SKILL
SOLICITORS’ ACCOUNTS
REVISION NOTES
Legal Practice Course
Do not print this cover page unless you need it,
colour prints can be expensive.
, ONE-PAGE EXAM OVERVIEW
Double entry bookkeeping: PAY DISBURSEMENTS: PETTY CASH:
Always make at least two entries at a time,
one DR, one CR
Disbursements = costs paid to third parties Withdraw money to keep as petty cash:
by solicitors on behalf of client (including
VAT). Office expenses are not included. DR Petty cash (separate ledger)
Rule 6.1 Breaches of the Rules must be
corrected promptly on discovery. CR Business Cash (Business account)
If there is enough money on client account:
Pay SMALL expenditure out of petty cash:
ISSUE A BILL OF COSTS: DR Client Ledger (Client account) DR Business ledger (Client account)
*Invoice sent to client* CR Client Cash (Business account) CR Petty cash ledger
Issue a bill (Profit costs): If there is not enough money on client
account:
Amount A = Profit costs amount without VAT
Amount B = VAT amount DR Business Ledger (Client account) PARTNER DEPOSITS MONEY:
Amount C = Profit costs plus VAT
CR Business Cash (Business account) CR Client ledger (Partner’s account)
DR Business Ledger (Client account) Amount A DR Business Cash (Business account)
CR Profit Costs (separate ledger) Amount A
PAY INTO CLIENT ACCOUNT:
DR Business Ledger (Client account) Amount B CONVEYANCING – DEPOSIT:
CR VAT Account (separate ledger) Amount B CR Client Ledger (Client account)
DR Client Cash (Business account) Buyer sends the deposit to their solicitor:
Client pays the bill:
CR Client Ledger (Client account – buyer)
CR Business Ledger (Client account) Amount C INTEREST: DR Client Cash (Business account)
DR Business Cash (Business account) Amount C
Client may give informed written consent Buyer’s solicitor send deposit to seller’s
Money is already on client account: to not receive interest. Otherwise, law firms solicitor:
DR Client Ledger (Client account) Amount C
must pay a fair sum. DR Client Ledger (Client account – buyer)
CR Client Cash (Business account) Amount C Amount A = Total interest gained CR Client Cash (Business account)
Amount B = Fair sum of interest
CR Business Ledger (Client account) Amount C Solicitor acts as a stakeholder:
DR Business Cash (Business account) Amount C CR Interest Received Ledger Amount A
Seller’s solicitor receives the deposit:
DR Business Cash (Business account) Amount A
CR Stakeholder ledger (separate ledger)
MIXED PAYMENTS: DR Interest Received Ledger Amount B
DR Client cash (Business account)
Method 1: Pay into client account first: CR Business Cash (Business account) Amount B
Seller’s solicitor sends deposit to the Seller:
DR Client Ledger (Client account) Full amount
CR Client Cash (Business account) Full amount ABATEMENT OF COSTS:
VAT ON LENDER DR Stakeholder Ledger (separate ledger)
CR Business Ledger (Client account) Business CR Client Ledger (Client account – seller)
money Amount
If you areAacting
= Reduction
for bothinclient
the bill
and the bank,
Amount
you will B = VAT
have to on reduction
charge for the time spent Solicitor acts as an agent:
DR Business Cash (Business account) Business acting for the lender in addition to your usual
money Reduction in profit cost:
fees. Seller’s solicitor receives the deposit:
Method 2: Pay into business account first: CR
DR Business
Office Ledger
Ledger Amount
(Client Aaccount) (fee CR Client Ledger (Client account – seller)
CR Business Ledger Full amount DR Profitpaid
amount Costs
byAmount
Buyer) A
CR Profit costs (Separate ledger) (fee DR Client Cash (Business account)
DR Business Cash Full amount Reduction
amount in by
paid VAT:
Buyer)
DR Client Ledger Client money Seller’s solicitor sends deposit to the Seller:
CR Business Ledger Amount
DR Office Ledger (Client B
account) (VAT paid
CR Client Cash Client money DR Client Ledger (Client account – seller)
DRBuyer)
by VAT Account Amount B
Method 3: Split the money: CR VAT account (Separate ledger) (VAT paid CR Client Cash (Business account)
by Buyer)
CR Business Ledger Business money BAD DEBTS:
DR Business Cash Business money DR Office Ledger (Client account) (fee CONVEYANCING – LENDER’S
CR Client Ledger Client money Write
amountoffpaid
debt:
by Bank) FEES:
CR Profit costs (Separate ledger) (fee
DR Client Cash Client money CR Business
amount paidLedger Unpaid amount
by Bank) You are acting for both client and the bank,
DR Bad and doubtful debts account Unpaid so you will have to charge for the time spent
amount
DR Office Ledger (Client account) (VAT paid acting for the lender in addition to your
RECEIPT OF MORTGAGE FUNDS: by Bank) usual fees.
Write
CR VAToffaccount
VAT on(Separate
bad debt:ledger) (VAT paid
Method 1: *No separate ledger for lender* by Bank)
CR Business Ledger VAT amount Amount A = Profit costs in relation to client
CR Client Ledger (Client account – buyer) Amount B = VAT amount in relation to client
DR VAT account VAT amount Amount C = Profit costs in relation to lender
DR Client Cash (Business account) Record the payment into client account: Amount D = VAT amount in relation to lender
CR client ledger of client who is being paid
Method 2: *Separate ledger for lender* DISHONOURED
the interest CHEQUE: DR Business Ledger (Client account) Amount A
DR client cash CR Profit costs (Separate ledger) Amount A
Receipt of funds: DR Client Ledger (Client account)
CR Client Cash (Business account) DR Business Ledger (Client account) Amount B
CR Client Ledger (Client account – lender) CR VAT account (Separate ledger) Amount B
DR Client Cash (Business account)
CLOSING A FILE: DR Business Ledger (Client account) Amount C
On completion, transfer from lender’s
client ledger to the buyer’s client ledger: Pay the remaining funds back to the client: CR Profit costs (Separate ledger) Amount C
DR Client Ledger (Client account – lender) DR Client Ledger (Client account) DR Business Ledger (Client account) Amount D
CR Client Ledger (Client account – buyer) CR Business Cash (Business account) CR VAT account (Separate ledger) Amount D
ALL THE KEY INFORMATION ON ONE PAGE
Solicitors’ Accounts – Revision notes | Page 1 of 17
, SOLICITORS’ ACCOUNT RULES agreement.
Rule 6.1 Breaches of the Rules must be corrected promptly on discovery. (d) Money relating to client but not to the work the firm has done
for client is not client money. In this case, make a note in that
SRA’s overarching objective is to keep client money safe. client’s ledger recording both the receipt of and the handing over
Rule 4.1 Client money must be kept separate from business money. of the cheque. – eg. if a third party sends you a cheque to
forward onto the client so that they can cash it.
CLIENT MONEY: When can you pay money out of client account?
What is client money? Rule 3.3 All payments into, transfers from, or withdrawals from a client
Rule 2.1 Client money = money held or received by the firm. It belongs account must be in respect of the solicitor delivering legal services.
to the client. Client money may only be withdrawn from client account if:
Client money if: 1. It is for the purpose for which it is being held – eg. paying court
(a) Money received from client on account of costs. fees.
* Money from client sent for general purposes in OR
connection with a matter. 2. It is following instructions from client, or third party from whom
* This is money which has been transferred to cover not the money is held – eg. you have been holding the money for the
yet incurred expenses. deposit for the purchase of a property.
OR
Example:
3. Client money becoming business money in order to satisfy bill
Luigi, a solicitor has been instructed in connection with a of costs: The money can be transferred after the firm delivers a
property purchase. Luigi will ask his client for money to cover bill of costs/other written notification of costs to client. Any
the Land Registry fees. If the client eventually decides to not payment taken from client account must only be for the sum
go ahead with the purchase and the searches are not then identified in the bill of costs/written notification.
paid for, the money remains client money.
OR
4. Mixed payments: when the business money element of a mixed
(b) Money received in respect of your fees or yet unpaid payment which has to be transferred to the business account.
disbursement expenses.
* Costs = fees and disbursements. Only withdraw if sufficient funds are held on behalf of that specific
* Fees = a firm’s own charges/profit costs (including VAT). client or third party to make the payment.
* Disbursements = costs paid to third parties by solicitors
on behalf of their client (including VAT). BUSINESS MONEY:
• Does not include: Office expenses – such as
postage fees. What is business money?
• Includes: Stamp Duty Land Tax, Land Registry
fees, company search fees and court fees. Business money = money belonging to authorised bodies. – ie. law firms
(c) Money received from client but belonging to a third party: Business money if:
money held as agent, stakeholder or held to the sender’s order.
– eg. the deposit for a purchase. * Paid disbursements:
(d) Money held as a trustee or as the holder of a specified office. If the firm has already paid for disbursements, the firm can be
Specified office is where someone is: reimbursed without having to issue a bill to client by paying any
1. A donee of a Power of Attorney money received from client into the business account.
2. A court of Protection deputy
OR Example:
3. A trustee of occupational pension scheme.
If a law firm held no money for their client, they will have to
Where should client money be placed? pay for the disbursement. The client will later send the money
but only after disbursements are paid by the law firm.
Rule 3.2 Client account = account at a bank or building society in England
and Wales.
* Money sent after a bill for the law firm’s fees is delivered:
The client account’s name must include the name of the law firm and Client pays solicitor for work undertaken.
have the word “client”. It is not a bank account belonging to client.
* Money sent by client after bill of costs is delivered: this is done
Ledger = an accounting tool used to record money coming in an going to reimburse costs or expenses not yet paid by the firm.
out and this helps us identify to whom the money belongs. A ledger is
not usually a real bank account. Where should business money be placed?
The ledger relating to client account is referred to as ‘client cash’. Business account = physical bank account used by a law firm to hold
Client ledgers are logical: ££ into ledger = CR, out = DR business money.
A law firm will have a general client account holding the money of The ledger relating to the business account is ‘Business cash’.
various clients. However, it can open a separate designated client
accounts holding each client’s money. The total amount ‘owed’ by a law Any money on the business account belongs to the firm.
firm to all its clients should equal the money held in client account(s).
General rule: business money should be paid into the business account.
The names of these accounts must include both the name of the law firm
AND the word ‘client’. When can you pay business money into client account?
Client money to be paid promptly into a client account once you A firm may allocate funds from mixed payments to the correct client
received and identified it as client money. account or business account.
Exceptions: Clients often send or transfer money needed to pay a bill for work done
(a) Money held as a trustee or the holder of a specified office (as but also to include some money for another matter.
discussed earlier) should not be paid into a client account if that If the money is transferred by client to the business account:
would conflict with the rules relating to the specified office. The firm must promptly allocate client money element into client
(b) Client money representing payments from the Legal Aid Agency account.
for your costs should not be paid into the client account. If client transfers a mixed payment to client account:
(c) You agree in a written alternative arrangement with the person The firm must promptly allocate the business money element to the
for whom the money is held not to hold the money in client business account – again leaving business money in with client money
account. This money will have to be held in accordance with the for a short while. The law firm is not in breach of the rules if it pays
business money into client account (and vice versa) this way.
Solicitors’ Accounts – Revision notes | Page 2 of 17
SOLICITORS’ ACCOUNTS
REVISION NOTES
Legal Practice Course
Do not print this cover page unless you need it,
colour prints can be expensive.
, ONE-PAGE EXAM OVERVIEW
Double entry bookkeeping: PAY DISBURSEMENTS: PETTY CASH:
Always make at least two entries at a time,
one DR, one CR
Disbursements = costs paid to third parties Withdraw money to keep as petty cash:
by solicitors on behalf of client (including
VAT). Office expenses are not included. DR Petty cash (separate ledger)
Rule 6.1 Breaches of the Rules must be
corrected promptly on discovery. CR Business Cash (Business account)
If there is enough money on client account:
Pay SMALL expenditure out of petty cash:
ISSUE A BILL OF COSTS: DR Client Ledger (Client account) DR Business ledger (Client account)
*Invoice sent to client* CR Client Cash (Business account) CR Petty cash ledger
Issue a bill (Profit costs): If there is not enough money on client
account:
Amount A = Profit costs amount without VAT
Amount B = VAT amount DR Business Ledger (Client account) PARTNER DEPOSITS MONEY:
Amount C = Profit costs plus VAT
CR Business Cash (Business account) CR Client ledger (Partner’s account)
DR Business Ledger (Client account) Amount A DR Business Cash (Business account)
CR Profit Costs (separate ledger) Amount A
PAY INTO CLIENT ACCOUNT:
DR Business Ledger (Client account) Amount B CONVEYANCING – DEPOSIT:
CR VAT Account (separate ledger) Amount B CR Client Ledger (Client account)
DR Client Cash (Business account) Buyer sends the deposit to their solicitor:
Client pays the bill:
CR Client Ledger (Client account – buyer)
CR Business Ledger (Client account) Amount C INTEREST: DR Client Cash (Business account)
DR Business Cash (Business account) Amount C
Client may give informed written consent Buyer’s solicitor send deposit to seller’s
Money is already on client account: to not receive interest. Otherwise, law firms solicitor:
DR Client Ledger (Client account) Amount C
must pay a fair sum. DR Client Ledger (Client account – buyer)
CR Client Cash (Business account) Amount C Amount A = Total interest gained CR Client Cash (Business account)
Amount B = Fair sum of interest
CR Business Ledger (Client account) Amount C Solicitor acts as a stakeholder:
DR Business Cash (Business account) Amount C CR Interest Received Ledger Amount A
Seller’s solicitor receives the deposit:
DR Business Cash (Business account) Amount A
CR Stakeholder ledger (separate ledger)
MIXED PAYMENTS: DR Interest Received Ledger Amount B
DR Client cash (Business account)
Method 1: Pay into client account first: CR Business Cash (Business account) Amount B
Seller’s solicitor sends deposit to the Seller:
DR Client Ledger (Client account) Full amount
CR Client Cash (Business account) Full amount ABATEMENT OF COSTS:
VAT ON LENDER DR Stakeholder Ledger (separate ledger)
CR Business Ledger (Client account) Business CR Client Ledger (Client account – seller)
money Amount
If you areAacting
= Reduction
for bothinclient
the bill
and the bank,
Amount
you will B = VAT
have to on reduction
charge for the time spent Solicitor acts as an agent:
DR Business Cash (Business account) Business acting for the lender in addition to your usual
money Reduction in profit cost:
fees. Seller’s solicitor receives the deposit:
Method 2: Pay into business account first: CR
DR Business
Office Ledger
Ledger Amount
(Client Aaccount) (fee CR Client Ledger (Client account – seller)
CR Business Ledger Full amount DR Profitpaid
amount Costs
byAmount
Buyer) A
CR Profit costs (Separate ledger) (fee DR Client Cash (Business account)
DR Business Cash Full amount Reduction
amount in by
paid VAT:
Buyer)
DR Client Ledger Client money Seller’s solicitor sends deposit to the Seller:
CR Business Ledger Amount
DR Office Ledger (Client B
account) (VAT paid
CR Client Cash Client money DR Client Ledger (Client account – seller)
DRBuyer)
by VAT Account Amount B
Method 3: Split the money: CR VAT account (Separate ledger) (VAT paid CR Client Cash (Business account)
by Buyer)
CR Business Ledger Business money BAD DEBTS:
DR Business Cash Business money DR Office Ledger (Client account) (fee CONVEYANCING – LENDER’S
CR Client Ledger Client money Write
amountoffpaid
debt:
by Bank) FEES:
CR Profit costs (Separate ledger) (fee
DR Client Cash Client money CR Business
amount paidLedger Unpaid amount
by Bank) You are acting for both client and the bank,
DR Bad and doubtful debts account Unpaid so you will have to charge for the time spent
amount
DR Office Ledger (Client account) (VAT paid acting for the lender in addition to your
RECEIPT OF MORTGAGE FUNDS: by Bank) usual fees.
Write
CR VAToffaccount
VAT on(Separate
bad debt:ledger) (VAT paid
Method 1: *No separate ledger for lender* by Bank)
CR Business Ledger VAT amount Amount A = Profit costs in relation to client
CR Client Ledger (Client account – buyer) Amount B = VAT amount in relation to client
DR VAT account VAT amount Amount C = Profit costs in relation to lender
DR Client Cash (Business account) Record the payment into client account: Amount D = VAT amount in relation to lender
CR client ledger of client who is being paid
Method 2: *Separate ledger for lender* DISHONOURED
the interest CHEQUE: DR Business Ledger (Client account) Amount A
DR client cash CR Profit costs (Separate ledger) Amount A
Receipt of funds: DR Client Ledger (Client account)
CR Client Cash (Business account) DR Business Ledger (Client account) Amount B
CR Client Ledger (Client account – lender) CR VAT account (Separate ledger) Amount B
DR Client Cash (Business account)
CLOSING A FILE: DR Business Ledger (Client account) Amount C
On completion, transfer from lender’s
client ledger to the buyer’s client ledger: Pay the remaining funds back to the client: CR Profit costs (Separate ledger) Amount C
DR Client Ledger (Client account – lender) DR Client Ledger (Client account) DR Business Ledger (Client account) Amount D
CR Client Ledger (Client account – buyer) CR Business Cash (Business account) CR VAT account (Separate ledger) Amount D
ALL THE KEY INFORMATION ON ONE PAGE
Solicitors’ Accounts – Revision notes | Page 1 of 17
, SOLICITORS’ ACCOUNT RULES agreement.
Rule 6.1 Breaches of the Rules must be corrected promptly on discovery. (d) Money relating to client but not to the work the firm has done
for client is not client money. In this case, make a note in that
SRA’s overarching objective is to keep client money safe. client’s ledger recording both the receipt of and the handing over
Rule 4.1 Client money must be kept separate from business money. of the cheque. – eg. if a third party sends you a cheque to
forward onto the client so that they can cash it.
CLIENT MONEY: When can you pay money out of client account?
What is client money? Rule 3.3 All payments into, transfers from, or withdrawals from a client
Rule 2.1 Client money = money held or received by the firm. It belongs account must be in respect of the solicitor delivering legal services.
to the client. Client money may only be withdrawn from client account if:
Client money if: 1. It is for the purpose for which it is being held – eg. paying court
(a) Money received from client on account of costs. fees.
* Money from client sent for general purposes in OR
connection with a matter. 2. It is following instructions from client, or third party from whom
* This is money which has been transferred to cover not the money is held – eg. you have been holding the money for the
yet incurred expenses. deposit for the purchase of a property.
OR
Example:
3. Client money becoming business money in order to satisfy bill
Luigi, a solicitor has been instructed in connection with a of costs: The money can be transferred after the firm delivers a
property purchase. Luigi will ask his client for money to cover bill of costs/other written notification of costs to client. Any
the Land Registry fees. If the client eventually decides to not payment taken from client account must only be for the sum
go ahead with the purchase and the searches are not then identified in the bill of costs/written notification.
paid for, the money remains client money.
OR
4. Mixed payments: when the business money element of a mixed
(b) Money received in respect of your fees or yet unpaid payment which has to be transferred to the business account.
disbursement expenses.
* Costs = fees and disbursements. Only withdraw if sufficient funds are held on behalf of that specific
* Fees = a firm’s own charges/profit costs (including VAT). client or third party to make the payment.
* Disbursements = costs paid to third parties by solicitors
on behalf of their client (including VAT). BUSINESS MONEY:
• Does not include: Office expenses – such as
postage fees. What is business money?
• Includes: Stamp Duty Land Tax, Land Registry
fees, company search fees and court fees. Business money = money belonging to authorised bodies. – ie. law firms
(c) Money received from client but belonging to a third party: Business money if:
money held as agent, stakeholder or held to the sender’s order.
– eg. the deposit for a purchase. * Paid disbursements:
(d) Money held as a trustee or as the holder of a specified office. If the firm has already paid for disbursements, the firm can be
Specified office is where someone is: reimbursed without having to issue a bill to client by paying any
1. A donee of a Power of Attorney money received from client into the business account.
2. A court of Protection deputy
OR Example:
3. A trustee of occupational pension scheme.
If a law firm held no money for their client, they will have to
Where should client money be placed? pay for the disbursement. The client will later send the money
but only after disbursements are paid by the law firm.
Rule 3.2 Client account = account at a bank or building society in England
and Wales.
* Money sent after a bill for the law firm’s fees is delivered:
The client account’s name must include the name of the law firm and Client pays solicitor for work undertaken.
have the word “client”. It is not a bank account belonging to client.
* Money sent by client after bill of costs is delivered: this is done
Ledger = an accounting tool used to record money coming in an going to reimburse costs or expenses not yet paid by the firm.
out and this helps us identify to whom the money belongs. A ledger is
not usually a real bank account. Where should business money be placed?
The ledger relating to client account is referred to as ‘client cash’. Business account = physical bank account used by a law firm to hold
Client ledgers are logical: ££ into ledger = CR, out = DR business money.
A law firm will have a general client account holding the money of The ledger relating to the business account is ‘Business cash’.
various clients. However, it can open a separate designated client
accounts holding each client’s money. The total amount ‘owed’ by a law Any money on the business account belongs to the firm.
firm to all its clients should equal the money held in client account(s).
General rule: business money should be paid into the business account.
The names of these accounts must include both the name of the law firm
AND the word ‘client’. When can you pay business money into client account?
Client money to be paid promptly into a client account once you A firm may allocate funds from mixed payments to the correct client
received and identified it as client money. account or business account.
Exceptions: Clients often send or transfer money needed to pay a bill for work done
(a) Money held as a trustee or the holder of a specified office (as but also to include some money for another matter.
discussed earlier) should not be paid into a client account if that If the money is transferred by client to the business account:
would conflict with the rules relating to the specified office. The firm must promptly allocate client money element into client
(b) Client money representing payments from the Legal Aid Agency account.
for your costs should not be paid into the client account. If client transfers a mixed payment to client account:
(c) You agree in a written alternative arrangement with the person The firm must promptly allocate the business money element to the
for whom the money is held not to hold the money in client business account – again leaving business money in with client money
account. This money will have to be held in accordance with the for a short while. The law firm is not in breach of the rules if it pays
business money into client account (and vice versa) this way.
Solicitors’ Accounts – Revision notes | Page 2 of 17
