What Are the SRA Accounting Rules and How Do They Work

For most businesses the year end accounts are simply a financial snapshot and a compliance obligation. For solicitors the accounting landscape is far more regulated and far more sensitive. The Solicitors Regulation Authority does not just require firms to produce accurate accounts. It requires them to follow strict rules about how client money is handled, how office money is used, how reconciliations are carried out, and how records are maintained. These requirements exist to protect the public because solicitors regularly hold significant sums of money on trust. Understanding the SRA accounting rules is essential for every law firm and in my opinion the firms that take these rules seriously experience fewer compliance issues, fewer surprises at year end, and far smoother SRA audits.

The SRA accounting rules govern how law firms must manage client money and how they must maintain accounting records. They set expectations for the handling of deposits, transfers, disbursements, interest calculations, reconciliations, residual balances, mixed payments, and the separation of client and office accounts. They also define when firms need an accountant’s report and when they can be exempt from such requirements. Although the rules used to be lengthy and highly prescriptive the modern version focuses more on principles than on detailed micromanagement. That said solicitors still need strict internal systems because the consequences of getting these rules wrong can include regulatory action, compensation claims, reputational damage, and even personal disciplinary outcomes.

This article explains how the SRA accounting rules work, what solicitors must do to comply, how client money must be safeguarded, what accountants look for during the annual inspection, and why the rules matter for both the firm and the client.

Why the SRA Accounting Rules Exist

The relationship between solicitors and their clients is built on trust. Clients hand over money for property transactions, litigation settlements, probate matters, commercial payments, deposits, and a wide range of purposes. In many cases the sums involved are substantial. The SRA accounting rules exist to protect those funds. They aim to ensure that client money is not mixed with office money, not used to support the firm’s own cash flow, and not exposed to unnecessary risk. They also aim to ensure that client money is returned promptly once it is no longer required.

In my opinion these rules are designed around transparency. The SRA does not want solicitors to handle client funds in ways that could mislead clients or create uncertainty over ownership. The rules create a framework that ensures proper separation, accurate recording, and regular reconciliation so that at any point in time the firm knows exactly how much client money it is holding and for what purpose.

What Counts as Client Money

One of the most important principles of the SRA accounting rules is understanding what qualifies as client money. Client money is any money that belongs to a client including funds held on account, transaction funds, court fees, disbursements paid in advance, settlement funds, and money that will be passed on to third parties. It also includes money that is temporarily held before billing unless the firm treats it as office money at the point of receipt. The boundary between client and office money must be respected at all times because each has its own ledger and its own bank account.

It is surprisingly common for new fee earners or inexperienced staff to misunderstand what counts as client money. For example advance payments for costs such as searches, Land Registry fees, or barrister fees are client money if they are intended to be used for the client's matter. Deposits taken for conveyancing work are client money. Even money received from the client that will immediately be paid out to another party must be treated as client money until the payment is made.

Separation of Client and Office Money

The SRA accounting rules require law firms to maintain strict separation between money that belongs to the client and money that belongs to the firm. This means having separate client bank accounts and office bank accounts. Client money must never be paid into the office account and office money must never be paid into the client account. This separation ensures that client money is always protected and never used for office liabilities or cash flow.

In my opinion this is the foundation of the SRA accounting rules. When separation is respected everything else becomes easier because reconciliations remain clean, client ledgers remain clear, and the risk of errors or misuse is greatly reduced. Problems arise when firms take shortcuts such as using client funds to cover temporary office shortfalls or posting items incorrectly in their accounting system. These mistakes create significant regulatory risk.

Prompt Banking of Client Money

The rules require solicitors to pay client money into the client account promptly. This is not simply a best practice recommendation. It is a regulatory requirement that aims to protect client funds from being held in transit or mixed with office money. The definition of prompt will vary slightly depending on the structure of the firm but the principle remains that delays should be avoided.

Firms that hold client money for extended periods without banking it expose themselves to risk because unbanked funds cannot be reconciled and the accounting records become inaccurate. For example a conveyancing firm receiving deposit funds must bank those funds without delay. Any lag in banking creates a gap in the audit trail which the SRA will notice during an inspection. Year end accountants will also question delays because they create potential breaches.

Returning Client Money When No Longer Required

Another important element of the rules is the requirement to return client money promptly once it is no longer needed. Many firms accumulate small residual balances simply because staff forget to return leftover funds after matters close. These balances might be small but they create a compliance risk because the firm is effectively holding money without justification.

Preparing for year end should always include an exercise to review old client ledgers, identify residual balances, and return them to the correct party. Some balances may be unclaimed because the client cannot be located. In that case the SRA allows firms to pay these balances to charity after following proper checks. In my opinion law firms should conduct this review regularly because stale residual balances are one of the most common issues raised by reporting accountants.

Accurate and Up to Date Accounting Records

The SRA accounting rules require law firms to keep accurate and contemporaneous records. This includes client ledgers, office ledgers, bank account records, and supporting documentation. Records must clearly show the movement of money in and out of each account and must link to individual client matters. Every receipt and payment must be recorded promptly with full detail and clear audit trails.

Law firms that use modern legal accounting software find this far easier because the system automates posting, reconciliation, and ledger management. Firms that use spreadsheets or outdated software usually struggle because manual posting leads to errors. In my opinion the quality of a firm’s accounting system is directly connected to its compliance health.

The Three Way Reconciliation Requirement

One of the most recognised parts of the SRA accounting rules is the requirement for monthly three way reconciliations. A three way reconciliation compares three sets of figures:

• The balance on the client bank account

• The total of all client ledgers

• The cashbook balance

All three must match. If there is a difference it must be explained and corrected promptly. This reconciliation ensures that the firm is holding the correct amount of client money in the client account. It is one of the main tools that reporting accountants use to assess compliance.

In my opinion the firms that complete reconciliations monthly with care and proper documentation find year end accounts and SRA audits straightforward. Firms that delay reconciliations or fail to investigate differences quickly face more serious issues. The reconciliation process also helps detect errors, bank posting mistakes, or unusual activity so it is invaluable beyond regulatory compliance.

Transfers Between Client and Office Accounts

Transfers between client and office accounts must follow strict rules. A solicitor cannot simply move client money to the office account. The transfer must be supported by a bill or notification of costs. The bill must be delivered to the client before the transfer is made. This creates a clear audit trail that confirms the firm has earned the money it is withdrawing.

A common breach occurs when firms move money from client to office without issuing the correct bill or without posting the bill on the system. This leads to discrepancies in the ledgers and breaches in the client money rules. Preparing for year end means ensuring that all transfers have the correct documentation and that all bills have been raised properly.

Handling Mixed Payments Correctly

Many firms receive payments that include both client money and office money. For example an invoice may include fees and disbursements. In these situations the solicitors’ finance team must apportion the incoming payment correctly between the accounts. The client portion must be transferred to the client account and the office portion to the office account.

If the entire payment is mistakenly placed into one account the firm may breach the accounting rules. This is why staff training is essential. In my opinion mixed payments are one of the easiest sources of error because they require judgement and familiarity with the rules.

Interest on Client Money

Law firms must account for interest on client funds when appropriate. They must have a written interest policy that explains how interest will be calculated and when interest will be paid to clients. Interest is not required in every situation particularly when the amount is negligible. However the firm must show that the policy is applied consistently.

Some firms forget to apply their own policy which creates compliance risk. Preparing for year end means reviewing whether interest has been calculated correctly and ensuring that the policy is up to date.

The Role of the Reporting Accountant

Most solicitors need a reporting accountant to review their client money records annually unless they qualify for an exemption. The accountant inspects the firm’s systems, reconciliations, ledgers, and compliance processes. They then submit an accountant’s report to the SRA if the firm has any material breaches.

In my opinion the reporting accountant acts as a safeguard for both the firm and the public. A clean report gives reassurance that the firm is managing client money properly. A qualified or qualified with issues report indicates problems that need immediate attention. The SRA may follow up on reports that show significant or repeated breaches.

Firms must provide the reporting accountant with full access to all accounting records, client files where relevant, reconciliations, bank statements, bills, transfer documentation, and policies. The quality of the firm’s systems and bookkeeping has a direct impact on how smoothly this review goes.

When Firms Are Exempt From the Accountant’s Report

Not all firms need an annual report. Some are exempt if they do not hold client money or if they only hold very small amounts under specific conditions. For example some firms that operate a model where all client funds go directly to third parties may not need to hold a client account. Others may handle client money only rarely and in amounts below the exemption threshold.

Even if exempt from the report the firm must still follow the SRA rules whenever it does hold money. It must also notify the SRA of its status. In my opinion too many firms misunderstand this exemption and assume it means they do not need systems at all. This is risky because exemptions can change if the firm’s work changes.

Common Breaches of the SRA Accounting Rules

Some breaches are more common than others. These include:

• Delayed banking of client funds

• Failure to complete three way reconciliations

• Transfers to office account without bills

• Unexplained differences on reconciliations

• Residual client balances left for years

• Misallocation of mixed funds

• Missing documentation

• Use of client funds to cover office shortfalls

• Incorrect handling of interest

Although I avoid list formats the pattern of these breaches is important to understand. Many arise from weak internal controls rather than deliberate wrongdoing. Regular training and supervision helps prevent them.

Why Strong Internal Systems Matter

In my opinion the firms that comply easily with the SRA accounting rules are those that prioritise strong internal systems. This means having a skilled cashier or finance manager, using specialist legal accounting software, conducting regular internal audits, and ensuring fee earners understand the basics of client money handling. When everyone understands their role the year end accounts are easier to complete and the accountant’s review is far smoother.

Well maintained systems also protect the firm from reputational risk. Clients trust solicitors with their money and expect it to be kept safe. A breach of the SRA accounting rules can lead to loss of trust long before any official regulatory action takes place.

Final Thoughts

The SRA accounting rules are designed to protect client money and maintain the integrity of the legal profession. They require solicitors to separate client and office funds, maintain detailed accounting records, perform regular reconciliations, return money promptly, issue correct bills, and work with a reporting accountant when required. Firms that prepare early and maintain high standards of bookkeeping find compliance straightforward. Firms that rely on outdated or inconsistent systems often struggle at year end and risk disciplinary consequences.

In my opinion understanding and respecting these rules is essential for every solicitor. Good accounting practice is not just about satisfying the SRA. It is about demonstrating professionalism, safeguarding client trust, and building a law firm that operates with financial clarity and confidence.