Did you know that even a small error in your legal trust account can result in severe penalties or ethical violations? Legal firms are held to high standards when it comes to managing client funds, and ensuring your trust liability matches your trust checking account is not just a best practice — it’s a regulatory requirement in most jurisdictions. Reconciling your trust liability and checking account in QuickBooks® is crucial for Legal Firms as outlined below.
As an experienced accountant working with legal professionals, I’ve seen how QuickBooks®, when used properly, can be a powerful tool in staying compliant with trust accounting rules. In this blog, we’ll explore why reconciling your trust liability and checking account is critical, and offer simple tips for doing it right in QuickBooks®.
Why Reconciliation Matters for Legal Trust Accounts
1. Compliance with Legal and Ethical Rules
Most states require that attorneys maintain client funds in a separate Interest on Lawyers’ Trust Account (IOLTA) and perform monthly reconciliations to prove that the balance of this account matches the sum of all individual client trust ledgers. Failure to do so can lead to fines, sanctions, or even disbarment.
QuickBooks® allows you to track both your trust liability (a liability account) and your trust bank account (a checking account) — but they must always be in sync.
2. Preventing Costly Errors
Without reconciliation, errors such as double entries, missed deposits, or unauthorized withdrawals can go unnoticed. These discrepancies can quickly snowball into compliance violations or even client disputes. Regular reconciliation ensures accuracy and peace of mind.
3. Improved Internal Controls
Reconciliation acts as a financial checkpoint that ensures the integrity of your bookkeeping. For law firms, especially those handling high volumes of client funds, reconciling helps:
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Detect fraud or misuse of funds
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Confirm that transactions are properly recorded
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Maintain transparency with clients and auditors
How to Reconcile Your Trust Accounts in QuickBooks®
Reconciling in QuickBooks® may sound technical, but with the right steps and setup, it becomes a routine task. Here are a few key tips:
1. Set Up Accounts Correctly
Start by creating:
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A Trust Checking Account (Bank-type account in QuickBooks)
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A Trust Liability Account (Other Current Liability-type account)
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Sub-accounts for each client, if desired, or use a third-party trust ledger app that integrates with QuickBooks®
💡 Tip: Use the Class or Customer field in QuickBooks® to tag each trust transaction to the correct client. We prefer to use the Customer field for a multitude of reasons right in QuickBooks®”
2. Record Every Transaction Accurately
Ensure every trust deposit and disbursement is entered against the trust liability account, not income or expense accounts. This keeps your balance sheet accurate and prevents the liability account from going out of sync with your checking account.
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Deposits: Use “Make Deposits” and post to the liability account.
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Payments: Use “Write Checks” or “Pay Bills” against the liability account.
- Journal Entries: Use “Journal Entries” to properly code transactions between the trust and liability accounts as well as making transfers to operating accounts so that you have a proper trail of details.
3. Perform Monthly Reconciliations
Just like your business checking account, reconcile your trust checking account monthly using QuickBooks’ built-in reconciliation tool. Compare it to your bank statement, and ensure that:
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The ending balance matches your bank.
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All outstanding checks and deposits are accounted for.
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Your trust liability balance equals the bank account balance.
4. Run a Reconciliation Report
Many bar associations and jurisdictions require a three-way reconciliation that compares:
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Trust Bank Account balance
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Trust Liability Account balance
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Client-specific ledger balances
You will want to ensure that you save these reports for any potential audit. Especially when using QuickBooks Online®, as any changes after the fact will change the view of the report (voiding a check, making a change to a transaction etc). We work closely with clients to teach them how to do this as well as provide monthly reconciliation services if you want to take that responsibility off of your plate.
Consequences of Not Reconciling Trust AccountsIgnoring trust reconciliation is risky. Possible consequences include:
- Compliance violations
- Client disputes over missing or mismanaged funds
- Audits, sanctions, or even disbarment
- Reputational damage
Regular reconciliation is your first line of defense against these threats and shows you’re managing client funds responsibly and professionally.
Let RPPC Help You Stay Trust-Account Compliant
Managing legal trust accounts doesn’t have to be overwhelming. At RPPC, we help law firms set up and maintain their QuickBooks® systems to ensure clean books, compliant records, and peace of mind. We support both desktop and online products!
Ready to strengthen your trust account process? Contact RPPC today to schedule a consultation and learn how we can support your legal practice.