Client accounts - Understanding 'T-accounts' and their appli...

Learning Outcomes

This article explains T-accounts in client accounts, including:

• Structure and function of T-accounts as a visual tool for double-entry bookkeeping in solicitors’ accounts
• Representation of debits and credits and interpretation of basic ledger entries
• Separation of client money and business money in compliance with the SRA Accounts Rules
• Mapping of common solicitors’ accounting events to correct T-accounts and ledger pairs (client ledger, cash sheet, business cash, profit costs and VAT ledgers)
• Recognition of when cash movements do and do not arise
• Application of the SRA Accounts Rules to classification of entries between client and business accounts, including mixed receipts, withdrawals, interest, and transfers
• Relevance to SQE1 client account transactions

SQE1 Syllabus

For SQE1, you are required to understand the principles of double-entry bookkeeping as applied to solicitors’ accounts, with a focus on 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.
• The requirement to pay client money promptly into a client account and exceptions (Rule 2.3).
• Client money to be available on demand and to be returned promptly when no longer properly held (Rules 2.4 and 2.5).
• Prohibition on using a client account as a banking facility and the circumstances permitting withdrawals (Rules 3.3 and 5.1–5.3).
• Mixed receipts and prompt allocation to the correct bank account (Rule 4.2).
• Correcting breaches promptly upon discovery (Rule 6.1).
• Interest on client money and sums in lieu of interest (Rules 7.1–7.2).
• Inter-client transfers, stakeholder versus agent deposits, and separate designated deposit client accounts.

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 does the left side of a T-account represent?
   1. Credit (CR)
   2. Debit (DR)
   3. Liability
   4. Income
2. Which SRA Accounts Rule requires firms to keep client money separate from business money?
   1. Rule 2.3
   2. Rule 3.3
   3. Rule 4.1
   4. Rule 5.1

3. When a firm receives client money for a disbursement, which accounts are affected in the double-entry system?

4. 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. In practice you will move between T-accounts, journal logic, and ledgers: T-accounts show direction (DR left, CR right), journal entries identify which account is debited or credited, and the firm’s ledgers (client ledger and cash sheet on the client side; business cash, profit costs, VAT and expense ledgers on the business side) record the postings systematically.

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.

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. Always think from the firm’s standpoint. For example, the client ledger represents the firm’s liability to the client for that matter: a credit on the client ledger increases the amount the firm owes the client; a debit reduces that liability. In contrast, the client cash account (the firm’s client bank balance) is an asset: a debit increases the client cash asset, a credit decreases it.

A common source of confusion arises because personal bank statements use the bank’s standpoint. What appears as a “credit balance” on a client’s own bank statement means the bank owes the customer money, which corresponds to a credit on the bank’s client ledger; in the firm’s books, the same client’s money increases the firm’s client cash asset with a debit to the client cash account.

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), treated as an asset.

Key Term: Business cash account
A ledger account representing the total cash held in the firm's business bank account(s), treated as an asset.

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

Debits (left) increase assets (like cash in the client account). Credits (right) decrease assets.

You can sketch T-accounts for all relevant ledgers to check direction consistently:

• Client cash account (asset): DR increases, CR decreases.
• Client ledger (liability): CR increases what is owed to the client, DR decreases it.
• Business cash account (asset): DR increases, CR decreases.
• Profit costs ledger (income): CR increases fees income; there is no cash movement when a bill is posted.
• HMRC-VAT ledger (liability to HMRC for output tax): CR increases VAT due.

Key Term: HMRC-VAT ledger
A business ledger recording VAT charged (output tax) and paid (input tax) to calculate amounts due to or from HMRC.

Key Term: Profit costs ledger
A business ledger recording professional fees billed to clients.

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.

In practical terms:

• Client money must be paid promptly into a client account unless an exception applies (Rule 2.3). “Promptly” depends on the circumstances; immediate or next working day is expected for receipts under the firm’s control.
• Client money should be available on demand unless a different written agreement exists (Rule 2.4).
• Client money must be returned promptly when there is no longer any proper reason to hold it (Rule 2.5), e.g. once a transaction completes or the estate is ready to distribute.
• Firms must not use client accounts to provide banking facilities (Rule 3.3). Payments into and out of a client account must be in respect of delivering regulated services.
• Withdrawals from a client account are permitted only for the proper purpose, following client/third-party instructions, or with SRA authorisation, and only when sufficient funds are held for that specific client (Rules 5.1–5.3).

Client accounts must be correctly named and located to be clearly distinguishable from business accounts:

• Held at a bank or building society in England or Wales (Rule 3.1).
• Named with the firm’s name and the word “client” (Rule 3.2).

Key Term: Cash sheet
The firm’s record of receipts into and payments out of bank accounts, with separate business and client columns to reflect movements in business cash and client cash.

There are limited exceptions where client money may be withheld from a client account (Rule 2.3):

• Money held by a solicitor acting in certain specified roles (e.g. trustee, deputy), where role-specific requirements govern how funds are held.
• Payments from the Legal Aid Agency for the firm’s costs may be paid directly into the business account.

Key Term: Legal Aid Agency (LAA)
The government body funding legal services for eligible clients; certain LAA payments can be received into the business account.

Firms must correct breaches promptly upon discovery (Rule 6.1). For example, if client money is mistakenly paid into the business account, it must be transferred immediately into the client account with appropriate double entries on the cash sheet and client ledger.

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).
• Submitting a bill (no cash yet): Debit client ledger business columns (recognising the amount payable), Credit profit costs ledger and HMRC-VAT ledger (recognising income and VAT due).
• Payment of a bill: Debit business cash account (asset increases), Credit client ledger (business columns) (liability to firm decreases).
• Mixed receipts (money containing both client and business elements): allocate promptly, ensuring the client money element sits in client account and the billed element sits in business account (Rule 4.2), using appropriate transfers if initially banked to a single account.

Key Term: Sum in lieu of interest
A fair amount paid by the firm to a client for client money held in the general client account, treated as a business expense rather than the client cash account’s own interest.

Key Term: Separate designated deposit client account (SDDCA)
A deposit account designated for a single client/matter, used where large sums are held for longer periods; all interest arising belongs to the client.

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.

Worked Example 1.4

The firm delivers a bill for £600 profit costs plus £120 VAT to a client. No payment is received yet. What entries apply?

Answer:
Debit (DR) client ledger (business columns) £600 for profit costs and £120 for VAT.
Credit (CR) profit costs ledger £600; Credit (CR) HMRC-VAT ledger £120.
No cash sheet entries arise until payment is received.

Worked Example 1.5

The client pays the bill of £720 by bank transfer into the business account. What entries apply?

Answer:
Debit (DR) business cash account £720.
Credit (CR) client ledger (business columns) £720.
This clears the client’s liability to the firm for the billed amount.

Worked Example 1.6

The firm receives a mixed payment of £980 into the client account comprising £780 completion funds (client money) and £200 to settle a previously delivered bill. How should this be treated?

Answer:
Immediately allocate the £200 business element to the business account:
Credit (CR) cash sheet client account £200; Debit (DR) cash sheet business account £200.
Record the liability clearance: Credit (CR) client ledger (business columns) £200.
The remaining £780 stays as client money: Debit (DR) cash sheet client account £780; Credit (CR) client ledger (client columns) £780.

Worked Example 1.7

A surveyor’s invoice for a probate valuation is in the client’s name and is subject to VAT. The firm pays the VAT-inclusive fee from the client account. What entries apply?

Answer:
Debit (DR) client ledger (client columns) with the VAT-inclusive amount.
Credit (CR) cash sheet client account with the VAT-inclusive amount.
No HMRC-VAT ledger entry is required when the client’s name is on the invoice (agency method).

Worked Example 1.8

£400 received on account of costs was mistakenly banked to the business account before any bill was delivered. How is the breach corrected?

Answer:
Transfer immediately to the client account:
Debit (DR) cash sheet business account £400; Credit (CR) client ledger (business columns) £400 reversing the mispost;
Credit (CR) cash sheet client account £400; Debit (DR) client ledger (client columns) £400 to recognise client money.
Record the correction promptly to comply with Rule 6.1.

Worked Example 1.9

The firm decides, per its interest policy, to pay a sum in lieu of interest of £25 to a client for funds held in the general client account. How is this recorded?

Answer:
First record the business expense: Debit (DR) interest payable ledger £25; Credit (CR) client ledger (business columns) £25.
Then transfer from business to client account: Credit (CR) cash sheet business account £25; Debit (DR) cash sheet client account £25.
Recognise a client ledger credit in client columns £25 to show the client’s receipt.

Worked Example 1.10

£100,000 is moved from the general client account into a separate designated deposit client account (SDDCA) for six months; £1,200 bank interest accrues before transfer back. What entries apply on transfer back?

Answer:
The receipt into the general client account is recorded as client money:
Debit (DR) cash sheet client account £101,200; Credit (CR) client ledger (client columns) £101,200.
All interest arising in the SDDCA belongs to the client and forms part of the client-side credit.

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.
• Submitting a bill does not affect cash; payment of a bill does.
• Inter-client transfers are movements within client ledgers only and do not touch the cash sheet.
• The client account balance must never be overdrawn; a credit balance in the client cash column indicates a breach.

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.
• Client money must be paid promptly into a client account, be available on demand, and be returned promptly when there is no proper reason to hold it.
• Firms must not use client accounts to provide banking facilities; withdrawals must be for permitted purposes and only if sufficient funds exist for that specific client.
• Mixed receipts must be allocated promptly to the correct bank account; only the billed portion belongs in business cash.
• Submitting a bill creates entries in the client ledger (business columns), profit costs and VAT ledgers; payment of a bill creates entries in the cash sheet and client ledger (business columns).
• Interest on client money is handled either by paying a fair sum in lieu of interest (expense) for general client accounts or by paying all SDDCA interest to the client.
• Breaches must be corrected promptly upon discovery, typically by immediate cash transfers to restore compliance.

Key Terms and Concepts

• Double-entry bookkeeping
• T-account
• Client money
• Business money
• Client ledger
• Business ledger
• Client cash account
• Business cash account
• HMRC-VAT ledger
• Profit costs ledger
• Cash sheet
• Legal Aid Agency (LAA)
• Sum in lieu of interest
• Separate designated deposit client account (SDDCA)