Demystifying Bookkeeping for Lawyers: How to Handle Trust Account Balances in QBO

Are you a bookkeeper that works with attorneys? Do you find the world of bookkeeping for lawyers confusing? Don't worry, I've got you covered. My name's Linda Artesani and I am with the Accountants Law Lab. And this week video is really all about demystifying bookkeeping for lawyers. And the major topic that we always run into is how to handle trust account balances in QuickBooks Online. So I came across this question in a Facebook post. And today we're going to tackle it and tackle how we would address a common question about trust accounting. That it's something bookkeepers face when dealing with attorneys in their bookkeeping. And some pretty insightful posts, and they had a really unique scenario. So the scenario goes like this. A small attorney law firm relied on QuickBooks Online only for their bookkeeping. And what they were doing for their workflow process is they were sending out an invoice using QuickBooks Online to do it, using the links, the payment links, to send it out to the client just to request a replenishment of funds for the client's trust account, the IOLTA. But what happens is that the client doesn't pay the invoice in the end of the same month that the invoice is generated. And this was causing a problem when they were trying to do a 3-way bank reconciliation. So this is how you would set up this particular scenario. You're going to create an item in your products, and you're going to have that item point to the trust liability header account. Funds Held in Trust. It would look like this. And then you're going to create an invoice using this item, and you're gonna send that out to the client. Let's just say, for example, you send it out on the 30th of the month, of the month. And then the client gets the invoice and doesn't pay it till the 15th of the following month. And you're running the balance sheet in accrual basis. And now your bank account is gonna have less money because the person hasn't paid this invoice. So the bank account hasn't been replenished with this trust fund. That trust bank account's gonna have less in it, and it's gonna throw off the trust liability account, because that's gonna show that the money is there in an accrual basis. You make an invoice, it's gonna book to that trust header account. Of course, you're not gonna make trust— you're not gonna make products for each individual client and then point them to the sub-liability account. You're going to actually do a journal entry to book it out of the trust header down to the trust liability account. It's going to look like this. The problem that comes up out of this scenario is that delta— the bank account doesn't have the funds in it, but the trust liability account, which should equal that bank account, is going to show that it has the funds in it. If you've got the books on accrual basis. And then you could switch it to cash basis and then you should still be balanced. But in this case, the client lived in an accrual world, they had accrual reporting and they're looking at a problem on their books and they said, how do I fix this scenario? There's a couple ways you can do this in QuickBooks Online. One of the ways, if you have no external software, is to use Gravity Legal and send out the trust request using a Gravity Legal payment link. Nothing happens in QuickBooks at all. The problem with that is you're not really tracking— if you're a firm that sends out trust replenishments all the time, you're not really tracking that you sent this out. So if a client doesn't pay it, you might not be following that it didn't get paid. A unique way that I thought of that you could do this is you could use a— An ins— the estimates inside of QuickBooks. And what you could do is take an estimate template, call it— take the word estimate off and do trust replenishment and create this document to send to the client using that trust liability pay product or item in the invoice, and then embed in the link to Gravity Legal to pay it. or LawPay. You could use LawPay as well. And then the payment link would be Gravity or LawPay. You're not gonna use QuickBooks in this scenario because you're not creating a payment link when you send out an invoice, an estimate. In the real world, there's no such thing. So if you did this and then in the body of it created that link, so it's a lot of steps because you're manually doing this without software. You could send that out to the client. The client could pay it, and when it comes in, at that point you click the estimate, and you go and you turn it into an invoice, record the payment. So you're creating kind of a sales receipt scenario. The money is being invoiced and paid in the same day. And now you don't have that inaccuracy of the trust account bank balance being less than the trust liability account. So that's my workaround. And it would look simply like this. It's funny that the answers on this post— one person actually said, create the invoice, send it out in QuickBooks, send it out to the client, and then if it's not received, delete it. The problem with that is, if they haven't paid that invoice and you delete it, and they go to pay it on the 15th of the next month, the payment link is gonna go nowhere because the invoice in that respect doesn't exist. So that's not a good answer. And so some other interesting answers from people. But I think this is probably the best case scenario, the second best case scenario, because really I recommend it, and we recommend at our firm that you get legal billing software, and I like LeanLaw. You can also use Clio for this. LeanLaw has a version of this where you connect that Gravity Legal account, and then you send out a trust request. It'll look like this. Again, it never touches QuickBooks until it's paid, but you have that request out there. —and it's going to create that tracking. Just like with the estimates at the end of the month, you've sent out this trust request customized estimate, you're going to be able to see all these estimates that they haven't been paid, and you can follow up on the fact that they haven't been paid in, in Gravity Legal. But you can see that if you're not using any legal billing software, that the workarounds are just that, they're workarounds. And it's a lot of work to track, and it's a lot of work to try to get the job done without using the software. And the software— and you know, when we have these conversations with clients and they don't want to pay for the software, it comes down to how much time is it going to take for the workarounds? Are they going to pay me for the workaround time? Are they doing it themselves? And they have to do the workaround when it's a matter of seconds, and that time saved is gonna by far pay for a software that's very inexpensive in my opinion to have and to protect the, your trust account balances and keep it locked down and pristine. Don't forget these software like Clio and LeanLaw, they don't let you take out more than the client actually gave you. So you never have a negative trust event happening. And if that's not a reason why you wanna pay for the software, I can't think of anything else more important. So you can do the workaround of having Gravity Legal or LawPay handle that. You can do payment links, you could send it out in an email where it's not touching the software. That's again another workaround, but then you're not really tracking them. You'd have to have maybe a spreadsheet or something to track it. All of those experiences are not great. And again, they're workarounds. And when you work with small firms, it's still worth it to have an and have the client invest in themselves and invest in LeanLaw or Clio. So I hope this video shed some light on trust accounting and that scenario of trust replenishment when you're working with lawyers and handling trust balances in QuickBooks Online. If you want to explore some more scenarios, I'm gonna continue on this walk through some of the things that happen when you do this kind of work with bookkeeping, bookkeeping for attorneys. And if you'd like to connect with us, join our Facebook group, The Accountant's Law Lab. Join our mastermind group where you'll work one-on-one with me and Sarah. And we also have a fast-track legal accounting course. So I hope to see you all next week. Of course, you can just hit the subscribe button and follow for more. Bye now. Bye.