SQE1 · Subject page 10 · 5 min read

SQE1 FLK2 subject notes: the SRA Accounts Rules on client money, client account, withdrawals, mixed payments, interest, breaches and reconciliations, with the double-entry bookkeeping the exam expects.

What this subject covers

The SRA specification lists: the definition of client money and the duty to pay it into a client account; when it may be held elsewhere; repayment; the name and use of client account and the ban on banking facilities; keeping client and office money separate; interest; correcting breaches; accounting records, reconciliations and bills (including disbursements by the agency and principal methods and VAT); joint accounts, a client's own account and third-party managed accounts; and accountants' reports. Each topic can be tested with the accounting entries required.

The rules are the SRA Accounts Rules (in force since 25 November 2019). In the SRA's blueprint, accounts questions are assessed within property and probate scenarios, so expect them inside a conveyancing or estate matter.

Key principles

Client money and office money

• Client money (rule 2.1) includes money held for a client or third party in connection with regulated services, money held as trustee, and money held for fees and unpaid disbursements before a bill is delivered. A payment on account of costs is therefore client money.
• Office money belongs to the firm: payment of a delivered bill, and reimbursement of a disbursement the firm has already paid from its own funds.
• Client money must be paid promptly into a client account (rule 2.3), and returned promptly once there is no longer a proper reason to hold it (rule 2.5).
• Client and office money must be kept separate (rule 4.1).

Client account

• A client account must be at a bank or building society in England and Wales, in the firm's name, with "client" in its title (rule 3.1).
• It must not be used to provide banking facilities: payments in and out must relate to an underlying legal transaction or service (rule 3.3).

Mixed payments

A payment that is part client and part office money must either be split on receipt, or be paid into client account with the office money transferred out within 14 days (rule 4.2).

Withdrawals

• Client money may be withdrawn only for the purpose for which it is being held, on the instructions of the client (or the third party for whom it is held), or on the SRA's prior written authorisation or in prescribed circumstances (rule 5.1).
• Before taking costs, the firm must give the client a bill or other written notification (rule 4.3).
• Money may be withdrawn for a client only if sufficient funds are held for that client (rule 5.3); otherwise the payment comes from office account. Paying against an uncleared cheque that bounces uses other clients' money.
• A residual balance of 500 pounds or less may be paid to charity without SRA authorisation after reasonable steps to return it, keeping records; larger sums need authorisation.

Interest

The firm must account for a fair sum of interest when it is fair and reasonable to do so (rule 7.1); the client may agree different terms in writing (rule 7.2). Firms usually publish an interest policy.

Breaches

Any breach must be corrected promptly on discovery, including replacing any shortfall from the firm's own money (rule 6.1). The COFA must take reasonable steps to ensure compliance and report serious breaches to the SRA promptly (SRA Code of Conduct for Firms).

Records and reconciliations

• The firm must keep accurate records of client ledgers, client cash and a record of bills (rule 8.1).
• A reconciliation of the client account with the client ledgers and bank statements must be done at least every five weeks, signed off by the COFA or a manager, with discrepancies promptly investigated (rule 8.3).
• Firms holding client money normally need an annual accountant's report unless an exemption applies (rule 12).

Other accounts

Money held in a joint account with another person or operated in a client's own account (for example under a power of attorney) is not in client account, but the firm must keep statements and records. A third-party managed account may be used instead of a client account if the client is informed and the provider is properly authorised (rule 11).

Double entry, the exam patterns

Each transaction has a debit and an equal credit. Receipts are debited to cash; payments are credited to cash. Each client ledger has an office column and a client column.

Disbursements and VAT: under the agency method the supply is to the client (invoice addressed to the client), the firm pays as agent and recharges the amount without adding VAT of its own. Under the principal method the supply is to the firm, which reclaims input tax and charges VAT on the recharge as part of its own bill.

Worked example

A firm acting on a house purchase receives 3,000 pounds from Ella on account of costs. It pays a 300 pound search fee from client account, then bills 2,000 pounds plus VAT of 400 pounds.

1. Receipt: debit client cash 3,000; credit Ella's ledger client column 3,000.
2. Search fee: debit Ella's ledger client column 300; credit client cash 300. Ella's client balance is now 2,700.
3. Bill: debit Ella's ledger office column 2,400; credit costs 2,000 and HMRC (VAT) 400.
4. Transfer for the bill: debit Ella's ledger client column 2,400 and credit client cash 2,400; debit office cash 2,400 and credit Ella's ledger office column 2,400. Ella's office column is cleared, and 300 pounds remains client money, to be returned promptly at the end of the matter.

Scope follows the SRA's SQE1 Functioning Legal Knowledge Assessment Specification (FLK2, Solicitors Accounts). Rule references are to the SRA Accounts Rules. The notes are our own summary, not SRA material. Law and rules as at 1 September 2026 (the SRA assesses the law as it stands four calendar months before the first assessment in a window).