Learning Outcomes
After studying this article, you will be able to explain the SRA Accounts Rules 2019 requirements for keeping records of bills and financial transactions. You will understand the purpose and format of client ledgers, the rules for documenting receipts and payments, the process for recording bills, and the importance of reconciliations and audit trails. You will also be able to identify common pitfalls and apply best practices to ensure compliance for SQE1.
SQE1 Syllabus
For SQE1, you are required to understand the record-keeping obligations imposed by the SRA Accounts Rules 2019. Focus your revision on:
- the requirement to keep accurate, contemporaneous, and chronological accounting records for all client and business transactions
- the format and content of client ledgers and cash books
- the rules for recording bills, receipts, payments, and transfers
- the need for regular reconciliations and maintaining a clear audit trail
- the retention and accessibility of accounting records for inspection and compliance
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 information must be included on a client ledger to ensure it is identifiable?
- How often must a firm reconcile its client account balances with bank statements under the SRA Accounts Rules 2019?
- Which records must be kept to provide an audit trail for client money transactions?
- True or false? A firm may destroy its accounting records after four years.
Introduction
Accurate record-keeping is essential for all solicitors and law firms regulated by the SRA. The SRA Accounts Rules 2019 set out strict requirements for documenting all financial transactions, including receipts, payments, bills, and transfers. These records protect client money, support regulatory compliance, and provide evidence in the event of an audit or investigation. For SQE1, you must know what records are required, how they should be kept, and the consequences of failing to maintain them.
The Purpose of Record-Keeping
The main aim of the SRA Accounts Rules is to keep client money safe and to ensure transparency in the handling of all financial transactions. Proper records allow firms to:
- demonstrate compliance with regulatory requirements
- identify and correct errors or breaches promptly
- provide a clear audit trail for all dealings with client and business money
Key Term: audit trail
A complete and chronological record of all financial transactions, enabling the tracing of each step from initial receipt to final payment or transfer.
Core Record-Keeping Requirements
Client Ledgers
Each client (and each matter) must have a separate client ledger. This ledger records all receipts and payments of client money, as well as any business money relating to that client or matter.
Key Term: client ledger
A record showing all financial transactions for a specific client or matter, including receipts, payments, and balances.
Cash Book (Cash Sheet)
Firms must keep a cash book (also called a cash sheet) for each bank account, showing all money received and paid out. The cash book must distinguish between client and business accounts.
Key Term: cash book
A chronological record of all receipts and payments into and out of each bank account operated by the firm.
Recording Bills
When a bill is issued to a client, the firm must record the amount of profit costs and VAT in the business section of the client ledger. No entry is made in the cash book until the bill is paid.
Key Term: bill
A written notification to a client of the costs incurred for legal services, including profit costs, VAT, and disbursements.
Receipts and Payments
All receipts and payments must be recorded promptly and accurately. For client money, the entry is made in the client ledger (client section) and the cash book (client account). For business money, the entry is made in the client ledger (business section) and the cash book (business account).
Transfers and Corrections
Transfers between accounts (e.g., from client to business account after a bill is paid) must be recorded in both the client ledger and the cash book. Any corrections to errors must be documented with supporting evidence.
Reconciliations and Audit Trails
Firms must reconcile their client account balances with bank statements at least every five weeks. Any discrepancies must be investigated and resolved promptly. All supporting documents (such as bills, receipts, and client instructions) must be retained to provide a complete audit trail.
Worked Example 1.1
A firm receives £2,000 from Client A for a property purchase. The money is paid into the client account. Later, the firm pays £1,500 to the seller’s solicitor and issues a bill for £400 plus £80 VAT.
Question: What records must the firm keep for these transactions?
Answer: The firm must record the £2,000 receipt in Client A’s client ledger (client section) and the cash book (client account). The £1,500 payment is recorded as a debit in the client ledger and a credit in the cash book. When the bill is issued, £400 profit costs and £80 VAT are debited in the business section of the client ledger, with corresponding credits in the profit costs and VAT ledgers. When the bill is paid from client money, the transfer is recorded in both the client ledger and the cash book.
Supporting Documentation and Retention
All records must be supported by documentation such as bills, receipts, invoices, and written client instructions. These records must be kept securely for at least six years and be readily accessible for inspection by the SRA or an accountant.
Key Term: supporting documentation
Documents that provide evidence for financial transactions, such as bills, invoices, receipts, and client instructions.
Accessibility and Inspection
Records must be kept up to date and in a format that allows the firm to identify at any time:
- the amount held for each client
- the purpose of each transaction
- the current balance on each client ledger
The SRA and reporting accountants have the right to inspect these records and request explanations for any entries.
Worked Example 1.2
A firm is selected for an SRA audit. The auditor asks to see the client ledger and supporting documents for a recent probate matter.
Question: What must the firm provide?
Answer: The firm must produce the client ledger for the probate matter, the cash book entries, copies of all bills issued, receipts for payments made, and any other documents (such as client instructions or invoices) that support the transactions recorded.
Common Pitfalls and How to Avoid Them
Exam Warning
Failing to keep records up to date, omitting supporting documents, or not reconciling accounts regularly are common breaches. These can lead to regulatory action and may be tested in SQE1 scenarios.
Revision Tip
Regularly review the SRA Accounts Rules and practice preparing sample client ledgers and cash book entries to consolidate your understanding.
Key Point Checklist
This article has covered the following key knowledge points:
- Firms must keep accurate, contemporaneous, and chronological records of all financial transactions.
- Each client and matter must have a separate client ledger, showing all receipts, payments, and balances.
- All receipts and payments must be recorded in the cash book for each bank account.
- Bills must be recorded in the business section of the client ledger when issued.
- Regular reconciliations of client account balances with bank statements are required.
- Supporting documentation must be retained for at least six years and be accessible for inspection.
- A clear audit trail must be maintained for all dealings with client and business money.
Key Terms and Concepts
- audit trail
- client ledger
- cash book
- bill
- supporting documentation
