23.3 Ledgers, Bills, Third-Party Accounts and Reports

Ledgers, cash book, reconciliation, and the record of bills

Rule 8.1 — you keep accurate, contemporaneous and chronological records that: (a) record, in client ledgers identified by the client's name and an appropriate description of the matter, all client-money receipts and payments on the client side and all non-client-money receipts and payments and bills of costs on the business side; (b) maintain a list of all balances shown by the client ledger accounts of the liabilities to clients (and third parties), with a running total; and (c) provide a cash book showing a running total of all transactions through client accounts. SRA guidance Helping you keep accurate client accounting records adds the working method SQE1 expects: double-entry (every client-money transaction in the client cash book and the client ledger), a current balance that is shown or readily ascertainable, and a separate contemporaneous record of inter-ledger transfers.

Heading example: Client: Ms Priya Shah — Matter: purchase of 18 Grove Park, Bristol. An unidentified 'misc client' ledger is not rule 8.1(a).

Rule 8.2 — at least every five weeks, obtain statements for all client accounts and business accounts. Rule 8.3 — at least every five weeks, for all client accounts, complete a reconciliation of (i) the bank or building society statement, (ii) the cash-book balance, and (iii) the client-ledger total. The record must be signed off by the COFA or a manager. You promptly investigate and resolve differences. Debit balances are listed separately, investigated, and rectified; you do not net them off against other clients' credits. Rule 8.4 — keep readily accessible a central record of all bills or other written notifications of costs.

Five weeks is a maximum gap, not a target. Many firms reconcile monthly. A reconciliation signed by a cashier who is not a manager or the COFA does not satisfy 8.3.

Agency versus principal disbursements, with mini double-entry

Treat the client column as 'what we hold for this person' and the business/office column as 'what this person owes the firm, or has paid the firm'.

Agency method — you pay as the client's agent. The supply is from the third party to the client. You do not add a second layer of VAT. Typical FLK2 items: SDLT or Land Transaction Tax, HM Land Registry fees, counsel's fees where counsel invoices the client, many probate-registry fees. If client money is available, pay from client account. Only the client column and client cash move.

Worked agency (property): SDLT of £8,450 paid from the buyer's client money.

Worked agency (wills): counsel's fee of £1,200 plus counsel's VAT of £240, invoice addressed to the executors, paid from estate client money. Pay £1,440. You do not add another 20%.

Principal method — the firm is the contracting party. The supply is to the firm; the firm recharges the client, usually as a taxable supply, so VAT is added if the firm's supply is standard-rated. Typical items: courier, travel, some search packs the firm buys in its own name. Pay from the business account. The business column of the client ledger records the disbursement.

Worked principal: company search £20 net, VAT £4, paid from the business account on a purchase file.

When you later bill that search as a principal disbursement, the VAT treatment follows the firm's supply. Do not pretend an SDLT payment was principal so you can add 20% for the firm.

Transfers, bills, VAT, reduction, and payment

Inter-client transfers (cash stays in the same client bank account): debit the paying client's client column, credit the receiving client's client column. Record the transfer contemporaneously. SRA guidance: where the transfer is a loan between clients, obtain and keep written authority of both. Transfers with no legal basis are also a rule 3.3 risk.

Split completion receipt (rule 4.2): a seller's completion statement shows net proceeds £190,000 plus agreed costs to be billed of £4,800 including VAT. Bank £194,800 to client cash and credit the seller's client column with £194,800. After you deliver the bill, transfer only the billed costs under rule 4.3.

Delivering the bill. Profit costs £4,000 plus VAT at 20% = £800. Total £4,800. On delivery (no cash yet):

Paying the bill from client money after that written bill, and only because the client column still has enough:

The business column now nets to nil for those costs. The client column has fallen by £4,800. You transferred the specific billed sum, including VAT, not a round £5,000.

Reduction (abatement). You reduce profit costs by £500, so VAT falls by £100. Credit the business column £600, debit profit costs £500, debit HMRC VAT £100. If you had already transferred £4,800, refund £600 from business to client (business cash CR, client cash DR, client column CR, and reverse £600 on the business column as the credit note requires). SQE1 rewards keeping VAT in step with the profit-costs reduction.

Client pays the bill from their own bank rather than from money you hold: debit business cash, credit the business column. No client-column entry unless you first received the cheque into client account by mistake, in which case rule 6.1 applies.

Joint accounts, client's own account, TPMAs, reports, retention

Rule 9 — joint accounts. If, when acting in a client's matter, you hold or receive money jointly with the client or a third party, Part 2 of the Rules does not apply except rule 8.2 (statements at least every five weeks) and rule 8.4 (central record of bills). A joint account is not a client account: it cannot be in the sole name of the authorised body. The money in it is still client money. Typical FLK2 picture: solicitor-executor named jointly with a lay co-executor on an estate account. SRA Joint accounts and record keeping guidance warns that equal access raises risk; consider a joint-signature mandate unless that is impossible. You still safeguard money under the Codes. You do not run the full rule 8.3 client-account reconciliation on a joint account, because 8.3 is not one of the applied provisions — but you still obtain the statements.

Rule 10 — client's own account. If in the course of practice you operate a client's own account as signatory, Part 2 does not apply except 8.2 (statements), 8.3 (reconciliations every five weeks), and 8.4 (bills). Typical picture: Court of Protection deputy or attorney paying from the client's personal bank account, so the money never enters the firm's client account. SRA Statement of our position regarding firms operating a client's own account recognises that monthly statements are sometimes delayed. If you cannot meet the letter of 8.2–8.3, the SRA will not treat you as in breach if you take reasonable steps to satisfy yourself the money is not at risk and you keep (i) a central register of such accounts, (ii) a separate record of transactions you carry out, and (iii) a record of bills. That information goes to the reporting accountant. Operating a client's own account still engages rule 12 (accountant's report).

Rule 11 — third-party managed accounts. You may agree with a client to use a TPMA for receipts and payments in respect of regulated services only if (a) use of the account does not result in you receiving or holding the client's money, and (b) before accepting instructions you take reasonable steps so the client is informed of and understands the contractual terms, how fees are paid and who bears them, and the client's right to terminate and to dispute payment requests. Rule 11.2 — obtain regular statements and ensure they accurately reflect all transactions. SRA TPMA guidance (updated 25 November 2019): money in a TPMA is not client money in the Accounts Rules sense, because you do not hold or receive it. The provider must be an FCA-authorised (or specified) payment institution; the account is an escrow-style bank or building-society arrangement beneficially owned by the third party. Tell the SRA you are using a TPMA (the form; one notification per provider). Different statutory protections apply compared with a firm client account — you must make that difference understandable to the client. Codes duties to safeguard assets and to act in each client's best interests still govern whether a TPMA is appropriate on that matter.

Rule 12 — accountants' reports. If at any time during an accounting period you held or received client money, or operated a joint account or a client's own account as signatory, you must obtain an accountant's report within six months of the period end, and deliver it to the SRA within the same six months if it is qualified to show a failure to comply such that money belonging to clients or third parties is, has been, or is likely to be placed at risk. Unqualified reports are obtained and kept; they are not routinely filed. Rule 12.2 exemption: all client money in the period was from the Legal Aid Agency, or the statement/passbook balance of client money held or received does not exceed an average of £10,000 and a maximum of £250,000 (or foreign-currency equivalent). Both the average and the maximum tests must be met. Average means the mean of the reconciliation balances across the period (SRA accountant's-report guidance). The statement/passbook balance includes client accounts and joint accounts and clients' own accounts operated by you (rule 12.3). Rule 12.4 — the SRA may still require a report on reasonable notice if you cease to operate as an authorised body and to hold or operate a client account, or if it is otherwise in the public interest. Rule 12.5 — the accountant must be a member of a chartered accountancy body and a registered auditor (or work for one). Rule 12.8 — you give the accountant details of all practice accounts at any bank, building society or other financial institution during the period, and whatever else they need.

Rule 13 — store all accounting records securely and retain them for at least six years. That includes ledgers, cash books, reconciliations, the central bills record, residual-balance registers, joint-account statements, and TPMA statements you obtained.

Exam traps: reconciling annually; treating a cashier's initials as COFA sign-off; adding VAT twice on an agency counsel's fee; transferring a round figure from client to business before any bill; calling TPMA funds client money; delivering every accountant's report to the SRA whether qualified or not; destroying ledgers at three years because that is a tax-file period.