Legal Practice Course (LPC) Solicitors' Accounts Flashcards

24 sample cards from the Solicitors' Accounts deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. A firm holds £20,000 for a client for 73 days at an annual interest rate of 2.5%. Calculate the simple interest due.

   $$I = P \times r \times \frac{t}{365} = 20{,}000 \times 0.025 \times \frac{73}{365} = £100.$$

2. State the general simple-interest formula used to calculate interest owed on client money held for part of a year.

   $$I = P \times r \times \frac{t}{365}$$ where $P$ is the principal sum held, $r$ is the annual interest rate (as a decimal) and $t$ is the number of days held.

3. What is 'output VAT' and when does a solicitor charge it?

   Output VAT is the VAT a VAT-registered firm charges its client on the value of its professional services (its fees). It is added to the firm's bill at the standard rate and later paid over to HMRC.

4. At the current standard UK VAT rate of 20%, what is the VAT and gross total on a professional fee of £800?

   VAT $= 800 \times 0.20 = £160$. Gross total $= 800 + 160 = £960$.

5. Give the formula to extract the VAT element from a VAT-inclusive (gross) amount at a 20% rate.

   $$\text{VAT} = \text{Gross} \times \frac{1}{6} = \text{Gross} \times \frac{20}{120}.$$ For example, from a gross sum of $£600$ the VAT is $600 \times \frac{1}{6} = £100$.

6. What is the difference between a disbursement and the firm's professional charges for VAT and ledger purposes?

   Professional charges are the firm's own fees (subject to output VAT and recorded as business money). A disbursement is a payment the firm makes to a third party on the client's behalf (e.g. court fee, counsel's fee, search fee) and may be paid from client money where funds are held.

7. Distinguish a 'principal method' disbursement from an 'agency method' disbursement for VAT.

   Principal method: the firm receives the supply itself, pays input VAT, then re-supplies to the client charging output VAT on the whole (e.g. some searches). Agency method: the firm merely acts as the client's agent paying a third party; the supply is to the client, so the firm passes on the disbursement without adding its own VAT (e.g. counsel's fees treated as the client's, court fees).

8. How is a non-taxable disbursement such as a court fee shown on a solicitor's bill?

   It is listed separately as a disbursement with no VAT added by the firm, because there is no VATable supply by the firm to the client — the firm simply pays it on the client's behalf as agent.

9. Under the agency method, how is counsel's fee recorded when paid out of client money held for the client?

   As an agency disbursement: CR Cash (client column) and DR Client ledger (client column) for the gross fee. The firm adds no output VAT of its own; the VAT (if any) on counsel's fee is the client's and is shown via the readdressed fee note.

10. What is the consequence if a firm pays a disbursement out of the client account when it holds insufficient client money for that client?

    It would overdraw that client's ledger (a debit balance on the client side), breaching the rules. Instead the firm should pay the disbursement from business money, or wait until sufficient client money is held.

11. In a conveyancing PURCHASE, on completion how is the mortgage advance received from the lender treated?

    As client money: it is paid into the client account (DR Cash client column, CR the buyer-client's ledger client column) and then used, together with the buyer's own funds, to pay the purchase price to the seller's solicitor.

12. What is 'bridging finance' in a conveyancing context, and how does it flow through the accounts?

    Bridging finance is a short-term loan (often from a bank) advancing funds so a client can complete a purchase before sale proceeds arrive. The loan is received as client money into the client account and applied to the purchase; it is later repaid out of the sale proceeds or the client's own funds.

13. In a property SALE, how are the sale proceeds received from the buyer's solicitor treated, and what typical payments follow?

    Sale proceeds are received as client money into the client account. Typical payments out include redeeming the seller's mortgage, paying estate agent's fees, paying the firm's costs (after billing), and returning the net balance to the client.

14. In probate, how are estate funds collected and distributed handled in the accounts?

    Money received in respect of the estate (e.g. from closing bank accounts, selling assets) is client money paid into the client account and held on the estate ledger. Liabilities (debts, legacies, IHT) and the firm's billed costs are paid out, with the residue distributed to beneficiaries.

15. What is the rule when a single bill covers professional charges plus an unpaid disbursement that the firm has not yet paid?

    The firm may take its charges plus VAT from client money after billing, but money received specifically to cover an as-yet-unpaid disbursement is client money and must be held in the client account until the disbursement is actually paid; it cannot be treated as the firm's own money.

16. Define a 'breach' of the SRA Accounts Rules and give two common examples.

    A breach is any failure to comply with the Rules. Common examples: overdrawing a client ledger (using one client's money for another), failing to pay client money promptly into the client account, taking costs before delivering a bill, and using the client account as a banking facility.

17. What must a firm do upon discovering a breach of the Accounts Rules involving a shortfall on client account?

    Correct the breach promptly on discovery (Rule 6) — typically by replacing/restoring the missing client money immediately from the firm's own funds — and record the correction. Serious breaches may also need to be reported to the SRA.

18. What is the rule on correcting errors and the timing of restoring client money?

    Rule 6: any breach must be remedied 'promptly' upon discovery, and any client money improperly withheld or withdrawn must be immediately paid into or restored to the client account, usually from the firm's own resources.

19. What is an accountant's report and who must obtain one?

    An annual report by a registered/qualified accountant confirming whether the firm has complied with the SRA Accounts Rules. A firm that has held or received client money during an accounting period must obtain one within six months of the end of that period (Rule 12).

20. When must an accountant's report be DELIVERED to the SRA, as opposed to merely obtained?

    Only a 'qualified' report (one that identifies a failure to comply that puts client money at risk) must be delivered to the SRA — within six months of the end of the accounting period. An unqualified report is obtained but generally need not be sent to the SRA.

21. In what circumstances is a firm EXEMPT from obtaining an accountant's report?

    A firm is exempt if all client money held/received in the period is from the Legal Aid Agency, or if the average client account balance does not exceed £10,000 and the maximum balance does not exceed £250,000 during the period (Rule 12.2).

22. What records must a firm keep, and how often must client account reconciliations be performed (Rule 8)?

    The firm must keep accurate, contemporaneous and chronological records — including client ledgers showing all dealings with client money and a running cash balance. It must obtain bank statements and reconcile the client account at least every five weeks, with a statement of the cause of any differences.

23. What is a 'three-way' client account reconciliation and what three figures must agree?

    A reconciliation comparing (1) the client cash account balance per the firm's records, (2) the total of all client ledger credit balances, and (3) the bank statement balance for the client account. All three must agree (after adjusting for uncleared items); discrepancies must be investigated and explained.

24. Compare how the firm's professional charges versus money held for future disbursements are classified.

    Professional charges (once billed) are business money taken from the client/business account into the business account. Money received specifically to fund a disbursement not yet paid is client money and must stay in the client account until the disbursement is actually paid out.

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