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Week 4 Part 2 - Money Matters - Trust Accounting - Coggle Diagram
Week 4 Part 2 - Money Matters - Trust Accounting
1.5 Distinguishing Time Costing
distinguish between time costing and trust accounting
billable time
When you commence practice the time you spend on client files will be recorded on time sheets.
The time you spend on files may be calculated in units or points, for example 6 min = 1 point
These records form the basis upon which law firms charge their clients – which becomes the income of the law firm.
Files also incur incidental expenses such as photocopying, facsimile, postage, etc. These expenses should be accounted for and recovered from the client
These amounts are collected in the office disbursements account, whose debit balance will often be reduced (credited) from a transfer from the trust account, assuming that this falls within the trust account authority provided by the client.
non-billable time
Time not spent on client files
Costs are recoverable under Legal Profession Act 2007 (Qld) Chapter 3 Part 3.4 Costs disclosure and assessment.
Clients are sent a bill outlining the services rendered and the amount owing. The bill must be given before costs may be recovered by a law firm. See the Legal Profession Act 2007 (Qld) s 258.
2 Double Entry Bookkeeping
2.1 Introduction
Legal practitioners run two accounting systems
Both accounting systems are based on double entry bookkeeping and have separate bank accounts
One for trust accounts
The Act and the Regulations require trust account records to be audited
accounting procedures must accord to accounting standards and concepts.
another for general business accounts
In double entry bookkeeping, every purchase has two parts as does every sale
incurred an expense and spent money
Trust accounting transactions involve the same concepts
Debits and Credits
Capital (credit) = Assets (debit) - Liabilities (credit)
liabilities (credit) = assets (debit) - capital (credit).
assets (debit) = capital (credit) + liabilities (credit).
For
double entry bookkeeping to work
,
for every debit made in the books, there must be a corresponding credit
Definitions
Liabilities
: Something the business owes. Liabilities are credit by nature ( it is the opposite of assets which are debit). To increase a liability you credit it. To decrease a liability you debit it.
Capital
: Amount of owner's investment in the business. Capital is credit by nature. To increase it (with profit) you credit it. To decrease capital (a loss) you debit it.
Assets
: Something of value that the business owns. E.g. land, motor vehicle, furniture. Assets by nature are a debit. To increase an asset you debit it. To decrease an asset you credit it.
The debits must always equal the credits
2.2 Obligations - s 243
The obligations of a legal practitioner associate of a law practice are discharged by:
(a) the establishment of a trust account;
(b) the keeping of a trust account;
(c) the payment of trust money into and out of a trust account and other dealings with trust money;
(d) the keeping of trust records;
(e) engaging an external examiner to examine trust records; and
(f) an action of a kind prescribed under a regulation.
The liability for trust account obligations falls jointly and severally on the principals of the law practice – the Legal Profession Act 2007 (Qld) s 244.
2.3 Four elements of a manual system
Secondary books
Secondary books begin to classify transactions described in source documents
sometimes referred to as journals
include
trust receipts cash book
trust account payments cash book
records bank deposits and other cash receipts
records payments made by trust account cheque
trust ledger
controlled money register
power money record
register of investments,
the general journal
trust journal records all non-cash transactions
journal may reflect credit purchases of assets or expenses and is also used to correct ledger errors.
Books of summary
details from secondary records are transferred or posted to individual client ledgers
All the individual ledger cards are referred to as the trust ledger
The details from the trust account receipts cash book and the trust account payments cash book are posted to individual client ledgers
Details from the controlled money receipts are posted to the individual controlled money movements records in the controlled money register
Source records
Source documents record a transaction as it actually occurs
include
trust account
controlled money receipts
cheque butts
Cheque butts are completed at the same time a cheque is written and records the important details of the cheque
For a list of those details, see Reg 37(6).
bank deposit slips
Reports
Reports are used to maintain the accuracy of the trust accounting system
reports include
bank reconciliation statement
monthly trial balance
2.4 Records
Records to be kept for trust accounting are classified in the following table found at the Queensland Law Society, Trust Accounting Guide (checked 13/02/2023) p.23.
Failure to maintain a general trust account incurs a maximum 100 penalty unit fine – Legal Profession Act 2007 (Qld) s 247 – except where the law practice only deals with controlled money or transit money.
A useful diagram showing the Trust Money Decision Chart can be found on page 13 of the Queensland Law Society, Trust Accounting Guide (checked 13/02/2023).
2.5 What is trust money? - s 237
The definition of trust money is found at s 237 of the Act
https://www.legislation.qld.gov.au/view/html/inforce/current/act-2007-024#sec.237
Essentially, trust money is money received by a solicitor, in the course of practice as a solicitor, to be held on behalf of another person and must be either:
(a) banked to the credit of a general trust account at an approved financial institution in Queensland (this is
trust money
);
Trust money
(b) paid as directed by the person on whose behalf the money is held (this is
transit money
– see Act s 253);
transit money
(c) dealt with under a power or authority for and on behalf of a person (this is
power money
– see Act s 254); or
power money
(d) held under the control of the solicitor and paid as directed by the person on whose behalf the money is held (this is
written **
direction money** – see Act s 248).
written direction money
Trust accounts must be operated at approved “ADIs”, which are defined at ss 237, 280 of the Act.
The Act s 238(1), (2) specifies that money involved in financial services or investments is not trust money. There are exceptions – see s 238(3).
Trust money
is not available for the payment of debts of the practice
(Act s 256) nor should be intermingled with other money (Act s 257).
Section 260(1) of the Legal Profession Act 2007 (Qld) requires a legal practitioner associate of a law practice to give written notice to the Law Society as soon as practicable after the associate becomes aware of the irregularity
Trust money may be dealt with according to the Act s 258 where the legal practice:
exercises a lien for the amount of legal costs reasonably due and owing by the person to the practice;
legal costs – provided the procedures in the regulations are complied with; or
deals with the balance as unclaimed money under s 713.
2.6 Source records
include
trust account receipts
record money that is received into the trust account
Money may take the form
cheque (personal and bank
electronic transfers
cash
must be deposited as soon as practicable in the general trust account
unless
the practice has a written direction by an appropriate person (a person legally entitled to give directions) to deal with it otherwise than by depositing it in the account;
the money is controlled money;
the money is transit money; or
the money is to be dealt with under a power to receive or disburse money for or on behalf of another person exercisable jointly and severally with the other person or a nominee of the other person.
The detailed requirements for receipts are specified in the Legal Profession Regulation 2017 (Qld) Reg 34
completed
after the trust money is received, except as provided by paragraph (b);
in the case of trust money received by direct deposit – after the law practice receives or accesses notice or confirmation (in written or electronic form) of the deposit from the ADI concerned (Reg 34(3)).
typical trust account receipt looks like :
bank deposit slips
are the documents that you fill in at the bank to record the depositing of cheques into your trust account.
Legal Profession Regulation 2017 (Qld) cl 35
stamped bank deposit slip confirms that the bank has received the funds
cheque butts
The detailed requirements for cheques and cheque butts are specified in Reg 37
cheque butt total indicates a running total of all cheque payments – it is
not limited to just one cheque.
A cheque becomes stale after 15 months (Cheques Act 1986 (Cth) s 3).
cheque butt looks like this:
Cheque clearances
Clearance of cheques received from clients (or for clients) and deposited at the bank is required before drawing against those funds (represented by the cheque),
If the law practice draws against them (i.e. writes cheques) before they are cleared then funds belonging to other clients may end up being drawn against resulting in a breach of the Act (s 259).
Special clearance means that the bank was paid to speed up the clearing process
Controlled Money Receipts
Reg 48 for further information in relation to controlled money receipts
Controlled money is to be deposited as soon as practicable in the account specified in the written direction relating to the money
Unclaimed money
law practice holding money in a trust account cannot find the person on whose behalf the money is held or a person authorised to receive it, the practice may (Legal Profession Act 2007 (Qld) ss 258, 713) provide the Public Trustee with a return containing information required in relation to the money and its owner.
2.7 Cash Books
format of the trust account
receipts
cash book is found in Reg 40
Detailed requirements as to the format of the trust account
payments
cash book is found in Reg 41
2.8 Trust Transfer Journal
records ‘non-cash’ transactions.
Examples include transfer of money from one matter to another within the trust ledger and correction of incorrect postings
detailed requirements of the trust transfer journal are found in Reg 43
2.9 Trust ledger
trust ledger is found at pp 43-48 of the Queensland Law Society, Trust Accounting Guide (checked 13/02/2023).
https://www.qls.com.au/Content-Collections/Guides/Trust-Accounting-Guide
See, also, Reg 42
The individual trust ledger accounts
are individual
accounts, i.e. there is one for each client's matter
A client can
have two or more
individual accounts – one for Matter S1, and the other one for Matter S2.
2.10 Controlled Money
Controlled money is trust money. However, it is dealt with separately from general trust money. The different ledgers are there just to keep track of the different types of trust money
requirements of controlled money are found in Reg 47 – 51
At the end of each month (within 15 days) the Law Practice must prepare a Controlled Money Listing (Report), which is a list of the controlled money accounts.
2.11 Approved ADI Statements
The trust ADI statement needs to be reconciled against the trust accounts at the end of each month
There should be no bank fees or interest
The allocation of fees to a solicitor’s trust account is a bank error and must be adjusted for in the bank reconciliation statement
2.12 Audit Procedure
Investigations are discussed under Chapter 3, Part 3.3 Division 3 of the Legal Profession Act 2007 (Qld). The law society may initiate or be asked by the commissioner to initiate an investigation – s 263
The main purposes of an investigation are to ascertain whether the law practice has complied with or is complying with the requirements of Part 3.3, associated regulations and to detect and prevent fraud or defalcation
– however this does not limit the scope of the investigation or the powers of the investigator
There is an obligation on legal practitioners and their associates, on becoming aware of a trust accounting irregularity, to give written notice of the irregularity to the Law Society
or corresponding regulatory authority – or risk a 50 penalty unit fine (Legal Profession Act 2007 (Qld) s 260).
