Preparing and Issuing Bills

Introduction

The fees a solicitor charges a client for legal work are known as **profit costs** (the **costs element** of a bill). Sooner or later the firm must turn the work it has done into a **bill**, recover the money owed, and account to **HMRC** for the **VAT** charged. This chapter explains **how a bill is recorded** in the firm's accounts under the **SRA Accounts Rules** (in force from 25 November 2019), how to **separate the profit-costs element from the VAT element**, and how to draw up a **financial statement** for a client. Remember that **Rule 8.4** requires the firm to keep a **central record of all bills and other written notifications of costs** given to clients.

Assessment focus

For SQE1 FLK2 (Solicitors Accounts), you must be able to **record the issue of a bill** correctly: the **profit costs (excluding VAT)** are credited to a **profit costs ledger** with the balancing debit in the **business column of the client ledger**, and the **VAT** is credited to an **HMRC (VAT) ledger** with the balancing debit, again, in the **business column of the client ledger**. The most heavily tested points are **which side each entry goes on**, the fact that **issuing a bill involves only business money** (no client money moves and no bank transfer occurs at this stage), and the **20% VAT computation**. Questions are single best answer (SBAQs) set in **realistic client scenarios**; you must apply the double-entry rules, not merely recite them. This is a closed-book assessment.

Study tips

1) Learn the **double entry for a bill** by heart: **profit costs — CR profit costs ledger, DR business column of client ledger**; **VAT — CR HMRC ledger, DR business column of client ledger**. 2) Note that issuing a bill is a pure **bookkeeping (ledger) event** — it creates a debt; **no money enters or leaves a bank account** until the client pays. 3) Master the **VAT maths**: VAT is **20%**; to strip VAT from a VAT-inclusive figure, divide by **1.2** (e.g. £120 inc VAT ÷ 1.2 = £100 + £20 VAT). 4) Remember **Rule 8.4** — a **central record of bills and notifications of costs** must be kept. 5) For **financial statements** there is **no prescribed layout**; it must simply be **clear and easy for the client to follow**. You will **not** be asked to draft one in the exam, but understanding it helps you see where the money goes.