What Are the SRA Accounting Rules and How Do They Work

At Towerstone Accountants we provide specialist accountancy services for solicitors and law firms operating under SRA regulation. This article has been written to explain What are the SRA accounting rules and how do they work in clear practical terms so you understand how the rules apply in day to day practice. Our aim is to help you stay compliant protect client money and make informed financial decisions.

The SRA Accounting Rules sit at the heart of financial regulation for solicitors in England and Wales. In my experience, these rules are often viewed as complex, restrictive, or even intimidating, particularly by smaller firms and sole practitioners. Yet when you step back, the purpose of the rules is actually very clear. They exist to protect client money, maintain trust in the legal profession, and ensure firms operate with proper financial discipline.

Problems arise not because the rules are impossible to follow, but because they are misunderstood, applied inconsistently, or treated as a technical box-ticking exercise rather than a framework for good practice. In this article, I will explain what the SRA Accounting Rules are, how they work in practice, and how solicitors should approach them on a day to day basis.

I am writing this from the perspective of advising solicitors in real firms, dealing with real pressures, cash flow challenges, staffing issues, and regulatory scrutiny. My aim is to make the rules feel understandable, workable, and relevant rather than abstract or academic.

What the SRA Accounting Rules are designed to achieve

The SRA Accounting Rules are issued by the Solicitors Regulation Authority. They apply to solicitors, law firms, and regulated practices that handle client money.

At their core, the rules are designed to ensure that:

• Client money is kept safe

• Client money is clearly separated from business money

• Firms maintain accurate financial records

• Errors or misuse of funds are identified quickly

• There is transparency and accountability

The rules are not primarily about tax, profitability, or business efficiency. They are about trust. Clients must be confident that when they hand over money to a solicitor, it will be handled properly and returned or used only for its intended purpose.

Who the SRA Accounting Rules apply to

The rules apply to any authorised firm or individual that receives or holds client money in connection with legal services.

This includes:

• Traditional solicitor firms

• Limited liability partnerships

• Sole practitioners

• Firms holding money for disbursements or settlements

If you never hold client money at all, some aspects of the rules may not apply, but most solicitors will encounter them at some point in practice.

What counts as client money

Understanding what counts as client money is one of the most important aspects of the rules.

Client money generally includes:

• Money received from or on behalf of a client

• Completion funds

• Damages or settlement proceeds

• Money held on account of costs

• Disbursements not yet incurred

The key principle is ownership. If the money does not belong to the firm, it is client money and must be treated as such.

The difference between a client account and an office account

The rules require a clear separation between client money and business money.

A client account is used to hold client money only. An office account is used to run the firm.

This separation is fundamental. Client money must never be mixed with office money except in very limited and controlled circumstances, such as when transferring billed costs that the firm is entitled to.

From a regulatory perspective, mixing funds is one of the most serious breaches a firm can commit.

When money can move from the client account to the office account

Money can only be transferred from the client account to the office account when the firm becomes entitled to it.

This usually happens when:

• A bill has been properly raised

• The amount transferred matches the bill

• The transfer is recorded accurately

Using client money to pay office expenses before entitlement exists is not permitted, even if the firm plans to bill later or repay the money.

How client money should be recorded

The SRA Accounting Rules require firms to keep accurate and up to date accounting records.

This includes:

• A client ledger for each client or matter

• A client cash book

• A client control account

• Supporting documentation for transactions

Each client must be able to see exactly what money is held on their behalf at any point in time.

Three way client account reconciliation

One of the most important practical requirements is regular reconciliation.

A proper client account reconciliation involves comparing:

• The balance on the client bank account

• The balance on the client control account

• The total of all individual client ledger balances

All three must agree. If they do not, there is an error that must be investigated and resolved.

The rules require this reconciliation to be carried out at least once every five weeks.

Why reconciliation is so important

Reconciliation is not just an administrative task. It is a safeguard.

It helps firms identify:

• Posting errors

• Missing transactions

• Incorrect allocations

• System issues

• Potential misuse of funds

The longer discrepancies go unnoticed, the harder they are to resolve.

Handling client interest

Client interest is another area governed by the rules.

If a firm holds client money that earns interest, the client may be entitled to some or all of that interest. Firms must have a written policy explaining:

• When interest will be paid

• How it is calculated

• Any minimum thresholds

The policy must be applied fairly and consistently. Interest should never be treated as firm income unless the rules and the firm’s policy clearly allow it.

Residual client balances

Residual balances arise when a matter concludes but a small amount of client money remains.

The rules require firms to:

• Make reasonable efforts to return the money to the client

• Follow a defined process if the client cannot be traced

Residual balances cannot simply be absorbed into firm income or used to pay office expenses.

Designated client accounts

In some cases, firms use designated client accounts for specific matters.

These are still client accounts and are subject to the same principles as pooled client accounts. They must be:

• Used only for that specific client

• Properly recorded

• Reconciled regularly

Having a designated account does not reduce compliance obligations.

The role of the Compliance Officer for Finance and Administration

Every authorised firm must appoint a Compliance Officer for Finance and Administration, often referred to as the COFA.

The COFA is responsible for:

• Ensuring compliance with the Accounting Rules

• Monitoring financial systems and controls

• Investigating breaches

• Deciding whether breaches are reportable

While tasks can be delegated, responsibility cannot. The COFA plays a central role in how the rules operate in practice.

What happens if the rules are breached

Breaches of the Accounting Rules vary in seriousness.

Minor, one off issues that are corrected promptly are treated very differently from systemic or repeated breaches.

Consequences can include:

• Reporting obligations

• Regulatory investigations

• Conditions on practising certificates

• Fines or disciplinary action

• In extreme cases, intervention into the firm

How a firm responds to a breach often matters as much as the breach itself.

Common causes of breaches

In my experience, breaches usually arise from:

• Poor systems

• Lack of training

• Cash flow pressure

• Infrequent reconciliation

• Over reliance on manual processes

They are rarely caused by a lack of technical intelligence.

How accountants help solicitors comply with the rules

Accountants play a vital role in translating the rules into workable systems.

They help firms by:

• Designing compliant accounting structures

• Supporting client account reconciliation

• Reviewing controls independently

• Advising on interest and residual balances

• Supporting COFAs with oversight

This practical support often prevents small issues from becoming serious problems.

The relationship between the rules and digital accounting

Digital accounting systems can support compliance, but only if configured correctly.

The rules still apply regardless of software. Automation does not remove responsibility.

Accountants help ensure that:

• Client and office accounts remain clearly separated

• Digital records are accurate

• Audit trails are preserved

• Reconciliations are meaningful

Technology should strengthen compliance, not obscure it.

How the rules affect day to day practice

For many solicitors, the rules influence daily decisions more than they realise.

They affect:

• When bills are raised

• How money is received and paid

• How long funds are held

• How matters are closed

• How partners monitor risk

Understanding the rules makes these decisions easier and more confident.

The importance of culture and training

Rules alone do not create compliance. Culture does.

Firms that embed the principles of the Accounting Rules into their culture tend to experience fewer issues. This includes:

• Training staff regularly

• Encouraging questions

• Treating client money with respect

• Escalating issues early

Compliance works best when it is shared, not siloed.

Why the rules matter even when nothing goes wrong

Some firms only think about the Accounting Rules when there is a problem.

In reality, the rules protect firms as much as they protect clients. They:

• Reduce financial risk

• Support trust and reputation

• Provide clear frameworks for decision making

• Demonstrate professionalism

Strong compliance is a competitive advantage in a profession built on trust.

Final thoughts

The SRA Accounting Rules are not there to make life difficult for solicitors. They are there to ensure that client money is handled with care, transparency, and integrity.

When understood properly, the rules are logical and workable. Problems tend to arise when firms treat them as an afterthought or rely on informal practices that have never been tested.

In my experience, solicitors who engage with the rules proactively, supported by good systems and professional accounting advice, find that compliance becomes part of normal business rather than a constant source of anxiety.

You may also find our guidance on solicitors accounts rules and What are the penalties for breaching SRA accounting rules useful when reviewing related SRA and accounting obligations. For a broader overview of solicitor accounting and compliance topics you can visit our solicitors accounts rules hub which brings all related guidance together.