Professional Conduct - Double Entry Book-keeping

Which 2 places should you record transactions where client money is coming into or out of the client account?

Client side of the client ledger

Cash sheet client account

Which 2 places should you record transactions involving non-client money?

Business side of the client ledger

Cash sheet business account

What must each client ledger be identified by according to Rule 8.1 and SRA Guidance?

The client's name and a description of the matter to which it relates.

How many client ledgers does a client have if they have several matters running simultaneously?

One client ledger for each matter.

What is the principle of double entry bookkeeping?

Two records are made for every transaction, one as a credit (CR) and the other as a debit (DR), which are equal in amount but opposite in nature.

How do the credit and debit records in double entry bookkeeping relate to each other?

They mirror each other - if one is CR, the other is DR.

How would issuing a bill of costs to a client appear on the ledger?

Even though this does not involve the receipt or payment of client money or non-client money, it will still involve an entry in the client ledger

It will be on the business side of the client ledger.

What happens in the client ledger when money is withdrawn from the client account?

Debit client ledger client account

Credit cash sheet client account

What happens in the client ledger when money is added to the client account?

It will appear as a credit in the client ledger (client side as it is client money).

The other entry would be in the client cash book and will be the opposite of the entries in the client ledger.

What do the entries in the client cash book represent in relation to the client ledger?

The entries in the client cash book are the opposite of the entries in the client ledger.

What should the total of all individual client ledger balances equal?

The total should equal the balance of the client cash book, which shows the total amount of money in the client account.

From whose perspective should you look to determine if an entry in the client ledger is a credit or debit?

From the client's perspective.

What are the two sides of the client ledger account?

The client side and the business side.

What is the relationship between the client ledger and the client cash book?

The client ledger entries reflect individual client transactions, while the client cash book shows the total amount of money in the client account.

What is an example of a transaction that would result in a debit in the client ledger?

Withdrawing money for a search fee on a property purchase transaction.

How is a payment made from the business account on behalf of a client recorded in the client ledger?

It appears as a debit, indicating that the client owes that amount to the authorised body.

What happens in the client ledger when a client repays the authorised body?

The repayment appears as a credit, reducing the debt owed by the client.

How often must bank statements for client and business accounts be obtained according to Rule 8.2?

At least every five weeks.

What does Rule 8.3 require regarding bank statements and client accounts?

It requires reconciliation of the client account statements with the cash book balance and the client ledger total at least every five weeks.

What is the purpose of the cash book balance in the reconciliation process?

It records how much client money is held in the client account.

What do the individual client ledgers (client side) show?

They show how much client money is held for each client.

What does Rule 8.4 require you to keep a record of?

All bills or written notifications of costs given to clients.

What comes after the number in the balance?

£100 DR or £100 CR e.g.,

Whose perspective do you use when inputting in the client ledger, and in the cash sheet for client account?

client ledger = client's perspective

cash sheet for client account = bank's perspective

What is the process of paying the deposit for a property via double-entry book-keeping?

1. deposit money goes buyer -> buyer's solicitor

2. deposit money goes buyer's solicitor -> seller's solicitor

3. receipt of this money is held by seller's solicitor either as an agent or as a stakeholder

Will buyer's solicitor use office money or client money to pay deposit to seller's solicitor?

- should use client money wherever possible

- office money can be used if client has insufficient funds in the client account (unusual, will usually already have the deposit from the client)

What kind of money will the deposit be when it is received by the seller's solicitor?

- client money, because it is money received on behalf of a third party in relation to regulated services delivered by seller's solicitor

How does it work when the seller's solictor holds the deposit as a stakeholder?

Will be held in client account, but recorded in ledger differently to usual:

- seller's solicitor holds the deposit on trust for both the buyer and the seller

- deposit cannot be handed over to one party without the consent of the other

- but the deposit money also cannot be allocated to the seller (by being shown as a credit in the client ledger client account)

- this would mean that the money belongs to the seller, which is not correct

How will the deposit be credited in the ledgers when seller's solicitor is holding it as a stakeholder?

- a separate client ledger called 'stakeholder' is used to record the receipt of the deposit

- deposit money will not be credited to the client's client ledger client account until the completion date

What will the records say at exchange of contracts, when deposit is first received by seller's solicitor?

Credit - client ledger stakeholder

Debit - cash sheet client account

What will the records say at completion of the sale?

Credit - client ledger client account

Debit - stakeholder ledger

(shows a transfer from the stakeholder ledger to the client account)

How will it be recorded when the deposit is held by the seller's solicitor as an agent?

- possible for seller's sol to hand money over to the seller before completion, without agreement of the buyer

- this is what happens in residential transactions, where seller needs deposit money in chain transaction

recorded as normal:

Credit - client ledger client account (for that client)

Debit - cash sheet client account

Should extra client money be returned at the end of a matter?

Yes

- must ensure that client money is returned promptly to the client for whom it's held, as soon as there is no longer any proper reason to hold those funds

How will transfer from client account to business account be recorded?

- Debit client ledger client account (money removed)

- Credit cash sheet client account

- Credit client ledger business account (money paid in)

- Debit cash sheet business account

How will transfer from business account to client account be recorded?

- Debit client ledger business account (money removed)

- Credit cash sheet business account

- Credit client ledger client account (money paid in)

- Debit cash sheet client account

How will a mixed payment be recorded?

- Credit client ledger client account

- Debit cash sheet client account

- Credit client ledger business account

- Debit cash sheet business account

What needs to be done before you can transfer money from client account to business account to pay costs?

Must present client with an invoice before this

Is it necessary for mixed payments to be paid entirely into the client account?

No, possible to ask the sender to split the amount and pay it into two different accounts

- either way is possible - look out for words like must in a question

What must you do if you improperly withdraw money from a client account to use for the business?

- must be immediately replaced (rather than telling a reporting officer within a certain number of days, etc)

How will replacing money improperly withdrawn from the client account be represented?

- Debit client ledger business account

- Credit cash sheet business account

- Credit client ledger client account

- Debit cash sheet client account.

How is a transfer from client 1 to client 2 shown in ledger entries?

- Debit client ledger for client 1

- Credit client ledger for client 2

(eg executor paying to beneficiary)

How will receipt of mortgage funds be recorded if solicitor does not open a separate ledger for the lender?

- Credit client ledger client account for the (buyer) client

- Debit cash sheet client account

How will receipt of mortgage funds be recorded if solicitor does open a separate ledger for the lender?

- Credit client ledger client account for the (lender) client

- Debit cash sheet client account

Then will move that money into buyer client's acocunt

- Debit client ledger client account for the (lender) client

- Credit client ledger client account for the (buyer) client

How is repayment of a mortgage recorded when solicitor does not open a separate ledger for the lender?

- Debit client ledger client account for the (seller) client

- Credit cash sheet client account

How is repayment of a mortgage recorded when solicitor does open a separate ledger for the lender?

Money moved to lender's client account:

- Debit client ledger client account for the (seller) client

- Credit client ledger client account for the (lender) client

Then money sent to lender:

- Debit client ledger client account for the (lender) client

- Credit cash sheet client account

What document must you keep if facilitating a private loan between 2 clients using client money?

Written authority of both clients for the private loan must be obtained and kept

in the firm's business account

How will receipt of money earned as interest on the main client account be recorded?

- Credit interest receivable ledger

- Debit cash sheet business account

How is paying interest to a client recorded?

Step 1

- Debit interest payable ledger

- Credit cash sheet business account

Step 2

- Credit client ledger client account for the client

- Debit cash sheet client account

How much interest should be paid to the client?

a fair sum of interest

Can the firm and client come to their own agreement re interest?

firm and the client can come to a different arrangement as to the payment of interest

- but this must be by written agreement

- and firm must provide sufficient information to enable the client to give informed consent.

Where must bills of costs to clients be recorded?

- client ledger business account

What are profit costs also known as?

fees charged by a solicitor to their client in a bill of costs or invoice

How is sending out a bill to a client recorded in the ledger?

- Debit the client ledger business account (creates a debt for client to pay)

- Credit the profit costs account

Is VAT charged in addition to provision of legal services, or is it inclusive?

- solicitor should tell client their fees, plus VAT

- if there is no mention of VAT when the solicitor informs the client of the costs then the costs are deemed inclusive of VAT (not ideal)

How is VAT recorded when a firm sends a bill of costs plus VAT to a client?

- Debit the client ledger business account for the amount of VAT

- Credit the VAT account ledger with the amount of VAT

How is the receipt of payment from a client in response to a bill recorded?

- Credit client ledger business account

- Debit cash sheet business account

What will happen if a client sends more money than is asked for in the bill? (eg sends additional money on account of costs)

- this is a mixed payment of business and client money

- recorded with 2 sets of double entries:

entry 1 records receipt of the business money up to the amount of the bill

and entry 2 records the receipt of the client money

How will taking money out of client account to pay client's costs be recorded? (2 sets of entries)

Withdraw money from the client account:

- Debit the client ledger client accountfor the client

- Credit the cash sheet client account

Pay the money into business account:

- Credit the client ledger business account for the client

- Debit the cash sheet business account.

Who will usually pay lender's legal fees and VAT?

borrower of the loan (common in loan agreements)

How will sending a bill for legal services to a lender be recorded, when there is no separate ledger for the lender?

(considering that borrower will pay their legal fees)

- Debit client ledger business account (for the borrower)

- Credit profit costs account

How will VAT be recorded when sending a bill for legal services to a lender, when there is no separate ledger for the lender?

(considering that borrower is paying for them)

- Debit client ledger business account (for the borrower) with the amount of the VAT charged to the lender

- Credit VAT account ledger with the amount of the VAT charged to the lender

How will sending a bill for legal services to a lender be recorded, when there IS separate ledger for the lender?

- Debit client ledger business account (for the lender)

- Credit profit costs account

How will VAT be recorded when sending a bill for legal services to a lender, when there IS separate ledger for the lender?

(considering that borrower will pay their legal fees)

- Debit client ledger business account (for the lender) with the amount of the VAT

- Credit VAT account ledger with the amount of the VAT

How will the actual payment of lender's costs by borrower be recorded? (when the lender does not have a separate ledger)

one of two ways:

- receipt of business money from the borrower client

- or a transfer is made of the borrower's money from the client account to the business account

How is method 1 (receipt of business money from the borrower client) recorded?

- Credit client ledger business account for the (borrower) client

- Debit cash sheet business account

if the client sends more money than is needed to pay lender's costs, this is a mixed payment and must be recorded as such

How is method 2 (transfer is made of the borrower's money) recorded? - 2 sets of entries showing withdrawal and payment

Withdraw money from the borrower client account

- Debit the client ledger client account for the borrower client

- Credit the cash sheet client account.

Pay the money into the business account

- Credit the client ledger business account for the borrower client

- Debit the cash sheet business account

How will the transfer of debt from lender to borrower be recorded?

(when the lender DOES have a separate ledger)

- Debit client ledger business account (of the borrower) for profit costs and VAT

- Credit client ledger business account (of the lender) for profit costs and VAT

(no money is actually moving, these entries are just removing the debt from the lender's client ledger and reallocating it to the borrower's client ledger, to show that borrower will pay their costs)

How will the actual payment of lender's costs by borrower be recorded? (when the lender DOES have a separate ledger)

can be recorded in the same way as when there is no separate ledger for the lender

- receipt of non-client money from the borrower

- or transfer of the borrower's money from client account to business account.

How will abatement (reduction) of profit costs be recorded?

- Credit the client ledger business account

- Debit the profit costs account

How will abatement (reduction) of VAT be recorded?

- Credit the client ledger business account forthat client for the reduction in VAT

- Debit the VAT account ledger for the reduction in VAT.

When will firm be able to recover VAT when writing off a bad debt

if the debt is at least six months old.

How is writing off a bad debt recorded?

- Credit client ledger business account for the client with the amount of the debt being written off (excluding VAT)

- Debit the bad and doubtful debts account (may go by another name)

How is writing off VAT on a bad debt recorded?

- Credit client ledger business account for the client with the amount of VAT in respect of the unpaid debt; and

- Debit VAT account ledger

What is a dishonoured cheque?

A dishonoured cheque (or "bounced check") means the bank refused to pay it, usually because the writer didn't have enough money

How is a dishonoured cheque recorded?

- the accounting entries that recorded the original receipt of the money are reversed

- this may cause the client side of the client ledger to be overdrawn by creating a debit balance

- if so, the solicitor must immediately transfer non-client money across from the firm's business account to the client account to bring the balance of the client side of the client ledger up to zero

What are disbursements?

disbursements = court fees, Stamp Duty Land Tax (SDLT), and Land Registry fees for registration

- search fees if the results are passed on without comment, like an agent

something paid on the client's behalf, as an agent, not just something arising through doing business

What are expenses (part of the business overheads)?

travel and accommodation costs

postage

telephone charges

property search fees if provided alongside analysis/advice (Brabners)

bank transfer fees

fees for obtaining copy documents used for providing advice.

What is the difference between expenses and disbursements for VAT?

disbursements = paid by sol as an agent, cannot charge further VAT

expenses = treated as part of the solicitor's standard-rated supply of services, and VAT must be added at the standard rate

- even if the law firm did not pay VAT when paying for them

Should you assume there is VAT if none is mentioned?

if there is no mention of VAT, assume none is being charged

How is paying disbursement & VAT as an agent recorded? (ie client money being paid out)

- Debit the client ledger client account the total amount + VAT

- Credit the cash sheet client account the total amount + VAT

How is paying disbursement & VAT as an agent recorded, when there is not enough money in the client account?

Business money will need to be used instead:

- Debit the client ledger business account combined total of the disbursement and VAT.

- Credit the cash sheet business account combined total of the disbursement and VAT.

What are the accounting entries for paying a disbursement as principal? (VAT recorded separately)

- Debit the client ledger business account for the disbursement

- Credit the cash sheet business account for the disbursement

What are the accounting entries for paying just the VAT on a disbursement as principal?

- Debit the VAT account ledger for the VAT

- Credit the cash sheet business account for the VAT.

How is sending a bill to the client for VAT after paying a disbursement as a principal? (bill only covers VAT)

- Debit client ledger business account for the VAT

- Credit the VAT account ledger for the VAT