Solicitors’ Accounts

Assessment
Part 1 – 20 marks, MCQs + short-answer questions on the rules => client money + office money in and out
+ abatement, interest

Part 2 – 20 marks – Ledger entries, filling in entries

Part 3 – 30 marks – property transaction, 3 parts:

1) Pre-exchange
2) Financial statement (buyer’s)
3) Post-exchange

General Rule
 Rule 1.2 – managers (partners / directors / members) are jointly and severally responsible for
compliance by authorised body, managers and employees with the accounting rules
 Rule 4.1 – a firm must keep ‘client money separate from money belonging to’ the firm

Client money (Rule 2.1)

Money held or received by the firm:
a) Relating to regulated services delivered to a client
o Legal and other services regulated by SRA + acting as trustee
o = Money on account of costs generally
b) On behalf of a third party in relation to regulated services delivered by you (agent, stakeholder,
held to order)
o E.g. deposit received by the seller’s solicitor held to buyer’s order; BUT not money held for
own client
c) As a trustee / holder of specified office / appointment
o E.g. donee of a power of attorney
d) In respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill
for the same
o Fees – own charges or profit costs + VAT
o Disbursements – costs paid to third party on behalf of client inc. VAT (excl. office expenses
– postage + courier costs) = money paid for a specific disbursement that has not yet been
paid by the firm

All this money must be kept separate from money belonging to the firm (office money)

Bank accounts ledgers (cash book)

 Office account – money belonging to the firm – ‘office cash’ ledger

 Client account – money belonging to the clients – ‘client cash’ ledger
o Rule 3.1– Must be an account at a branch or BS in England and Wales
o Rule 3.2
a) Must contain the name of the firm
b) Must contain the word ‘client’

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You should:
 Keep a running balance – however, for exam, do not need running balance of office + client cash
ledgers (greyed out), as have only limited information on transactions; only need to keep running
balance for client ledger
 List transactions in chronological order
 Include:
o where double-entry transaction made: ‘office cash’ or ‘client cash’ / Office ledger: X Ltd or
Client ledger: X Ltd
o a narrative identifying and providing adequate information about the transaction

Client ledgers
Recording transactions involving client money => record in both:
1. ‘Client ledger’ = which client that transaction relates to
o DR – money out
o CR – money in
2. ‘Client cash’ ledger
o Entries should be opposite of client ledger entry

Recording transactions involving office money from client => record in both:
1. ‘Office ledger’ for client – money owed to firm for work / money spent by firm on client’s behalf
o DR – send bill / money out
o CR – pay bill / money in
2. ‘Office cash’ ledger

Basic rules for making entries

1. TWO entries for each transaction
2. ONE CR entry, ONE DR entry
3. Either:
a. BOTH entries MUST be Client-side; or
b. BOTH entries MUST be Office-side

NB for each client: office ledger should either be DR or 0; client ledger should always be CR or 0

Office Account Payments

1. Where VAT payable on disbursement (e.g. coal mining search), must be made out of office account
2. Costs / expenses w/out money on account – Rule 5.3 – only withdraw client money from a client
account if sufficient funds are held on behalf of that specific client’, otherwise use office funds to
pay costs / expenses, repayment of which will be office money (whether or not a bill is delivered to
the client)

 Money sent after bill for fees delivered – office money

o NB when invoice sent, DR office ledger of client + CR profit costs account

Mixed Payments
 Where MIXED payment (i.e. client money + non-client money) => firm must allocate promptly any
funds to the correct account (either client or office) (Rule 4.2)
o May either pay all into client or office and transfer as appropriate, OR split and pay correct
amount into client and correct amount into office

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Client Account

Payments
 Rule 2.3 – client money must be paid promptly into a client account, except where:
o 2.3(a) – money held as trustee of a specified office or appointment, such as a. donee of a
PoA, need not be paid into CA where this conflicts with obligations under rules relating to
specified office or appointment
 Will usually require wholly separate account
o 2.3(b) – client money = Legal Aid Agency money for your costs
o 2.3(b) – you agree in the individual circumstances an alternative arrangement in writing with
the client for whom money is held
 Rule 2.4 – client money must be available on demand
 Rule 2.5 – client money must be returned promptly when no reason to hold

Withdrawals / Payments
 Rule 3.3 – payments/transfers/withdrawals must be in respect of delivery of regulated services +
not banking facilities to clients / third parties
 Withdrawals only where (Rule 5.1):
o For purpose for which money being held (i.e. for same transaction);
o Following instructions from client / third party from whom money is held; or
o On SRA’s prior written authorisation or SRA prescribed circumstances – balance of < £500 on
client matter may be paid to charity of law firm’s choice, where has taken reasonable steps
to find the rightful owner

Client money becoming office money (or vice versa where transferring mixed payment)
 Rule 4.3 – Firm holding client money on account of costs; shifts to office money following delivery
of bill of costs (fees + disbursements) ONLY for the amount of the bill and ONLY to the amount of
money held for that specific client
o Money out of client account: DR client ledger; CR client cash
o Money into office account: CR office ledger; DR office cash
 Rule 6.1 – firm must correct breaches promptly upon discovery => client money improperly
withheld / withdrawn must be replaced ASAP

Disbursements
 Where VAT payable on disbursement (e.g. coal mining search), must be made out of office account
 Where disbursements paid by firm at the end of a month all together (e.g. credit account with Land
Registry), disbursement charged to client office ledger/client ledger when the debt is incurred, not
when it is paid

Petty Cash
 A petty cash ledger records petty cash held; it is analogous to the office cash ledger
 Cash is withdrawn from the office cash ledger as CR and entered as petty cash DR (because petty
cash OWES office cash the money)

 Payments out of petty cash:

o DR office ledger VAT-free amount
o CR petty cash VAT-free amount
 Then, on invoicing, charge VAT out of client office ledger
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Cheques received on behalf of client
 Where cheque payable to client, in client ledger note in details column that cheque was received
and sent to client
 NO CR or DR – no money put into accounts

Accounting records for client money

 Rule 8 –
o Obligation to keep accurate, contemporaneous and chronological records (8.1)
 Where money / cash received from client, must at the least record this in a register
(e.g. cash diary) for later posting to client cashbook and ledger
 But NB Rule 2.3 – this must then be paid to the client account promptly
o Bank statements must be obtained every 5 weeks (8.2)
o Reconciliations between statements and records every 5 weeks signed off by COFA (8.3)
o Central record of all bills readily accessible (8.4)

 Rule 12 –
o Where have (1) held client money, (2) operated a joint account or (3) operated a client’s
account as signatory, you must:
 Obtain an accountant’s report for that period within 6 months of the end of the
period +
 Deliver it to the SRA within 6 months of the end of the accounting period if qualified
to show failure to comply with rules (12.1)
 NB this obligation is on the firm, although delivery may in practice be by the
accountant
o No need for accountant’s report where (12.2):
 Only Legal Aid Agency money
 Total of client money (in all client accounts, joint accounts and clients’ accounts
operated by firm) held ≤ average of £10,000 AND maximum of £250,000
o SRA may require firm to obtain and deliver an accountant’s report on reasonable notice if
firm ceases operating as authorised body OR SRA considers it in the public interest (12.4)

 Rule 13 – must store all accounting records securely and retain these for ≥ 6 years

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Property Transactions
Deposits on exchange of contracts
Buyer’s solicitor
 Buyer sends deposit money to solicitor = client money in client account (Rule 2.1(a))
o CR client ledger: buyer client
o DR client cash
 Payment of deposit to seller’s solicitors:
o DR client ledger: buyer client
o CR client cash
Seller’s solicitor
 Deposit cheque received from buyer’s solicitor = on behalf of a third party in relation to regulated
services delivered by seller’s solicitor = client money (Rule 2.1(b))

 Where acting as stakeholder = holding deposit on trust for buyer + seller until clear to whom the
money should be paid; will pay with consent of other party / on sale of property
o On exchange:
 CR client ledger: stakeholder
 DR client cash
o On completion:
 DR client ledger: stakeholder
 CR client ledger: seller client
o On payment of cheque to client:
 DR client ledger: seller client
 CR client cash

 Where acting as agent for seller = can hand money over to the seller before completion:
o On receipt of deposit cheque:
 CR client ledger: seller client
 DR client cash
o On payment of cheque to client:
 DR client ledger: seller client
 CR client cash
Mortgage funds
 Often buyer’s lender will ask buyer’s solicitor to act on its behalf + will pay mortgage funds to
buyer’s solicitor shortly before completion = client money (Rule 2.1(a))
 There is no NEED to open a separate ledger for the lender, provided the details column makes it
clear the money is in ‘receipt of mortgage funds from X Bank’

Method 1 – record in ledger of buyer-borrower

 Receipt of mortgage funds:
o CR client ledger for buyer (making clear that money from lender)
o DR client cash

Method 2 – open a separate ledger for lender

 Receipt of mortgage funds:
o CR client ledger for lender
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 o DR client cash
 Completion:
o DR client ledger for lender
o CR client ledger for buyer/borrower

Costs charged to a bank / building society

 Applies where buyer/seller paying lender’s costs

Where no separate ledger for lender

 On invoicing, record profit costs to buyer/seller + lender in the office ledger of client as two
separate transactions (i.e. DR client office ledger x2 AND DR client office ledger x2 for VAT) + in
profit costs (i.e. CR profit costs x 2 AND CR VAT Account x2)

Where there is a separate ledger for lender

 On invoicing, record profit costs in respective office ledgers of buyer/seller (i.e. DR client office
ledger AND DR client office ledger for VAT) and lender (i.e. DR lender office ledger AND DR lender
office ledger for VAT) + in profit costs (CR x2) + VAT Account (CR x2)
 Transfer costs from lender’s office ledger to buyer/seller’s office ledger (in 1 transaction, even
where VAT)
o DR office ledger buyer/seller client
o CR office ledger lender client

Paying the invoice

 Remove money from buyer/seller’s client account

o DR buyer/seller client ledger
o CR client cash
 Add money to client’s office ledger
o CR buyer/seller office ledger
o DR office cash

Mortgage redemption
 You receive funds from the buyer’s solicitor on behalf of the seller, and must transmit sufficient
funds to discharge the seller’s mortgage to the lender and transmit the remained to the seller

Method 1 – record in ledger of seller-borrower

 Receipt of sale funds:
o CR client ledger for seller (making clear that some of money to be paid to lender to redeem
mortgage)
o DR client cash

 Money then goes straight from seller’s client ledger to lender upon payment of redemption figure
to lender
o DR client ledger for seller
o CR client cash

Method 2 – open a separate ledger for lender

 Receipt of sale funds (pay all into seller ledger):
o CR client ledger for seller total sale proceeds
o DR client cash
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  Immediately after this (transfer to lender ledger):
o DR client ledger for seller redemption figure
o CR client ledger for lender
 Money then goes from lender’s client ledger to lender upon payment of redemption figure
o DR client ledger for lender
o CR client cash
Accounting for VAT, Abatement of costs and Bad debt
 Businesses send to HMRC output VAT (i.e. VAT charged on sales) – input VAT (i.e. VAT incurred on
purchases / supplies to them)
 VAT is chargeable at the point of supply + for solicitors that is date of the invoice
 Unless solicitor informs client costs will be ‘plus VAT’, deemed to be inclusive of VAT

Accounting for VAT on profit costs

 Must keep record of all VAT paid (e.g. on search fees) + received (e.g. on profit costs) in VAT
Account ledger

On issuing VAT invoice:

1) Amount of profit costs recorded
o DR office ledger of client with profit costs (excluding VAT)
o CR profit costs with profit costs (excluding VAT)
2) Amount of VAT shown on invoice recorded
o DR office ledger of client with VAT payable on profit costs
o CR VAT account with VAT payable on profit costs

On payment of invoice:
2. CR office ledger of client with profit costs + VAT
3. DR office cash with profit costs + VAT

Accounting for an abatement of costs

4. Abatement = where client disputes bill + solicitor agrees to reduce fees + reduce VAT

5. Accounting entries for costs:

o CR office ledger for client with the abatement in costs (exc. VAT)
o DR profit costs with abatement in costs (excl. VAT)
6. Accounting entries for VAT:
o CR office ledger for the client with the VAT on the abatement
o DR VAT account with the VAT on the abatement

Accounting for VAT on disbursements

1. For purpose of Rules, ‘disbursements’ = any costs or expenses paid or to be paid to a third party on
behalf of the client or trust (including any VAT element) save for office expenses such as postage
and courier fees
o E.g. postage / ordinary courier service / telephone calls / photocopying ≠ disbursements
AND these costs should not be passed on to the client
o E.g. courier to another country because client abroad when would normally be in the same
country / paying SDLT / LR fees / estate agent’s fees / CH fees

 For HMCR, ‘disbursements’ = expenses paid on client’s behalf on which no VAT chargeable to the
client (i.e. the full VAT-inclusive amount will be recovered from the client as ONE amount, rather
than as an amount plus VAT)
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 o Costs or expenses paid to other parties on which no VAT chargeable to the client (i.e. full
amount recovered in one go) = Disbursements
o Costs or expenses paid to other parties on which VAT is chargeable to the client (i.e. amount
+ separate VAT amount) = VATable Charge

2. No VAT is charged to client (i.e. the client is charged a VAT-exclusive amount) where a business
makes an exempt supply of goods / services (i.e. where no VAT is charged at all):
o Court fees
o Damages
o SDLT
o Some search fees (LR search)
o Fees for other LR applications

3. Disbursements (whole sum charged VAT-inclusive OUT OF CLIENT ACCOUNT where possible, i.e.
solicitor must not account for VAT in the law firm’s VAT account ledgers) => where solicitor incurs
liability for costs or expenses where acting as an agent of the client / payment made on behalf of
client => this occurs where:
i) Invoice addressed to client
 Court fees
 Estate duty
 Incorporation fees
 Land charges fees
 Land registry fees
 Probate fees
 Stamp duty / SDLT
 Charges for professional services of third party, e.g. estate agent fees, notaries,
surveyors, witnesses, charges for police + medical reports
ii) Client instructs third party and solicitor pays for ease (because holding money for client)
iii) There is a deemed supply to the client = client responsible for making payment, such as
SDLT; or
iv) Service passed straight on to client

4. If VAT-registered business makes taxable supply to solicitor as principal (i.e. where the solicitor
does not fall into (i)-(iv) above, such as where producing a report on the basis of a search, on which
VAT was paid), solicitor entitled to show VAT paid on supply in firm’s VAT records as input VAT
o Electronic search result where firm uses results to provide search report (even if also passed
on to client) = Charge
 Assume searches (e.g. coal mining + environmental) are Charges unless clear that
they are passed straight to client
o Electronic search result passed straight to client = Disbursement

Where solicitor accounts for VAT (principal), how and when is cost passed to client?

E.g. £1,000 + £200 VAT charged by accountant to law firm for accounting services – firm as principal

Solicitor pays accountant’s invoice

 DR office ledger for client with £1,000 (must use office account where solicitor acting as principle)

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 o Until the solicitor issues the invoice relating to the work carried out, there has been no
supply for the purposes of VAT by the solicitor, and thus at this stage, no entry in relation to
VAT (£200) should be made in the client’s office ledger, although note entered to ensure it is
charged later : VAT of £X to charge when bill rendered to client
 CR office cash with £1,000 (office cash, as solicitor is principal)
 DR VAT account with £200 (as from HMRC’s perspective, this input VAT paid by the firm can be
offset against money owed to HMRC from output VAT)
 CR office cash with £200
Solicitor invoices client
E.g. Profit costs of £2,000 + £400 VAT + accountants costs + VAT

 DR office ledger for client with £2,000 (our fees, as accountant’s fees already charged)
 CR profit costs with £2,000

 DR office ledger with VAT of £600 (£200 from accountant + £400 on our fees)
o NB both VAT charges to client as ONE entry
 CR VAT account £600

Where solicitor is agent / paying on behalf of client for each, how is VAT accounted for?
Where sufficient funds belonging to that client + costs paid upfront:
 DR client ledger: name of client with VAT inclusive amount
 CR client cash with VAT inclusive amount

Where insufficient funds OR costs incurred and paid later:

 DR office ledger for client with VAT inclusive amount
 CR office cash with VAT inclusive amount
+ reflect the fact that the sum paid includes VAT in details column

Bad Debts
 When a firm writes off bad debt, it can recover the VAT element if it is at least 6 months old
 CR office ledger for client with amount of the unpaid debt (excluding VAT)
 DR bad and doubtful debts account
+
 CR office ledger for client with amount of VAT in respect of the unpaid debt
 DR VAT account
Dishonoured cheques
 When cheque dishonoured, accounting entries that recorded the original receipt of money are
reversed =>
o DR client ledger; CR client cash
 If this causes client ledger to be overdrawn by creating a debit balance, the solicitor must
immediately transfer office money across to the client ledger to bring the client ledger balance up
to 0 (Rule 6.1)
o DR office ledger; CR office cash
o CR client ledger; DR client cash
Timing of ledger entries where unpaid costs
 Office ledger entries for costs = when cost INCURRED, not when paid
 Client money may not be used to pay for incurred but unpaid costs until it has issued a bill to the
client (Rule 2.1(d) + 4.3(a))
VAT + Lender’s costs

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No separate ledger for the lender
 Profit costs and VAT both from borrower + lender recorded in borrower’s office ledger: make
separate entries for buyer/seller profit cost + buyer/seller’s VAT + lender profit costs + lender’s VAT

Separate ledger for lender

 Profit costs + VAT for each client recorded in their respective office ledgers
 Lender’s costs (profit costs + VAT) transferred in one transaction to borrower’s office ledger in usual
way
Interest and sums in lieu of interest

Separate designated deposit accounts

Making a deposit from the general client account into the separate designated client account:
 Take money out of general client account:
o DR Client ledger: [client name]
o CR Client cash
 Pay money into separate designated client account:
o CR [client name] separate designated client ledger
o DR [client name] separate designated client cash

Transferring money from designated client account into general client account:
 Take money out of separate designated client account:
o DR [client name] separate designated client ledger
o CR [client name] separate designated client cash
 Pay money into general client account
o CR client ledger: [client name]
o DR client cash

SRA Accounts Rules on depositing interest

 Rules 7.1: firm must account to clients or third parties for fair sum of interest on any client money
held by the firm
o Fair sum => takes into account the amount held, length of time for which held, need for
instant access, rate of interest payable on the bank account where the money held; and
compounding practice of bank on the account
 Rules 7.2: firm may by written agreement come to a different arrangement with the client / third
party, giving sufficient information for client / third party’s informed consent
o Most firm’s will have a written policy on the payment of interest to meet the requirement
that they provide sufficient information
Interest paid on money held in a general client account
 Interest ≠ client money under Rules 2.1(a)-(d), and therefore = office money
 Rule 4.1 – office money must be kept secret from client money + therefore:
o Interest on general client account should be paid into office account +
o Then a sum in lieu of interest paid to the client (Rule 7.1)

 Pay interest into office account:

o CR interest received ledger
o DR office cash
 Fair sum of interest out of the office account
o DR interest paid ledger (NB this is a DIFFERENT ledger to the interest received ledger)

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 o CR office cash

 Payment of interest into client account:

o CR client ledger: [client name]
o DR client cash
Interest paid on a separate designated client account where all interest paid directly to client
 CR [client name] separate designated client ledger
 DR [client name] separate designated client cash

Financial statements
 Financial statement = statement sent by the solicitor to a client showing:
o All financial transactions that have occurred or will occur with respect to a client; and
o The ‘balance’ of monies that is either payable by the client or due to the client

 Property transaction => financial statement sent prior to completion showing:

o To buyer: amount of money buyer will have to provide in order to complete
o To seller: amount of money solicitor will pay to seller following completion

o From seller’s solicitor to buyer’s solicitor, a completion statement = sets out balance to be
paid on completion

Format of financial statement

 Must show:
o Every relevant financial item (transaction)
o Balance of money due to or from client
 Group transactions adding to client balance / reducing client balance together
To: [Buyer client]
Re: Purchase of [property address]
Completion date: [Completion date]
Amount payable to seller under the contract A
Plus: fees, costs + disbursements B
Total payable C
Less: funds already received from buyer client + funds to be received from
(D)
lender + interest on funds held
Balance needed from buyer on completion E

To: [Seller client]

Re: Sale of [property address]
Completion date: [Completion date]
Amount payable by buyer under the contract V
Less: amount required to redeem mortgage + fees and disbursements (W)
Net sale proceeds X
Add: funds already received from seller client + interest on funds held Y
Balance to send to seller Z

Buyer’s financial statement

 ADD
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 o Purchase price
o Fees + disbursements (inc. VAT)
 Both for buyer + lender
 DEDUCT
o Deposit
o Money on account of costs
o Mortgage loan
o Interest on sums held by solicitor

Seller’s financial statement

 ADD
o Sale price (deposit + balance)
o Money on account of costs
o Interest on sums held by solicitor
 DEDUCT
o Fees + disbursements (inc. VAT)
 Both for seller + for mortgage lender on redemption
o Redemption of mortgage on property
o Estate agent’s fees inc. VAT

Showing VAT on financial statements

 In the following situations, VAT must be shown separately on the financial statement:
o VAT chargeable by solicitor to client (e.g. on own fees); or
o VAT chargeable to client on any Charges for supplies delivered to and arranged by solicitor

 In the following situations, the VAT-inclusive amount of the expense must be included in the
financial statement (i.e. not itemised separately)
o Client not being charged VAT by solicitor, as solicitor has paid Disbursements as agent
o Solicitor had made payment to third party for ease

 NB – where acting for borrower + lender, firm’s fees for acting for lender are shown (where no
separate lender ledger) in profit costs + VAT
 HOWEVER, where making entry for firm’s fees for acting for lender in buyer’s financial statement,
this appears as one figure inclusive of VAT

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