What is Client Money?
Service Providers like Legal, Digital Media, and Investment Firms receive money from Clients for payment to vendors against service contracts. Vendors for Legal Firms could include regulatory authorities such as the Court of Law, Tax Department. In Investment Firms Client Money is mainly for buying securities for the Clients, paying transaction charges. And for Media Companies, Vendors relates to Sourcing media presence which includes Ads, Sponsorships etc
Maintain Separate Records
Service Providers receive Client money for a specific purpose and Clients can call back the amount non-utilized at any point. Therefore, It is important to keep a separate record of Client Money received and spent. Never mix Client money with Service provider’s fee income.
Accounting of Client Money
Client money is the money which we can used for payment on behalf of the customer. It is neither Service Provider’s income nor an expense. In books of accounts we should recognize this as an advance received. All the payment made on behalf of the customer we can adjust against this advance. The pending amount after completion of work we should return to the client. The reverse entry for the same we should pass in the Balance sheet.
Good Practices for Client Money Handling
While dealing with external vendors for clients, always disclose details clearly, seek the Invoice and get documents in their name. Send a regular statement of account to Clients. This ensures that Clients are up to date on the amount spent and they are on top of their account. Always remember to highlight any errors or disputes in a timely manner related to money spent on their behalf. A properly done accounting is always helpful and creates confidence in clients regarding your client money managing skills.
Service Providers should maintain appropriate documentary evidence and share them with Clients to validate the usage of Client Money.
Tax Impact
Keep in mind, Client Money spend is a transaction between Clients and third party vendors. Service Provider is not a part of the transaction and does not have any tax liability. Although he is supposed to facilitate required transaction documentation and disclosures. Relevant tax impact includes Value Added Tax (VAT), Income Tax, Excise and Custom tariffs to name a few.
About Us
Accountant’s Box is an accounting firm based out of the UAE. We provide cloud-based accounting and related services across boundaries. For information, you could reach us at [email protected].