Practice Management
Course
Trust Accounting Workbook Questions and Exercises Booklet
Queensland Law Society | QLS Practice Management Course: Managing People / Page1of 66

Revision status

Revision No / Author/Editor / Description / Date
1.0 / Giles Watson / Initial draft / 16/06/14
2.0 / Michael Drinkall / Substantial redraft / 04/03/16
2.1 / Michael Drinkall / Minor amendments / 03/06/16
2.2 / Michael Drinkall / Minor amendments / 06/06/16
2.3 / Michael Drinkall / Minor amendments / 10/06/16

Table of contents

Introduction

Section 1:Recognising trust and other money

1.1Recognising trust money

1.2Recognising types of trust funds

1.3Dealing with trust money

1.4Maintaining records

1.5Answers

Section 2:Completing primary records

2.1Primary records

2.2Writing trust account receipts

2.3Trust account deposit form

2.4Writing receipts and bank deposit records

2.5Writing trust account cheques

2.6Trust transaction list for July

2.7Answers

Section 3:Understanding secondary records

3.1Secondary records

3.2Trust account receipts cash book

3.3Trust account ledger

3.4Trust account payments cash book

3.5Trust account ledger

3.6Trust account transfer journal

3.7Answers

Section 4:Office accounts

4.1General records

4.2Office (Debtors) ledger accounts

4.3Monthly reports

4.4Payment of fees from trust account

4.5Answers

Section 5:Charging legal fees, paying from trust, preparing statements

5.1Preparing accounts

5.2Preparing bills of costs

5.3Recording costs

5.4Trust account statement

5.5Answers

Section 6:Maintaining records of other trust money

6.1Categories of trust money

6.2Transit money

6.3Investment money

6.4Answers

Section 7:Preparing monthly reports

7.1End of month – Three way reconciliation

7.2Balancing the trust account cash books

7.3Reconciliation to trust account ledger

7.4Transaction list for August 20xx

7.5Trust account bank reconciliation

7.6Investment money

7.7Office account

7.8Monthly reports

7.9Answers

Section 8:Complying with further statutory requirements

8.1Prescribed account

8.2Conclusion

8.3End of Month Checklist

8.4Answers

Section 9:Additional documents

9.1Blank trust account primary records

9.2Blank office (debtors) ledger

Queensland Law Society | Practice Management Course: Trust Accounting Workbook Questions and Exercises Booklet / Page1 of 57

Introduction

All Practice Management Course (PMC) participants are required to complete a Trust Accounting Workbook (your Workbook), which involves completing appropriate trust accounting records for different scenarios.

In addition to this Questions and Exercises booklet, you have also been provided with a Workbook of blank records.

You are required to work through this Questions and Exercises booklet and:

  • answer the questions in each section;
  • complete the separate Workbook as indicated.

At the end of each section, there will be an opportunity to check your answers and completed records.

To demonstrate completion of the task, you are required to submit your completed Workbook document to thin 15working days of the final PMC workshop day (you are not required to submit this Questions and Exercises booklet).

NOTE: The trust accounting materials presented here are in a manual format. It is acknowledged that a vast majority of law practices now utilise a computerised accounting package to maintain their trust accounting records. By completing the trust account records in manual form you will gain a far better understanding of the trust accounting process. You will also be able to apply this universal knowledge to all of the different trust accounting software packages available.

Section 1: Recognising trust and other money

1.1Recognising trust money

To recognise whether trust money has been received, you must know and understand the relevant provisions of the Legal Profession Act 2007 (the Act).

You will need to refer to s237 of the Act as you work through this section.

Look carefully at the definition of ‘trust money’ in s237(1) of the Act. To decide if certain money is trust money, you must ask four questions:

  1. Has ‘money’ been entrusted to a law practice?
  2. Has money been ‘entrusted’ to a law practice?
  3. Has money been entrusted to a ‘law practice’?
  4. Has money been entrusted to a law practice ‘in the course
    of or in connection with the provision of legal services’?

See the table below for guidance:

Money / The term ‘money’ is not defined in the Act, but its dictionary definition includes cash and cheques.
Entrusted / The term ‘entrusted’ is not defined in the Act, but its use reinforces that trust money is placed in a law practice’s ‘care and protection’: Queensland Law Society Trust Accounting Guide, page 9.
Law practice / The term ‘law practice’ is defined in Schedule 2 of the Act to mean:
  • an Australian legal practitioner who is a sole practitioner
  • a law firm
  • an incorporated legal practice; or
  • a multidisciplinary partnership.
The term ‘law firm’ is defined in Schedule 2 and the term ‘Australian legal practitioner’ is defined in s6.
A law practice is deemed to have received money when the law practice obtains possession or control of it directly, or indirectly, as a result of its delivery to an associate of the law practice s 242.
Associate is defined in s 7(1) and includes an employee of the law practice.
Legal services / The term ‘legal services’ is defined exhaustively in Schedule 2 of the Act as work done, or business transacted, in the ordinary course of legal practice.
If a practitioner is treasurer of a local sporting club and receives money as such, the money is not received ‘in the course of or in connection with the provision of legal services’. If the practitioner is instructed to act for the club, and receives money as practitioner, that money would be entrusted to a law practice ‘in the course of or in connection with the provision of legal services’.

1.2Recognising types of trust funds

There are different types of trust money, as outlined in the table below:

Trust money / ‘Trust money’ is defined as money entrusted to a law practice in the course of or in connection with the provision of legal services by the practice. It includes money received in advance of providing legal services, transit money, controlled money and power money.
Trust money received in the form of cash must be deposited to the trust account or a controlled money account. All other trust money must be either deposited to the trust account as soon as practicable or dealt with according to whether it is written direction money, controlled money, transit money or power money. / s 237(1) LPA
s 255(1) LPA
s 255(3) LPA
s 248(1) LPA
Transit money / ‘Transit money’ is defined to mean money received by the law practice subject to instructions to pay or deliver it to a third party, other than an associate of the law practice. The law practice must pay or deliver the money within the time period specified in the instructions or, if no time is specified, as soon as practicable after its receipt. eg. Cheque received at a conveyancing settlement payable to the Office of State Revenue for stamp duty.
Cash cannot be treated as transit money. Rather, the cash must be deposited to the trust account or a controlled money account.
The law practice must keep brief particulars of the transaction and the purpose for which the transit money was received. It is best practice to retain copies of the transit money cheques received and any directions in respect of them. / s 237(1) LPA
s 253(1) LPA
s 255(3) LPA
s 255(4) LPA
s 52(2) LPR
Controlled money / ‘Controlled money’ is defined as money received or held by the law practice for which it has a written direction to deposit the money in an account, other than a trust account, over which the law practice has or will have exclusive control, eg An interest bearing account. / s 237(1) LPA
s 255(3) LPA
Power money / Power money refers to trust money that is the subject of a power given to the law practice or an associate. Such money must be dealt with only under the power relating to the money. Examples include a power of attorney, guardianship order or an authority to sign on a person’s bank account.
Trust money that is received in the form of cash and is the subject of a power must be deposited in the trust account or a controlled money account before the money is deposited to an account maintained by the practice or associate pursuant to the power.
The law practice must keep a record of all dealings with the money to which the law practice or associate is a party, together with all supporting information. It must also maintain a Register of Powers and Estates in respect of which the law practice or an associate is acting, either alone or jointly with the law practice or one or more associates, in relation to trust money.
A separate trust account statement must be furnished for each record. It will contain particulars of the information required to be kept in relation to the power money account and the balance (if any) of the money. / s 254(1) LPA
s 255(5) LPA
s 56(2) LPR
s 57(1) LPR
s 53(4) LPR
Written direction money / Money received subject to a written direction from an appropriate person must be dealt with in accordance with the direction within the time period specified in the direction or, if no time specified, as soon as practicable after it is received. An ‘appropriate person’ is defined as a person legally entitled to give the law practice directions in relation to dealings with the trust money.
Cash cannot be treated as written direction money. Rather, the cash must be deposited to the trust account or a controlled money account.
The law practice must keep a written direction for seven years after finalisation of the matter to which the direction related. / s 248(1) LPA
s 248(2) LPA
s 248(4) LPA
s 255(2) LPA
s 255(3) LPA
s 36 LPR

Q1/1 A client is going overseas and adds the practitioner as a signatory to their bank account so that the practitioner will have quick access to their funds when needed for settlement of a purchase.

Has trust money been received? If so, which type?

  1. Trust money has not been received.
  2. Transit money has been received.
  3. General trust money has been received.
  4. Investment money has been received.
  5. Power money has been received.

Q1/2 A client, purchasing a new home, gives a cheque for the deposit, drawn in favour of the agent, to the practitioner to forward it immediately to the agent as provided in the contract.

Has trust money been received? If so, which type?

  1. Trust money has not been received.
  2. Transit money has been received.
  3. General trust money has been received.
  4. Investment money has been received.
  5. Controlled money has been received.

Q1/3 Mary is executor and trustee of her late father’s estate. She is an employed practitioner in a law practice. Is money received by her for the estate trust money?

  1. The money will never be trust money.
  2. The money will always be trust money – as she is a practitioner and receiving money.
  3. The money may be trust money – if the practitioner is acting as a private individual but her firm is acting for the estate.
  4. The money will only be trust money if Mary is acting as practitioner for the estate.

Q1/4John is a partner in a law practice. A client gives John a cheque to cover anticipated professional fees in a matter. Is it trust money?

  1. Yes
  2. No

1.3Dealing with trust money

At 4pm, a practitioner receives a cheque from a client for $15,000 on account of stamp duty ($13,000) and other anticipated disbursements ($2,000). The next day, the practitioner banks the cheque into the trust account of the law practice, in which the practitioner is a partner.

Q1/5 Which of the following statements is correct?

  1. Provided the necessary records have been completed, the practitioner has handled the cheque appropriately.
  2. Even if the necessary records have been completed, the practitioner has not handled the cheque appropriately.

The day after the cheque was banked into the law practice’s trust account, the practitioner draws a trust account cheque for $13,000 payable to the Office of State Revenue for stamp duty on the contract.

Q1/6 Has the practitioner complied with the Act?

  1. The practitioner has complied with the Act because the trust money was received for that purpose.
  2. The practitioner has not complied with the Act because until the funds have been cleared by the financial institution, the law practice is drawing against other clients’ funds.
  3. In order to comply with the Act, the practitioner would need to have arranged a special clearance with the bank.

Jack, an employed practitioner, receives a cheque from a client on account of costs and disbursements in a civil litigation matter. Three days later, Jack banks the cheque into the law practice’s trust account and then signs a trust account cheque payable to counsel for counsel’s fees.

Q1/7 Think of at least three ways Jack appears to have breached the Act and Regulation.

  1. ………………………………………………………………………………………………………………………………
  2. ………………………………………………………………………………………………………………………………
  3. ………………………………………………………………………………………………………………………………

1.4Maintaining records

Section 261(1) of the Act and s59(1) of the Regulation requires the keeping in permanent form trust records in relation to trust money received by the law practice. Permanent form is defined in s 237 of the Act. The records must be kept in a way that discloses the true position in relation to trust money received for any person and also enables the records to be conveniently and properly investigated or externally examined: s261(1). What does this mean in practice?

Q1/8 Where must such records be maintained?

………………………………………………………………………………………………………………………………………

Q1/9 Can they be maintained in a language other than English?

………………………………………………………………………………………………………………………………………

Q1/10 Is there any restriction on using a computer system to maintain them?

………………………………………………………………………………………………………………………………………

Q1/11 How long must they be retained for?

………………………………………………………………………………………………………………………………………

Q1/12 What ‘trust records’ must you maintain?

………………………………………………………………………………………………………………………………………

1.5Answers

Recognising types of trust funds

Q1/1 The correct answer is 5: Power money has been received.

  1. Incorrect. Even though no specific sum has been received, the definition of ‘trust money’ in s237(1)
    includes money that is the subject of a power, exercisable by the law practice or an associate, to deal
    with the money for another person.
  2. Incorrect. No cheque has been received.
  3. Incorrect. No money is to be banked into a trust account.
  4. Incorrect. The money is not to be invested by the practitioner.
  5. Correct. The definition of ‘trust money’ in s237(1) includes money that is the subject of a power,
    exercisable by the law practice or an associate, to deal with the money for another person.

Q1/2 The correct answer is 2: Transit money has been received.

  1. Incorrect. Money has been entrusted to the law practice in the course of or in connection with the provision of legal services by the law practice (see definition of ‘trust money’: s237(1)). This is transit money. The practitioner is not required to pay it into a trust account provided it is dealt with immediately as required by the instruction relating to the money pursuant to s253(1).
  2. Correct. The cheque has been entrusted to the law practice. The trust money consists of a cheque drawn in favour of someone else, who is lawfully entitled to it and the cheque is to be forwarded as required by the instruction relating to the money pursuant to s253(1).
  3. Incorrect. The money is not to be banked into a trust account by the law practice provided it is dealt with as required by the instruction relating to the money pursuant to s253(1).
  4. Incorrect. The money is not to be banked into a trust account or invested by the law practice provided it dealt with as required by the instruction relating to the money pursuant to s253(1).
  5. Incorrect. The practitioner has not been authorised to operate an account in the name of the client: see definition of ‘controlled money’: s237(1).

Q1/3 The correct answer is 3: the money may be trust money – if the practitioner is acting as a private individual but her firm is acting for the estate.

  1. Incorrect. Money from the estate will be trust money if received in the course of legal practice by the practitioner.
  2. Incorrect. Money from the estate may not be trust money if Mary is acting purely as a private individual and Mary’s law practice is not acting for the estate.
  3. Correct. Mary is an associate of the law practice: s 7(1)(a)(v) definition of ‘associate’. Money is deemed to be received by the law practice if received by an associate: s242(1)(b). If Mary gives money to the law practice
    to bank, it will be trust money. If, however, Mary opens an estate account at a bank with herself as signatory as executor/trustee and not in connection with, or under the control of the law practice, the money will not be trust money.
  4. Incorrect. If Mary is acting as practitioner for the estate, the money will certainly be trust money but the money may also be trust money if someone else in the law practice acts for the estate.

Q1/4 The correct answer is Yes: The money has been received by the law practice in the course of or in connection with the provision of legal services and has been received on account of costs in advance of providing the services.

Dealing with trust money

Q1/5 The correct answer is 1: provided the necessary records have been completed, the practitioner has handled the cheque appropriately.

Trust money has been received. Although the practitioner has not banked the cheque on the same day as
it was received, it appears to have been banked as soon as practicable: s248(1) of the Act.

Q1/6 The correct answers are 2 and 3.

  • The practitioner has not complied with the Act because until the funds have been cleared by the financial institution, the law practice is drawing against other clients’ funds.
  • In order to comply with the Act, the practitioner would need to have arranged a special clearance with the bank.

Even though the money was received for that purpose, a law practice does not have control of the funds until such time as the funds have been cleared by the financial institution, thus enabling the law practice to debit an amount to an account. Without a special clearance, the practitioner would, in effect, be drawing against the trust money of another client. See the definition of ‘trust money’ in s237 of the Act, and the definition of ‘when money is received’ in ss242(1) and (2). If the client’s cheque is dishonoured, there will be a deficiency in the client’s trust ledger account; and an offence under s259(1).

Q1/7 Jack appears to have breached the Act/Regulation in the following ways:

  1. Unless the cheque was received on a Friday or there were exceptional circumstances, Jack has breached
    s248(1) by not banking the cheque as soon as practicable after receiving the funds.
  2. Unless Jack had arranged with the bank for a special clearance, the cheque received from the client would
    not be cleared funds. Jack would then, in effect, be drawing against the trust money of some other client and therefore be in breach of s259(1).
  3. If Jack has not kept records of the transactions, he has breached s261 of the Act and s59(1) of the Regulation.
  4. Jack may not be a signatory to the trust account or may be required to sign jointly.

Maintaining records

Q1/8 No specific requirement.