant report if:
a. all client money held/received is from LAA or
b. in accounting period, total balance of all client accounts + any joint accounts + client own accounts operated by firm does not exceed
(i) An average of £10k and
(ii) A maximum of £250k

47
Q

Which 2 kinds of firms do not have to obtain an accountant’s report?

A

Not required to obtain accountant report if:

a. all client money held/received is from LAA or

b. in accounting period, total balance of all client accounts + any joint accounts + client own accounts operated by firm does not exceed
(i) An average of £10k and
(ii) A maximum of £250k

48
Q

How long should all accounting records be securely stored & retained?

A

At least six years

49
Q

When must the accountant’s report be delivered to the SRA?

A

Must be delivered to SRA within 6 months if it is qualified to show a failure to comply with the rules

→ Serious factors (which are likely to lead to qualification) include:

  • Significant shortfall on client account
  • Systematic billing for items that have not been incurred
  • Actual or suspected fraud or dishonesty by managers or employees
  • Unavailability of accounting records / deficiencies
  • Client account improperly used as banking facility
  • Client account bank reconciliations not carried out

SQE1: Solicitors' Accounts (1 decks)

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