Accounting procedures and entries - Maintaining accurate cli...

Learning Outcomes

This article presents an advanced and practice-oriented analysis of accounting procedures and entries relevant to solicitors’ accounts, specifically maintaining accurate client ledgers and records under the SRA Accounts Rules. On successful study of this material, you will be able to:

• Apply the principles of double-entry bookkeeping to all receipts, payments, transfers, and adjustments involving client and business money in legal practice, identifying the correct debit and credit entries in all standard and complex scenarios, including mixed and inter-client transactions.
• Distinguish clearly between client money and business money, explaining the regulatory implications of each, and identify the four SRA-defined categories of client money (regulated services for client, third-party money relating to services, money held in special capacity, and money for fees/disbursements prior to billing).
• Demonstrate how to maintain and interpret dual column client ledgers and cash accounts, ensuring all postings accurately separate client and business movements, and comprehend the narrative and technical requirement for contemporaneous, chronological, and accurate recordkeeping for each client and matter as required by Rule 8.
• Execute with precision the correct recording of complex receipts and payments, including those involving VAT, disbursements, abatement, and interest, via correct double-entry journal methods and with strict compliance with SRA requirements.
• Manage mixed receipts in line with firm policy and SRA Rule 4.2, including prompt allocation, the banking and transfer process, and explicit procedures when banks do not offer cheque splitting. Understand the timescales required and document policy compliance in all relevant files.
• Conduct and record client-to-business and business-to-client transfers correctly under Rule 4.3, following delivery of a bill or written notification, verifying sufficiency of client funds, and ensuring all entries are contemporaneously supported by ledgers and central records.
• Complete the accounting process for inter-client and inter-matter ledger-only transfers—recognising no movement occurs on the cash account, posting accurate DR and CR entries in client ledgers, and maintaining an audit trail.
• Identify and respond appropriately to ledger deficits (including those due to dishonoured cheques or overdrawn client account transactions), undertaking immediate replacement of client funds with business money, and documenting correction for compliance and reporting purposes.
• Describe central recordkeeping and reconciliation duties as set out in Rule 8—ensuring a central register of bills/fee notifications, comprehensive reconciliation of client accounts (at least every five weeks), listing running balances for all client ledgers, and archiving all breach rectification records for six years.
• Calculate, account for, and document fair payment of interest arising from holding client funds, including both general account holdings and separate designated deposit client accounts (SDDCAs), applying firm policy and distinguishing entries for sums in lieu versus direct interest payments.
• Explain and comply with Rule 3.3’s prohibition on using the client account as a banking facility, setting out the regulatory, professional, and disciplinary risks of any breach or misapplication in both legal and ethical contexts.
• Outline the recordkeeping and withdrawal procedures for special account types: joint accounts, clients’ own accounts (including as attorney/deputy), and third-party managed accounts, noting required modifications to standard recording rules based on account type.
• Evaluate the overall role of these commitments in protecting client assets, upholding public trust, and ensuring the continual financial and regulatory integrity of legal practice in England and Wales.

SQE1 Syllabus

• Requirements for accurate, contemporaneous, and chronological accounting records under Rule 8, including detailed client and matter identification per SRA guidance, and the necessity of dual column ledgers for complex transactions.
• Utilisation and continuing management of client ledgers and cash accounts, with separation and correct posting in business and client columns, ensuring clarity of record for every transaction within both practice and client contexts.
• Operation of double-entry bookkeeping for all monetary events, with full comprehension of receipt and payment flows for both client and business money, and proper allocation of debits and credits in all affected ledgers (including for VAT and disbursements).
• Mandatory recordkeeping and reconciliation controls: including running balances per ledger and cash sheet, matter-level identification, maintained central bills register, five-week reconciliation cycles, system for detecting and handling breaches, and adapted rules for accounts operated jointly with clients or on their behalf.
• Treatment of mixed receipts under Rule 4.2: core options for banking, accounting for allocation, rationale and documentation for firm procedures, and comprehensive double-entry recording for all transfers.
• Law and practice of post-billing transfers (Rule 4.3): ensuring bills or written notification are delivered and funds are sufficient, with entries in both ledgers and bank accounts as required by SRA guidance.
• Inter-client and inter-matter transfer entries: methodical use of DR and CR within client ledger columns, strict compliance with the no-cash-movement rule, and retention of written authority and audit records.
• Approval and supervision of withdrawals: requirement for appropriate authorisation by designated staff (including COFA), procedures to ensure client-specific sufficiency of funds (Rule 5.3), and obligations when deficits or breaches are identified.
• Calculation and recording of interest on client money: drafting and maintaining a written interest policy, correct posting for general interest and SDDCA receipts, and specific double entries for “sum in lieu” payments made from the business account.
• Enforcement of Rule 3.3: recognition and avoidance of all forms of banking facility misuse, understanding legal precedents and SRA disciplinary standards.
• Obligations for prompt return of client money (Rule 2.5), effective management of unreturnable residual balances (including charitable disbursement protocol), and all documentation and record retention requirements attached thereto.
• Day-to-day recordkeeping, reconciliation, and compliance duties for joint accounts, clients’ own accounts, and third-party managed accounts—identifying which full rules apply, and which do not, for each special case.
• Protocols for immediate and documented correction of any rule breaches—focus on timely replacement of misapplied funds, documentation of correction, and regular COFA review.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following statements about double-entry bookkeeping is correct?
   1. Every transaction requires a single entry in the relevant ledger.
   2. Every transaction requires two debit entries in different ledgers.
   3. Every transaction requires one debit entry and one corresponding credit entry in different ledgers.
   4. Every transaction requires two credit entries in different ledgers.
2. A firm receives £5,000 from a client generally on account of costs. What are the correct initial double entries?
   1. DR Client Ledger (Client), CR Cash Account (Client)
   2. DR Cash Account (Client), CR Client Ledger (Client)
   3. DR Client Ledger (Business), CR Cash Account (Business)
   4. DR Cash Account (Business), CR Client Ledger (Business)
3. According to the SRA Accounts Rules, how should client ledgers be identified?
   1. By a unique reference number only.
   2. By the client’s name only.
   3. By the client’s name and a description of the matter.
   4. By the matter description only.

Introduction

Correct handling and recording of client money is an essential professional responsibility for solicitors, as prescribed by the Solicitors Regulation Authority (SRA) Accounts Rules. Failure to keep accurate, contemporaneous, and segregated records of client and business money transactions can result in significant legal, regulatory, and ethical risks, including disciplinary action, personal liability under trust law, criminal sanctions if dishonesty or misappropriation occurs, and reputational damage not only to the practitioner or firm but to the legal profession as a whole. Above all, strict application of the Accounts Rules serves to protect client assets by ensuring absolute separation from business funds and preserving the financial security and traceability of money that solicitors hold in trust.

Robust compliance requires technical accounting discipline and vigilant application of regulatory rules. Every receipt, payment, or transfer affecting client or business funds must be accurately classified, correctly recorded, and entered without undue delay, establishing running balances for each client and matter at any given time. This continuous process supports critical internal safeguards such as five-weekly reconciliations (Rule 8.3), supports the oversight of the firm’s Compliance Officer for Finance and Administration (COFA), and guarantees swift action should discrepancies or breaches occur during regular audits by accountants or SRA investigation.

Key Term: SRA Accounts Rules
A set of regulatory standards issued by the Solicitors Regulation Authority that governs the handling, recording, and safeguarding of client money by solicitors and their firms. The Accounts Rules detail the separation, prompt banking, and documentation requirements for client and business funds, as well as specific procedures for dealing with breaches or exceptional situations.

Key Term: double-entry bookkeeping
A system requiring every financial transaction to result in two separate entries: a debit (DR) in one account and a corresponding credit (CR) in another. This principle guarantees that the accounting equation (Assets = Liabilities + Equity) always balances, providing a self-checking mechanism that ensures the integrity and accuracy of recorded finances.

Double-Entry Bookkeeping Principles

Double-entry bookkeeping underpins the entire accounting structure of law firms and is mandated for all transactions involving client and business money under SRA requirements. The core axiom is that every financial event must be recorded with at least two equal and opposite entries—a debit and a credit—across different accounts or ledger columns. This principle underlies both the control framework for internal management and the external auditability of every transaction affecting client or business accounts.

• A debit (DR) records an increase in an asset (e.g., bank account), a reduction in a liability (e.g., amount owed to a client), or an increase in an expense.
• A credit (CR) records an increase in a liability (e.g., the firm’s obligation to a client), an increase in equity, or a reduction in an asset.

Each transaction’s dual effect is posted so that, in aggregate, the books always balance; every movement into one account must be matched by a corresponding movement out of another.

Key Term: debit (DR)
In legal practice accounts, a debit entry increases client or business assets (such as funds in a bank account) or recognizes expenses incurred. DR entries are always to the left of an account or ledger column.

Key Term: credit (CR)
In the legal context, a credit entry denotes an increase in the firm’s obligation to a client within the client ledger, or a reduction of the business/cash asset when shown in the cash account; always shown in the right-hand column.

Competent understanding of which side (DR or CR) is posted for any entry type is critical for compliance. This system is not just mechanical: it provides a transparent audit trail and supports the detection and prompt rectification of errors.

Key Term: journal entries
Summaries of double-entry postings for each transaction, explicitly stating which accounts or ledgers are affected, the amount involved, and delineating which entries are DR and which are CR. Journal entries provide a snapshot of the transaction flow for examination or audit.

A distinctive feature of law firm accounts is that most ledgers are constructed and viewed from the firm’s (the business’s) viewpoint, so the impact of each entry is always considered in terms of the firm’s liabilities and entitlements, not the client’s personal finances.

Accounting Records in Law Firms

Law firms are unique among businesses, as they routinely handle significant sums of money belonging to clients or third parties (such as estate beneficiaries, lenders, or counterparties), rather than only dealing with their own business money. This reality places an absolute regulatory burden on legal practices to separate and meticulously record each movement of client money, maintaining an uninterrupted audit trail for every client and transaction.

Key Term: business money
Money belonging exclusively to the firm, including fees paid after billing and reimbursements for disbursements paid post-bill issuance.

Key Term: client money
Funds received or held in connection with regulated legal services (including as trustee, agent, stakeholder, or donee of a power of attorney) that do not belong to the firm. Per the SRA Accounts Rules, client money is defined in four categories:

• Money held for a client in connection with regulated services.
• Money for a third party in relation to regulated services.
• Money held as a trustee or under special capacity (e.g., as Court of Protection deputy).
• Money held as fees/disbursements before delivery of a bill.

Rule 4.1 requires this client money to be kept entirely separate from business money at all times, typically via different bank accounts and dual column ledgers.

Key Term: client account
A bank or building society account in England and Wales, titled with the firm’s name and the word “client”, established specifically for the safeguarding and segregation of client money. This account must not be used to provide or approximate a banking service for clients or third parties; all funds must be linked to regulated legal work.

Ledgers and Cash Accounts

The architectural feature of legal accounts is the dual system of ledgers and cash accounts, constructed to clarify the flow and current standing of both client and business money. Each serves distinct but interrelated purposes.

Key Term: ledger
A structured record—manual or digital—in which a law firm enters monetary transactions as debits or credits, tracking the flow and balance of client and business money for each matter.

Law firms employ several ledgers. Transaction solely related to the business (such as payment of wages, rent, or firm income) are recorded in business-only ledgers (e.g., profit costs ledger, office expense ledger). These ledgers have no “client” column because they never record transactions involving client money.

However, client-related activities demand dual column ledgers—each with a “business” column and a “client” column—to allow for meticulous tracking of funds that may span both spheres.

Key Term: cash account
Also known as the cash book or cash sheet, this record traces all monetary inflows and outflows from the business and client bank accounts. In law firms, the cash account is structured with parallel columns—one tracking the firm's own bank (“business” account), the other for client bank account movements.

Key Term: dual column ledger
A client ledger or cash account that presents both business and client columns side-by-side. Dual column ledgers enable law firms to display business money and client money separately within the same matter or cash record, maintaining clear segregation for regulatory compliance and audit purposes.

Key Term: client ledger
An individual client’s running account, recording (in dual columns) the movement and current balance of client money and, if appropriate, business money (such as profit costs owed or paid in a matter). Each client ledger is uniquely identified by both the client's name and a meaningful matter description, and supports and evidences the overall position in the client bank account.

Rule 8.1 mandates that every matter must have a clearly identifiable client ledger, stating the client’s name and a description of the matter sufficiently detailed to distinguish between multiple matters for the same client.

The accuracy, promptness, and completeness of postings are essential. Each entry must record the date, nature, and parties to each transaction, permitting running balances to be seen or easily calculated at any time. This supports both the practical needs of the solicitors and the regulatory and audit function of regulators.

Dual Column Ledgers and How They Are Used

In practice, all monetary transactions handled by law firms are recorded in dual column ledgers, ensuring that client and business transactions are separated and never commingled. The correct use of dual columns is not only a regulatory requirement, but also a practical necessity for reconciling accounts and protecting client assets.

• In the client column, credit entries (CR) typically increase the amount the firm owes to the client (i.e., how much of the client’s money the firm holds), while debit entries (DR) indicate money paid out on the client’s behalf, reducing this balance.
• In the business column, debit entries (DR) usually recognize money the client owes to the firm—such as for fees or disbursements—while credits (CR) reduce these sums, such as when a bill is paid.

A correctly maintained client ledger will always display a credit balance in the client column for active client money; a debit balance (indicating funds paid out in excess of money held for that client) signals a breach requiring prompt correction.

Recording Receipts

The accurate and timely recording of money received is essential for fulfilling SRA requirements. The process for recording depends on whether the receipt is classified as client or business money, or a mixture.

• Receipts of client money (such as funds on account for costs/disbursements, sale proceeds, or balances received in trust) are entered as a DR (increase) in the cash account's client column. The matching entry is a CR in the client ledger's client column, showing the firm owes the money to the client or is holding it in trust.
• Receipts of business money (such as bill payments) are entered as a DR in the business column of the cash account, with a corresponding CR in the business column of the client ledger, reflecting the reduction of the client's debt to the firm.

Time is of the essence: client money must be paid into the client account "promptly"—interpreted as the day of receipt or the next working day, save for reasonable exceptions.

Ledgers in Practice: Understanding Entry Flows

Key Term: SRA Accounts Rules
The defining regulatory framework for solicitors' treatment of both client and business money; it sets explicit expectations for accuracy, separation, and safeguard, and mandates comprehensive record-keeping.

Worked Example 1.1

A firm receives £500 from Client A generally on account of costs. The firm also receives £200 from Client B in payment of a bill already issued. How are these receipts recorded?

Answer:
Client A (£500):

• DR £500 Cash Account (Client column)
• CR £500 Client Ledger A (Client column)
  Client B (£200):
• DR £200 Cash Account (Business column)
• CR £200 Client Ledger B (Business column)

Recording Payments

Before initiating any payment, the solicitor must verify the nature of the intended payment and confirm sufficient funds are held for the specific client.

• Payments out of the client account (e.g., to third parties, to return balances to clients, or to meet disbursements) result in a CR in the cash account client column and a DR in the client ledger client column.
• Payments of firm expenses from the business account result in a CR in the business column of the cash account and a DR in the relevant business ledger (e.g., expense ledger or profit costs ledger).

Withdrawals from client account require proper authorisation by qualified staff under Rule 5.2, with documentary evidence secured for every transaction.

Worked Example 1.2

A firm needs to pay a court fee of £150 for Client C. The firm holds £500 for Client C in the client account. Separately, the firm pays its monthly electricity bill of £300. How are these payments recorded?

Answer:
Client C (£150 Court Fee):

• CR £150 Cash Account (Client column)
• DR £150 Client Ledger C (Client column)
  Electricity Bill (£300):
• CR £300 Cash Account (Business column)
• DR £300 Electricity Expense Ledger (Business column)

Complex payment situations—such as transactions exceeding available client funds—must be handled with scrutiny. In the case of an inadvertent overpayment or a dishonoured client cheque (before cleared funds are in the client account), immediate replenishment from the business account is required.

Complex Transactions: Transfers and Mixed Receipts

Legal firms frequently manage transactions in which receipts comprise both client and business money, or in which money must be transferred between accounts following billing or inter-client instructions.

Mixed receipts (for example, a cheque or bank transfer that combines bill payment for profit costs and a further sum to hold on account) present particular challenges:

• If the bank will split the cheque (rare), each portion is posted to its respective account.
• More commonly, the full amount is banked into the client account, and the business portion is transferred promptly to the business account, with supporting journal and ledger entries.
• The definition of "promptly" is not fixed but must be reasonable and consistent with SRA guidance and firm policy (often no later than 14 days or as soon as operationally possible).

Key Term: inter-client transfer
An internal ledger-only transfer reallocating client funds from one client/matter to another at the client’s instruction (for example, moving proceeds from a sale matter to pay inheritance tax on an estate matter for the same client). No cash account movement is made—just DR and CR in the relevant client ledgers.

Key Term: separate designated deposit client account (SDDCA)
A dedicated account opened specifically for holding large or long-term sums for an individual client or matter. All interest belongs to the client, and SDDCAs may require special accounting treatment for transfers and interest.

Worked Example 1.3

A client sends £1,000 by bank transfer: £600 is to settle a delivered bill (profit costs + VAT), and £400 is to be held on account of future costs. The firm’s policy is to pay mixed receipts into the client account first, then transfer promptly. What are the entries?

Answer:
Initial receipt:

• DR £1,000 Cash Account (Client)
• CR £1,000 Client Ledger (Client)
  Transfer business element (£600) to business account:
• CR £600 Cash Account (Client)
• DR £600 Client Ledger (Client)
• DR £600 Cash Account (Business)
• CR £600 Client Ledger (Business)
  The remaining £400 is retained as client money.

Worked Example 1.4

Firm holds £800 client funds for Client D. A bill for £750 (profit costs + VAT) is delivered, and the sum is immediately transferred to the business account. What entries?

Answer:
Delivering the bill:

• DR £750 Client Ledger D (Business)
• CR £750 Profit Costs/HMRC VAT Ledgers
  Transfer from client to business:
• CR £750 Cash Account (Client)
• DR £750 Client Ledger D (Client)
• DR £750 Cash Account (Business)
• CR £750 Client Ledger D (Business)

Worked Example 1.5

The firm acts for Client E in two matters: £1,500 client funds are held on “Matter 1” (sale), Client instructs a transfer of £300 to “Matter 2” (will). How are entries posted?

Answer:

• DR £300 Client E Ledger (Matter 1 – Client column)
• CR £300 Client E Ledger (Matter 2 – Client column)

Worked Example 1.6

Solicitor receives a £5,000 cheque on account of costs from Client F and pays it into client account. The following day the cheque bounces but a £400 disbursement has already been paid from the client account for Client F. What must the firm do?

Answer:
There is now a deficit for Client F (contrary to Rule 5.3). The firm must immediately replace the shortfall from business account into client account (Rule 6.1):

• DR £400 Cash Account (Client) (restores the client balance)
• CR £400 Cash Account (Business) (the corresponding business payment)
  Ledger entries must reflect both the correction and the client’s continued liability. When cleared funds are later received from the client, the business-to-client movement is reversed.

Key Term: client account reconciliation
A five-weekly process of matching client account statements to the records in the cash sheet and to the aggregated balances of all client ledgers. Discrepancies must be promptly investigated and documented.

Mixed Receipts Expanded

The SRA Accounts Rules permit flexibility in how mixed receipts are handled, but best practice is that firm policy is documented and all staff follow established allocation procedures. Entries must always be supported by clear narrative and dated documentation.

Accuracy and Compliance

Under Rule 8, law firms must keep ledgers and all supporting records accurate to the penny, contemporaneously and in chronological order, such that a running balance for each client and matter is always apparent or easily ascertainable. This is essential for meeting reconciliation requirements, managing risk, and demonstrating compliance to auditors and the SRA.

Reconciliation of client accounts (Rule 8.3) is mandated at least every five weeks, and must compare the balances on bank statements, cash sheets, and the sum total of individual client ledgers. Any discrepancies must be investigated and resolved immediately.

Key Term: Compliance Officer for Finance and Administration (COFA)
The manager appointed by the firm to oversee and enforce compliance with the SRA Accounts Rules. The COFA’s responsibility encompasses monitoring, reporting, and rectifying breaches, maintaining central financial records, and setting authorisation protocols for all withdrawals.

Rule 8.4 requires a central electronic or written record of all bills and written notifications of costs as a cross-reference for audit and regulatory inspection. Records of rectified breaches, including associated documentation, must be retained for at least six years.

Key Term: central record of bills
The SRA-mandated, readily accessible register where all bills or written notifications of costs are recorded centrally. This controls and evidences the linkage between accounting entries and bill delivery, and is subject to audit.

Treatment of Different Account Types: Joint Accounts, Clients’ Own Accounts, and TPMAs

While most Rules apply fully to client accounts, adapted requirements govern the management of joint accounts, clients’ own accounts, and third-party managed accounts (TPMAs):

• Joint accounts: Where the firm operates a joint account jointly with a client or third party (e.g., as an executor among lay executors), only certain rules apply—specifically, obtaining bank statements at least every five weeks and maintaining a central record of all bills relating to the account.
• Clients’ own accounts: Where, for example, the firm is appointed as a Court of Protection deputy or under a power of attorney, additional requirements apply: bank statements every five weeks, reconciliation at the same interval, and maintenance of the bills register. The solicitor must always act as a fiduciary, safeguarding client money.
• TPMAs: Firms using a TPMA must ensure the provider is FCA-regulated, notify the SRA, maintain internal transactional records, obtain and check TPMA statements regularly, and provide transparent information to clients about the arrangement.

Records for all these account types must be retained for six years, with proper documentation for withdrawals, bills, and reconciliations.

Interest and Designated Deposits

Law firms must pay a fair sum of interest on client money held, in compliance with the firm’s written interest policy (Rule 7). This obligation extends to both pooled client account holdings and SDDCAs.

Key Term: interest policy
A written policy of the firm outlining how interest on client money is calculated, paid, or excluded, ensuring payments to clients are fair. Alternative arrangements may be made in writing with the client, provided sufficient information is given for informed consent.

For client money held in the general client account, interest earned (from the bank) belongs to the firm, which must then pay the client a fair sum in lieu of that interest—typically as a transfer from business to client account.

Accounting entries for interest payable from pooled client accounts:

• DR Interest Payable (Expense ledger – Business)
• CR Client Ledger (Business)
• Then, business-to-client cash transfer:
  • CR Business Cash Account
  • DR Business column of Client Ledger
  • DR Client Cash Account
  • CR Client Ledger (Client)

For interest earned and credited directly in SDDCAs, all interest belongs to the client, and is DR in the cash account client deposit column, CR in the client ledger deposit column.

Worked Example 1.7

The firm’s policy states Client G is to receive £80 in interest on pooled funds. What are the entries?

Answer:
Step 1 (record business expense):

• DR £80 Interest Payable (Expense Ledger – Business)
• CR £80 Client Ledger G (Business)
  Step 2 (business-to-client transfer):
• CR £80 Cash Account (Business)
• DR £80 Client Ledger G (Business)
• DR £80 Cash Account (Client)
• CR £80 Client Ledger G (Client)
  Payment out of client account may then proceed.

Interest policies, including thresholds for payment and arrangements where interest is not paid, must be communicated to clients before money is received, ensuring transparency and informed choice.

Transfers of funds into and out of SDDCAs must be fully documented in the firm’s ledgers or using separate ledgers for SDDCAs as appropriate.

Returning and Allocating Client Money

Rule 2.4 dictates that absent a written agreement, all client money must be available for return on demand. Upon conclusion of a matter or satisfaction of the client’s liabilities, the balance must be returned without delay, preventing the accumulation of residual balances.

Where clients are untraceable, residual balances under £500 may be paid to charity subject to detailed efforts to trace the client and documentary recordkeeping. For sums above £500, SRA authorisation is required, and the process must be rigorously followed and evidenced.

Delays or failures to return client money are breaches and can attract regulatory scrutiny. Payment instructions for non-standard allocations, such as retaining funds for future unrelated payments (e.g., paying credit card bills), must be refused; the account should not be used as a substitute for a bank.

Prompt processing and allocation of receipts, especially mixed payments, is important. Regulators expect such tasks to be prioritised, as the potential for misapplication or complaint increases the longer funds remain unapplied.

Authorisation and Sufficiency of Funds for Withdrawals

Withdrawals from client account are permitted only where:

• The firm holds sufficient funds for that specific client or matter (Rule 5.3).
• The withdrawal is for a permitted purpose: payment to the client, a third party, to the firm (after bill delivery), or to charity (subject to the prescribed protocol).
• The payment has been appropriately authorised and supervised (Rule 5.2)—in practice, this means systems for partner/COFA authorisation, dual signatories where required, and written support for every transaction.

If a negative ledger balance arises for a client (e.g., due to payment out before funds are received or a cheque is dishonoured), immediate replacement of the missing amount from the business account is required. All supporting records must evidence not only the initial error but the remedial action taken.

Using one client’s funds to cover another’s payment is a serious breach of trust, regulatory discipline, and may amount to a criminal offence in case of dishonesty.

Misuse of Client Account and Use Restriction

Rule 3.3 strictly prohibits use of the client account to provide banking facilities. The only legitimate reason for using the client account is to support the provision of regulated legal services for clients in connection with an identifiable legal transaction. Instructions to process unrelated or personal payments—even if agreed with a client—must always be refused.

Key Term: client account (use restriction)
The client account must never be used to process payments that are not directly connected to regulated legal work on behalf of a client. Any such usage exposes the firm to regulatory, civil, and potentially criminal liability.

Professional guidance and disciplinary decisions affirm that a solicitor may only handle client funds or process payments if required by the legal work being performed. The convenience or personal request of a client does not create an exception; the transaction must have sufficient legal nexus and be directly linked to the solicitor's regulated practice.

Notable risks in breach of this rule include exposure to money laundering, aiding tax evasion, and the potential for insolvency-related liabilities or reversal of transactions.

Worked Example 1.8

A client asks the firm to retain the net proceeds of a property sale in client account and pay their monthly credit card bills on their behalf. What should the firm do?

Answer:
The firm must refuse this instruction. Such payments are not related to regulated services and fall foul of Rule 3.3. The net sale proceeds should be returned promptly to the client for their own use; the client account cannot be used for convenience banking.

Disciplinary action in such circumstances can be severe, including financial penalties, findings of dishonesty, and disqualification from the profession.

Controls for Other Account Types

When acting as joint holder of an account with a client or third party (e.g., as an executor), or as signatory on a client’s own account (such as under a power of attorney or by court appointment as deputy), SRA Rules prescribe modified but substantial recordkeeping and authorisation duties.

For joint accounts, at least five-weekly statements and a central bills record must be maintained. For client’s own accounts, statement reconciliation and central record of bills is additionally required. The solicitor is obliged to act as a fiduciary at all times, prioritising the client’s best interests.

When using TPMAs, a firm must confirm provider regulation by the FCA, notify the SRA, retain clear records, and explain all arrangements and fees transparently to the client.

Key Point Checklist

This article has covered the following key knowledge points:

• Law firms are required to maintain robust, accurate, contemporaneous, and clearly segregated accounting records in full compliance with the SRA Accounts Rules.
• Client and business money must always remain separate both in the banking system and within internal ledgers. Dual column ledgers and cash accounts are essential for segregating and identifying receipts and payments.
• Every transaction must be entered through double-entry bookkeeping, with equal and opposite DR and CR postings across ledgers, matching the business’s viewpoint.
• All client ledgers and cash accounts must be constructed so that balances for every client and matter are always ascertainable, and all activity is immediately traceable and supportable by primary documentation.
• Receipts are posted as DR in the cash account, CR in the client ledger (for client money) or business ledger (for business money). Payments are made as CR in the cash account, DR in the corresponding ledger.
• All client account withdrawals must be supported by sufficient funds for that client; negative balances are breaches and must be immediately remedied.
• Entries for mixed receipts must comply with Rule 4.2, and allocations must be prompt and fully documented. Bank policies frequently necessitate initial deposit in one account with subsequent transfer(s) to the appropriate balances.
• All transfers between client and business accounts following bills must satisfy Rule 4.3, including written notification, and be supported by four-way accounting entries.
• Inter-client, inter-matter, and internal ledger transfers must be accurately recorded, with clear written authority (where applicable) and without impact on the cash account.
• Recording and payment of interest, particularly in the context of pooled client money versus SDDCAs, must align with the written policy and use appropriate DR and CR entries for in lieu payments.
• Client account may never be used for “banking” activities or for payments unconnected with regulated services; professional disciplinary and criminal liability may result from breach.
• Residual client balances must be managed diligently, returned where possible, or paid to charity under specified conditions; accurate and lasting records must be kept.
• Compliance with Rule 8 requires at least five-weekly reconciliation, a central register of bills, meticulous records of all ledgers, and archiving of documentations for six years.
• Designated roles (COFA, managers) remain personally responsible for systems, authorisation controls, breach investigation, and documenting every corrective action taken.
• Operation of joint accounts, client’s own accounts, and TPMAs entails adapted but detailed recordkeeping and reporting requirements, always with a focus on safeguarding client money.
• All transactions, ledgers, cash accounts, and reconciliations form the backbone of financial integrity for law firms and are a core part of serving and protecting client interests.

Key Terms and Concepts

• SRA Accounts Rules
• double-entry bookkeeping
• debit (DR)
• credit (CR)
• business money
• client money
• ledger
• cash account
• dual column ledger
• client ledger
• client account
• journal entries
• inter-client transfer
• separate designated deposit client account (SDDCA)
• Compliance Officer for Finance and Administration (COFA)
• central record of bills
• client account reconciliation
• interest policy
• client account (use restriction)