Client Money Misallocation

Accounting
1

This is the scenario. I am a limited company. I collect payments from individuals/business on behalf of clients. Someone paid £120 into my client (bank) account. I tagged that to a nominal code for Client Money from the bank import. I later paid that money out to Client1, so payment out from client account and reduce the same Client Money nominal code by £120. Later I am informed that a misallocation has occurred and the £120 belongs to Client2. I could ask Client1 for the money back, but given that it is my mistake I’m going to stand the cost. So I transfer (on online banking) £120 from my current account to my client account. I then import the entries into the bank on Quickfile. The £120 which has landed in the client account needs to be tagged to the Client Money nominal. This leaves me with an untagged -£120 on the current account which I do not know what to do with.

I’m thinking about using my Refunds and Corrections holding account, or tagging the -£120 to some nominal, but am unsure what to do. Can anyone advise please?

Thanks

2

Hi @bench499d

I just want to be sure that I understand your situation correctly.

  • You receive payments on behalf of clients, and you then transfer the money to them
  • You have received £120.00 for a client, but mistakenly paid it to Client 1 rather than Client 2
  • As it’s your error, you’re not asking for the money back and transfer the correct £120.00 to Client 2
  • Effectively, you’ve received £120.00 and paid out 2 x £120.00

Is that correct?

3

Yes that is correct. Only the “second” £120 is the company’s money which I have paid from the current account into the client account.

It’s the tagging that’s the issue - I can’t tag it as a transfer from current account to client account because I’ve already tagged the client account side as a payment to the client money nominal, leaving the current account side untagged.

4

There may be a few different ways to handle this situation. As I see it the £120 you had to produce from your own funds was due to a processing error. I would seek a second opinion on this (I am not an accountant) but would imagine it should be posted to an expense code (thus writing down your profits). There won’t be an exact nominal code for this type of expense, so I would create a new one in the Chart of Accounts section under the expenses header, you could call it something like “Processing Errors”.

I would recommend you discuss with your accountant whether you were then able to claim tax relief on this, I can’t be sure here. If you do claim relief, ensure you keep as much supporting information as you can in case it is later challenged.

Hope that helps!

5

Thanks for this. I have created a nominal code as you suggested and tagged the bank transaction. I will check with the accountant come final accounts time as you suggest.