LPC

SOLICITORS’
ACCOUNTS

LGS Handout
24/25

Part A: Introduction & the SRA Solicitors Accounts Rules

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1.1 Introduction

This section of the course requires you to understand the following:

1. The SRA Accounts Rules (SARs) (in force from 25 November 2019), by which
the SRA controls the handling by solicitors of clients’ money.

You need to be able to engage with the SARs and resolve problems by reference
to them. The SARs make clear that both the firm and individuals within the firm
are bound by the SARs.

2. The most appropriate accounting procedures to deal with a variety of

transactions. You have to understand and remember the major principles of
dealing with client money by reference to the Rules. The postings exercises on
this module will test your understanding and application of both the major SARs
and issues of accounting principle.

The SRA is rightly concerned that all solicitors are taught and assessed in the basics of the
Rules and the manner of their operation. Issues such as money laundering and the danger
of your practice being used as a criminal’s bank account are examples of the real dangers
presented. The basic understanding and assessment of the system is best conducted using
manual paper driven systems.

In practice, of course, computerised systems are used almost universally and a wide
variety of these are available. The principles however derive directly from the paper
systems which follow; every debit has a matching credit and the decision about which
account to post funds to has to be made irrespective of whether the system works on
paper or in an electronic medium.

The first requirement is that you understand the SRA Accounts Rules. This handout is the
starting point for an understanding of the Rules. We have set out overleaf a copy of Part
1 and Part 2 of the SRA Account Rules. (You can access the Rules in full here in your SRA
Codes of Conduct & Account Rules book). They give the basic rules for handling client
money and its necessary separation from money belonging to the business.

The Rules also detail how you should deal with other money belonging to clients or third
parties (Part 3) and the issue of accountants’ reports, storage and retention (Part 4). You
must read these in full, in your own time.

At the outset it is probably worth synthesising the effect of the SARs into the following
three rules. If you understand these then by following the principles, you will probably be
correct:

1. You need separate bank accounts for Client money and the solicitor’s money
(Business money).

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 2. You can keep all the clients’ money together in one bank account, but there
must be separate records for each client, showing the Client side and any
transactions on the Business side for each client.

3. But although the client money can be held in one bank account you can never
pay out more on behalf of an individual client than stands to his credit on
Client account (because if you did that the other clients would be ‘bailing him
out’).

You should spend some time becoming broadly familiar with the SARs themselves. The
multiple-choice questions in the assessment may probe your knowledge of the operation
of the SARs. You will be able to refer to your ‘SRA Codes of Conduct and Accounts Rules’
book during the assessment but that would not be a good time to approach them for the
first time.

1.2 The SRA Account Rules

SRA Accounts Rules

Introduction

These rules set out our requirements for

when firms (including sole practices)

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authorised by us receive or deal with
money belonging to clients, including
trust money or money held on behalf of
third parties. The rules apply to all firms
we regulate, including all those who
manage or work within such firms.

Firms will need to have systems and

controls in place to ensure compliance
with these rules and the nature of those
systems must be appropriate to the
nature and volumes of client transactions
dealt with and the amount of client
money held or received.
The employees of a solicitors’ firm would
Part 1: General include all the solicitors, trainee solicitors and
paralegals, but also anyone else who is an
employee at the firm!
Application section

1.1 These rules apply to

authorised bodies, their
managers and employees and
references to “you” in these
rules should be read
accordingly.

1.2 The authorised body’s

managers are jointly and
severally responsible for
compliance by the authorised
body, its managers and
employees with these rules.

1.3 In relation to a licensed body,

the rules apply only in respect
of activities regulated by the
SRA in accordance with the
terms of its licence.

Part 2: Client money and client

accounts

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Client money

2.1 “Client money” is money held

or received by you:

(a) relating to regulated

services delivered by you to a
client;

(b) on behalf of a third party in

relation to regulated services
delivered by you (such as
money held as agent,
stakeholder or held to the
sender’s order);

(c) as a trustee or as the holder

of a specified office or
appointment, such as donee of
a power of attorney, Court of
Protection deputy or trustee of
an occupational pension
scheme;

(d) in respect of your fees and

any unpaid disbursements if
held or received prior to
delivery of a bill for the same.

2.2 In circumstances where the

only client money you hold or
receive falls within rule 2.1(d)
above, and:

(a) any money held for

disbursements relates to costs
or expenses incurred by you on This is very important!
behalf of your client and for
which you are liable; and

(b) you do not for any other

reason maintain a client
account;

you are not required to hold this

money in a client account if you
have informed your client in
advance of where and how the
money will be held. Rules 2.3,
2.4, 4.1, 7, 8.1(b) and (c) and
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 12 do not apply to client money
held outside of a client account
in accordance with this rule.

2.3 You ensure that client money is

paid promptly into a client account
unless:

(a) in relation to money falling

within 2.1(c), to do so would
conflict with your
This is very important too!
obligations under rules or
regulations relating to your
specified office or
appointment;
(b) the client money represents
payments received from the
Legal Aid Agency for your
costs; or
(c) you agree in the individual
circumstances an
alternative arrangement in
writing with the client, or the
third party, for whom the
money is held.

2.4 You ensure that client money is

available on demand unless you
agree an alternative arrangement
in writing with the client, or the
third party for whom the money is
held.

2.5 You ensure that client money is

returned promptly to the client, or
the third party for whom the Money laundering issue…
money is held, as soon as there is
no longer any proper reason to
hold those funds.

Client account
i.e. Client money must be kept separate from
3.1 You only maintain a client business money. Even more fundamental.
account at a branch (or the head
office) of a bank or a building
Mixed payments are complicated. In simple
society in England and Wales. terms, if you receive money which is partly the
client’s, and partly yours (e.g. a cheque of
3.2 You ensure that the name of money for a completion and repayment of
any client account includes: disbursements you have made, it can either be
split between client account and the Business
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 account or all paid into Client account and the
(a) the name of the part which is the firm’s then being transferred
authorised body; and off.

(b) the word “client” to

distinguish it from any other
type of account held or
operated by the authorised
body.

3.3 You must not use a client

account to provide banking
facilities to clients or third parties.
Payments into, and transfers or
withdrawals from a client account
must be in respect of the delivery
by you of regulated services.

Client money must be kept separate

4.1 You keep client money separate

from money belonging to the
authorised body.

4.2 You ensure that you allocate

promptly any funds from mixed
payments you receive to the
correct client account or
business/office account.

4.3 Where you are holding client

money and some or all of that
money will be used to pay your
costs:

(a) you must give a bill of

costs, or other written
notification of the costs
incurred, to the client or the
paying party;

(b) this must be done

before you transfer any
client money from a client This is very important! If you overdraw a client’s
account to make the client account, you are using other people’s
payment; and money to make that payment!

(c) any such payment must

be for the specific sum
identified in the bill of costs,
or other written notification
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 of the costs incurred, and
covered by the amount held
for the particular client or
third party.

Withdrawals from client account

5.1 You only withdraw client

money from a client account:

(a) for the purpose for

which it is being held;

(b) following receipt of

instructions from the client,
or the third party for whom
the money is held; or

(c) on the SRA’s prior

written authorisation or in
prescribed circumstances.

5.2 You appropriately authorise

and supervise all withdrawals
made from a client account.

5.3 You only withdraw client

money from a client account if
sufficient funds are held on behalf
of that specific client or third party
to make the payment.

Duty to correct breaches upon

discovery

6.1 You correct any breaches of

these rules promptly upon
discovery. Any money improperly
withheld or withdrawn from a
client account must be immediately
paid into the account or replaced
as appropriate.

Payment of interest

7.1 You account to clients or third

parties for a fair sum of interest on
any client money held by you on

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 their behalf.
Rule 8.1(c)is one of the reasons why we have a
cash ledger/sheet.
7.2 You may by a written
agreement come to a different
arrangement with the client or the
third party for whom the money is
held as to the payment of interest,
but you must provide sufficient
information to enable them to give
informed consent.

Client accounting systems and controls

8.1 You keep and maintain

accurate, contemporaneous, and
chronological records to:

(a) record in client ledgers

identified by the client’s name
and an appropriate description
of the matter to which they
relate:

(i) all receipts and

payments which client
money on the client side
of the client ledger
account;

(ii) all receipts and

payments which are not
client money and bills of
costs including
transactions through the
authorised body’s
accounts on the business
side of the client ledger
account;

(b) maintain a list of all the

balances shown by the client
ledger accounts of the liabilities
to clients (and third parties),
with a running total of the
balances; and

(c) provide a cash book

showing a running total of all
transactions through client
accounts held or operated by
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 you.

8.2 You obtain, at least every five

weeks, statements from banks,
building societies and other
financial institutions for all client
accounts and business accounts
held or operated by you.

8.3 You complete at least every

five weeks, for all client accounts
held or operated by you, a
reconciliation of the bank or
building society statement balance
with the cash book balance and
the client ledger total, a record of
which must be signed off by the
COFA or a manager of the firm. You
should promptly investigate and
resolve any differences shown by
the reconciliation.

8.4 You keep readily accessible a

central record of all bills or other
written notifications of costs given
by you.

1.3 Part 3: Dealing with other money belonging to clients or third parties

There are situations where a solicitor does not need to maintain a client account. There
are limited circumstances where client money can be held in the business account.
However, there are other ways in which the client’s money might be managed. The three
methods referred to in Part 3 of the SARs are:

- Operating a joint account with a client or third party;

- Operating a client’s own bank account; and
- Using third party managed accounts (‘TPMA’) to hold clients’ money.

1.3.1 Operating a joint account with a client

An example of when this might happen is if the solicitor is one of the executors of the
deceased and the other person is a lay person. The money of the estate does not have to
be placed in a client account but can be held in an account in the joint names of the
solicitor and other executor.

Rule 9.1 provides that Part 2 of the Rules does not apply to such an account, but it will
still be necessary to comply with Rule 8.2 and Rule 8.4.

1.3.2 Operating a client’s own bank account

An example of when this might happen is when the client lacks mental capacity to
operate their own account and where the solicitor has been appointed as an attorney
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under a lasting power of attorney or where the solicitor has been appointed as a deputy
by the Court of Protection.

Rule 10.1 provides that most of Part 2 of the Rules does not apply, but it will still be
necessary to comply with Rule 8.2, 8.3 and 8.4.

1.3.3 Using third party managed accounts to hold client’s money

TPMAs are bank or building society accounts operated by third party companies that
provide a facility for the management of client’s money and are an alternative to the
solicitor management the client’s money through a client account. Any money held in the
TMPA will not be ‘client money’ and will therefore not be subject to the SRA Account
Rules.

Part B: Accounting Entries

1.1 Introduction

So far, we have introduced you to the SRA Accounts Rules. We will now look to put these
rules into a practical context by considering some basic transactions, how double entry
bookkeeping is used and what solicitors’ ledger accounts look like.

2 Double entry bookkeeping

The idea behind double entry bookkeeping is that there are always two aspects to every
transaction. Every DR (debit) entry will have a corresponding CR (credit) double entry.

3 Ledger Accounts
As discussed, a solicitor’s firm will hold client money and they will need to keep this
money separate from the money belonging to the business. Solicitors therefore use
‘simple ledger accounts’ to keep a record of this. These simple ledger account will have a
column for the date of the transaction, a column for the description, two columns to
record the debit (DR) and credit (CR) entries and then a column for the balance. As
solicitors hold and use client money, solicitors will need ledgers to record what is
happening with the client’s money as well as ledgers recording what is happening with
the firm’s money (business money). You can see an example simple ledger account
below:

Name of ledger account & Business Client

matter
Date Particulars Dr Cr Bal Dr Cr Bal

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 4 Basic Transactions
4.1 Receipt of a client’s money into Client Account

Smith has instructed us in a county court action against Jones. He gives us £500 on
general account. We could only pay it into business if we had delivered a bill for this
precise sum - it would then be our money. This is not our money, so it goes to client
account. See Rule 2.1 and 2.3.

Client: Smith - litigation Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Cash/you 500 500

2nd word is the payer or

Remember the basic payee. When that
principles: 1st word is Running a cash sheet balance on a paper
person is the client the
where to find the other half system is hard work, so for these examples
word ‘you’ is used.
of the double entry. (and in any assessment question) you do not
have to.

Cash Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Smith – litigation /you 500

Why do we have a “Cash” ledger/sheet?

Remember Rule 8.1(c) requires solicitors to keep a cash book to record the running total
of all transactions through the client accounts held by the solicitor. As a matter of good
practice, a firm will also keep a cash book for business money (as well as client money).
For this module you will be expected to understand how to prepare a cash ledger/cash
sheet. A cash ledger/sheet keeps a record of all the monies which are coming in to and
going out of both the business and client bank accounts held by the firm. You will learn
to do this as part of the process of double entry bookkeeping.

4.2 Payment from Client Account

We pay a £70 court fee. We have money in client account and there is no reason why we
cannot use it to pay this disbursement on his behalf. See Rule 5.1.

Client: Smith – litigation Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Cash/you 500 500
Jan 2 Cash/court fee 70 430

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 Cash Business Client
Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Smith – litigation/you 500
Jan 2 Smith- 70
litigation/court fee

4.3 Payment from Business Account

There is no reason why we could not have paid that disbursement from business account
(though as it is the solicitor’s own money that is then being used when making a
payment from business it is better to use client account where possible). We now pay an
enquiry agent (£28) and this time we will pay it from business account.

Client: Smith - litigation Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Cash/you 500 500
Jan 2 Cash/court fee 70 430
Jan 3 Cash/enquiry agent 28 28

Cash Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Smith -litigation/you 500
Jan 2 Smith - 70
litigation/court fee
Jan 3 Smith-litigation/ 28
enquiry agent

We are already starting to cheat. This is not

strictly the payee’s name; it is the nature of
the payment. Either is acceptable.

4.4 Receipt into Business Account

This tends to happen mostly at the end of the transaction when the solicitor transfers
from client account the moneys owed to him in costs, VAT and expenses met. Of course,
if an exact sum is paid to the solicitor by way of reimbursement of a sum expended on
the client’s behalf, it is the solicitor’s money. The solicitor should then pay it direct into
business unless he pays it into client but transfers it to business promptly.

(Very unrealistically) Smith reimburses us with the amount we have spent on that
enquiry agent.

Client: Smith - litigation Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Cash/you 500 500
Jan 2 Cash/court fee 70 430
Jan 3 Cash/enquiry agent 28 28
Jan 4 Cash/you 28 -

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 Cash Business Client
Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Smith-litigation/you 500
Jan 2 Smith-litigation/Court 70
Fee
Jan 3 Smith-litigation/ 28
enquiry agent
Jan 4 Smith-litigation/ 28
you

Important!

An individual client’s business account naturally throws a debit (‘DR’) balance. If there is
a credit (‘CR’) balance you probably have client money in there - trouble.

An individual client’s client account naturally throws a CR balance (i.e. remember, a

clients pay their money into the client bank account, you would therefore expect this
account to be in credit). If there is a DR balance you have overdrawn that individual’s
account and it is being supported by the funds of other clients - even more trouble. See
Rule 5.3.

The Decision As To Whether To Pay Expenses From Business Or Client Account.

This causes some difficulty. Generally, you should remember that:

1. The solicitor’s own money is being used when anything is paid from business
account. Practices do not like doing this as they have a habit of running an
overdraft on business account at the bank; such borrowing is expensive.

2. There may be VAT reasons why client account cannot be used even if there are
funds in there (principal payments - see later in the module).

3. Petty cash can never be paid from client account.

4. In purely practical terms it may be troublesome to seek to use client account

money at all times. Suppose the solicitor is holding £10,000 on client account
awaiting exchange of contracts which will require its use as a deposit in two days’
time. It would not be worth using £20 of it today to pay a search fee. If this were
done the solicitor would end up having to send two cheques (one from client and
one from business account) when he actually pays the deposit the day after
tomorrow.

5. Recording Costs

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As soon as the bill of costs is delivered to the client he owes the firm money and his
business account is debited with the costs and VAT. Costs are never entered against
client account, even if there’s spare money in there.

Smith having withdrawn the action we charge him £400 costs plus VAT at 20% (£80).

Client: Smith - litigation Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Cash/you 500 500
Jan 2 Cash/court fee 70 430
Jan 3 Cash/enquiry agent 28 28
Jan 4 Cash/you 28 -
Jan 5 Costs 400
Jan 5 VAT (on costs) 80 480

So Where’s The Double Entry?

There is no cash sheet entry because no money has come into or gone out of the firm as
a result of this transaction. All that has happened is that an obligation has been
recorded against that client’s ledger.

The double entries are in the Costs Account...

Costs Business Notes:

1. Dec 13 - Jan 1 are for illustrative
Date Particulars Dr Cr Bal purposes only.
Dec 13 Eccles – property 270 270
2. Costs is a one column account; it
purchase only ever shows credits. If costs
Dec 18 Johnson – litigation 30 300 were refunded that would be
done through an Abatements
matter and Allowances Account.
Dec 29 Stokes – probate 1,300 1,600
matter
Jan 1 Hill – personal injury 78 1,678
matter
Jan 5 Smith - litigation 400 2,078

and in the VAT Account (HMRC)

Notes:
VAT Account (HMRC) Business 1. Dec 13 - Jan 1 are for illustrative
purposes only.
Date Particulars Dr Cr Bal
Dec 13 Eccles: property 54 54 2. This is a real two column
account. Whenever we pay
purchase - on costs VAT, entries will go into the Dr
Dec 18 Johnson: litigation 6 60 column. Eventually we will have
to account to H.M. Revenue and
matter - on costs Customs for the amount by
Dec 29 Stokes: probate 260 320 which the Cr column exceeds
the Dr.
matter - on costs
Jan 1 Hill: personal injury 15.60 335.60
matter - on costs
Jan 5 Smith: litigation - 80 415.60
on costs

5.1 A Miscellaneous Point About Costs

On a number of transactions, and especially property ones, the bill of costs which is sent
to the client has with it a statement of account. On this may appear a number of other
expenses which have been made or which it is anticipated will be made. So typically,
the account might appear as follows:
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 Costs 800
VAT 160
Search Fees (already paid) 60
Land Registry Fees (yet to be paid) 120
Total 1,140

Although the statement of account which the client receives will show the amount of
£1,140 as being required, not all of this sum will yet have appeared on the
business/client accounts.

The search fee which has already been paid will have appeared (probably in business
account) and, at the moment the bill is sent out, so will the Costs and VAT (in business
account).

But the land registry fee has not yet been paid and so will not appear anywhere in the
accounts.

See Rule 2.1(d). The effect of this is that money received for all fees and disbursements
paid to the firm are considered client money unless and until they are billed. The
definition of client money does not include money received for disbursements which
have already been paid, so where money is received for reimbursements of such a
payment, it is receipt of business money by the firm. Where money is received for an
unpaid disbursement (such as the land registry fee), this is client money. See also Rule
4.1, 4.2 and 4.3.

When the client sends the gross sum of £1,140 the firm needs to decide how to deal with
this payment:

Options:

i) the cheque could be split so that the amount owed to business account could be paid
there with the balance going to client account (although banks aren’t keen on splitting
cheques anymore!)

Illustration of i) – Splitting

Client: Houldon – property Business Client

purchase
Date Particulars Dr Cr Bal Dr Cr Bal
March 1 Cash/Search fee 60 60
March 22 Costs 800
March 22 VAT (on costs) 160 1,020
April 18 Cash/you 1,020 - 120 120

Or,

ii) (much more likely) the entirety of the sum could be paid into one account before the
element belonging to the other account is transferred (rule 4.2 requires mixed
payments to be ‘allocated promptly’ to the correct account).

Firms will have their own policies on what to do with mixed receipts, but it is generally
advisable to pay the mixed monies into the client account and then transfer the
business element to the business account.
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Illustration of ii) - Paying all into Client

Client: Houldon – property Business Client

purchase
Date Particulars Dr Cr Bal Dr Cr Bal
March 1 Cash/Search fee 60 60
March 22 Costs 800
March 22 VAT (on costs) 160 1,020
April 18 Cash/you 1,140 1,140

There will now be enough money in client account to pay the Land Registry fee when it
falls due (out of client) and transfer to business the amount owed to the practice.

Or,

iii) Paying all into Business

The entirety of the sum could be paid into the business account and the client money
could be transferred over the client account. Whilst possible, this method is very unlikely
to be used.

6. Transfers

These are very common and there are two basic sorts; between business and client
account (extremely common) and between the client accounts of different clients (rather
less common). The two are fundamentally different. Don’t mix them up.

BETWEEN CLIENT ACCOUNT AND BUSINESS ACCOUNT

See Rule 8.1(a). This requires firms to record on each client’s ledger account all client
and business money receipts and payments made for that client on the client and
business section of the accounts. Therefore, if a client’s money is withdrawn from the
client bank account and is paid into the business bank account, this must be recorded.

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6.1.1 From client to business: we hold £400 on general account for our client
Jennings and we have billed him £80 plus VAT of £16.

Client: Jennings - litigation Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
March 1 Cash/you 400 400
March 22 Costs 80 80
March 22 VAT (on costs) 16 96
March 23 Cash/Tfr 96 96 304

2. The money coming into the 1. The money coming out of

business account; a dr and a client account; a dr and a cr
cr

Cash Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
March 23 Jennings - 96 96
litigation/Tfr

Notes: 1. Think of it as two double entries (it is). First, the money comes out of client
account (ledger and cash sheet entries). Second, it arrives in business
account (ledger and cash sheet entries).

2. Money has gone out of one bank account and into another, therefore both
sets of double entries must be shown on our ledger accounts

6.1.2 From business to client which is rather less common; typically, it might be done
where a mistake has been made and a shortfall must be made up on client account by
transfer from business. See rule 6.1.
A MAJOR
Client: Baker - divorce Business Client error. It
Date Particulars Dr Cr Bal Dr Cr Bal must be
corrected
Apr 1 Cash/you 800 800 immediate
ly
Apr 22 Cash/Damages paid 900 (100)
Apr 23 Cash/Tfr 100 100 100 -

1. The money coming out of 2. The money coming into

business account; a dr and a client account; a dr and a cr
cr

Cash Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Apr 23 Baker - divorce/Tfr 100 100

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Notes:
1. Again, think of it as two entries. First, the money comes out of business
account (ledger and cash sheet entries). Second, it arrives in the client account
(ledger and cash sheet entries)

2. Again, money has gone out of one bank account and into another, therefore
both sets of double entries must be shown on our ledger accounts.

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6.2 TRANSFER FROM ONE CLIENT TO ANOTHER

This is quite different because the amount of money in the firm’s bank accounts does not
change. If we move money from client account of client Davies to the client account of
client Thomas, the total at the bank remains unchanged. What does change is the name
under which we hold the money. See rule 8.1.

We hold £4,000 for Davies and on Feb 3rd he instructs us to transfer £100 to the account
of Thomas, who is also a client.

Client: Davies – property sale Business Client

Date Particulars Dr Cr Bal Dr Cr Bal
Jan 1 Balance 4,000
Feb 3 Thomas-property 100 3,900
purchase/Tfr

Client: Thomas – property Business Client

purchase
Date Particulars Dr Cr Bal Dr Cr Bal
Feb 3 Davies- property 100 100
sale/Tfr

Notes:

1. It’s simple. Just a CR entry and a matching DR entry

2. The total balances on the firm’s bank accounts are unaffected. The balances
on business bank account and client bank account have not altered. All we
have done is reallocate who that money in our client bank account belongs to
on our client ledgers.

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