Client accounts - Accounting entries required for client account transactions

Learning Outcomes

After reading this article, you will be able to identify and apply the correct accounting entries for common client account transactions in legal practice. You will understand how to distinguish between client and business money, record receipts and payments, handle mixed funds, and comply with SRA Accounts Rules. You will also be able to explain key terms and avoid common errors when dealing with client account transactions for the SQE1 exam.

SQE1 Syllabus

For SQE1, you are required to understand the accounting entries required for client account transactions in the context of solicitors’ accounts. Focus your revision on:

• the distinction between client money and business money, and how each is recorded
• the double-entry bookkeeping system as applied to client account transactions
• the correct accounting entries for receipts and payments involving client accounts
• handling mixed receipts (client and business money in one payment)
• compliance with SRA Accounts Rules for client account transactions
• the requirements for record-keeping, reconciliation, and prompt allocation of funds

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. What are the correct double-entry accounting entries for receiving client money on account of costs?
2. How should a law firm record a payment made from the client account on behalf of a client?
3. What is the required treatment when a firm receives a mixed payment containing both client money and business money?
4. True or false? Client money can be paid into the business account if it is more convenient for the firm.

Introduction

Client account transactions are a core part of solicitors’ accounts and are strictly regulated by the SRA Accounts Rules. For SQE1, you must be able to identify and apply the correct accounting entries for receipts and payments involving client money, ensure compliance with the rules, and understand the principles of double-entry bookkeeping as they apply to legal practice. This article explains the key requirements and provides worked examples to help you prepare for the exam.

Client Money and Business Money: The Distinction

Solicitors regularly handle money belonging to clients as part of legal transactions. It is essential to keep client money separate from the firm’s own business money at all times.

Key Term: client money
Money held or received by a solicitor relating to regulated services delivered to a client, or on behalf of a third party, or as a trustee, or in respect of fees and unpaid disbursements before a bill is delivered.

Key Term: business money
Money belonging to the law firm, including fees received after a bill is delivered, reimbursements for paid disbursements, and other firm income.

Double-Entry Bookkeeping and Ledgers

All accounting entries in solicitors’ accounts are made using the double-entry bookkeeping system. Every transaction must be recorded as a debit (DR) in one account and a credit (CR) in another, ensuring the books remain balanced.

Key Term: double-entry bookkeeping
An accounting system where every transaction is entered twice: once as a debit and once as a credit, in two different accounts.

Key Term: client ledger
A record for each client matter showing all receipts and payments of client and business money relating to that client.

Key Term: cash account
The record of all money received into and paid out of the firm’s bank accounts, with separate columns for business and client accounts.

Recording Receipts of Client Money

When a firm receives client money (for example, a retainer or funds for a transaction), the money must be paid promptly into the client account. The correct double-entry is:

• Debit (DR) the cash account (client side)
• Credit (CR) the client ledger (client side)

Worked Example 1.1

A client pays £2,000 on account of costs by bank transfer. What are the correct accounting entries?

Answer:
Debit (DR) £2,000 to the cash account (client side);
Credit (CR) £2,000 to the client ledger (client side) for that client matter.

Recording Payments from the Client Account

When making a payment from the client account on behalf of a client (such as paying a disbursement or sending funds to a third party), the entries are:

• Debit (DR) the client ledger (client side)
• Credit (CR) the cash account (client side)

Worked Example 1.2

A solicitor pays £500 from the client account to a surveyor on behalf of a client. What are the correct entries?

Answer:
Debit (DR) £500 to the client ledger (client side) for the client;
Credit (CR) £500 to the cash account (client side).

Recording Receipts and Payments of Business Money

Business money (such as payment of a bill or reimbursement for a paid disbursement) must be paid into the business account. The entries are:

• Debit (DR) the cash account (business side)
• Credit (CR) the client ledger (business side)

Worked Example 1.3

A client pays £1,200 in settlement of a bill after it is delivered. How should this be recorded?

Answer:
Debit (DR) £1,200 to the cash account (business side);
Credit (CR) £1,200 to the client ledger (business side) for that client.

Handling Mixed Receipts

A mixed receipt is a payment that includes both client money and business money (for example, a payment covering both a bill and funds for a transaction). The SRA Accounts Rules require the firm to allocate the funds promptly to the correct accounts.

Key Term: mixed receipt
A payment received by the firm that contains both client money and business money.

The firm may either split the payment between the client and business accounts or pay the whole amount into one account and promptly transfer the relevant part to the other account.

Worked Example 1.4

A client sends a cheque for £5,500, comprising £5,000 for a property completion (client money) and £500 for the firm’s bill (business money). How should this be dealt with?

Answer:
The firm can either split the cheque and pay £5,000 into the client account and £500 into the business account, or pay the whole amount into one account and promptly transfer the appropriate sum to the other account. The entries must ensure that client money is not kept in the business account and business money is not kept in the client account.

SRA Accounts Rules: Key Requirements

The SRA Accounts Rules set out strict requirements for handling client account transactions:

• Client money must be paid promptly into a client account.
• Only client money (and limited permitted sums) may be held in a client account.
• Withdrawals from the client account must only be made for the proper purpose and only if sufficient funds are held for that client.
• Mixed receipts must be allocated promptly to the correct account.
• All dealings must be recorded in the client ledger and cash account.
• Regular reconciliations of client accounts are required.

Exam Warning

The SRA prohibits using the client account as a banking facility for clients or third parties. Payments into and out of the client account must relate to the delivery of regulated legal services. Do not accept funds for convenience or unrelated purposes.

Summary Table: Typical Accounting Entries

Key Point Checklist

This article has covered the following key knowledge points:

• Client money and business money must always be kept separate and recorded in the correct accounts.
• Double-entry bookkeeping requires every transaction to be entered as a debit and a credit in two accounts.
• Receipts of client money are debited to the cash account (client side) and credited to the client ledger (client side).
• Payments from the client account are debited to the client ledger (client side) and credited to the cash account (client side).
• Mixed receipts must be allocated promptly to the correct accounts, and any transfers recorded.
• SRA Accounts Rules prohibit using the client account as a banking facility and require accurate, prompt record-keeping for all client account transactions.

Key Terms and Concepts

• client money
• business money
• double-entry bookkeeping
• client ledger
• cash account
• mixed receipt