Trust accounting, in theory, is relatively simple. All law firms who receive funds from a client for a refundable retainer or settlement should be properly classifying and reconciling the trust balances with a systematized trust accounting procedure. However, if the accounts are not maintained and reviewed on a regular basis, the accounts could easily become out of balance.
Not all accountants and bookkeepers understand the complexity of law firm trust accounting. Main Accounting Services takes trust reconciliations very seriously. In fact, our tagline is “Your Trust Matters”. Whether or not you are currently working with a knowledgeable accountant or bookkeeper, we encourage you to review the following in order to understand what is required to properly track and reconcile your client trust accounts.
Banking
Opening and maintaining a proper IOLTA (Interest on Lawyers’ Trust Accounts) bank account is essential. Most banks understand the importance of IOLTA accounts and can assist law firms with establishing the new account and registering the account with the state bar association. State bar websites have recommendations on approved banks on their web portals.
- Interest: The interest earned on these accounts is not earned interest for the law firm. All interest is promptly withdrawn and submitted to the state bar, which often uses it to fund legal assistance and charitable causes.
- Fees: Since most law firms accept credit card payments for trust retainers, it is important to select a merchant provider that understands how law firm trust accounting works. Most merchant services will deduct the fees associated with credit card processing out of the same bank account where deposits are made. However, with trust accounts, these fees should be deducted from the operating account, not from the IOLTA. Sometimes fees for non-sufficient-funds are withdrawn from the IOLTA account (if a check bounces, for example). In this case, the law firm should transfer funds from the operating account to the IOLTA account as soon as possible to avoid an overdraft.
Reconciliations
Most state bar associations require a law firm to create and maintain client trust reconciliations (at least) on a monthly basis. These are often referred to as “three-way” reconciliations because three items are required for a proper report:
- Bank Balance: Reconciling your bank balance to your books is essential. The bank reconciliation will include any uncashed checks or undeposited funds.
- Book Balance: The bank balance on your books is listed as an asset and should ALWAYS match the client trust liability balance.
- Balance by Client: The reconciliation should be broken down by individual client balances. Additionally, all transactions should be identified by client or “matter”. All deposits and withdrawals should be identified with a client name so you can produce a client’s ledger activity. We also recommend reconciling the client balances on the books to the law firm’s billing software to ensure the billing software trust balances also tie out to the bank activity.
Outstanding Checks
All checks issued out of an IOLTA account should be promptly entered into the accounting software to ensure the books balance shows what the balance will be once all checks are cashed. Often, we see outstanding checks that may never get cashed. After all attempts to get the checks cashed have been exhausted, we encourage our clients to submit the funds to their state unclaimed funds department.
Outstanding Deposits
All outstanding deposits should be identified and resolved as soon as possible. In some cases, a law firm will mistakenly deposit the funds into the operating account instead of the IOLTA. Without a detailed reconciliation, the IOLTA account could inadvertently become overdrawn.
Billing Software Reconciliations
Main Accounting Services will always attempt to reconcile the “books” to the billing software trust balances. We do this for several reasons:
- So that all employees of the law firm feel confident in the client trust balances.
- Sometimes, someone at the law firm will issue a trust refund to a client, but we verify that the refund was issued out of the correct bank account and inform clients of any differences between the billing software trust balances and the bank.
Cleaning up trust accounts can require a tremendous amount of time researching each transaction. Main Accounting Services helps clients develop solid trust accounting workflows and procedures to ensure compliance with their state bar regulations. If you do not have a three-way trust reconciliation or procedures in place and are concerned about being out of compliance, reach out to us for a free consultation.