Accounting procedures and entries - Maintaining accurate client ledgers and records

Learning Outcomes

This article outlines the fundamental procedures for maintaining accurate client accounting records in compliance with the SRA Accounts Rules. It covers the core principles of double-entry bookkeeping as applied in legal practice, the distinction between client money and business money, and the correct methods for recording receipts and payments in client ledgers and cash accounts. Understanding these procedures is essential for ensuring client money is safeguarded and for meeting regulatory requirements assessed in the SQE1 examination.

SQE1 Syllabus

For SQE1, you must demonstrate a practical understanding of the accounting systems and controls required by the SRA Accounts Rules. This includes maintaining accurate records for client money and business money transactions. You need to know how to apply double-entry bookkeeping principles to record receipts, payments, and transfers, ensuring compliance with the Rules.

Your revision should focus on:

  • The requirements for keeping accurate, contemporaneous, and chronological accounting records (Rule 8).
  • The proper use of client ledgers and cash accounts, including the dual column format for business and client entries.
  • The correct double-entry procedures for recording receipts and payments of both client money and business money.
  • Understanding the specific requirements for client ledger identification and maintaining running balances.
  • The importance of prompt and accurate recording to facilitate reconciliations and ensure client money safety.

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

The proper handling and recording of client money is an essential part of legal practice, governed by the Solicitors Regulation Authority (SRA) Accounts Rules. Compliance with these rules is not only a regulatory necessity but fundamental to maintaining client trust and the financial integrity of the firm. A key aspect of compliance is the maintenance of accurate client ledgers and accounting records. This requires a thorough understanding of the principles of double-entry bookkeeping and the specific application of the SRA Accounts Rules to various financial transactions within a legal practice. For the SQE1 assessment, you will need to demonstrate knowledge of these procedures and the ability to apply them correctly.

Double-Entry Bookkeeping Principles

The system used universally for recording financial transactions in business, including law firms, is double-entry bookkeeping. This system is based on the principle that every financial transaction has two equal and opposite effects on a business’s financial position.

Key Term: double-entry bookkeeping
An accounting system where every transaction is recorded with two entries: a debit in one account and a corresponding credit in another account. This ensures the accounting equation (Assets = Liabilities + Equity) remains balanced. The two entries are known as a debit (DR) and a credit (CR). In simple terms, from the firm’s viewpoint:

  • A debit entry typically represents an increase in assets or expenses, or a decrease in liabilities or equity.
  • A credit entry typically represents a decrease in assets or expenses, or an increase in liabilities or equity.

For every debit entry made in one account (or ledger), a corresponding credit entry of the same amount must be made in another account. This ensures that the accounts always balance.

Key Term: debit (dr)
An accounting entry recording a sum owed or paid out, typically increasing asset or expense accounts, or decreasing liability, equity, or income accounts. Recorded on the left side of an account ledger.

Key Term: credit (cr)
An accounting entry recording a sum received or owed, typically increasing liability, equity, or income accounts, or decreasing asset or expense accounts. Recorded on the right side of an account ledger.

Understanding which entry is the debit and which is the credit is fundamental to maintaining accurate records.

Accounting Records in Law Firms

Given that law firms handle both their own money (business money) and money belonging to clients or third parties (client money), their accounting systems must clearly distinguish between the two to comply with the SRA Accounts Rules, particularly Rule 4.1 which mandates separation.

Key Term: business money
Money that belongs solely to the law firm itself.

Key Term: client money
Money held or received by a firm relating to regulated services, belonging to a client or a third party, including money held as trustee or stakeholder, and money for unbilled fees or unpaid disbursements (Rule 2.1).

This separation necessitates a dual system for certain records.

Ledgers

Firms maintain various ledgers to track different types of financial activities.

Key Term: ledger
A book or digital file containing accounts, where financial transactions are recorded using debits and credits. Examples include asset ledgers, expense ledgers, and client ledgers.

For accounts dealing exclusively with the firm’s own finances (e.g., profit costs ledger, expense ledgers), only business columns (DR, CR, Balance) are needed.

However, ledgers that track transactions involving both business and client money require a dual-column format.

Dual Column Ledgers

The most common examples requiring dual columns are the cash account and individual client ledgers.

Key Term: cash account
A ledger (often called a cash book or cash sheet) recording all receipts into and payments out of the firm’s bank accounts. In law firms, it typically has separate columns for business bank account transactions and client bank account transactions.

Key Term: client ledger
A ledger maintained for each individual client, usually showing separate columns for transactions involving the firm's business money relating to that client and transactions involving client money held for that client.

The dual columns (DR, CR, Balance for business; DR, CR, Balance for client) ensure that transactions are recorded against the correct type of money and bank account, maintaining the required separation mandated by the SRA Accounts Rules.

Recording Receipts

When money is received, the first step is to identify whether it is business money or client money.

  • Receipt into Bank Account: Recorded as a DR entry in the relevant column (Business or Client) of the cash account.
  • Corresponding Entry: Recorded as a CR entry in the relevant column (Business or Client) of the client ledger (if relating to a specific client) or another appropriate ledger (e.g., profit costs ledger if it’s payment of a bill).

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): This is client money (Rule 2.1(d)).

  • DR £500 Cash Account (Client column)
  • CR £500 Client Ledger A (Client column)
    Client B (£200): This is business money (payment for a delivered bill).
  • DR £200 Cash Account (Business column)
  • CR £200 Client Ledger B (Business column) (This reduces the debt Client B owes the firm).

Recording Payments

When money is paid out, the first step is to determine whether it should be paid from the business bank account or the client bank account (Rule 5.3 requires sufficient funds to be held for the specific client before paying from the client account).

  • Payment from Bank Account: Recorded as a CR entry in the relevant column (Business or Client) of the cash account.
  • Corresponding Entry: Recorded as a DR entry in the relevant column (Business or Client) of the client ledger (if paid for a specific client) or another appropriate ledger (e.g., an expense ledger).

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): This is a disbursement paid on behalf of the client. As sufficient client funds are held, it can be paid from the client account (Rule 5.1(a), Rule 5.3).

  • CR £150 Cash Account (Client column)
  • DR £150 Client Ledger C (Client column)
    Electricity Bill (£300): This is a business expense.
  • CR £300 Cash Account (Business column)
  • DR £300 Electricity Expense Ledger (Business column)

Accuracy and Compliance

Maintaining accurate records is mandated by Rule 8.1. Records must be contemporaneous and chronological. Client ledgers must clearly identify the client and matter (Rule 8.1(a)). Running balances must be shown or be readily ascertainable (Rule 8.1(c), Rule 29.9 SRA Accounts Rules 2011 equivalent). This meticulous approach is essential for compliance, preventing misappropriation, enabling reconciliations (Rule 8.3), and ensuring the firm can always account for the client money it holds.

Key Point Checklist

This article has covered the following key knowledge points:

  • Accurate client ledgers and records are critical for compliance with SRA Accounts Rules and safeguarding client money.
  • Double-entry bookkeeping requires every transaction to have equal debit (DR) and credit (CR) entries in separate ledgers.
  • Law firms use a dual system for cash accounts and client ledgers to separate business money and client money transactions.
  • Receipts are recorded as DR in the cash account and CR in the corresponding ledger (client or business section).
  • Payments are recorded as CR in the cash account and DR in the corresponding ledger (client or business section).
  • Client money must generally be paid from the client account, and only if sufficient funds are held for that specific client (Rule 5.3).
  • Business payments must be made from the business account.
  • Accurate, contemporaneous, and chronological records are required by Rule 8.

Key Terms and Concepts

  • double-entry bookkeeping
  • debit (dr)
  • credit (cr)
  • business money
  • client money
  • ledger
  • cash account
  • client ledger
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal