Solicitors’ Accounts (SLA): essential SQE1 knowledgeSolicitors’ Accounts is examined in FLK2, primarily in the contexts of:Property Law and PracticeWills and Administration of EstatesIt does not have…
Solicitors’ Accounts is examined in FLK2, primarily in the contexts of:
Property Law and Practice
Wills and Administration of Estates
It does not have a separate percentage allocation. Property Practice including related accounts represents 14–20%, and Wills and Administration including related accounts represents another 14–20% of FLK2. Ethics and professional conduct are pervasive. Official SQE1 blueprint
Candidates must apply:
The SRA Accounts Rules
Core double-entry bookkeeping
Rules governing client and business money
Bills, disbursements, VAT and transfers
Record-keeping, reconciliations and accountants’ reports
1. Fundamental accounting principle
Every transaction has two entries:
One debit
One corresponding credit
The total debits and credits must be equal.
The practical starting question is always:
Whose money is it, where is it held, and why is it being received or paid?
2. Main accounting records
Candidates should understand:
Record
Purpose
Client cash book
Records money entering and leaving client bank accounts
Business cash book
Records money entering and leaving the firm’s business bank account
Client ledger, client side
Records client money held or used for that client
Client ledger, business side
Records fees, bills, VAT and business transactions relating to that client
Fees account
Records the firm’s fee income
VAT account
Records VAT charged or paid
Disbursement records
Record payments made on the client’s behalf
List of client balances
Shows the firm’s total liabilities to clients and third parties
Each client ledger must identify:
Client
Matter
Client-side transactions
Business-side transactions
Running balance
3. Debit and credit: practical meaning
Asset accounts
For bank accounts:
Debit increases the balance
Credit decreases the balance
Client ledger
On the client side:
Credit records money received for the client
Debit records money paid or transferred for the client
On the business side:
Debit records amounts owed by the client to the firm
Credit records payments or transfers satisfying that liability
A useful rule is:
Cash received is debited to the relevant cash book and credited to the person or account for whom it is held.
4. Definition of client money
Under SRA Accounts Rule 2.1, client money is money held or received:
Relating to regulated services delivered to a client
On behalf of a third party in connection with regulated services
As agent, stakeholder or to the sender’s order
As trustee or holder of a specified office or appointment
For fees or unpaid disbursements before delivery of a bill or written notification of costs
Examples include:
Conveyancing deposit
Purchase money
Mortgage advance
Sale proceeds
Money collected for an estate
Money for an unpaid disbursement
Advance payment for unbilled fees
Damages received for a client
Money held as stakeholder
5. Business money
Business money belongs to the authorised body.
Examples include:
Fees after a bill has been delivered
VAT on billed fees
Reimbursement of a disbursement already paid by the firm
Money introduced by the firm
Interest belonging to the firm under a valid arrangement
The character of money depends on its legal purpose, not the account into which it was accidentally paid.
6. Advance payments for fees
Money received on account of fees before a bill or written notification is delivered is ordinarily client money.
Therefore, it must generally:
Be paid promptly into client account
Be recorded on the client side of the ledger
Remain there until the firm gives a bill or written notification
Be transferred only for the specific billed amount
The firm cannot treat an estimate, quotation or completion statement automatically as a bill.
7. Exception where a firm does not maintain a client account
Under Rule 2.2, a firm may hold money for fees and certain unpaid disbursements outside client account where:
That is the only category of client money it holds
The disbursements are costs for which the firm is liable
The firm does not otherwise maintain a client account
The client was told in advance where and how the money would be held
This is a limited exception, not general permission to place client money in business account.
8. Requirement to pay money into client account
Client money must normally be paid promptly into client account.
Exceptions include:
A conflicting obligation applying to a trustee or specified office holder
Legal Aid Agency payments for the firm’s costs
An alternative arrangement agreed in writing with the client or relevant third party
The limited Rule 2.2 arrangement
The firm must also ensure that client money is available on demand unless an alternative arrangement has been agreed in writing.
9. Client account requirements
A client account must ordinarily be maintained:
At a bank or building society branch or head office in England and Wales
In the authorised body’s name
With the word “client” in the account name
For example:
Green & Co Solicitors Client Account
The name must distinguish it from the firm’s business account.
10. Separation of client and business money
Client money must be kept separate from money belonging to the firm.
Accordingly:
Client money belongs in client account
Business money belongs in business account
Mixed receipts must be allocated promptly
Business money should not remain in client account
Client money should not remain in business account except under a valid exception
A small amount of firm money may sometimes be placed in client account for a proper operational reason, such as opening or maintaining the account, but it must be properly recorded.
11. Mixed receipts
A mixed receipt contains both client and business money.
Example:
£1,200 received
£1,000 is unbilled money for a transaction
£200 relates to an already delivered bill
The receipt must be allocated promptly:
£1,000 to client account
£200 to business account
If operationally paid initially into one account, the other component must be transferred promptly to the correct account.
12. Prohibition on providing banking facilities
A firm must not use client account as a general banking facility for clients or third parties.
Every payment into or out of client account must be connected with regulated legal services delivered by the firm.
Red flags include:
Receiving sale proceeds where the firm did no underlying legal work
Paying unrelated personal expenses
Passing money through the account merely to establish credibility
Allowing a client to use the firm’s account because they lack a bank account
Receiving and forwarding investment funds unconnected with the retainer
Converting currency for convenience
Client instructions do not make an unrelated payment permissible.
13. Withdrawing client money
Client money may be withdrawn only:
For the purpose for which it is held
On the client’s or relevant third party’s instructions
With prior written SRA authorisation
In prescribed circumstances
Every withdrawal must be:
Properly authorised
Properly supervised
Supported by sufficient funds held for that specific client
A firm cannot use one client’s balance to fund another client’s transaction, even temporarily.
14. No overdrawn client ledgers
Before making a withdrawal, the firm must hold sufficient funds for that individual client or third party.
Therefore:
Overall client-account solvency is insufficient
The particular client ledger must have enough money
Anticipated receipts cannot be treated as received
Uncleared or unconfirmed funds create risk
Another client’s credit balance cannot cover the shortfall
An overdrawn client ledger normally indicates a breach requiring immediate correction.
15. Basic client-money receipt
Suppose the firm receives £50,000 as a conveyancing deposit.
Entries:
Account
Entry
Client cash book
Debit £50,000
Client ledger, client side
Credit £50,000
The debit records the increase in the client bank account. The credit records the firm’s liability to the client.
16. Basic client-money payment
Suppose the firm pays £500 from client account for an authorised search or tax payment.
Entries:
Account
Entry
Client ledger, client side
Debit £500
Client cash book
Credit £500
The client’s balance decreases and money leaves the client bank account.
17. Receipt of business money
Suppose the firm receives £1,200 in payment of an already delivered bill.
Entries ordinarily include:
Account
Entry
Business cash book
Debit £1,200
Client ledger, business side
Credit £1,200
The business bank balance increases and the client’s debt to the firm is discharged.
18. Bills of costs
A bill ordinarily records:
Professional fees
VAT
Relevant disbursements
Payments already made
Amount now payable
When a bill is delivered, the client becomes liable to the firm for the billed amount.
Typical entries include:
Debit client ledger, business side, for the total bill
Credit fees account for net professional fees
Credit VAT account for output VAT
Appropriate treatment of billed disbursements
Candidates should calculate VAT only on items legally subject to VAT.
19. Transfer of billed costs from client to business account
Before transferring client money to pay the firm’s costs:
A bill or other written notification of costs must be given.
The transfer must not exceed the specific notified sum.
Sufficient money must be held for that particular client.
The transfer must be properly recorded.
Entries involve two linked movements:
Client side
Debit client ledger
Credit client cash book
Business side
Debit business cash book
Credit client ledger
This moves money from client bank to business bank and settles the billed liability.
20. Completion statement versus bill
A completion statement generally explains money required or distributed for a transaction. It is not necessarily a compliant bill of costs.
It may include:
Purchase price
Deposit
Mortgage advance
Apportionments
Tax
Registration fee
Legal fees
VAT
Before transferring fees from client to business account, the firm must have delivered:
A bill of costs, or
Another written notification of the costs incurred satisfying Rule 4.3
Do not assume that every document headed “completion statement” authorises the costs transfer.
21. Disbursements
A disbursement is an expense relating to the client’s matter. Candidates must distinguish whether the solicitor acts as:
Agent for the client
Principal contracting personally for the service
This determines:
Who owes the supplier
Whether the payment is client or business money
VAT treatment
Ledger entries
How the item appears on the bill
22. Agency disbursements
For a true agency disbursement:
The supplier provides the service to the client
The client is liable to the supplier
The solicitor merely pays on the client’s behalf
Possible examples include certain:
Court fees
Land Registry fees
SDLT or LTT
Probate fees
If paid from money properly held in client account:
Debit client ledger, client side
Credit client cash book
A true disbursement is not automatically part of the solicitor’s own taxable supply.
23. Principal disbursements
Where the firm contracts with the supplier and is liable for the cost, it acts as principal.
Possible examples include:
Some search-provider charges
Courier charges
Photocopying
Travel
Other services obtained by the firm as part of its own service
The firm ordinarily pays from business account and recovers the amount through its bill.
The VAT treatment generally forms part of the firm’s own supply rather than being passed through as a true agency disbursement.
The precise classification depends on the actual legal and commercial arrangement, not the label used.
24. VAT essentials
Candidates should understand:
Output VAT on the firm’s taxable legal services
Input VAT paid by the firm on business supplies
VAT treatment of agency and principal disbursements
VAT element of bills
Correct ledger and VAT-account entries
A common SQE calculation is:
If net fees are £1,000 and VAT is 20%:
Net fees: £1,000
VAT: £200
Total bill: £1,200
Do not charge VAT again on a genuine agency disbursement merely because it appears on the solicitor’s bill.
25. Interest on client money
Under Rule 7, the firm must account to the client or third party for a fair sum of interest on client money held on their behalf.
Relevant factors may include:
Amount held
Length of time
Applicable interest rate
Reason for holding the money
Administrative cost
Whether the money was immediately required
A firm may agree a different arrangement in writing, but it must provide sufficient information for informed consent.
Interest may be recorded as:
A receipt into client account for the client, or
A payment by the firm, depending on how the arrangement operates
26. Return of client money
Client money must be returned promptly when there is no longer a proper reason to retain it.
At the end of a matter, the firm should:
Account to the client
Return the balance
Resolve disputed entitlements
Attempt to trace the owner
Maintain evidence of tracing steps
Avoid leaving unexplained residual balances
Administrative convenience is not a proper reason for indefinite retention.
27. Residual balances
Where a client cannot be traced, prescribed procedures may permit withdrawal of residual funds.
Candidates should understand:
Reasonable tracing steps are required
Appropriate records must be retained
Smaller balances may be paid to charity under prescribed conditions
SRA authorisation is generally required for larger residual balances
The firm may need to reimburse the client if subsequently located
The current SRA threshold for withdrawal to charity without individual prior authorisation is generally £500 or less, subject to the prescribed conditions.
28. Duty to correct breaches
Any breach must be corrected promptly upon discovery.
Money improperly:
Withdrawn
Withheld
Transferred
Paid into the wrong account
must be replaced or transferred appropriately.
Examples include:
Overdrawn ledger
Client money in business account
Business money in client account
Payment from the wrong client matter
Unauthorised costs transfer
Accounting error
Bank charge wrongly deducted from client account
The firm should not wait to identify the responsible employee or recover money from a third party before replacing missing client money.
29. Responsibility for compliance
The Accounts Rules apply to:
Authorised bodies
Managers
Employees
Managers are jointly and severally responsible for the firm’s compliance.
The COFA has an important monitoring role, but appointment of a COFA does not transfer all responsibility away from:
Partners
Directors
Managers
Fee earners
Cashiers
Serious breaches may require reporting to the SRA.
30. Accurate records
Records must be:
Accurate
Contemporaneous
Chronological
Sufficient to identify the relevant client and matter
Capable of showing the firm’s liabilities to clients and third parties
The system must record:
All client-money receipts and payments
All business transactions
Bills
Transfers
Disbursements
VAT
Client balances
Cash-book movements
Records should permit the firm to establish at any time how much is held for each client.
31. Bank statements and reconciliation
The firm must obtain statements for client and business accounts at least every five weeks.
For client accounts, it must complete a reconciliation at least every five weeks between:
Bank statement balance
Client cash-book balance
Total client-ledger balances
The reconciliation must:
Be recorded
Be signed off by the COFA or a manager
Identify discrepancies
Be followed by prompt investigation and correction
This three-way reconciliation is a high-priority examination point.
32. Central record of bills
The firm must maintain a readily accessible central record of:
Bills
Other written notifications of costs
This supports:
Costs transfers
Audit trail
Regulatory supervision
Client-account reconciliation
Accountant’s review
33. Transfers between client ledgers
A transfer between two client matters requires proper authority and a genuine underlying reason.
The entries ordinarily involve:
Debit to the client ledger from which value is transferred
Credit to the receiving client ledger
No money necessarily moves through the bank account, so there may be no cash-book entry.
Examples include:
Transfer between two matters for the same client with authority
Application of funds following an appropriate agreement
Correction of an erroneous posting
A ledger transfer cannot be used to conceal a shortage.
34. Office-to-client transfers
The firm may need to introduce business money into client account to:
Correct a shortage
Pay interest due
Reimburse a mistaken withdrawal
Meet a liability properly owed by the firm
Entries generally record:
Money leaving business account
Money entering client account
Credit to the relevant client ledger
Once business money is placed in client account for the client’s benefit, it must be treated consistently with that purpose.
35. Property-transaction entries
Candidates should recognise transactions involving:
Deposit received
Mortgage advance
Buyer’s completion funds
Sale proceeds
Redemption payment
Estate-agent commission
SDLT or LTT
Land Registry fees
Search fees
Apportionments
Legal fees and VAT
Balance returned to client
Example: sale proceeds
On receipt into client account:
Debit client cash book
Credit seller’s client ledger
Subsequent authorised payments may include:
Mortgage redemption
Estate-agent invoice
Legal costs after billing
Net proceeds to seller
36. Mortgage advances
A mortgage advance received into client account is client money held for the transaction and subject to the lender’s instructions.
The solicitor must:
Use it only for the authorised purchase
Comply with the certificate of title
Complete within the lender’s permitted timeframe
Return unused funds promptly
Account for any required interest
Avoid releasing it before contractual and lender conditions are satisfied
The borrower’s instructions cannot override restrictions imposed by the lender.
37. Stakeholder deposits
A deposit held as stakeholder is held for both contracting parties pending the event specified by the contract.
Accordingly:
It cannot normally be released to the seller before completion
It must be separately identified
It remains client money
The solicitor must follow the stakeholder terms
Interest entitlement depends on the applicable arrangement
This differs from holding the deposit as agent for the seller.
38. Estate-administration entries
Candidates should recognise:
Deceased’s bank balances collected
Sale proceeds
Dividends and interest
Funeral expenses
Probate fees
Inheritance Tax
Debts
Legacies
Interim distributions
Residuary distributions
Solicitor’s bill
Money retained for minors
Estate money held by the solicitor is client money and should be recorded on the estate’s client ledger.
A distribution should not be made before:
Authority is established
Liabilities are addressed
Beneficiary identity is verified
The PR authorises payment
Sufficient reserves are retained
39. Joint accounts
A joint account is operated jointly by the solicitor and the client or a third party.
Under Rule 9, most Part 2 requirements do not apply, but the firm must still comply with specified record requirements, including:
Obtaining statements at least every five weeks
Maintaining the central record of bills and costs notifications
The precise mandate and authority must be clear.
40. Client’s own account
Where the solicitor operates the client’s own bank account as signatory, most Part 2 rules do not apply.
However, the firm must still:
Obtain statements at least every five weeks
Carry out reconciliations at least every five weeks
Maintain records of bills and costs notifications
This may arise where a solicitor acts under:
Power of attorney
Deputyship
Estate-administration authority
Trust arrangements
41. Third-party managed accounts
A TPMA may be used only where:
The arrangement means the firm does not receive or hold the client’s money
The client understands the contractual terms
The client understands the fees and who pays them
The client understands termination rights
The client can dispute payment requests
The firm obtains regular statements
The firm checks that statements accurately reflect transactions
A TPMA is an alternative payment arrangement, not the firm’s client account.
42. Accountant’s reports
A firm that has held or received client money, or operated a joint or client’s own account, must generally:
Obtain an accountant’s report
Do so within six months of the end of the accounting period
A report must be delivered to the SRA within that period if it is qualified to identify non-compliance placing client or third-party money at risk.
The reporting accountant must meet the applicable professional requirements.
43. Exemption from obtaining an accountant’s report
A firm is generally exempt where:
All client money received came from the Legal Aid Agency, or
During the accounting period, total relevant balances did not exceed both:
An average of £10,000
A maximum of £250,000
These are current regulatory thresholds and should be checked against the law-and-practice cut-off for the examination.
The SRA may nevertheless require a report where appropriate.
44. Storage and retention of records
Accounting records must generally be retained for at least six years.
This includes relevant:
Ledgers
Cash books
Statements
Reconciliations
Bills
Supporting documentation
Accountants’ reports
Records of transfers and withdrawals
Records should remain accessible and capable of reconstruction.
45. Common ethical and regulatory problems
Candidates should recognise:
Using another client’s money
Delaying correction of a shortage
Improper costs transfer
Misleading ledger description
Backdating a bill
Concealing a reconciliation difference
Failing to supervise withdrawals
Allowing client account to operate as a bank
Retaining residual balances indefinitely
Paying funds to an unverified third party
Ignoring fraud or cybercrime indicators
Failing to report a serious breach
Honesty, integrity, public trust and protection of client money are central.
46. Cybercrime and payment instructions
Before transferring client money, the firm should verify:
Recipient
Account details
Authority
Purpose
Any change in payment instructions
Whether communications have been compromised
A last-minute email changing bank details is a major warning sign.
If money is misdirected, the firm should act immediately to:
Contact the bank
Attempt recall or freezing
Notify appropriate internal officers
Protect the client account
Correct any resulting shortage
Consider regulatory, insurer and law-enforcement reporting
47. High-priority double-entry patterns
Transaction
Debit
Credit
Client money received
Client cash book
Client ledger, client side
Client money paid
Client ledger, client side
Client cash book
Business money received from client
Business cash book
Client ledger, business side
Business payment on client’s behalf
Client ledger, business side
Business cash book
Bill delivered
Client ledger, business side
Fees/VAT/disbursement accounts
Costs transferred from client to business
Client ledger/client cash book and business cash book/client ledger
Corresponding opposite entries
Ledger-to-ledger transfer
Paying client ledger
Receiving client ledger
The exact entries depend on:
Whether money is client or business money
Whether the firm acts as agent or principal
Whether a bill has been delivered
Whether VAT applies
Which bank account is used
Highest-priority topics
Prioritise:
Definition of client money
Client versus business money
Advance fees before billing
Client-account requirements
Prohibition on banking facilities
Permitted withdrawals
No overdrawn client ledgers
Bills before costs transfers
Agency versus principal disbursements
VAT treatment
Basic double-entry entries
Interest
Prompt correction of breaches
Five-week reconciliations
Joint and client’s own accounts
Third-party managed accounts
Accountant’s reports
Property completion entries
Estate-administration entries
Fraud, supervision and regulatory reporting
Best SLA question method
For every transaction, ask:
Whose money is it?
Why is it being held?
Has a bill been delivered?
Is it client money or business money?
Which bank account should receive or pay it?
Which ledger side is affected?
What is the debit?
What is the corresponding credit?
Is there enough money for this specific client?
Is the withdrawal authorised and connected to regulated services?
Does VAT apply?
Has any breach occurred that must be corrected immediately?