Client Monies & Double Entry Bookkeeping
Solicitors are required to keep track of any money they deal with. Double entry bookkeeping establishes which money belongs to each client, according to SRA Rules.
- Solicitors Regulation Authority (SRA)
- What is client money?
- Double entry bookkeeping
- How does double entry bookkeeping work?
- Keeping Client Money Separate
- Further Examples of Solicitors Accounting
1. Solicitors Regulation Authority (SRA)
From the multinational ‘big hitters’ to high street sole practitioners, most solicitors handle a lot of money that does not belong to them. These funds, belonging to clients or third parties, will often be kept for some periods in accounts belonging to the firm that has dealt with the particular matters out of which they arise. As such, the Solicitors Regulation Authority (SRA) regards the handling of this money very seriously, putting measures in place to ensure that the money is kept secure.
The SRA Accounts Rules are underpinned by the overriding principle that the safety of client money is a priority, meaning the money of the firm (the business money) should never be kept together with that of clients or third parties. This money must be kept safe and secure, and only withdrawn with the appropriate consent.
2. What is client money?
Client money is defined as money that relates to the legal or professional services that the firm provides, as well as that received from third parties during the course of legal services. An example would be monies held in relation to the sale or purchase of the property.
Firms will have separate bank accounts for this money, known as a client account, which must be different from the firm’s own business account. Money should be paid promptly into the client account when received and paid back as soon as there is no longer any reason to continue holding it. Fair interest from the account must also go to the client or third party – it is still their money, after all.
3. Double entry bookkeeping
Double entry bookkeeping is essential here, as firms will quite regularly be in receipt of monies that are ‘mixed’ – that is to say when the transaction contains both money for the firm and for the client. The SRA Rules here state that in these instances, money must still be allocated into the appropriate account promptly, so while the money may be paid into either account, it must be moved to the correct one. Guidance on this clarifies ‘promptly’ as within 14 days.
All payments from the client account must also be adequately sanctioned and client money only used for its intended purpose. Proper chronological records must be kept and bookkeeping is used to establish which money relates to each client at any given time. The firm must hold enough money for a client before making any payments in relation to their matter, as one client cash bank account is likely to hold funds relating to several different clients. To overdraw from one client’s ledger means that you have used another client’s money for a matter which was not intended, something that is strictly against the Rules. A breach such as this means that the firm has to replace the expenditure from its own business account.
The double entry bookkeeping used in solicitor accounts will include a ledger heading with the name of the client/third party and the relevant matter, information about each transaction, as well as up to date balances. Firms must be checked via an accountants report within 6 months of the end of their accounting period and the SRA will be notified of any breaches of the Rules.
4. How does double entry bookkeeping work?
Generally speaking, double entry bookkeeping deals with recording debits and credits, or money in and money out. Entries are recorded in pairs that correspond with one another.
If the firm receives a payment that must be recorded, a debit entry (DR) will go into one column of the ledger, and an opposite credit entry (CR) in the other. The important part for solicitors firms is to accurately record the correct transactions in the appropriate ledgers, so as to distinguish business money from client money.
So, if a firm receives £1,000 from a client, Mr. A, for payments relating to his purchase of a house, then this would be client money and so would go into the client cash account ledger as a DR. The firm would also have a client ledger for Mr. A, in which the £1,000 would be entered as a CR, signifying that this is his money. The balance on both ledgers should always correspond, the only difference being the DR or CR. Using this double entry bookkeeping method enables the firm to keep track of Mr. A’s money specifically, even when the firm is authorised to spend it, as per the SRA Rules.
This is just one basic example of how double entry bookkeeping will be used in an SRA regulated firm. Although all solicitors must study and pass a module on this sort of accounting during their LPC (Legal Practice Course), most will never actually be balancing the books themselves. Many firms have an individual who is responsible for accounting.
On occasion, firms may hold money in a client account that cannot be returned to the client or third party legally entitled to it at the end of the matter. The SRA guidance on this states that any residual amount from a singular client matter under £500 may be donated to a charity of the firm’s choice so long as it meets the ‘prescribed circumstances’ under the Rules, which essentially outlines the reasonable steps that must be taken in order to show you have attempted to return the money to its rightful owner. This can be done without an application to the SRA. For residual balances exceeding £500, written authority is required from the SRA before reassigning the funds.
5. Keeping Client Money Separate
The SRA Rules require that client money is to be kept separate from the firm’s own money.
When, as often happens, a firm receives a mixed payment containing, e.g. client money plus money to pay the firm’s bill, the Rules state that the firm must “allocate promptly” funds to the correct account.
Firms will normally request money generally on account of costs: the money requested will be intended to cover the firm’s fees for its professional services and its future disbursements (money paid out in line with the legal services being provided, such as a land registry search when buying property). Until a bill is issued, such money is client money and must be paid into the client bank account. Withdrawing such money is dealt with as follows:
When you are holding client money and some or all of that money will be used to pay legal costs:
- Solicitors must give a full bill of costs, or other written notification, to the client or the paying party;
- this must be done before any client money is transferred from a client account to make the payment; and
- any such payment must be for the specific sum identified in the bill of costs or other written notification and covered by the amount held for the particular client or third party.
Double entry bookkeeping is used here to ensure that the firm is not in breach of the SRA Rules.
6. Further Examples of Solicitors Accounting
A firm has a client bank account and a bank account for its own business money. It receives the following receipts. Are they receipts of client money, the firm’s own business money, or a mixture of both?
- Client A sends £300 on account of costs.
This would be client money, as no specific bill has been issued.
- Following the receipt of a bill, Client B sends £300 to cover the firm’s fees and VAT.
This would be the firm’s money, as it is profit costs and VAT. A bill had been issued.
- Following receipt of a bill, Client C sends £300 to cover the firm’s fees and VAT together with £250,000 to complete the purchase of a flat.
The £300 is the firm’s money, but the £250,000 still belongs to the client.
- Following receipt of a bill, Client D sends £300 to cover the firm’s fees and VAT together with £3,000 to meet counsel’s fees as yet unpaid.
The £300 belongs to the firm, as does the £3,000 as it is for an already paid disbursement and a bill has been issued.