Understanding Accounting for Law Firms
One of the most difficult bookkeeping tasks for law firms is the correct processing of client trust accounts. The client trust account is a bank account where law firms hold money for a client to cover the cost of expenses. The trust account, also known as an IOLTA account (Interest on Lawyers Trust Account), must be separate from the law firms operating account and the funds must be clearly identified. Each state has guidelines governing the handling and reporting of attorney trust funds. Attorneys can neither borrow from or utilize trust funds to operate their business.
One of the easiest ways to properly account for and reconcile the trust funds account is by purchasing proper accounting software, although there are several on the market, I prefer utilizing QuickBooks software. The software is reasonably inexpensive and will provide attorneys with the tools they need to not only properly manage their trust account, but also to run the daily operations of their business, including billing. Please note that some larger firms will have different requirements and may utilize a QuickBooks add-on for their billing purposes.
Client Trust Account
Within QuickBooks, the user will set up a bank account named “Client Trust Account.” If more then one trust account is required, the user can set up subaccounts, one for each client. The subaccount is part of the main account, but all of its transactions will be kept separate. There are tricks to learning how to best customize QuickBooks to work for your specific needs. The key is understanding the back end reporting you will want to have.
Trust Liability Account
The next step would require the user to set up a Trust Liability account, which represents the money owed to the client. subaccounts should be assigned for each client as noted above for the Client Trust bank account.
By utilizing the subaccounts all activity of each client will be easy to reconcile, and the user will be able to access reports for each trust fund under their control making compliance a snap. A feature in QuickBooks will enable the user to generate a custom report, a “Trust Liability Proof” to illustrate that the trust fund accounts are in balance.
The above represent a simplistic scenario. There are other issues and work arounds that can be incorporated depending on the complexity of the situation. Examples of this are whether setting up a separate Trust Accounts Payable account is necessary or if the user will use a firm credit card to pay for client costs (some states may prohibit this practice), or whether expenses are paid for by the firm and then reimbursed from the trust fund etc., or there can be several matters the firm is working on for the client and the funds for these other matters must be segregated, or lastly, if the volume of trust fund activity is large, I would recommend maintaining a separate company file in the software...