Linda Artisani explains trust accounting for law firm accountants: the pooled bank account and individual client ledgers must balance like a piggy bank. Florida requires copies of both sides of every check; North Carolina recommends monthly reconciliations. Software like Clio or LeanLaw automates the work, but meticulous record-keeping and regular reconciliation are non-negotiable because state bars audit these accounts.
Chapters
Hi there. Linda Artisani from the Accountants Law Lab. So we're still traveling through some of the terms you're gonna hear in working with lawyers, and one of them is trust accounting. So you probably have a general idea of what trust accounting is. However, you're gonna hear that word kind of tossed around at a law firm, and sometimes it means the trust bank account. And sometimes it actually means the trust liability accounts, or the individual ledgers that each client's money. So if you picture one giant piggy bank, and inside has individual little folios for each person. So all the money that's inside this piggy bank has individual ledgers. So you know that the total equals the total in the bank. I think the best way to describe it is the bank account could have $1,000, and it has 10 people gave $100 each. So when you hear the word trust accounting, it might mean that total of the money in the trust liability. It could mean the total in the money that's inside the bank account. I could mean the money that's inside the individual client's retainer funds, or the money that the client has given the attorney to secure their services. We mentioned last, a couple weeks ago, the word retainer and what retainer means. So these are some of the things that you're going to come across when working with attorneys. So just think of trust accounting as an important aspect of legal practice that requires a higher level of detail and accuracy as you start to track this. And this is why you want to work with attorneys. You want that extra layer of complexity as you start to do this work. In their books. It's one of those things that if you think about it, as you start to do the work, it's something that's not easily automated. And we know that automation and technology is just nipping at our heels. This is kind of a little bit of job security. As you start to move into working with more and more attorneys, you'll see that there's complexity to it. It's fun. You have to be that detail-oriented person that likes to do this work, that likes and enjoys doing accounting for— with the detail. If you're one of those people that, you know, going through a reconciliation and it's off by a penny and you stay with it to find that penny, then you're the person that needs to be doing this work with attorneys. So know that there's rules, and there's rules for all attorneys and all in all different states, and sometimes within the states there could be county rules. So you need to go to the bar that's at the level of the state that the lawyer practices in. So that could also mean that you need to go to additional states if they practice in multiple states. States. You need to know those rules and familiarize yourself with the rules. It's easily done by going on the Bar Association for the local— at the local level, and you'll see that they'll have a ton of paperwork on how this needs to be presented and how the data files should be set up. I see some data files that come by my desk that I'm like, wow, what was this person thinking? Because you want the records to be in good order in case it's an audit and the bar comes knocking at the attorney's door. It doesn't have to be somebody turn them in or complaining they didn't get their retainer back. It can actually be caused by a random, random audit. So you want to be prepared that you have these records to the penny, that the money equals what's in the bank. And that's important to make sure that you know that. So know the rules. For example, in the state of Florida, any money brought into the trust bank account has to have a copy of both sides of the check. Any payments that came in by check. You need to prove whose money's in there, and that's a requirement in the state of Florida. Now, there's other rules in other states, so make sure that if you're a cloud accountant like we are, we do work in multiple areas of the country, that you know all those rules. The other thing you wanna make sure, you maintain good records. So you want to present the records in such a way, which may mean you're creating a new file if your records come from another— if you get a client that's an attorney and they're just a disaster, sometimes it's best to start over. And so maintaining good records means that you're going to have them presented with the parent trust account and all the individual ledgers subbed down underneath it. In the article you'll see some pictures of how that should be presented. Make sure that you have the date of the transaction, the payee name of the transaction, the purpose of the transaction. These are all important pieces. Now, on a side note, if you use software like LeanLaw or Clio, they kind of require you to put that in as you start to book these transactions in. It's a lot less work for us to maintain those trust records when you use that software. So if you have that legal billing software, which I highly recommend, even for the smallest firm, the smaller firms really like Clio because it's got a whole bunch of other pieces in it for those firms to track. It's practice management software. You can keep the data there. You keep everything about the client in one place. Communication, documents, it's all housed in Clio. LeanLaw's more of a billing software, more mid-market space. So you'll have those items in other, in another way, maybe in an additional software. But you want to have those good records. The attorney wants to have those good records. You're really looking at that piece that attaches to QuickBooks so you can monitor that, especially when you want to dive into some metrics down the road. Which is another reason why you wanna specialize in this. You want to maintain separate accounts. Now that doesn't mean making a bank account and sub-bank account. That's kind of an old school method. The, the way the IRS wants to see it as well is it's a liability. That person gave you money before the work was even done. And so it's a deposit that you're holding that money. And as an accountant, that's what we wanna see it presented as. So it's a liability. You now owe this client the work. Or you return the funds. So make sure it's presented that way and that you have the individual names set up. LeanLaw is great because it does this automatically. It has the sub-liabilities accounts set up when you create the clients so that as you bring the money in, it automatically goes in those sub-accounts. Really super important. The other tip is to reconcile regularly. So your state— I think North Carolina is one that tells you you can reconcile quarterly. Just do it monthly. You're gonna save yourself a ton of time and heartache. If it goes wrong, you'll know on that month it's wrong instead of having to go back and figure out what quarter it went wrong. And the last step, and this is brought up actually in our Law Lab meeting, it's so important to communicate with the attorney. Are there outstanding checks that weren't cleared on the bank account? Is there a transaction that maybe they earned revenue and transferred the wrong amount than what was put into the billing software? All of these communications have to happen, and you need to stay on top of it. So there's a constant, clear communication channel with your client, whether you do that in Slack or Teams or Licio. However you do, do that work, you want to have that ability to communicate with your client, to stay on top of good records. It's important for the record keeping. So in the world of trust accounting, legal bookkeeping, You're looking at a great deal of care and precision. Make sure that you understand the work, you keep it up to date, on point, and compliant with the law. Very, very important. The attorney's license to practice law, if there's bad records, could be affected. So you wanna make sure that you provide good work. It also tells you that that elevates you to a place where you're just letting that attorney not have to worry about that piece. They'd rather do the job of practicing law, and a good accountant accountant or bookkeeper is going to give them that peace of mind that they're all looking for. If you want to learn more about these topics and more, join our Accountants Law Lab. It's a mastermind group where we have a lot of discussions on trust accounting and a lot of other topics. So I hope you join us. If you're interested in learning more about how to work with attorneys, just take our course, Fast Track Legal Accounting. You'll get your feet wet and on the ground running to work with more attorneys. And we hope you do that because it's a fantastic industry to work in. Thank you. And on that note, I hope you all have a wonderful week. If you want to hear more from me on these topics, hit the subscribe button. Bye now. Bye.
