SOLICITOR’S ACCOUNTS NOTES
Double Entry Bookkeeping and SRA Accounts Rules ........................................................................................4
Double Entry Bookkeeping ..................................................................................................................................4
Principles of double entry ................................................................................................................................4
Rules for recording transactions ......................................................................................................................4
The business owner ..........................................................................................................................................5
Debit and credit ................................................................................................................................................5
The Form of Accounts..........................................................................................................................................5
When recording a transaction: .........................................................................................................................5
Making Entries .....................................................................................................................................................5
When a solicitor issues a bill for work done, they record two aspects: ...........................................................6
Cash and Ledger Accounts ...................................................................................................................................6
SRA Accounts Rules ............................................................................................................................................6
The nature of the Rules ....................................................................................................................................6
Principles governing the Rules ........................................................................................................................7
Who is bound by the Rules? ............................................................................................................................7
Client Money and Client Accounts .......................................................................................................................8
Client money ........................................................................................................................................................8
Client accounts .....................................................................................................................................................8
Paying money into the client bank account .........................................................................................................9
The general rule ...............................................................................................................................................9
Exceptions ........................................................................................................................................................9
Returning client money ........................................................................................................................................9
Keeping client money separate from the firm’s own money ...............................................................................9
Mixed receipts ..................................................................................................................................................9
Moving money for fees and disbursements ...................................................................................................10
Billing for anticipated fees and disbursements ..............................................................................................10
Transferring money for paid disbursements...................................................................................................10
Withdrawals of client money from the client bank account............................................................................... 11
Circumstances in which money can be withdrawn ........................................................................................ 11
Residual client account balances.................................................................................................................... 11
Improper use of a client bank account as a banking facility .............................................................................. 11
The prohibition ............................................................................................................................................... 11
SRA warning notice .......................................................................................................................................12
Factors to bear in mind when questioning fund movement: ..........................................................................12
Client accounting systems and controls .............................................................................................................13
Common Accounting Entries ..............................................................................................................................14
The two sets of accounting records ....................................................................................................................14
The format of accounts ......................................................................................................................................14
Requirements as to formats ............................................................................................................................14
The dual cash account ....................................................................................................................................14
, The dual ledger account for each client .........................................................................................................14
Receipts of money ..........................................................................................................................................15
Payments of money ............................................................................................................................................15
Recording the firm’s professional charges .........................................................................................................15
Transfers and Mixed Receipts.............................................................................................................................17
Cash transfers .....................................................................................................................................................17
Recording a transfer from the client bank account to the business bank account is done in two stages: ......17
Important points regarding bills: ....................................................................................................................17
Inter-client transfers ...........................................................................................................................................18
To record an inter-client transfer: ...................................................................................................................18
Mixed receipts ....................................................................................................................................................18
Split cheques ..................................................................................................................................................18
Direct transfers ...............................................................................................................................................18
Summary of Mixed Receipts and Transfers ...................................................................................................19
Value Added Tax ...................................................................................................................................................20
General principles ..............................................................................................................................................20
Output tax .......................................................................................................................................................20
Input tax .........................................................................................................................................................20
Value of supply...............................................................................................................................................21
Time of supply ...............................................................................................................................................21
Tax invoices ...................................................................................................................................................21
Collection and accounts .................................................................................................................................21
VAT and firms providing legal services .............................................................................................................21
Professional charges .......................................................................................................................................21
Disbursements for VAT purposes ...................................................................................................................21
The treatment of ‘non-disbursements’ in the firm’s accounts ........................................................................22
The treatment of disbursements in the firm’s accounts..................................................................................23
Special Accounting Entries ..................................................................................................................................25
Receipt of a cheque made out to the client or a third party................................................................................25
Dishonoured cheques .........................................................................................................................................25
Abatement ..........................................................................................................................................................26
Accounting Entries (Reversal): ......................................................................................................................26
Bad debts ............................................................................................................................................................26
Petty cash ...........................................................................................................................................................26
Insurance commission ........................................................................................................................................27
Where a financial benefit has been received, ‘properly accounting’ is likely to be: .....................................27
Interest ..................................................................................................................................................................29
The obligation to account ...................................................................................................................................29
The obligation ................................................................................................................................................29
Methods of dealing with interest ....................................................................................................................29
Factors affecting the choice of method ..........................................................................................................30
Use of a separate designated deposit bank account ...........................................................................................30
, The nature of the account ...............................................................................................................................30
Accounting entries .........................................................................................................................................30
Use of the general client bank account ..............................................................................................................31
The general client bank account.....................................................................................................................31
Accounting entries .........................................................................................................................................31
Property Transactions..........................................................................................................................................32
Stakeholder money .............................................................................................................................................32
Stakeholder Accounting Methods: .................................................................................................................32
Bridging finance .................................................................................................................................................33
Mortgages...........................................................................................................................................................33
Mortgage advances – acting for buyer and lender .........................................................................................33
Professional charges on mortgage advance....................................................................................................33
Mortgage redemption – acting for lender and seller ......................................................................................34
Professional charges on mortgage redemption ..............................................................................................34
Joint Accounts, the Client’s Own Bank Account and Third Party Managed Accounts ................................35
SRA Principles and Code of Conduct ................................................................................................................35
Joint accounts .....................................................................................................................................................35
Operating a client’s own account .......................................................................................................................35
Third party managed accounts ...........................................................................................................................36
The TPMA provider and the TPMA ..............................................................................................................36
Engaging with the client ................................................................................................................................36
Operating the TPMA ......................................................................................................................................36
Regulatory protection .....................................................................................................................................36
SRA Guidance ................................................................................................................................................37
Compliance ...........................................................................................................................................................38
Accountants’ reports...........................................................................................................................................38
Retention and storage of accounting records .....................................................................................................39
, Double Entry Bookkeeping and SRA Accounts Rules
• All businesses must keep records of their financial dealings, and law firms are no exception.
• Those managing the firm need to keep track of its financial position, such as determining profitability or the
ability to hire more staff.
• The term ‘accounts’ describes the day-to-day records a firm keeps of its financial transactions.
• Law firms’ financial dealings are generally complex.
• Because so many different events occur, it is impractical for those running the firm to rely only on
individual documents, such as bank statements and client bills, to provide a full picture of the firm’s
financial position.
• Instead, necessary information is taken from individual documents and entered on separate records.
• These separate records, or accounts, are simply summaries of financial information.
• All law firms, from sole practitioners to multinational LLPs, follow the same standard process for recording
financial transactions in their accounts.
• Law firms differ from many other types of business because they frequently hold money that belongs to
other people, typically the firm’s clients.
• As a matter of professional conduct, solicitors must adhere to rules regarding the proper handling of clients’
money and the keeping of accounting records, ensuring that the public can place trust and confidence in law
firms.
Double Entry Bookkeeping
• The process of recording financial transactions in the accounts of a law firm is called bookkeeping.
• This terminology originates from the time when records were hand-written into large bound books, which is
why these records are still often referred to as ‘the books’ of the business.
• Today, firms usually keep their financial records using computerised systems.
• All firms utilize the double entry bookkeeping system to record day-to-day transactions.
• This system is used universally as standard by businesses of all types and sizes. It was developed by
Venetian traders in the fifteenth century.
• Double entry bookkeeping is a system of recording financial dealings based on a series of rules.
• Although some rules may appear arbitrary or counter-intuitive, once the initial decisions made by the
Venetian traders are accepted, the system maintains its own internal logic.
Principles of double entry
• Double entry bookkeeping is based on the premise that every financial transaction has two aspects to it, and
both aspects must be recorded.
Examples illustrating the two aspects of transactions are:
• The firm pays cash to buy premises: Aspect 1 – The firm has less cash; Aspect 2 – The firm has acquired an
asset in the form of premises.
• The firm pays staff wages: Aspect 1 – The firm has less cash; Aspect 2 – The firm has incurred an expense.
• The firm bills a client for work done: Aspect 1 – The firm has earned income; Aspect 2 – The firm has a
debt (the amount of the bill) owing to it.
• The client pays the firm the money owed: Aspect 1 – The firm has lost the debt that was owing to it; Aspect
2 – The firm has more cash.
• Both aspects are recorded in the books, and each aspect must be recorded in a different account.
• The system requires separate accounts for different items, such as cash, each type of asset, each type of
expense, each person the firm owes money to, and each debtor that owes money to the firm.
• Accounts are divided into two sides.
• The two aspects of any transaction are recorded on different sides of the two accounts.
Rules for recording transactions
Left column (DR) Right column (CR)
Expense incurred Income earned
Asset acquired/ increased Asset disposed of/ reduced
Liability reduced/ extinguished Liability incurred/ increased
Cash gained Cash paid
• When recording an individual transaction, one aspect appears in the left-hand column (recorded on the left-
hand side of one account), and the other aspect appears in the right-hand column (recorded on the right-
hand side of another account).
Double Entry Bookkeeping and SRA Accounts Rules ........................................................................................4
Double Entry Bookkeeping ..................................................................................................................................4
Principles of double entry ................................................................................................................................4
Rules for recording transactions ......................................................................................................................4
The business owner ..........................................................................................................................................5
Debit and credit ................................................................................................................................................5
The Form of Accounts..........................................................................................................................................5
When recording a transaction: .........................................................................................................................5
Making Entries .....................................................................................................................................................5
When a solicitor issues a bill for work done, they record two aspects: ...........................................................6
Cash and Ledger Accounts ...................................................................................................................................6
SRA Accounts Rules ............................................................................................................................................6
The nature of the Rules ....................................................................................................................................6
Principles governing the Rules ........................................................................................................................7
Who is bound by the Rules? ............................................................................................................................7
Client Money and Client Accounts .......................................................................................................................8
Client money ........................................................................................................................................................8
Client accounts .....................................................................................................................................................8
Paying money into the client bank account .........................................................................................................9
The general rule ...............................................................................................................................................9
Exceptions ........................................................................................................................................................9
Returning client money ........................................................................................................................................9
Keeping client money separate from the firm’s own money ...............................................................................9
Mixed receipts ..................................................................................................................................................9
Moving money for fees and disbursements ...................................................................................................10
Billing for anticipated fees and disbursements ..............................................................................................10
Transferring money for paid disbursements...................................................................................................10
Withdrawals of client money from the client bank account............................................................................... 11
Circumstances in which money can be withdrawn ........................................................................................ 11
Residual client account balances.................................................................................................................... 11
Improper use of a client bank account as a banking facility .............................................................................. 11
The prohibition ............................................................................................................................................... 11
SRA warning notice .......................................................................................................................................12
Factors to bear in mind when questioning fund movement: ..........................................................................12
Client accounting systems and controls .............................................................................................................13
Common Accounting Entries ..............................................................................................................................14
The two sets of accounting records ....................................................................................................................14
The format of accounts ......................................................................................................................................14
Requirements as to formats ............................................................................................................................14
The dual cash account ....................................................................................................................................14
, The dual ledger account for each client .........................................................................................................14
Receipts of money ..........................................................................................................................................15
Payments of money ............................................................................................................................................15
Recording the firm’s professional charges .........................................................................................................15
Transfers and Mixed Receipts.............................................................................................................................17
Cash transfers .....................................................................................................................................................17
Recording a transfer from the client bank account to the business bank account is done in two stages: ......17
Important points regarding bills: ....................................................................................................................17
Inter-client transfers ...........................................................................................................................................18
To record an inter-client transfer: ...................................................................................................................18
Mixed receipts ....................................................................................................................................................18
Split cheques ..................................................................................................................................................18
Direct transfers ...............................................................................................................................................18
Summary of Mixed Receipts and Transfers ...................................................................................................19
Value Added Tax ...................................................................................................................................................20
General principles ..............................................................................................................................................20
Output tax .......................................................................................................................................................20
Input tax .........................................................................................................................................................20
Value of supply...............................................................................................................................................21
Time of supply ...............................................................................................................................................21
Tax invoices ...................................................................................................................................................21
Collection and accounts .................................................................................................................................21
VAT and firms providing legal services .............................................................................................................21
Professional charges .......................................................................................................................................21
Disbursements for VAT purposes ...................................................................................................................21
The treatment of ‘non-disbursements’ in the firm’s accounts ........................................................................22
The treatment of disbursements in the firm’s accounts..................................................................................23
Special Accounting Entries ..................................................................................................................................25
Receipt of a cheque made out to the client or a third party................................................................................25
Dishonoured cheques .........................................................................................................................................25
Abatement ..........................................................................................................................................................26
Accounting Entries (Reversal): ......................................................................................................................26
Bad debts ............................................................................................................................................................26
Petty cash ...........................................................................................................................................................26
Insurance commission ........................................................................................................................................27
Where a financial benefit has been received, ‘properly accounting’ is likely to be: .....................................27
Interest ..................................................................................................................................................................29
The obligation to account ...................................................................................................................................29
The obligation ................................................................................................................................................29
Methods of dealing with interest ....................................................................................................................29
Factors affecting the choice of method ..........................................................................................................30
Use of a separate designated deposit bank account ...........................................................................................30
, The nature of the account ...............................................................................................................................30
Accounting entries .........................................................................................................................................30
Use of the general client bank account ..............................................................................................................31
The general client bank account.....................................................................................................................31
Accounting entries .........................................................................................................................................31
Property Transactions..........................................................................................................................................32
Stakeholder money .............................................................................................................................................32
Stakeholder Accounting Methods: .................................................................................................................32
Bridging finance .................................................................................................................................................33
Mortgages...........................................................................................................................................................33
Mortgage advances – acting for buyer and lender .........................................................................................33
Professional charges on mortgage advance....................................................................................................33
Mortgage redemption – acting for lender and seller ......................................................................................34
Professional charges on mortgage redemption ..............................................................................................34
Joint Accounts, the Client’s Own Bank Account and Third Party Managed Accounts ................................35
SRA Principles and Code of Conduct ................................................................................................................35
Joint accounts .....................................................................................................................................................35
Operating a client’s own account .......................................................................................................................35
Third party managed accounts ...........................................................................................................................36
The TPMA provider and the TPMA ..............................................................................................................36
Engaging with the client ................................................................................................................................36
Operating the TPMA ......................................................................................................................................36
Regulatory protection .....................................................................................................................................36
SRA Guidance ................................................................................................................................................37
Compliance ...........................................................................................................................................................38
Accountants’ reports...........................................................................................................................................38
Retention and storage of accounting records .....................................................................................................39
, Double Entry Bookkeeping and SRA Accounts Rules
• All businesses must keep records of their financial dealings, and law firms are no exception.
• Those managing the firm need to keep track of its financial position, such as determining profitability or the
ability to hire more staff.
• The term ‘accounts’ describes the day-to-day records a firm keeps of its financial transactions.
• Law firms’ financial dealings are generally complex.
• Because so many different events occur, it is impractical for those running the firm to rely only on
individual documents, such as bank statements and client bills, to provide a full picture of the firm’s
financial position.
• Instead, necessary information is taken from individual documents and entered on separate records.
• These separate records, or accounts, are simply summaries of financial information.
• All law firms, from sole practitioners to multinational LLPs, follow the same standard process for recording
financial transactions in their accounts.
• Law firms differ from many other types of business because they frequently hold money that belongs to
other people, typically the firm’s clients.
• As a matter of professional conduct, solicitors must adhere to rules regarding the proper handling of clients’
money and the keeping of accounting records, ensuring that the public can place trust and confidence in law
firms.
Double Entry Bookkeeping
• The process of recording financial transactions in the accounts of a law firm is called bookkeeping.
• This terminology originates from the time when records were hand-written into large bound books, which is
why these records are still often referred to as ‘the books’ of the business.
• Today, firms usually keep their financial records using computerised systems.
• All firms utilize the double entry bookkeeping system to record day-to-day transactions.
• This system is used universally as standard by businesses of all types and sizes. It was developed by
Venetian traders in the fifteenth century.
• Double entry bookkeeping is a system of recording financial dealings based on a series of rules.
• Although some rules may appear arbitrary or counter-intuitive, once the initial decisions made by the
Venetian traders are accepted, the system maintains its own internal logic.
Principles of double entry
• Double entry bookkeeping is based on the premise that every financial transaction has two aspects to it, and
both aspects must be recorded.
Examples illustrating the two aspects of transactions are:
• The firm pays cash to buy premises: Aspect 1 – The firm has less cash; Aspect 2 – The firm has acquired an
asset in the form of premises.
• The firm pays staff wages: Aspect 1 – The firm has less cash; Aspect 2 – The firm has incurred an expense.
• The firm bills a client for work done: Aspect 1 – The firm has earned income; Aspect 2 – The firm has a
debt (the amount of the bill) owing to it.
• The client pays the firm the money owed: Aspect 1 – The firm has lost the debt that was owing to it; Aspect
2 – The firm has more cash.
• Both aspects are recorded in the books, and each aspect must be recorded in a different account.
• The system requires separate accounts for different items, such as cash, each type of asset, each type of
expense, each person the firm owes money to, and each debtor that owes money to the firm.
• Accounts are divided into two sides.
• The two aspects of any transaction are recorded on different sides of the two accounts.
Rules for recording transactions
Left column (DR) Right column (CR)
Expense incurred Income earned
Asset acquired/ increased Asset disposed of/ reduced
Liability reduced/ extinguished Liability incurred/ increased
Cash gained Cash paid
• When recording an individual transaction, one aspect appears in the left-hand column (recorded on the left-
hand side of one account), and the other aspect appears in the right-hand column (recorded on the right-
hand side of another account).
