Topic 3 - Double entry book-keeping Flashcards
(178 cards)
1
Q
What is the primary requirement of solicitors’ accounts compared to other businesses?
A
Compliance with the SRA Accounts Rules regarding client accounting.
2
Q
What must be maintained in client ledgers according to Rule 8.1?
A
Accurate, contemporaneous, and chronological records of all receipts and payments.
3
Q
What is the purpose of a cash book in client accounting?
A
To provide a running total of all transactions through client accounts.
4
Q
Fill in the blank: A client account cash book is often referred to as the _______.
A
cash sheet client account.
5
Q
What does the business side of the client ledger account record?
A
Receipts and payments of non-client money and issuing of bills of costs.
6
Q
How should client ledgers be organized if a client has multiple matters?
A
Separate client ledgers for each matter, identified by the client’s name and matter description.
7
Q
What principle should accounts be maintained on according to SRA guidance?
A
The double-entry principle.
8
Q
What does the double-entry principle entail?
A
For every transaction, two entries for the same amount are made in the accounts.
9
Q
What are the two types of entries in double-entry bookkeeping?
A
Credit (CR) and debit (DR).
10
Q
True or False: The balance on an individual client ledger should always be a debit balance.
A
False.
11
Q
What does the balance on a client ledger account indicate?
A
How much client money the authorized body holds for that client.
12
Q
What must be done at least every five weeks according to Rule 8.2?
A
Obtain statements from banks for all client and business accounts.
13
Q
What is required to be reconciled according to Rule 8.3?
A
The bank statement balance with the cash book balance and the client ledger total.
14
Q
What is a profit costs account?
A
A central record of all bills or written notifications of costs given to clients.
15
Q
What happens when a bill of costs is issued?
A
A debt is created, and the client owes that amount to the authorized body.
16
Q
What does the client cash book record?
A
The total amount of money held on behalf of clients in the client account.
17
Q
Fill in the blank: The entries for transactions involving non-client money are recorded in the _______.
A
business account cash book.
18
Q
What should the balances on individual clients’ client ledgers (client side) be if the SRA Rules are complied with?
A
Nil (0) or credit balances.
19
Q
What does a debit entry in the client ledger (business side) indicate?
A
That the client owes money to the authorized body.
20
Q
What should a ledger account include according to SRA guidance?
A
The name of the client and a description of the matter or transaction.
21
Q
True or False: All transactions must involve the receipt or payment of money.
A
False.
22
Q
What is the significance of the balance in the client cash book?
A
It must equal the total of all individual client ledgers’ balances.
23
Q
What does a credit entry in the client ledger indicate when a client sends money?
A
The client is in credit with the authorized body.
24
Q
What is the purpose of the SRA Accounts Rules?
A
To ensure proper recording and management of client and non-client money.
25
What is the double-entry principle?
For every transaction, two records are made: one credit (CR) and one debit (DR).
26
How is client money received recorded?
Credit the client ledger client account for the client
Debit the cash sheet client account.
27
What are the entries for client money paid out from the client account?
Debit the client ledger client account for the client
Credit the cash sheet client account.
28
What is the accounting entry for non-client money received?
Credit the client ledger business account for the client
Debit the cash sheet business account.
29
What are the entries for non-client money paid out from the business account?
Debit the client ledger business account for the client
Credit the cash sheet business account.
30
How are payments out of petty cash recorded?
Debit the client ledger business account for the client
Credit the cash sheet petty cash.
31
What should be done with a cheque received payable to the client?
Forward the cheque on to the client.
32
What is the purpose of a petty cash account?
To handle small cash payments for convenience.
33
Fill in the blank: The client ledger business account shows how much the client ______ to the authorised body.
owes
34
True or False: Client money is defined under Rule 2.1 of the SRA Accounts Rules.
True
35
What is the difference between client ledger client account and client ledger business account?
Client ledger client account records transactions involving client money; client ledger business account records transactions involving non-client money.
36
What must every transaction have according to the double-entry system?
Two entries: one credit and one debit.
37
What happens when a client reimburses for petty cash spent on their behalf?
The money is non-client money and is paid into the business account.
38
What does it mean if the client ledger shows a debit for a client?
It indicates that the client owes money to the authorised body.
39
List the key client ledger entries.
* Client money received
* Client money paid out/withdrawn
* Non-client money received
* Non-client money paid out/withdrawn
* Non-client money paid out from petty cash
40
Fill in the blank: The cash sheet petty cash account records money going into and coming out of ______.
petty cash
41
What should be noted when a cheque is received that is payable to the client?
It cannot be banked in the firm's client account.
42
What is a common example of a payment made from petty cash?
Taxi fare.
43
What is the accounting entry for client money received?
Credit client ledger client account for that client
Debit cash sheet client account
44
What is the accounting entry for client money paid out or withdrawn?
Debit client ledger client account for that client
Credit cash sheet client account
45
What is the accounting entry for non-client money received?
Credit client ledger business account for that client
Debit cash sheet business account
46
What is the accounting entry for non-client money paid out or withdrawn?
Debit client ledger business account for that client
Credit cash sheet business account
47
What is the accounting entry for non-client money paid out from petty cash?
Debit client ledger business account for that client
Credit cash sheet petty cash
48
What does the double-entry system involve for each transaction?
One credit entry and one debit entry
49
What are the two steps involved in transferring money from the client account to the business account?
1. Withdraw money from the client account
2. Pay the money into the business account
50
What must be done before transferring client money to pay costs?
Give a bill of costs or other written notification of the costs incurred to the client or the paying party
51
What does Rule 4.2 state regarding mixed payments?
Funds must be allocated promptly to the correct client account or business account
52
What must be done if a mixed payment is paid in its entirety into the client account?
Transfer the non-client money element out of the client account into the business account
53
What must happen if there is a debit balance in the client ledger?
It must be fully investigated and rectified promptly
54
What indicates a breach of the SRA Accounts Rules?
A debit balance in the client ledger client account
55
What is the first step when transferring money from the business account to the client account?
Withdraw money from the business account
56
What is the second step when transferring money from the business account to the client account?
Pay the money into the client account
57
What is the accounting entry for transferring money between two clients?
Debit the client ledger client account of the client transferring the money
Credit the client ledger client account of the client to whom the money is being transferred
58
What does the term 'deposit' refer to in property transactions?
A payment of part of the purchase price of the property
59
What is the significance of the exchange date in a property transaction?
It is when the sale becomes legally binding for both buyer and seller
60
What must the buyer's solicitor do with the deposit during a property transaction?
Pay the deposit to the seller's solicitor
61
What is the completion date in a property transaction?
When the remainder of the purchase price is paid and legal ownership is transferred
62
What is required to ensure accurate client accounting records?
Adequate controls to prevent and rectify debit balances
63
What is the purpose of double-entry bookkeeping in property transactions?
To record pairs of accounting entries related to property transactions.
64
What is the typical deposit percentage required from a buyer upon exchange of contracts?
10% of the purchase price.
65
What must be credited when a buyer's solicitor receives deposit money from the client?
Client ledger client account for that (buyer) client.
66
What must be debited when a buyer's solicitor receives deposit money?
Cash sheet client account.
67
What is the role of the seller's solicitor upon receiving a deposit?
To hold the deposit as client money under Rule 2.1(b) of the SRA Accounts Rules.
68
How should deposit money be recorded when held as a stakeholder?
Using a separate client ledger called 'stakeholder'.
69
What is a stakeholder arrangement in property transactions?
A trust arrangement where the deposit is held for both buyer and seller until further action is determined.
70
What happens to the deposit money at the completion of a property sale?
It is transferred from the stakeholder ledger to the seller's client ledger.
71
What is the significance of recording mortgage funds in client ledgers?
To ensure accurate tracking of funds and compliance with SRA Accounts Rules.
72
What are the accounting entries when a buyer's solicitor receives mortgage funds?
Credit client ledger client account for the (buyer) client and debit cash sheet client account.
73
What must a solicitor do if they record mortgage funds in a separate client ledger for the lender?
First account for the receipt of funds in the lender's client ledger.
74
True or False: The buyer's solicitor can use office money instead of client money for deposits.
True, but only in limited circumstances.
75
What should be included in the narratives alongside entries in the client ledger?
Adequate information identifying the source of the transaction.
76
Fill in the blank: The deposit received by the seller's solicitor is recorded as _______ under the SRA Accounts Rules.
client money.
77
What happens if the property sale does not complete as planned?
The deposit may need to be returned to the buyer.
78
What is the accounting entry for the seller's solicitor upon receiving a deposit as an agent?
Credit client ledger client account for that (seller) client and debit cash sheet client account.
79
What is the procedure for transferring mortgage funds from the lender to the buyer's client ledger?
Debit client ledger client account for the (lender) client and credit client ledger client account for the (buyer) client.
80
When is the deposit credited to the seller's client ledger?
At completion of the property sale.
81
What does Rule 2.1(a) of the SRA Accounts Rules pertain to?
It defines client money.
82
What is the significance of the ledger entries made by the solicitors during a property transaction?
To maintain accurate records of all financial transactions.
83
What is the first entry in the client account when receiving mortgage funds?
Debit client ledger client account for the (seller) client: £315,000
## Footnote
This entry indicates the receipt of mortgage funds in the client's account.
84
What is the second entry when recording the receipt of mortgage funds?
Credit cash sheet client account: £315,000
## Footnote
This entry reflects the cash received from the mortgage lender.
85
In method 1 of mortgage redemption, what is the first accounting entry?
Debit client ledger client account for the (seller) client
## Footnote
This entry records the amount to be paid to the lender for mortgage redemption.
86
In method 1 of mortgage redemption, what is the second accounting entry?
Credit cash sheet client account
## Footnote
This entry indicates that cash is being used to pay off the mortgage.
87
In method 2 of mortgage redemption, what is the first accounting entry?
Debit client ledger client account for the (seller) client
## Footnote
This shows that the funds are moving from the seller's account.
88
In method 2 of mortgage redemption, what is the second accounting entry?
Credit client ledger client account for the (lender) client
## Footnote
This indicates that the funds are now held in the lender's client ledger.
89
What is the first entry when sending redemption money to the lender in method 2?
Debit client ledger client account for the (lender) client
## Footnote
This records the payment made to the lender.
90
What is the second entry when sending redemption money to the lender in method 2?
Credit cash sheet client account
## Footnote
This reflects the cash being sent out as redemption payment.
91
What happens in the case of private loans between clients?
Involves a transfer from one client to another
## Footnote
This transfer can be for a house purchase or other reasons, impacting the client accounts.
92
What is the accounting entry for a transfer of mortgage advance?
Credit client ledger client account for the (lender) client: £315,000
## Footnote
This entry indicates the transfer of mortgage funds to the lender's account.
93
What is the effect of transferring mortgage money between the buyer and lender?
It only affects the client ledgers of the clients, as the money is already in the client account and will stay there.
94
What should be obtained and retained on file when transfers arise as a result of loans between clients?
The written authority of both the lender and borrower.
95
What bookkeeping system is advised for authorised bodies according to SRA guidance?
The double-entry system of bookkeeping.
96
In double-entry bookkeeping, what are the two types of entries for every transaction?
* Credit (CR)
* Debit (DR)
97
What is recorded when deposit monies are received by the buyer's solicitor?
* Credit client ledger client account for that client
* Debit cash sheet client account
98
What happens to deposit monies paid out by the buyer's solicitor to the seller's solicitor?
* Debit client ledger client account for that client
* Credit cash sheet client account
99
What accounting entries occur at the exchange when the deposit is received?
* Credit stakeholder ledger
* Debit cash sheet client account
100
What occurs at completion when the deposit money belongs to the seller?
* Debit stakeholder ledger
* Credit client ledger client account for that client
101
What is the first step in the payment of mortgage monies to the borrower?
* Credit client ledger client account for the (buyer) client
* Debit cash sheet client account
102
What is the first entry in the payment of redemption monies to the lender?
* Debit client ledger client account for the (seller) client
* Credit client ledger client account for the (lender) client
103
What does Rule 7.1 of the SRA Accounts Rules state regarding interest?
You account to clients or third parties for a fair sum of interest on any client money held by you on their behalf.
104
What factors should be considered when determining a 'fair sum' of interest?
* Amount held
* Length of time for which cleared funds were held
* Need for instant access to the funds
* Rate of interest payable on the amount held
* Practice of the bank or building society regarding interest compounding
105
Under Rule 7.2, what is required for an authorised body to not pay interest to a client?
A written agreement with sufficient information to enable informed consent.
106
Where should all interest earned on the general/main client account be paid?
Into the authorised body’s business account.
107
What is the purpose of the interest paid/payable ledger?
To record the interest received by the authorised body and paid out by the authorised body.
108
What are the steps to record the payment of interest to a client?
Step 1: Debit interest payable ledger
Step 2: Credit client ledger client account for the client.
109
What must an authorised body do when opening a separate designated client account?
Set up a separate designated client ledger for that client.
110
What are the entries for money being paid into a separate designated client account?
* Credit client ledger separate designated client account for that client
* Debit cash sheet separate designated client account for that client
111
What must be recorded when transferring money from the general/main client account to a separate designated client account?
* Debit client ledger client account for the client
* Credit cash sheet client account
* Credit client ledger separate designated client account for the client
* Debit cash sheet separate designated client account for that client
112
What is a separate designated client account?
An account that holds a client's money separately from the general client account.
113
What are the steps to transfer money from a separate designated client account to a general client account?
1. Withdraw money from the separate designated client account
2. Pay the money into the general/main client account.
114
How is interest earned on a separate designated client account typically handled?
Most authorised bodies pay all interest earned directly to the relevant client.
115
What is the double-entry bookkeeping system?
A system where every transaction has two entries: one debit (DR) and one credit (CR).
116
What entries are made to record the payment of interest to a client?
* Credit client ledger separate designated client account for the client
* Debit cash sheet separate designated client account for the client.
117
What happens when a client pays a bill that includes VAT?
The payment must be recorded in the business account and the client ledger business account.
118
What is the standard rate of VAT on legal services?
20%.
119
What must be recorded when issuing a bill of costs?
Entries must be recorded on the business side of the client ledger account.
120
Fill in the blank: The record of VAT paid or charged by an authorised body is often referred to as the _______.
VAT account [ledger].
121
What is Rule 8.4 of the SRA Accounts Rules?
It states that a central record of all bills or written notifications of costs must be kept.
122
What entries are made when issuing a bill of costs plus VAT?
* Debit the client ledger business account for that client
* Credit the VAT account [ledger].
123
True or False: A bill of costs creates a debt that the client owes the authorised body.
True.
124
What should an authorised body ensure before transferring client funds to pay a bill?
Ensure there is sufficient money held in the client account on behalf of the client.
125
What is the consequence of not mentioning VAT when informing clients of costs?
The costs are deemed inclusive of VAT.
126
What is the accounting entry for a transfer of client money from the general account to a separate designated client account?
* Debit client ledger client account for the client
* Credit cash sheet client account
* Credit client ledger separate designated client account for the client
* Debit cash sheet separate designated client account for the client.
127
What is the accounting entry for paying interest to a client?
* Debit interest payable ledger
* Credit cash sheet business account
* Credit client ledger client account
* Debit cash sheet client account.
128
What must an authorised body do if it is VAT registered?
Pay VAT to HMRC on the supplies of legal services it provides.
129
What happens if a client sends an amount that exceeds the bill and VAT?
It could be recorded with two separate double entries for non-client money and client money.
130
What should the authorised body do when the client pays the bill plus VAT?
Record the receipt of the payment in the business account and update the client ledger business account.
131
Fill in the blank: The balance in the client ledger business account shows how much money that particular client _______.
owes the authorised body.
132
What is the significance of Rule 8.1(a)(ii)?
It mandates that all receipts and payments not involving client money must be recorded in the business side of the client ledger account.
133
What must be ensured before transferring money to pay a bill plus VAT?
Sufficient money must be held in the client account on behalf of the client.
134
What is the transfer amount specified in the bill of costs?
The profit costs plus VAT.
135
What are the two steps involved in transferring money from the client account to the business account?
* Withdraw money from the client account
* Pay the money into the business account
136
What must be provided to the client before transferring client money for costs?
A bill of costs or other written notification of the costs incurred.
137
What is the first step when withdrawing money from the client account?
Debit the client ledger client account for the client.
138
What is the second step when paying money into the business account?
Credit the client ledger business account for the client.
139
If the lender's bill plus VAT is recorded in a separate client ledger, where must it be recorded?
In the lender's separate client ledger.
140
What happens if there is no separate client ledger for the lender?
The bill and VAT are recorded in the borrower client's ledger.
141
What entries are made when issuing a bill plus VAT to a borrower?
* Debit client ledger business account for the borrower with profit costs
* Credit profit costs account with profit costs
* Debit client ledger business account for the borrower with VAT
* Credit VAT account with VAT
142
What is the result of transferring costs from one client to another?
The debt is removed from the lender's client ledger and allocated to the borrower's client ledger.
143
What is the double-entry bookkeeping principle?
Every transaction has two entries: one credit (CR) and one debit (DR).
144
What are the entries for abating a bill?
* Credit client ledger business account for the profit costs reduction
* Debit profit costs account for the profit costs reduction
* Credit client ledger business account for the VAT reduction
* Debit VAT account for the VAT reduction
145
What does 'abating a bill' mean?
Reducing the fees recorded when the bill was sent out.
146
What must be recorded for every transaction involving bills?
The entries must be made on the business side of the client ledger account.
147
What is the VAT rate charged on the profit costs?
20%.
148
How are the entries for reducing a bill recorded?
The same records as those used to record the original bill.
149
What must be kept readily accessible according to Rule 8.4?
A central record of all bills or other written notifications of costs.
150
What does the balance of a client ledger business account show?
How much money that particular client owes the authorised body.
151
What is the first entry when a client disputes a bill?
Abate the profit costs.
152
What is the second entry when a client disputes a bill?
Abate the VAT.
153
True or False: The amount transferred will be the total of the bill plus VAT as one figure.
True.
154
What does a client ledger business account show?
The amount of money that client owes the authorised body
155
What are the accounting entries when a bill is sent to a client for £2,400 plus VAT?
* Debit client ledger business account £2,400
* Credit profit costs £2,400
* Debit client ledger business account £480 (VAT at 20% on £2,400)
* Credit VAT account £480
156
What happens when a client agrees to reduce fees by £400 plus VAT?
* Credit client ledger business account £400
* Debit profit costs £400
* Credit client ledger business account £80 (VAT at 20% on £400)
* Debit VAT account £80
157
What is a bad debt in the context of an authorised body?
When a client fails to pay an amount due and the authorised body decides some or all of the money will never be collected
158
What is the procedure for writing off a bad debt?
* Credit client ledger business account for the client with the amount of the debt being written off (excluding VAT)
* Debit bad and doubtful debts account
* Credit client ledger business account for the amount of VAT in respect of the unpaid debt
* Debit VAT account
159
Fill in the blank: If a bad debt is at least six months old, the firm can recover the _____ element of the debt.
VAT
160
What must be done if a cheque is dishonoured?
Reverse the accounting entries that recorded the original receipt of the money
161
What is the double-entry system of bookkeeping?
Every transaction has two entries, one credit (CR) and one debit (DR)
162
What is a disbursement in legal accounting?
Costs or expenses which the law firm pays to third parties on behalf of a client
163
What must be identified before determining if VAT is payable on a disbursement?
Whether the payee is a VAT registered business making a taxable supply of goods or services
164
What are the accounting entries for paying a disbursement plus VAT as an agent?
* Debit the client ledger client account
* Credit the cash sheet client account
165
What is the difference between paying as agent and paying as principal?
Paying as agent means acting on behalf of the client, while paying as principal means the law firm incurs the cost itself.
166
What are the accounting entries if the law firm pays a disbursement plus VAT as principal?
* Debit the client ledger business account for the disbursement
* Credit the cash sheet business account for the disbursement
* Debit the VAT account for the VAT
* Credit the cash sheet business account for the VAT
167
What must be used to pay a disbursement plus VAT when acting as principal?
Non-client money
168
What happens to the VAT amount when a law firm sends a bill to the client after paying a disbursement as principal?
* Debit the client ledger business account for the VAT
* Credit the VAT account
169
What does the pair of double entries do in the VAT account?
Removes the VAT from the VAT account and shows that the client owes the VAT amount to the law firm
## Footnote
The entries credit the VAT account to cancel a previous debit and debit the business side of the client ledger.
170
What indicates that a payment will be accounted for using the principal method?
The invoice is addressed to the law firm and there is no indication it is for the client
## Footnote
This means the law firm instructed the accountant directly.
171
What are the accounting entries to record the payment of the disbursement?
1. Debit client ledger business account £1,000
2. Credit cash sheet business account £1,000
## Footnote
This records the payment of the disbursement.
172
What are the accounting entries to record the payment of the VAT?
1. Debit VAT account [ledger] £200
2. Credit cash sheet business account £200
## Footnote
This records the payment of VAT on the disbursement.
173
What is the first step when the solicitor issues a bill of costs for their fees?
Debit client ledger business account £200 and credit VAT account [ledger] £200
## Footnote
This moves the VAT on the accountant's fees to the client ledger.
174
When paying a disbursement plus VAT as an agent, what should be done if there is sufficient client money?
Debit client ledger client account for the cost plus VAT and credit cash sheet account for the cost plus VAT
## Footnote
This uses client money for the payment.
175
What should be done if there is insufficient client money to pay a disbursement plus VAT?
Debit client ledger business account for the cost plus VAT and credit cash sheet business account for the cost plus VAT
## Footnote
This ensures the payment is made using the business account.
176
In the principal method, what is the first step after the authorized body pays the disbursement?
Debit client ledger business account for the disbursement amount (excluding VAT) and credit cash sheet business account with the same amount
## Footnote
This captures the transaction without VAT.
177
What is done in the second step after the authorized body issues a bill to the client?
Debit client ledger business account for the VAT amount and credit VAT account [ledger] with the same amount
## Footnote
This records the VAT in relation to the cost.
178
True or False: The law firm can use client money to pay for disbursements only if there is sufficient money held for the client.
True
## Footnote
This ensures compliance with regulations regarding client funds.
