Solicitors’ Accounts – Recording Receipts, Payments, Billing & Compliance

Structure of Client vs General Client Account

  • Firms deal with many clients but typically operate one general client bank account rather than opening a separate bank account for each matter.
  • Segregation of individual client balances happens in the client ledger, not at bank-account level.
  • Two principal sets of records:
    • Client-account records (client ledger + client-side cash account/cash sheet).
    • Business/office-account records (office ledger + business cash account, profit-cost account, HMRC account).
  • Foundational double-entry rule: (every debit has an equal credit)(\text{every debit has an equal credit})
    • Receipt into a cash account ⇒ Debit cash account, Credit relevant ledger.
    • Payment out of a cash account ⇒ Credit cash account, Debit relevant ledger.

Prompt Deposit of Client Money

  • All money that meets the definition of client money must be banked promptly into the client account.
    • No statutory definition under the current rules; safe interpretation mirrors the former rule: same working day or next working day.
  • Client money cannot be used for firm/partner personal expenditure (e.g., “buying a car”).

Recording Receipts & Payments (General Mechanics)

  • "Cash account" = cash sheet = chronological list of bank movements.
  • For client transactions use the client-side cash account; for firm transactions use the business/office cash account.
  • Typical posting pattern:
    1. Receive £X from client
    • Client ledger (client side): Credit £X.
    • Client cash account: Debit £X.
    1. Pay £Y on client’s behalf (out of client funds)
    • Client ledger (client side): Debit £Y.
    • Client cash account: Credit £Y.

Rule Against Over-Withdrawal

  • Never withdraw more from the client account than the balance held for that individual client.
  • Check the individual client ledger, not the global client-account bank balance.
  • Consequence of over-withdrawal: using another client’s funds ⇒ serious SRA breach, fines, possible striking-off.
  • Illustration: Holding £1,000 for Client A but paying £1,500 disbursement ⇒ £500 of other clients’ funds misapplied.

Example 1 – Lucy’s Litigation Matter

  • Facts:
    • 1 July: Receive £1,000 on account of costs/disbursements.
    • 2 July: Pay £100 court fee.
  • Entries:
    1. Receipt (1 July)
    • Client ledger (Lucy): Credit £1,000.
    • Client cash sheet: Debit £1,000.
    1. Payment (2 July)
    • Client ledger (Lucy): Debit £100.
    • Client cash sheet: Credit £100.
  • Balance held for Lucy after payment = £900.

Issuing a Bill – No Cash Account Movement

  • Raising a bill involves no immediate bank movement; therefore do not post to any cash account.
  • Two components must be shown separately:
    1. Professional charges (fees) → Profit-cost account.
    2. VAT → HMRC (VAT control) account.
  • Double entries:
    • Fees: Debit client ledger (business side) | Credit profit-cost account.
    • VAT: Debit client ledger (business side) | Credit HMRC account.
  • When the client eventually pays the bill:
    • Money is firm’s money (not client money) ⇒ banked into business account.
    • Posting: Debit business cash account | Credit client ledger (business side).

Disbursements Billed in Advance

  • If a bill includes sums for future disbursements (e.g. Stamp Duty in conveyancing):
    • SRA guidance discourages lodging such advance monies in the business account.
    • Firms should treat them as client money until the disbursement is actually incurred.

Reducing / Abating a Bill

  • If a client queries the bill and the firm agrees a reduction:
    • Reverse the original postings pro-rata.
    • Example: Reduce fees by £100 & VAT by £20:
    • Fees: Credit client ledger (business) £100 | Debit profit-cost £100.
    • VAT: Credit client ledger (business) £20 | Debit HMRC £20.

Cheque Received, Disbursement Paid Before Clearance (Cheque Bounces)

  • Initial receipt posting (before bounce):
    • Client ledger (client side): Credit.
    • Client cash sheet: Debit.
  • If cheque dishonoured, reverse that posting:
    • Client ledger: Debit.
    • Client cash sheet: Credit.
  • Problem: a disbursement has already been paid → client ledger now shows debit balance (overdrawn).
  • Must immediately transfer firm’s own funds into client account to correct:
    1. Imagine writing a cheque from business to client account.
    2. Postings:
    • Business records: Debit client ledger (business) | Credit business cash account.
    • Client records (on banking): Credit client ledger (client side) | Debit client cash sheet.
  • Put in only enough to cover the disbursement, not the whole bounced cheque amount.
  • Ethical significance: restores other clients’ money, ends rule breach promptly.

Activity Walk-Through – Client X

  1. Receive £500 on account
    • Client ledger (client side): Credit £500.
    • Client cash sheet: Debit £500.
  2. Search fee £300 (client funds available)
    • Client ledger (client side): Debit £300.
    • Client cash sheet: Credit £300.
  3. Second search fee £300 (insufficient client funds)
    • Use office money:
      • Client ledger (business): Debit £300.
      • Business cash account: Credit £300.
  4. Issue bill £600 fees + £120 VAT
    • Fees: Debit client ledger (business) £600 | Credit profit-cost £600.
    • VAT: Debit client ledger (business) £120 | Credit HMRC £120.
  5. Agree £100 fee + £20 VAT reduction (reverse partial postings)
    • Fees: Credit client ledger (business) £100 | Debit profit-cost £100.
    • VAT: Credit client ledger (business) £20 | Debit HMRC £20.

Connections & Practical/Exam Relevance

  • Rules embody core fiduciary duty: safeguard client money and avoid misappropriation.
  • Understanding posting flows helps in:
    • SRA Accounts Rules compliance audits.
    • Drafting suitable office procedures for banking.
    • Answering exam hypotheticals quickly: “Which ledger? Which cash account? Which side?”
  • Real-world consequences: fines, practising certificate conditions, reputational harm.

Key Numerical/Formula Recap

  • Double-entry identity: ∑Debits=∑Credits\sum \text{Debits} = \sum \text{Credits} at all times.
  • Client notional balance after transaction =Opening balance+Credits−Debits= \text{Opening balance} + \text{Credits} - \text{Debits}.
  • VAT currently at 20 % → VAT posting =0.20×net fee= 0.20 \times \text{net fee} (e.g.
    £600 fee → £120 VAT).

Ethical & Operational Take-Aways

  • Prompt banking = protects clients from firm insolvency/fraud.
  • Never rely on aggregate bank balance; check individual ledgers.
  • Query/abatement = fairness to client and correct VAT accounting to HMRC.
  • Immediate rectification of breaches (e.g.
    bounced cheque) expected by SRA.
  • Avoid advance billing for un-incurred disbursements—maintains transparency.

Study Tips

  • Practise T-accounts for each scenario (receipt, payment, bill, abatement, bounce).
  • Memorise which postings go to: Client ledger (client vs business side), Cash account (client vs business), Profit-cost, HMRC.
  • In an exam, label each ledger clearly; show both sides of every double entry.
  • Use a checklist:
    1. Is it client money? → client bank account.
    2. Any bank movement? → cash account needed?
    3. Fee/VAT? → profit-cost/HMRC.