Core principles

Question 1

What does a CR (Credit) entry indicate?

Answer 1

• Increase in liabilities, equity, or income.
• Decrease in assets or expenses.

Question 2

What does a DR (Debit) entry indicate?

Answer 2

• Decrease in liabilities, equity, or income.
• Increase in assets or expenses.

Question 3

In a cash account, what does a CR (Credit) entry represent?

Answer 3

• Money leaving the account.
• Example: Funds paid out of the client or business account.

Question 4

In a cash account, what does a DR (Debit) entry represent?

Answer 4

• Money coming into the account.
• Example: When money is received into the client or business account.

Question 5

In a client ledger account client section, what does a CR (Credit) entry represent?

Answer 5

• Money received for the client.
• Example: When a client deposits funds into the client account, increasing the balance held for the client.

Question 6

In a client ledger account client section, what does a DR (Debit) entry represent?

Answer 6

• Payment made on behalf of the client.
• Example: When client funds are used to pay for a disbursement, reducing the funds held for the client.

Question 7

In the business section of a client ledger, what does a CR (Credit) entry represent?

Answer 7

• The client has paid money to the firm, reducing their debt.
• Example: When funds are transferred from the client account to the business account after issuing a bill.

Question 8

In the business section of a client ledger, what does a DR (Debit) entry represent?

Answer 8

• The client owes money to the firm.
• Example: When a bill for professional charges is issued, reflecting the client’s obligation.

Question 9

How do CR (Credit) and DR (Debit) entries interact in a typical transaction involving the client and business accounts?

Answer 9

Each transaction must be recorded with a DR and CR entry, ensuring that total debits always equal total credits.

Question 10

How are DR and CR entries used in the Profit Costs Account and HMRC Account in solicitor accounts?

Answer 10

1. Profit Costs Account
   
   • CR (Credit):
   • Reflects income earned (e.g., when a bill is issued for professional charges).
   • Example:
   • Bill issued for £400 profit costs:
   • CR: Profit Costs Account £400 (income earned).
   • DR: Client Ledger Account (business section) £400 (client owes the firm).
   • DR (Debit):
   • Reflects a reduction in income (e.g., bad debt written off).
   • Example:
   • A £200 bill is written off as a bad debt:
   • DR: Profit Costs Account £200.
   • CR: Client Ledger Account £200.
2. HMRC Account
   
   • CR (Credit):
   • Reflects an increase in VAT liability (e.g., when VAT is charged on a bill).
   • Example:
   • Bill issued for £400 profit costs + £80 VAT:
   • CR: HMRC Account £80 (VAT liability created).
   • DR: Client Ledger Account (business section) £80 (client owes VAT).
   • DR (Debit):
   • Reflects a reduction in VAT liability (e.g., when VAT is paid to HMRC).
   • Example:
   • The firm pays £1,000 VAT to HMRC:
   • DR: HMRC Account £1,000.
   • CR: Cash Account (business section) £1,000.