SRA Accounts Rules: Client Money, Business Money & Double-Entry Bookkeeping

Context & Housekeeping

• Lecture follows the exact sequence of the study guide → easy cross-referencing while revising.
• Assumption: student can simultaneously consult profit & loss accounts and balance sheets from prior modules.

Regulatory Framework & Scope of the SRA Accounts Rules (in force $Nov\ 2019$)

• Rules issued by the Solicitors Regulation Authority (SRA).
• Regulate deliberate misuse of money belonging to clients.
• Apply to:
  • Authorised bodies (licensed or recognised bodies & sole-practitioner practices).
  • Managers of those bodies.
  • Employees of those bodies.
• Managers are jointly & severally liable for compliance → personal exposure if rules breached.
• Rules also bind other providers of legal services regulated by the SRA (e.g., ABSs, some not-for-profit legal organisations).

Key Principle: Protecting Clients’ Money

• Fundamental requirement: keep clients’ money separate from business (firm’s) money.
  • Reduces risk of misuse & ensures swift client reimbursement if firm collapses.
• Ongoing tension: law firm is both a business (seeks profit) and a fiduciary (holds third-party funds).

Defining “Client Money”

• Client Money = money held or received:
  1. In connection with regulated services provided to a client.
  2. On behalf of a third party because of your regulated services.
  3. As agent / stakeholder / trustee / specified office-holder (e.g., attorney under LPA, Court of Protection deputy, occupational-pension trustee).
  4. For fees & unpaid disbursements if money is received before a bill is delivered.
• Client = current, prospective or former client.
• Regulated services = any legal / professional service within SRA jurisdiction.
• Heuristic test: “Could the solicitor buy a new car with this money without upsetting anyone?”
  • If no ➔ it is client money.

Distinguishing “Business Money”

• Money that belongs to the firm (e.g., fees already billed & paid, partner capital, operating revenue) = Business Money.

Illustrative Scenarios

• $£30,000$ deposit for client’s property purchase → client money (client would be furious if used for a VW).
• $£150,000$ life-policy proceeds due to executors → client money (heirs expect full amount; mischievous Tesla joke emphasises point).

Dedicated Client Bank Account

• Firms must open at least one "client account" at a bank/building society in England & Wales.
• Account title must include:
  1. Firm’s name, and
  2. The word “Client”.
  • Purpose: alerts bank that the funds are trust property, preventing bank’s right of set-off.
• Prohibited use: offering banking facilities to clients (e.g., parking private funds or paying non-legal invoices) ➔ risk of money-laundering / creditor-evasion & strike-off.

Mandatory Record-Keeping

• Maintain records identified by client name, showing:
  • All receipts & payments of client money.
  • All receipts & payments that are NOT client money.
• Principal tool: Client Account Ledger (a.k.a. client ledger).
• Additional—but exam-light—requirements:
  • Regular three-way reconciliations (ledger vs. cashbook vs. bank).
  • Independent sign-off and retention for prescribed periods.

Double-Entry Bookkeeping in Law Firms (Demystified)

• Both the client accounting system & the business accounting system use double entry.
• Core mantra: Every transaction = one Debit (Dr) + one Credit (Cr) → totals always balance.
• Analogy: driving a car without knowing combustion mechanics.

Two Parallel Cash Accounts (a.k.a. Cash Sheets)

1. Client Cash Account
   • Pooled account used in most exam questions.
   • Records movements in the firm’s client bank account.
2. Business Cash Account (historically “Office Account”)
   • Records movements in the firm’s own bank account (overheads, profits, billed fees, etc.).

Posting Logic

• Transactions involving only client money → 2 entries both in the client set of books.
• Transactions involving only business money → 2 entries both in the business set.
• Transfer between client & business accounts → 4 entries (Dr + Cr in each set).

Worked Example: Charles’s Castle Purchase

1. Receipt of Money on Account of Costs
   • Client sends $£500$ → client money.
   • Client Ledger (Charles): Credit $£500$.
   • Client Cash Account: Debit $£500$.
   • Interpretation: client bank owes Charles $£500$.
2. Payment to Surveyor
   • Firm pays $£100$ from client account.
   • Client Ledger (Charles): Debit $£100$ (balance now $£400$).
   • Client Cash Account: Credit $£100$.
3. If firm had paid the surveyor from business funds:
   • Use same debit/credit pattern but inside the business cash & ledger.

Universal Posting Rules (memorise!)

• Receipt: $\text{Debit}\,\text{Cash} \rightarrow \text{Credit}\,\text{Client Ledger}$.
• Payment: $\text{Credit}\,\text{Cash} \rightarrow \text{Debit}\,\text{Client Ledger}$.
• For transfers between ledgers → apply rules in both books.

Ethical & Practical Implications

• Breach = potential strike-off, fines, criminal exposure (esp. under AML regulations).
• Proper segregation safeguards client trust, firm reputation, and the wider public confidence in legal profession.

Links to Other Modules / Foundational Principles

• “Stakeholder / stakeholder’s order” & “to the court’s order” scenarios previewed; detailed in later module.
• Concepts dovetail with professional conduct (fiduciary duty, confidentiality) & financial compliance (AML, SARs).

Exam Tips & Common Pitfalls

• Always identify ownership of funds first.
• Label your cash sheets clearly: "Client Cash" vs. "Business Cash".
• Watch for four-entry transfers (e.g., paying billed fees from client money after bill delivery).
• Include $£$ signs in exam answers where relevant; examiner expects precision.
• Reconcile figures after every set of postings—imbalances signal a debit/credit mix-up.

Quick-Reference Cheat Sheet

• Who is bound? Authorised body, managers, employees (managers = joint & several liability).
• Account titles: “Firm Name – Client Account”.
• Prohibited use: providing mere banking facilities.
• Double-Entry Law: every Dr needs a matching Cr.
• Mnemonic: “R D C C / P C D L”
  • Receipt ➔ Debit Cash / Credit Client ledger.
  • Payment ➔ Credit Cash / Debit Ledger.

"You don't need to see under the bonnet; just know which gear goes forward and which goes back." – Lecturer’s driving analogy.