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Notes on Solicitors' Accounts for the LPC at BPP University. While original prepared for BPP University students, some of my friends have used these notes to prepare for their exams at Ulaw and City University and achieved a distinction.
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BPP University College Of Professional Studies Limited (BPP)
Legal Practice Course
Solicitors Accounts
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Exam: Errors relating to the Rules will be penalised more than other (b) Rule 2.3(b) Client money representing payments from the Legal
types of errors. Permitted: basic calculator Aid Agency for your costs should not be paid into the client
account.
SOLICITORS’ ACCOUNT RULES (c) Rule 2.3(c) You agree in a written alternative arrangement with
Rule 1.1 These rules apply to all authorised bodies. – ie. law firms the person for whom the money is held not to hold the money
in client account. This money will have to be held in accordance
Firms must have systems and controls in place to ensure compliance with the agreement.
with the rules.
Rule 6.1 Breaches of the Rules must be corrected promptly on discovery. (d) Money relating to client but not to the work the firm has done
for client is not client money. In this case, make a note in that
SRA’s overarching objective is to keep client money safe. client’s ledger recording both the receipt of and the handing over
Rule 4.1 Client money must be kept separate from office money. of the cheque. – eg. if a third party sends you a cheque to
forward onto the client so that they can cash it.
CLIENT MONEY:
When can you pay money out of client account?
What is client money?
Rule 3.3 All payments into, transfers from, or withdrawals from a client
Rule 2.1 Client money = money held or received by the firm. It belongs account must be in respect of the solicitor delivering legal services.
to the client.
Client money may only be withdrawn from client account if:
Client money if: 1. Rule 5.1(a) It is for the purpose for which it is being held – eg.
(a) Money received from client on account of costs. paying court fees.
• Money from client sent for general purposes in
connection with a matter. OR
• This is money which has been transferred to cover not
yet incurred expenses. 2. Rule 5.1(b) It is following instructions from client, or third party
from whom the money is held – eg. you have been holding the
Eg. if a solicitor has been instructed in connection with a money for the deposit for the purchase of a property.
property purchase, solicitor will ask client for money to cover the OR
Land Registry fees. If client doesn’t go ahead with the purchase
and the searches are not then paid for, the money remains client
money. 3. Rule 5.1(c) It is on the SRA’s prior written authorisation or in
prescribed circumstances. The only prescribed circumstance
(b) Rule 2.1(a) Money received in respect of your fees or yet which exists at the moment is to withdraw residual client
unpaid disbursement expenses. account balances of less than £500 for any client matter if the
• Costs = fees and disbursements. balance is paid to a charity of the law firm’s choice.
• Fees = a firm’s own charges/profit costs (including VAT). OR
• Disbursements = costs paid to third parties by solicitors
on behalf of their client (including VAT). 4. Client money becoming office money in order to satisfy bill of
Does not include: Office expenses such as postage fees. costs: The money can be transferred after the firm delivers a bill
Includes: Stamp Duty Land Tax, Land Registry fees, of costs/other written notification of costs to client. Any
company search fees and court fees. payment taken from client account must only be for the sum
identified in the bill of costs/written notification.
(c) Rule 2.1(b) Money received from client but belonging to a third
party: money held as agent, stakeholder or held to the sender’s OR
order. – eg. the deposit for a purchase.
5. Rule 4.2 Mixed payments: when the office money element of a
(d) Money held as a trustee or as the holder of a specified office. mixed payment which has to be transferred to the office account.
Specified office is where someone is: Rule 5.3 Only withdraw if sufficient funds are held on behalf of that
1. A donee of a Power of Attorney specific client or third party to make the payment.
2. A court of Protection deputy
OR OFFICE MONEY:
3. A trustee of occupational pension scheme.
What is office money?
Where should client money be placed?
Office money = money belonging to authorised bodies. – ie. law firms
Rule 3.2 Client account = account at a bank or building society in England
and Wales. Office money if: Rule 2.1(d)
• Paid disbursements – eg. if law firm held no money for client so
The client account’s name must include the name of the law firm and had to pay for disbursement and client later sends money but
have the word “client”. It is not a bank account belonging to client. only after disbursements are paid by the law firm.
If the firm has already paid for disbursements, the firm can be
Ledger = an accounting tool used to record money coming in an going reimbursed without having to issue a bill to client by paying any
out and this helps us identify to whom the money belongs. A ledger is money received from client into the office account.
not usually a real bank account.
The ledger relating to client account is referred to as ‘client cash’. • Money sent after a bill for the law firm’s fees is delivered: Client
Client ledgers are logical: ££ into ledger = CR, out = DR pays solicitor for work undertaken.
A law firm will have a general client account holding the money of • Money sent by client after bill of costs is delivered: this is done
various clients. However, it can open a separate designated client to reimburse costs or expenses not yet paid by the firm.
accounts holding each client’s money. The total amount ‘owed’ by a law
firm to all its clients should equal the money held in client account(s). Where should office money be placed?
The names of these accounts must include both the name of the law firm Office account = physical bank account used by a law firm to hold office
AND the word ‘client’. money. Note, the Rules may use the word “business account”.
Client money to be paid promptly into a client account once you The ledger relating to the office account is ‘office cash’.
received and identified it as client money.
Any money on the office account belongs to the firm.
Exceptions:
(a) Rule 2.3(a) Money held as a trustee or the holder of a specified Rules 2.3, 4.1 and 4.2 General rule: office money should be paid into the
office (as discussed earlier) should not be paid into a client office account.
account if that would conflict with the rules relating to the
specified office.
The firm must set up a separate client account for this money so
it is kept separate from office money and other client’s money.
Solicitors’ Accounts – Revision notes | Page 1 of 15
,When can you pay office money into client account?
Rule 4.1-4.2 A firm may allocate funds from mixed payments to the
correct client account or office account.
Clients often send or transfer money needed to pay a bill for work done
but also to include some money for another matter.
If the money is transferred by client to the office account: The firm must
promptly allocate client money element into client account.
If client transfers a mixed payment to client account: The firm must
promptly allocate the office money element to the office account – again
leaving office money in with client money for a short while. The law firm
is not in breach of the rules if it pays office money into client account
(and vice versa) this way.
OTHER RULES:
Rule 8.2-8.3 Solicitors must keep accounting records for client money:
law firms must obtain bank or building society statements min. every five
weeks and must carry out reconciliations between the bank statements
and the firm’s own records.
Rule 8.4 A law firm must “keep readily accessible a central record of all
bills or other written notification of costs” that they have sent to
clients.
Rule 12 Firms have to obtain an independent accountant’s report and
deliver it to the SRA.
If a law firm has not carried out client account bank reconciliations, this
is likely to lead to the accountant having to submit a qualified report.
Rule 12.9 There is a prescribed form for the accountant to use to prepare
their report on a law firm.
Rule 13.1 Record-keeping: Firms must retain all “accounting records” for
at least 6 years but client’s instructions in relation to holding client
money must only be retained if they don’t comply with the Rules.
Solicitors’ Accounts – Revision notes | Page 2 of 15
, RECORDING TRANSACTIONS Balance:
The method of accounting used by solicitors is called double-entry Rule 8.1(b) You must always ensure to keep a running balance for your
bookkeeping. To use this system, for every entry you make into an accounts, and this should clearly appear on your ledgers.
account or ledger, you must also make a corresponding opposite entry
in another account or ledger and thus, every entry is recorded twice. Write the new balance of the account. Remember to put “DR” or “CR”
next to the balance. A zero balance is recorded with a ‘–’, or a ‘0’. Any
balance columns you do not need to keep running balances for are
DOUBLE-ENTRY BOOKKEEPING: shown “greyed out”.
The basic rules of double-entry bookkeeping: Bank Account
Office cash
Rule 8.1 Governs client accounting systems: Date Details DR CR Bal
• Your books should be maintained on the double entry principle. £ £ £
• The current balance on client ledger should be clear 1 Jul Balance 2,000 CR
• Entries should be made in chronological order
AND
• Client ledgers should include the name of person for whom the CLIENT AND OFFICE LEDGERS:
money is held and contain a heading which provides a
description of the matter or transaction. For client money:
Example: Client cash = ledger recording the entries into and out of client account.
AB Ltd Debits and credits:
Office ledger Client ledger Solicitor holds money for client so law firm owes to client.
Date Details DR CR Bal DR CR Bal When more liabilities, so money comes in, credit the ledger.
£ £ £ £ £ £ When less liabilities, so money goes out, debit the ledger.
4 Apr Client cash 500 500 CR
(On account of costs) Separate ledger for each client: each is called a client ledger. Each
individual client ledger shows how much of that client money belongs to
The main rules of double-entry bookkeeping: each individual client. Thus, total of balances on client ledgers must be
1. For each transaction, you must make a pair of entries, so two equal to the total balance in client account.
separate entries in two separate accounts or ledgers. Always make sure to write the client’s full name as in your question on
2. In each pair, one entry must be a CR (credit) entry and the other the ledger.
entry must be a DR (debit) entry.
3. Both entries will be made on the same side of the ledger, eg. For office money:
either both entries will be on the client side or the office side.
-
How to write an entry? o Office cash = a bank account for the firm’s money. This is the ledger for
the office account and is a separate bank account.
Date of transaction: o
o Debits and credits:
o
Make sure to always write the date of the transaction on the left-hand Client owes money to the firm.
side. o When more debt (bill of costs sent out), debit the ledger.
o When less debt (client pays money owed), credit the ledger.
Details of the transaction: o
o Separate ledger for each client: This is called the office ledger and it
Two elements: records how much money that particular client owes solicitor.
1. The name of the ledger in which you make the corresponding
entry – this should be in bold When recording transactions:
2. The description of the transaction – in brackets
In practice the two ledgers are kept on the same page:
Bank Account
Office cash Bank Accounts
Date Details DR CR Bal Office cash Client cash
£ £ £ Date Details DR CR Bal DR CR Bal
2 May Client ledger: Mr Smith 2,000 £ £ £ £ £ £
(On account of costs)
Debit (DR) or credit (CR)?
The sum of the money and whether it is being credited or debited to the
account.
• Asset ledgers:
Bank account, client ledgers or money owed to solicitor – eg. Two different ledgers:
Bank Account, Petty Cash, Receivables. office cash and client cash
Receives money (+): debit the account
Pays out (-): credit the account
• Liability ledgers:
Payables (Money that solicitor owes to someone) – eg. VAT
Account, Stakeholder ledger.
Higher liability (+): credit the account
Lower liability (-): debit the account
• Income ledgers:
Profit Costs, Sales
Higher income (+): debit the account
Lower income (-): credit the account
• Expense/loss ledgers:
Rent Expense, Bad Debt
Higher expense (+): credit the account
Lower expense (-): debit the account
Solicitors’ Accounts – Revision notes | Page 3 of 15
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