Learning Outcomes
After studying this article, you will be able to explain the structure and function of T-accounts as a visual tool for double-entry bookkeeping in solicitors’ accounts. You will understand how T-accounts represent debits and credits, how they illustrate the separation of client and business money, and how they help you interpret basic ledger entries. This knowledge is essential for answering SQE1 questions on client account transactions.
SQE1 Syllabus
For SQE1, you are required to understand the principles of double-entry bookkeeping as applied to solicitors’ accounts. This article covers the following syllabus points:
- The basic rules of double-entry bookkeeping (debits and credits).
- The use of T-accounts to represent ledger accounts visually.
- The distinction between client money and business money, and their correct recording.
- How T-accounts help illustrate compliance with the SRA Accounts Rules on segregation of funds.
- Recognising correct accounting entries for common client and business transactions.
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.
-
What does the left side of a T-account represent?
- Credit (CR)
- Debit (DR)
- Liability
- Income
-
Which SRA Accounts Rule requires firms to keep client money separate from business money?
- Rule 2.3
- Rule 3.3
- Rule 4.1
- Rule 5.1
-
When a firm receives client money for a disbursement, which accounts are affected in the double-entry system?
-
True or false? In a client ledger, a credit entry increases the amount owed to the client.
Introduction
Understanding double-entry bookkeeping is essential for solicitors’ accounts and for SQE1. T-accounts are a simple visual tool to help you see how debits and credits work in practice. They also make it easier to see how client money and business money are kept separate, as required by the SRA Accounts Rules. This article explains the structure of T-accounts, how they represent transactions, and how they help you interpret ledger entries in client account scenarios.
The Double-Entry Bookkeeping Principle
Every financial transaction in a law firm has two effects and must be recorded twice: once as a debit (DR) and once as a credit (CR), in two different accounts. This keeps the accounts balanced and allows you to track both where money comes from and where it goes.
Key Term: Double-entry bookkeeping
A system where every transaction is recorded as both a debit and a credit in two separate accounts, ensuring the books always balance.
The effect of a debit or credit depends on the type of account:
- Assets (e.g. cash, client account): Debit increases, Credit decreases.
- Liabilities (e.g. client money held): Credit increases, Debit decreases.
- Income: Credit increases, Debit decreases.
- Expenses: Debit increases, Credit decreases.
- Equity/Capital: Credit increases, Debit decreases.
T-Accounts: Visualising Ledger Accounts
A T-account is a simple diagram used to show the two sides of any ledger account. The left side is for debits (DR), and the right side is for credits (CR). This format helps you quickly see how transactions affect the account balance.
Key Term: T-account
A visual representation of a ledger account, shaped like a "T", with debits on the left and credits on the right.
For example, a T-account for the client cash account looks like this:
Client Cash Account
| DR | CR |
|---|---|
Debits (left) increase assets (like cash in the client account). Credits (right) decrease assets.
T-Accounts and the SRA Accounts Rules
The SRA Accounts Rules require strict separation of client money and business money. Double-entry bookkeeping and T-accounts help you record and visualise this separation. Client money is always recorded separately from business money, and each has its own ledger and cash account.
Key Term: Client money
Money held or received by a firm on behalf of a client or third party, which does not belong to the firm.Key Term: Business money
Money belonging to the firm itself, such as fees received after a bill is delivered.Key Term: Client ledger
A record showing all transactions for a specific client or matter, reflecting the firm's liability to the client.Key Term: Business ledger
A record showing transactions relating to the firm's own money for a particular client or matter.Key Term: Client cash account
A ledger account representing the total cash held in the client bank account(s).Key Term: Business cash account
A ledger account representing the total cash held in the firm's business bank account(s).
How Debits and Credits Work in Practice
In solicitors’ accounts, the direction of the entry (debit or credit) depends on the type of account and the nature of the transaction. For example:
- Receiving client money: Debit client cash account (asset increases), Credit client ledger (liability increases).
- Paying a disbursement from client money: Credit client cash account (asset decreases), Debit client ledger (liability decreases).
- Paying a business expense: Credit business cash account (asset decreases), Debit expense account (expense increases).
Worked Example 1.1
A client pays £1,000 on account of costs and disbursements. How are the T-accounts affected?
Answer:
Debit (DR) client cash account £1,000 (asset increases).
Credit (CR) client ledger £1,000 (liability increases).
The firm now holds £1,000 for the client.
Worked Example 1.2
The firm pays a Land Registry fee of £200 from the client account for the client. What are the T-account entries?
Answer:
Credit (CR) client cash account £200 (asset decreases).
Debit (DR) client ledger £200 (liability decreases).
The firm has used £200 of the client’s money for the authorised purpose.
Worked Example 1.3
The firm pays its own office rent of £500 from the business bank account. How are the T-accounts affected?
Answer:
Credit (CR) business cash account £500 (asset decreases).
Debit (DR) rent expense account £500 (expense increases).
Client money is not involved.
Revision Tip
When reviewing ledger entries, always check which account is being debited and which is being credited. Remember:
- Debits increase assets and expenses.
- Credits increase liabilities, income, and equity.
Key Point Checklist
This article has covered the following key knowledge points:
- T-accounts are a visual tool for understanding debits and credits in double-entry bookkeeping.
- The left side of a T-account is always debit (DR); the right side is credit (CR).
- Debits increase assets and expenses; credits increase liabilities, income, and equity.
- The SRA Accounts Rules require strict separation of client and business money, which is reflected in separate ledgers and T-accounts.
- Understanding T-accounts helps you interpret ledger entries and answer SQE1 questions on client account transactions.
Key Terms and Concepts
- Double-entry bookkeeping
- T-account
- Client money
- Business money
- Client ledger
- Business ledger
- Client cash account
- Business cash account
