Breaches of the SRA Accounts Rules - Accounting entries requ...

Learning Outcomes

This article details the requirements under the SRA Accounts Rules for rectifying breaches promptly upon discovery, with an emphasis on precisely how to make the necessary accounting entries. Proficiency in this area includes:

• Identifying various types of breaches, recognising both substantive errors (such as incorrectly using client money or failing to return funds when required) and formal discrepancies (such as incomplete or inaccurate records), with careful attention to the distinctions between client and business money and the correct allocation of funds.
• Determining, through careful reading of the relevant facts, when immediate replacement of client money is required to protect the interests of clients and third parties. This involves recognising the scenarios in which withdrawals from a client account leave a shortfall, using the correct process for restoration, and understanding when a firm must remedy a breach without waiting for periodic checks or reconciliations.
• Selecting and applying the correct double-entry accounting procedures to move funds between the business and client bank accounts, thereby rectifying shortfalls and restoring balances accurately. This includes being able to write and interpret the relevant journal entries, understanding the impact of debits and credits across the various ledgers (client ledger, cash sheet, business ledger), and ensuring that both the cash movement and the true attribution of liability are recorded transparently.
• Reversing incorrect postings—such as where client money has been paid into the business bank account or business money has been paid into the client bank account—and ensuring subsequent correct transactions are made, with an unbroken audit trail that allows for full and accurate reconciliation.
• Competently using inter-client (paper) transfers to fix attribution errors between client ledgers or matters without any physical cash movement, being able to distinguish between paper transfers and cash transfers, and knowing when each is appropriate and permissible under the Accounts Rules.
• Managing and promptly correcting situations arising from dishonoured cheques and payments made before the clearance of funds, ensuring that other clients’ money is not misapplied and that any resulting shortfall is immediately rectified using the firm’s own resources.
• Identifying breaches related to premature withdrawal for costs or improper posting of disbursements (with reference to the agency/principal distinction), and understanding the correct accounting remedy for each, particularly in respect of compliance with VAT treatment and the timing of transfers between accounts.
• Appreciating the importance of a strong system of internal controls, periodic reconciliations (including regular bank and ledger reconciliations at least every five weeks), and the responsibilities of COFAs (Compliance Officers for Finance and Administration) and managers in monitoring, identifying, and ensuring rapid correction of breaches. This extends to proper record-keeping, retention obligations (at least six years), and maintaining robust audit trails for investigation and accountant’s reporting.
• Understanding the reporting obligations where serious or repeated breaches occur, or where client money may have been put at risk, including the criteria for a qualified accountant’s report, direct and prompt reporting to the SRA, and the distinction between material and non-material breaches.

Demonstrating proficiency in these learning outcomes enables accurate and timely application of the SRA Accounts Rules to the fact-rich scenarios typical of SQE1 questions and the practical realities of legal practice, ensuring that client money is always protected and regulatory compliance maintained.

SQE1 Syllabus

For SQE1, you are required to understand how to rectify breaches of the SRA Accounts Rules, with a focus on the following syllabus points:

• The overriding duty to correct breaches promptly upon discovery, including immediate replacement of client money where required (Rule 6.1), and the responsibility on the part of the COFA and all managers to take prompt remedial action.
• Procedures for identifying and handling a shortfall in the client account (client account shortfall), including obligations to protect other clients’ money and the correct process for tracing and reconciling deficits.
• Accounting entries for reversing incorrect transactions, including reclassifying receipts or payments from the wrong bank account, both in practice (e.g. adjusting physical bank balances) and in the ledgers, while maintaining a clear audit trail.
• Correct entries necessary after a reversal to ensure that the relevant transaction is properly reflected in the records, including the use of cash transfers and inter-client transfers and their accounting implications.
• The requirements for using firm’s own (business) money to rectify shortages in the client account, and the converse where business money has been incorrectly placed in the client account, with particular attention to the prohibition on the use of client money as a banking facility or credit buffer for the firm.
• Maintaining accurate records to ensure that breaches can be identified, corrected, and subsequently audited for regulatory compliance. This involves an understanding of the different types of ledgers (client, business, profit costs, HMRC-VAT, interest), cash sheets, and reconciliation procedures.
• Steps to remedy breaches where client money has been wrongly paid into or out of a business account, or where mixed or inter-client receipts require allocation. Be able to identify the correct treatment for mixed receipts, disbursements, and allocation of monies for costs, particularly when bills have not yet been delivered.
• The process for rectifying shortfalls caused by drawing against uncleared funds or the dishonour of deposited cheques, including recognition of the risks and the necessity for prompt correction.
• Correct application of ‘paper’ (ledger-only) transfers to reallocate client money between ledgers or matters, with no cash sheet entries, and an understanding of the limits of such transfers (for example, when moving funds between clients or between a client's multiple matters).
• Strict prohibition on use of client accounts for banking facilities or to accommodate personal or business payments unconnected to regulated legal services (Rule 3.3), and proper rectification if this occurs, including the prompt return of non-permissible funds and considering the potential for disciplinary action.
• Obligations and procedures for returning client money promptly when no longer needed (Rule 2.5), including special treatment of residual balances, the steps required to trace unclaimed clients, payment of small balances to charity, and the authority needed from the SRA for sums above the threshold.
• Internal and external reporting obligations relating to breaches, including the role of the COFA, the criteria for qualifying and delivering accountants’ reports to the SRA where serious breaches are identified, and the need to document steps taken to prevent recurrence.

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. According to Rule 6.1 of the SRA Accounts Rules, when must breaches be corrected?
   1. Within 14 days of discovery.
   2. Promptly upon discovery.
   3. At the end of the accounting period.
   4. When instructed by the SRA.
2. If £100 of client money is incorrectly used to pay a firm's business expense, what is the immediate action required regarding the client account?
   1. Notify the client immediately.
   2. Obtain SRA authorisation before acting.
   3. Replace the £100 in the client account immediately using business money.
   4. Wait for the next bank reconciliation before correcting.
3. Which ledger account is typically debited when correcting a client account shortfall using the firm's own funds?
   1. Client ledger client account.
   2. Client ledger business account.
   3. Cash sheet client account.
   4. Interest payable ledger.

Introduction

Compliance with the SRA Accounts Rules is essential for all firms and individuals authorised by the SRA who handle client money. The principal principle is the absolute safeguarding of client funds, and errors must be remedied as a matter of urgency. Rule 6.1 places a clear and unqualified obligation to correct any breach of the Rules promptly upon discovery; this is especially important where the breach involves the client bank account or misapplication of client funds.

This duty extends to robust operation of internal accounting systems, including using double-entry bookkeeping and performing regular and timely reconciliations between ledgers and bank statements (required at least every five weeks), so that errors can be detected and rectified at the earliest opportunity. The role of the COFA (Compliance Officer for Finance and Administration) is significant in maintaining the accuracy of client accounting procedures, addressing systems weaknesses, and ensuring the firm meets all regulatory requirements.

Robust systems and procedures—including clear separation of client and business money, prompt allocation of mixed receipts, and vigilant attention to the principles of double-entry bookkeeping—are necessary to prevent breaches. The SRA expects firms not only to establish such controls but to continually monitor compliance, immediately investigate discrepancies, and take all reasonable steps to avoid recurrence.

Key Term: Breach
A failure to comply with any requirement set out in the SRA Accounts Rules, including payment, withdrawal, transfer, or record-keeping errors relating to client or business money. Key Term: Rectification
The process by which a breach of the SRA Accounts Rules is put right, involving necessary accounting corrections, restoration of client funds, revision of records, and, where appropriate, reporting or notification to the SRA or other stakeholders.

Operationally, the approach to all breaches—even administrative or technical ones without an immediate shortfall—must be swift and systematic: identify, assess risk, determine required entries, restore the position, and document both the reason and correction for audit purposes. Prompt documentation is essential, both for regulatory compliance and for ensuring that future problems can be prevented or quickly resolved.

The Duty to Correct Breaches Promptly

Rule 6.1 of the SRA Accounts Rules is unequivocal: upon discovery of a breach, the firm must remedy it promptly. The duty is non-negotiable and immediate where client money has been improperly withheld, misapplied, or wrongly withdrawn. For example, if a payment is made from a client account on behalf of an individual who lacks sufficient funds, thereby misusing other clients' money, the missing amount must be restored—using the firm's resources—without delay.

Promptness, in the context of the Rules, is interpreted in light of the degree of risk to which client money has been exposed and whether, as a result of the breach, a client or third party might have become disadvantaged. Delays in recognition or response—even where the breach is inadvertent—can aggravate the regulatory seriousness of the situation. The SRA and reporting accountants view any unjustified delay or continued non-compliance as exacerbating the breach, especially when the issue is process-related and has caused repeat errors or risks to client money.

Firms must ensure that staff at all levels are regularly trained in recognising breaches and understand their obligation to bring matters to the attention of the COFA or a partner promptly. The manager(s) of a firm bear personal responsibility for ensuring that systems are robust, that corrections are made expediently, and that record-keeping is sufficient to allow for later scrutiny.

Key Term: COFA
The Compliance Officer for Finance and Administration, a designated senior individual within the firm responsible for ensuring regulatory compliance, investigating breaches, rectifying weaknesses, and reporting serious breaches to the SRA in accordance with the Codes of Conduct.

A firm’s duty does not end once the breach is corrected. The COFA must also review the incident to assess potential firm-wide issues and, where appropriate, improve internal controls to prevent recurrence, while documenting all actions taken and the rationale behind decisions regarding reporting to the SRA. If a series of small or technical breaches occur, they may, in aggregate, become material, justifying internal audit or external reporting.

Common Breaches and Rectification Entries

A range of common breaches demand rapid and precise rectification, and each requires specific accounting entries made in the firm’s ledgers. These include, but are not limited to:

• Payment of client money into the wrong bank account (e.g., the business account instead of a client account), thereby breaching Rules 2.3 and 4.1.
• Payment of a business expense from client money, usually in breach of Rule 5.1, especially where insufficient funds are held on behalf of the specific client for whom the payment is made.
• Use of other clients’ money to cover a withdrawal (client account shortfall), representing a breach of fiduciary duty as well as Rule 5.3.
• Incorrect transfer of costs before billing (premature withdrawal for profit costs), which is not permitted under Rule 4.3.
• Posting errors, mixed receipts, or attribution of funds to the wrong client or matter; failure to return client funds promptly when the reason for holding them has ended; and providing prohibited banking facilities using the client account.
• Failures in the timely identification or correction of errors during routine reconciliations, or in accordance with internal control policies and procedures.

To rectify, the firm must generally reverse the initial incorrect entry and then enter the correct transaction. This may entail moving funds between bank accounts (business to client, or vice versa) and making corrections on both the client and business ledgers and the cash sheet. The two essential mechanisms are "cash transfers" (actual movements of funds between accounts) and "inter-client transfers" (paper transfers) for correcting ledger postings only.

Key Term: Cash transfer
A dual-entry, cross-account movement of money between business and client accounts to correct a prior error, involving simultaneous entries on both the client and the cash (bank) ledgers. Key Term: Inter-client transfer
The reattribution of funds between client ledgers or matters (e.g., correcting money posted to the wrong client), made solely as journal entries with no physical movement of cash between actual client or business bank accounts.

For each type of breach, the correct journal entries are essential to both restoring the firm’s compliance and providing an audit trail for future scrutiny, including by reporting accountants and the SRA. The guiding principle is always immediate replenishment (not simply adjustment in the ledgers) of any sums that have been withdrawn, withheld, or misapplied.

Use of Client Money for Business Payments

One of the most serious and frequently examined breaches is the use of client account balances to pay for a business expense, especially where insufficient funds are held on behalf of the specific client for whom the payment is made. This not only violates Rules 5.1 and 5.3 but risks exposing the firm to breach of fiduciary duty and possible claims in breach of trust.

Immediate rectification demands that the firm restores the missing client money by:

• Transferring the identical amount from the business bank to the client bank account, irrespective of any arrangements with the specific client, as the duty is to all clients whose funds were exposed, not only the one for whom the payment was made.
• Recording the corresponding correcting entries in the relevant ledgers, ensuring both the cash movement and the true attribution of liability appear clearly in the client ledger business columns.

The correct double entries for this restoration (cash transfer, business to client) are as follows:

• DR (debit) Client Ledger Business Account (reflecting a firm receivable—the debt due from the client for the business expense paid)
• CR (credit) Cash Sheet Business Account (money leaving business bank)
• CR Client Ledger Client Account (money arriving in client ledger)
• DR Cash Sheet Client Account (money entering client bank)

Worked Example 1.1

A firm pays its £500 electricity bill using a cheque drawn on the general client bank account by mistake. The error is discovered the next day.

Answer:
This constitutes an improper withdrawal in breach of Rule 5.1 and Rule 5.3. The firm must immediately replace the £500 by transferring it from the business bank account. Accounting Entries:

• DR Client Ledger Business Account (Electricity Expense) £500
• CR Cash Sheet Business Account £500
• CR Client Ledger Client Account (for the client from whose account the funds were wrongly used) £500
• DR Cash Sheet Client Account £500

It is essential for the audit trail that the initial incorrect posting is not simply deleted but is reversed, and the correcting entries are clear and cross-referenced in the narrative. Internal policy should require contemporaneous explanations for such rectification entries, referencing the breach and the correction, for both compliance review and ensuing reconciliations.

Client Account Overdrawn (Shortfall)

A “client account shortfall” arises where withdrawals are made for a particular client, but there are insufficient funds held on their behalf in the client bank account. This indicates that money belonging to other clients has been used (improperly) to make the payment in violation of Rule 5.3, and is always regarded as a serious breach, requiring immediate action.

Whether the shortfall results from an error, a delay in funds clearing, or a posting mistake, the procedure is always the same:

• Calculate the precise deficit on the client ledger for the matter concerned.
• Transfer the matching sum from the business bank account to the client bank account, thus restoring all other clients to their full entitlement.
• Document the cause of the breach and the rectification taken.

The accounting entries for this business-to-client cash transfer are:

• DR Client Ledger (affected client) Business Account (showing a debt to the firm)
• CR Cash Sheet Business Account
• CR Client Ledger (affected client) Client Account
• DR Cash Sheet Client Account

Worked Example 1.2

A solicitor pays counsel's fees of £1,200 for Client X from the client bank account, but the client ledger for Client X only shows a credit of £1,000—creating a £200 shortfall.

Answer:
This is a breach of Rule 5.3. £200 belonging to other clients has been wrongly used. The breach is rectified by replacing the £200 from the business bank account immediately. Accounting Entries:

• DR Client Ledger (Client X) Business Account £200
• CR Cash Sheet Business Account £200
• CR Client Ledger (Client X) Client Account £200
• DR Cash Sheet Client Account £200

Now, Client X’s business-side entry reflects a debt to the firm, and the client bank account is restored to compliance for all clients.

Dishonoured Cheques and Uncleared Funds

When a client’s cheque is paid into the client account and payments are made before it clears, a dishonour creates a shortfall for that client. Rule 6.1 requires the immediate replacement of any resulting deficit in the client bank account using the firm’s own resources.

The standard sequence is:

• Reverse the earlier receipt on the ledgers (to remove the credit for funds that ultimately did not clear).
• Transfer enough business money to correct any debit now shown in the client ledger.

Worked Example 1.3

On Monday, the firm receives a £500 cheque from Client V on account and pays it into client bank account. On Tuesday, the firm pays a £100 court fee from the account for Client V. By Thursday, the bank notifies the cheque is dishonoured.

Answer:
Reverse the earlier receipt for £500 and then immediately replace the £100 shortfall from business money.

• DR Client Ledger (Client V) Client Account £500
• CR Cash Sheet Client Account £500
• DR Client Ledger (Client V) Business Account £100
• CR Cash Sheet Business Account £100
• CR Client Ledger (Client V) Client Account £100
• DR Cash Sheet Client Account £100

The end result is that the shortfall has been made good, and future payments from the client account for Client V must not be made until sufficient cleared funds are present. Internal control procedures should flag uncleared funds and prohibit premature withdrawals.

Client Money Paid into the Business Account

If a receipt that is client money is incorrectly paid into the business bank account instead of the client account (in breach of Rule 2.3), the error must be corrected by transferring the money promptly, even if only a short time elapses.

The necessary journal entries:

• DR Client Ledger Business Account
• CR Cash Sheet Business Account
• CR Client Ledger Client Account
• DR Cash Sheet Client Account

This brings the physical funds and the audit trail back into compliance.

Worked Example 1.4

The firm receives £400 on account of costs and unpaid disbursements for Ms Lee but banks it into the business account in error, with no bill delivered.

Answer:
The £400 is client money, so must be transferred into the client account immediately.

• DR Client Ledger (Ms Lee) Business Account £400
• CR Cash Sheet Business Account £400
• CR Client Ledger (Ms Lee) Client Account £400
• DR Cash Sheet Client Account £400

This ensures the firm is not holding client money in the wrong account and avoids further breach. The narrative in the ledger and on the cash sheet should state the rectification and the date the breach was discovered.

Business Money Paid into the Client Account

The reverse situation occurs when business money (e.g. in payment of a bill) is credited to the client bank account, often inadvertently. The SRA Accounts Rules (Rule 4.1) require that business money must be transferred promptly out of the client account.

The correct accounting entries for the transfer are:

• DR Client Ledger Client Account (to clear the client’s liability in the client ledger)
• CR Cash Sheet Client Account (money leaves client bank)
• DR Cash Sheet Business Account (money enters business bank)
• CR Client Ledger Business Account (the client’s liability is cleared)

Worked Example 1.5

A client pays a £360 bill (including VAT) via bank transfer, but it arrives in the client bank account.

Answer:
This is business money, so must be transferred promptly into the business bank account.

• DR Client Ledger (client) Client Account £360
• CR Cash Sheet Client Account £360
• DR Cash Sheet Business Account £360
• CR Client Ledger (client) Business Account £360

After this, the outstanding bill is cleared, and the client account is restored to the correct position.

Costs Taken Without Entitlement (No Bill Delivered)

No transfer may be made from client to business account to pay for profit costs until a bill (or written notification of costs) has been delivered to the client (see Rule 4.3). If money is withdrawn for costs without this entitlement, it is a clear breach.

The correct remedy is:

• Replace the amount withdrawn by transferring it from business to client, as per previous cash transfer patterns, and record the correction in both the client and cash ledgers.
• After proper billing, make a compliant transfer from client to business account.

Worked Example 1.6

£900 is withdrawn from a client ledger for profit costs, but no bill is delivered.

Answer:
Replace £900 immediately into the client bank account.

• DR Client Ledger (client) Business Account £900
• CR Cash Sheet Business Account £900
• CR Client Ledger (client) Client Account £900
• DR Cash Sheet Client Account £900

Subsequently, a proper bill must be delivered and only then may a correct client-to-business transfer be completed. It is essential that records show both the premature withdrawal and its rectification.

Disbursement Posting Errors (Agency vs Principal Method)

Errors can occur where the distinction between agency and principal disbursements is overlooked. When an invoice is in the firm's name (principal method), it must be paid from the business bank account, with VAT entered into the firm’s records. If the payment is instead made from the client account, client money is misapplied and must be restored.

Key Term: Agency method
For invoices in the client’s name; the total (including VAT) is paid from the client account, and no entry is made to the firm’s VAT account or ledger. Key Term: Principal method
For invoices in the firm’s name; the payment is made from the business account, both input and output VAT are recorded by the firm, and the costs are recharged to the client through billing.

If, for example, a surveyor’s fee (invoice addressed to the firm) is paid out of client account, both the sum and associated VAT must be restored to the client bank account from the business bank account, with VAT properly accounted for.

Rectification when the principal method is breached:

• Restore client funds via a cash transfer (business to client) for the full VAT-inclusive amount.
• Post the business-side entries, including VAT, as if the firm had paid correctly from the business account.

Worked Example 1.7

A surveyor’s invoice (£1,200 + £240 VAT) is addressed to the firm, but is paid from the client bank account.

Answer:
Restore the client account immediately, then post business-side and VAT entries correctly.

• DR Client Ledger (client) Business Account £1,440
• CR Cash Sheet Business Account £1,440
• CR Client Ledger (client) Client Account £1,440
• DR Cash Sheet Client Account £1,440

Post the proper principal method: CR Cash Sheet Business Account £1,200; DR Client Ledger Business Account £1,200; DR HMRC/VAT Ledger £240; CR Cash Sheet Business Account £240.

Subsequent recharging to the client is done when issuing the bill.

Mixed Receipts Paid into the Wrong Account

Mixed receipts—such as a payment covering both a delivered bill (i.e. business money) and further sums on account (client money)—must be split appropriately. If all the money is initially paid into the wrong account (usually the client account), an immediate transfer of the business money to the business account must be made.

If paid wholly into the client account:

• Transfer the business portion from client to business account.

If paid wholly into the business account:

• Transfer the client portion from business to client account.

Worked Example 1.8

£750 is received into the client bank account: £550 is payment of a delivered bill (business money), and £200 is on account (client money).

Answer:
Promptly transfer £550 to the business account (client-to-business transfer). £200 remains as client money.

• DR Client Ledger Client Account £550
• CR Cash Sheet Client Account £550
• DR Cash Sheet Business Account £550
• CR Client Ledger Business Account £550

This maintains compliance in treatment and prevents commingling of funds.

Inter-Client Misposting (Wrong Ledger/Matter)

Where a receipt or payment is attributed to the wrong client ledger (e.g., attributed to Matter B when intended for Matter A), this is corrected by a paper transfer—making debit and credit entries in the affected ledgers, but no entries on the cash sheet.

Correction entries:

• DR the client ledger that is owed funds (correct matter/client)
• CR the client ledger that incorrectly received funds

Worked Example 1.9

£1,000 due to Client R (Matter A) is incorrectly credited to Client S (Matter B).

Answer:
Paper transfer (inter-client): DR Client R – Matter A Client Account £1,000; CR Client S – Matter B Client Account £1,000.

No cash sheet entries are required, preserving the accuracy of the client bank account while correcting the ledger allocation.

Returning Client Money Promptly and Residual Balances

Rule 2.5 enforces the duty to return client money as soon as there is no longer a proper reason to retain it. In transaction closures, probate, or concluded litigation, the firm must pay balances to the client as soon as the legal work is complete, absent any justified retention (such as outstanding costs, anticipated disbursements, or instructions to hold pending further matters).

Where the client (or beneficiary) cannot be traced or where the balance is not claimed despite reasonable steps, the SRA authorises payment of residual balances under specific conditions:

• Balances up to £500 per client/matter may be paid to charity after documented, reasonable efforts to trace the client.
• A central register of such payments and evidence of tracing must be kept for audit purposes; receipts from the charity and any indemnity provided must be retained.
• For sums above £500, SRA authorisation is required (see current SRA guidance for the procedure).

Key Term: Residual client balance
An amount held for a client or third party which remains unreturned after completion of the engagement and exhaustion of reasonable efforts to contact or trace the client.

Worked Example 1.10

£325 remains on a closed matter for over a year; the client cannot be traced.

Answer:
Pay the £325 to a charity, ensuring compliance by updating the central register and retaining all documentation of tracing steps and the charity’s receipt.

• DR Client Ledger (matter) Client Account £325
• CR Cash Sheet Client Account £325

If the client later emerges, the charity indemnifies the firm so that the rightful owner may reclaim the sum. The central register should show date, matter, charity, and amount, along with details of the tracing attempts undertaken.

Banking Facilities Prohibition (and How to Rectify)

Rule 3.3 strictly prohibits any use of the client account as a personal or business banking facility. The only permissible movement of funds is linked directly to a matter in which the firm is providing regulated legal services. It is not sufficient for the instruction to come from the client; there must be a clear link to a legal transaction being handled by the firm.

If a client requests that their funds be held to pay unrelated expenses (such as monthly rental payments not arising from a legal matter, or payments to unrelated third parties), the firm must refuse, return the funds, and cease acting if necessary.

Correction entries:

• Return non-permissible funds to the client: DR Client Ledger Client Account; CR Cash Sheet Client Account.

If improper payments have already been made, ensure full replacement using business funds, as for any other shortfall. Document the breach and the steps taken to avoid similar risks in future, as improper use of the client account not only breaches the Rules, but potentially gives rise to risks of money laundering, regulatory penalties, and disciplinary sanctions.

Firms must also assess whether such misuse of the client account constitutes a material breach, requiring notification in their accountant’s report and possible direct reporting to the SRA, especially where there are indicators of external pressure, insolvency risk, or attempted circumvention of law or regulation.

Exam Warning Always select answers that reflect the need for immediate replacement of client funds and prompt correction of breaches. Never opt for delay, further instruction, or waiting for bank reconciliation before fixing shortfalls.

Revision Tip Visualise the route of money: correcting a shortfall always involves a business-to-client transfer (money into client account from business account), while returning improper receipts involves a client-to-business transfer. Double-entry bookkeeping underpins every transaction; always ensure every DR is matched by a CR in the correct ledger column and bank account.

Key Point Checklist

This article has covered the following key knowledge points:

• The SRA Accounts Rules require all breaches to be corrected promptly upon discovery, with immediate replacement of client money where required, regardless of how the error occurred or by whom.
• Breaches of accounting rules are most frequently due to misapplication of client funds, improper withdrawals, mispostings between ledgers or accounts, improper receipt or late return of balances (including residual balances), premature transfer to the business account, or providing banking facilities.
• Rectification of a client account shortfall is achieved by transferring the necessary funds from the business bank account to the client bank account and making corresponding accounting entries in the correct ledgers, with additional documentation explaining the breach and the correction.
• Cash transfers between business and client accounts require careful journal entries in both the business and client columns of the cash sheet and client ledger, and the corresponding correction must be made promptly (not delayed until routine reconciliation).
• Where client money is paid into the business account in error (e.g., receipt on account before a bill is delivered), the identical amount must be transferred into the client account immediately using a business-to-client transfer, properly referenced and cross-referenced to the original error.
• If business money is received into the client bank account, the relevant sum must be promptly transferred to the business bank account to avoid commingling and to ensure transparency in the treatment of client and firm funds.
• Dishonoured client cheques and withdrawals against uncleared funds resulting in negative client ledger balances trigger an immediate duty to make good the client account with business money, and prevent the use of other clients’ funds to cover specific client payments.
• Sums transferred from the client account as fees or costs before entitlement arises (no bill delivered) must be replaced at once, with accurate rectification entries and proper billing procedure thereafter, and the records must demonstrate the chronology and rationale of transactions for any auditor or regulator.
• Disbursement posting errors involving the agency/principal distinction require immediate correction to restore client money (including, for principal method errors, proper posting to the VAT and business ledgers and, if necessary, clarifying entries in all affected ledgers).
• Mixed receipts (business and client money) must be allocated and transferred to the correct accounts without delay. Failure to act promptly is a breach of Rule 4.2.
• Mispostings between client ledgers are rectified solely by inter-client or inter-matter transfers (paper transfers); these do not involve physical movement of funds but must be supported by clear narrative and internal documentation.
• Client monies must be returned without delay at the end of matters once there is no longer any proper reason to retain them; residual balances where the client cannot be traced are dealt with under specific SRA-authorised procedures.
• Use of client accounts as banking facilities is strictly prohibited; breaches must be rectified promptly by ceasing the practice, returning money to the client, and reviewing controls to prevent recurrence. Failures to comply may trigger both qualification of the accountant’s report and direct SRA investigation.
• Firms must maintain and regularly reconcile records to ensure client accounts are never overdrawn, and that shortfalls are identified and fixed promptly.
• The COFA and all managers have a continuing duty to monitor for breaches, ensure documentation is up-to-date and accurate, act rapidly upon breach, and escalate material issues to the SRA or auditors where appropriate.
• All procedures and corrections must be well documented and auditable—secure retention of records for a minimum of six years is required under the Rules.

Key Terms and Concepts

• Breach
• Rectification
• Client Account Shortfall
• COFA
• Cash transfer
• Inter-client transfer
• Agency method
• Principal method
• Residual client balance

Key Term: Client Account Shortfall
A situation where a client's ledger card or matter is in debit—indicating that more money has been withdrawn on a client's account than is held for that client, meaning other clients' money is at risk. It must be rectified immediately by replacing the shortfall from the firm's own funds. Key Term: Residual client balance
An unreturned sum of client money left after the conclusion of a matter or transaction, including situations where the client or beneficiary cannot be traced. Specific SRA procedures govern the withdrawal of such balances, especially those over £500. Key Term: COFA
Compliance Officer for Finance and Administration—an individual responsible within a law firm for monitoring and ensuring its compliance with the SRA Accounts Rules and ready correction of breaches. Key Term: Cash transfer
The transfer of funds between client and business bank accounts, accompanied by appropriate double entries in the cash sheet and ledgers to ensure the accuracy of the accounting records. Key Term: Inter-client transfer
A process for reallocating funds between client ledgers or matters without the movement of physical cash between accounts, achieved solely through offsetting entries in the ledgers. Key Term: Agency method
Payment of a third-party invoice addressed to the client, paid from the client account. The firm acts as agent, and records are kept only in the client ledger and cash sheet (VAT-inclusive amount); no entry to the firm’s VAT records. Key Term: Principal method
Payment of a third-party invoice addressed to the firm (business), paid from the business account. The firm records both input and output VAT, and sells the service onward to the client when billing. Key Term: Breach
Any instance of non-compliance, whether administrative or substantive, with the SRA Accounts Rules including improper handling of client money, delays or errors in returns or withdrawals, and failures in recording or reporting.

Through strict application of these standards, and by understanding both the regulatory context and practical operational requirements, solicitors and their firms maintain the confidence of clients, the regulator, and the wider community as trusted custodians of client funds.