In this instructional video, the speaker walks attorneys and legal bookkeepers through the common causes of trust‑account imbalances and how to correct them. The core problem is that many firms only balance the trust account against the bank, neglecting the third dimension—identifying the owner of every cent in the trust. The speaker highlights pitfalls such as reliance on spreadsheets with faulty formulas, use of standalone software that does not integrate with QuickBooks, and failure to reconcile bank feeds, all of which can cause mismatches. Specific correction techniques are detailed: creating dual journal entries for wire fees and bank charges, using a sub‑liability “trust account clearing” account, and moving funds between operating and trust accounts to restore proper balances. The video also covers practical issues with practice‑management integrations (Clio, LeanLaw), such as duplicate entries and mismatched transfer amounts, and stresses the importance of regular reconciliation, clean starting points, and audit‑ready records. The speaker advises firms to engage a knowledgeable legal bookkeeper when the mess becomes unmanageable and promotes the Law Lab as a resource for further support.
Chapters
This week we're going to talk a little bit about correcting trust account mistakes with attorneys' books and how we go about it. My mind often, often drifts off into the tranquility of my yoga practice when it comes to maintaining balance. However, when you work with attorneys and trust accounts, balance is a difficult thing. It's not as easy as standing on one foot and doing Warrior 3. It's a lot more than that. So there's a lot of reasons that a trust account can become unbalanced. Multiple, multiple reasons. And a lot of times I've met attorneys that say that, well, my trust account is balanced. Well, yes, it's balanced to the bank. You can just go in and see that it's balanced. QuickBooks matches the bank account, but it's not balanced the 3 ways. That third way, we wanna know exactly what each amount, every penny that the trust account, bank account holds, who it belongs to. That's usually where it falls apart. So sometimes it becomes unbalanced because an attorney will use spreadsheets, and they're not actually using software. And when they use the spreadsheets, the formulas aren't correct, or— I've seen all creative ways that attorneys have used software spreadsheets to do this work. And I've also seen it fail multiple times, or just starts to grow too big too fast. And it's one of the main reasons why they come to us, and they're like, I need to get this in software. I just It's becoming unmanageable as I grow. The second reason is a dependence on external software that is not integrated with QuickBooks, and it's just standalone out here in maybe a desktop program or any other way that they use it. And it doesn't integrate with QuickBooks, so it's really difficult to manual— maintain this over here and then balance the books and make sure that the transfers align which is why you wanna integrate the software in the first place. As my business partner Sarah says all the time, you have to follow the money and it's hard to follow it when one side's cut off from the other. So that's another problem area. There's also, like I said, misconceptions about the bank balance because it's connected to the QuickBooks bank feed. Sometimes I've seen people not even reconcile at all. They figure the bank feed's source of truth only to find out sometimes the bank feeds are wrong. And if you don't reconcile, you'll never know that. So definitely you need to reconcile. And then sometimes you just need to navigate through a correction process that maybe will allow, maybe will align with if there's money that came outta trust that's for, for example, a wire fee and the bank charged the IOLTA account. How do you fix that? That wire fee belongs to the operating account. It's an overhead of the law firm. It can't be taken outta the money that they haven't earned yet, which is what trust accounts are. So now that becomes a two-part journal entry, or you can use the transactions in QuickBooks to really state the story of what happened. As you take the money out of operating to replenish it, you're gonna take it out of operating and book it towards the, towards the bank service fee, 'cause that's what that is. So that shows the money coming out. And then to come into the trust account, you have to show the money coming in to replenish that check account where that money has been booked originally when the money was taken out. So as the money was taken out, you wanna have a sub-liability account called Trust account clearing. So it could be trust account clearing for wire fees or bank charges. And then you want to replenish that as the money comes back in as you move it from operating to trust. So those are the things that you really require to put your, your thinking cap on as you start to make these corrections. And it's important, it's crucial to establish a clean starting point when you're looking at a client's books, trying to figure out where it was reconciled, no problem. And all of a sudden it fell off a steep cliff, and you need to figure out and target. Okay, so it stopped being balanced in June of 2022. Now I need to figure out how to fix that, and it's easier to go forward than to go backwards. So find that place of misalignment and start to fix it and then go forward. You'll start to see patterns. You start to see things that aren't booked right. Really simple ways to pull the balance sheet up and just expand it out and look at it and see if there's anything booked in the bank account for the IOLTA, the trust bank account. See if there's anything booked to the P&L accounts there. That's a red flag right away that, hey, this is why this isn't balancing. So you want to look at that as well. You want to look at maybe if the client booked into their software, let's just say Clio, for example, they booked in a deposit in their software to Clio and showed the money coming into the trust bank account, but in actuality they banked it into, they booked it into the operating. How do you fix that? That's a big mess. You have to fix that because the money's sitting in the wrong bank account. If they pay themselves out of trust to operating, that money never arrived in trust. So you're gonna have to move the funds back to cover that. So you do, do have to fix those things. That's definitely a, a problem. Now, if they are using Clio and there's a correction made in the Clio side, it sends a duplicate entry over, which is why we hear from people, we don't want to connect the software because of the duplication and the, and the things that come over and they kind of sit and hang and linger in the undeposited fund account. Mm-hmm. You want to make sure that you're on top of these records. That's not a great excuse for not connecting them. You wanna stay on top of the records, you wanna stay compliant, you wanna reconcile. There's a way to reconcile now in Clio. If it's brand new and the client's kind of new, it works. If it's an existing client, it's real hard to do. But know that that's a feature inside of Clio. If you're using LeanLaw, same thing. You wanna make sure that everything aligns up. So just because they posted something inside of LeanLaw, if they physically made a transfer at the bank for a different amount, you look at it and as the money starts to come in, you're looking at it going, Okay, they said they transferred $2,700.50 and in actuality they did it for $5,000. Then you have to make those entries to make those corrections. So those are the important things. If you get really stuck, find a good legal bookkeeper to help you clean up the mess at least and get yourself situated in a better place. God forbid you ever get audited. You want to have good clean records to be able to handle the auditor, and you want to be able to do that quickly because they don't give you a lot of time if you're getting audited. And I think that's the best piece of advice. If you're in a place or space where it's messy, this topic we talk about at the Law Lab. So definitely start to find somebody good that knows what they're doing and have them look at the books and help you fix the errors and get yourself back into a beautiful place of compliance. There's nothing like it. On that note, I hope this is helpful. And if you're working with bookkeepers, I think that as a bookkeeper, you wanna know how to do all these fixes 'cause there's a lot of, I've heard some crazy stories in the Law Lab. So if you're interested in joining us, feel free to join us. And on that note, we'll see you all next time. Bye, everybody. Bye.
