Client accounts - Debits and credits in asset accounts

Learning Outcomes

This article explains the fundamental principles of double-entry bookkeeping as applied to solicitors' accounts, focusing on asset accounts like cash accounts and client ledgers. It outlines how debits and credits are used to record receipts and payments involving both business and client money. After reading this article, you should understand the basic mechanics of recording financial transactions in solicitors' accounts in compliance with the SRA Accounts Rules 2019, enabling you to interpret ledger entries and identify correct accounting procedures for SQE1 assessment purposes.

SQE1 Syllabus

For SQE1, you are required to understand the practical application of accounting principles within the framework of the SRA Accounts Rules 2019. This includes correctly identifying and recording transactions involving client and business money using the double-entry system.

As you work through this article, remember to pay particular attention in your revision to:

  • The core principles of double-entry bookkeeping.
  • The distinction between debit (DR) and credit (CR) entries and their effect on different types of accounts, particularly asset accounts.
  • How receipts and payments of both client and business money are recorded in the cash account and client ledgers.
  • Ensuring compliance with the SRA Accounts Rules when making accounting entries.

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 only a single entry in one ledger.
    2. For every debit entry, there must be a corresponding debit entry in another ledger.
    3. For every credit entry, there must be a corresponding debit entry in another ledger.
    4. Debit entries always decrease asset accounts.
  2. A law firm receives £5,000 from a client on account of costs. How should this receipt be recorded in the client ledger?
    1. Debit (DR) £5,000 in the business account column.
    2. Credit (CR) £5,000 in the business account column.
    3. Debit (DR) £5,000 in the client account column.
    4. Credit (CR) £5,000 in the client account column.
  3. A firm pays a court fee of £150 on behalf of a client using business money, as no client funds are currently held. How is this payment recorded in the cash account?
    1. Debit (DR) £150 in the business account column.
    2. Credit (CR) £150 in the business account column.
    3. Debit (DR) £150 in the client account column.
    4. Credit (CR) £150 in the client account column.

Introduction

Understanding how financial transactions are recorded is fundamental to complying with the SRA Accounts Rules 2019. The system used by all businesses, including law firms, is double-entry bookkeeping. This system provides a structured way to record the financial activities of the firm accurately and ensures that the accounts remain balanced. For SQE1, you need to understand how this system applies specifically to the management of client and business money within a law firm, particularly concerning asset accounts like cash and client ledgers.

Double-Entry Bookkeeping Explained

The core idea behind double-entry bookkeeping is that every financial transaction has two equal and opposite effects on a firm’s accounts. To reflect this duality, every transaction is recorded with two entries: a debit (DR) in one account and a credit (CR) in another account.

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, ensuring the accounts always balance.

Debits and Credits

In accounting, 'debit' and 'credit' simply refer to the left and right sides of an account, respectively. Their effect depends on the type of account:

  • Assets (e.g., cash, amounts owed by clients): Debits increase the account balance; Credits decrease it.
  • Liabilities (e.g., amounts owed to clients, loans): Debits decrease the account balance; Credits increase it.
  • Income (e.g., profit costs): Debits decrease the account balance; Credits increase it.
  • Expenses (e.g., rent, wages): Debits increase the account balance; Credits decrease it.

Key Term: debit (DR)
An accounting entry typically recorded on the left side of an account. It increases asset and expense accounts and decreases liability, equity, and income accounts.

Key Term: credit (CR)
An accounting entry typically recorded on the right side of an account. It increases liability, equity, and income accounts and decreases asset and expense accounts.

For SQE1 purposes, focusing on asset accounts (like cash) and liability accounts (like the client side of a client ledger, representing money owed to the client) is important.

Core Accounting Records

Law firms maintain various records. For recording day-to-day transactions involving client and business money, the two key records are the cash account (often called the cash sheet or cash book) and client ledgers.

Cash Account

The cash account records all money flowing into and out of the firm's bank accounts. Because firms must keep client money separate from their own business money (Rule 4.1, SRA Accounts Rules 2019), the cash account typically has two sets of columns: one for the business bank account and one for the client bank account.

Key Term: cash account
A ledger that records all receipts and payments of money through the firm's bank accounts, usually separated into business and client account columns. (Also referred to as cash sheet or cash book).

  • Receipt of money: Always results in a DR entry in the relevant (business or client) cash account column.
  • Payment of money: Always results in a CR entry in the relevant (business or client) cash account column.

Client Ledger Account

A separate ledger account must be maintained for each client, and often for each matter for that client (Rule 8.1(a), SRA Accounts Rules 2019). This ledger tracks the financial position between the firm and that specific client. Like the cash account, it usually has dual columns:

  • Business account columns: Record transactions affecting the amount the client owes the firm or the firm owes the client regarding business money (e.g., billed costs, disbursements paid from business money). A DR balance means the client owes the firm; a CR balance means the firm owes the client business money (rare).
  • Client account columns: Record transactions involving client money held for that client (e.g., money received on account, payments made from client funds). A CR balance means the firm holds client money for the client; a DR balance indicates money has been paid out exceeding funds held, which is a breach of the Rules unless specific exceptions apply.

Key Term: client ledger
An accounting record maintained for each individual client, showing dealings with both business money and client money related to their matters.

Recording Receipts and Payments

Understanding how debits and credits affect the cash account and client ledgers is essential for recording transactions correctly.

Receipts of Money

When a firm receives money, you must first identify whether it is client money or business money.

  • Receiving Client Money (e.g., money on account of costs):
    • DR Cash account (Client column) - Cash asset increases.
    • CR Client ledger account (Client column) - Liability to the client increases.
  • Receiving Business Money (e.g., payment of a bill):
    • DR Cash account (Business column) - Cash asset increases.
    • CR Client ledger account (Business column) - Amount owed by the client decreases (reducing the DR balance or creating/increasing a CR balance).

Worked Example 1.1

A firm receives a cheque for £500 from client Priti Patel generally on account of costs. What are the correct double entries?

Answer: This is client money. The receipt increases the firm's cash held in the client bank account and increases the amount the firm owes to Priti Patel.

  • DR Cash account (Client column) £500
  • CR Priti Patel client ledger (Client column) £500

Payments of Money

When a firm pays money out, you must decide whether to use client money (if sufficient funds are held for that specific client and the payment is permissible under Rule 5) or business money.

  • Paying Using Client Money (e.g., a disbursement paid from funds held on account):
    • DR Client ledger account (Client column) - Liability to the client decreases.
    • CR Cash account (Client column) - Cash asset decreases.
  • Paying Using Business Money (e.g., paying an expense for a client when no client money is held):
    • DR Client ledger account (Business column) - Amount owed by the client increases.
    • CR Cash account (Business column) - Cash asset decreases.

Worked Example 1.2

The firm holds £800 for Priti Patel in the client account. The firm pays a £150 court fee (a disbursement) on her behalf using client money. What are the correct double entries?

Answer: This is a payment of client money for a purpose for which it is held. It decreases the firm's cash held in the client bank account and decreases the amount the firm owes to Priti Patel.

  • DR Priti Patel client ledger (Client column) £150
  • CR Cash account (Client column) £150

Exam Warning

A common error is confusing the effect of debits and credits on different account types. Remember: for asset accounts like Cash, DR increases and CR decreases. For liability accounts like the client ledger (client column), CR increases (more money held for client) and DR decreases (less money held for client). Mixing these up leads to incorrect recording and potential breaches of the SRA Accounts Rules.

Revision Tip

Think of the client column on the client ledger like your personal bank statement from the firm's point of view: a CR balance means the firm owes the client money (funds available), while a DR balance means the client owes the firm money (or money has been paid out). The cash account is like the firm's own bank statement: DR means money came in, CR means money went out.

Key Point Checklist

This article has covered the following key knowledge points:

  • Double-entry bookkeeping ensures every transaction has equal and opposite debit (DR) and credit (CR) entries.
  • Debits increase asset accounts (like cash) and decrease liability accounts (like money owed to clients).
  • Credits decrease asset accounts and increase liability accounts.
  • The cash account records money movement in the firm's bank accounts (business and client). Receipts are DR; payments are CR.
  • The client ledger tracks the financial position with each client, separated into business and client money columns.
  • Receipts of client money: DR Cash (client), CR Client Ledger (client).
  • Receipts of business money: DR Cash (business), CR Client Ledger (business).
  • Payments using client money: DR Client Ledger (client), CR Cash (client).
  • Payments using business money: DR Client Ledger (business), CR Cash (business).
  • Accurate recording is essential for compliance with the SRA Accounts Rules 2019.

Key Terms and Concepts

  • double-entry bookkeeping
  • debit (DR)
  • credit (CR)
  • 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.

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Senior Associate at Trilegal