In this instructional video, the presenter outlines the three essential practices every legal or generalist bookkeeper must master when handling attorney‑client trust accounts (IOLTA). The talk begins with a brief overview of ethical obligations and the definition of an IOLTA account, emphasizing that client funds remain unearned until services are performed and that mismanagement can lead to severe sanctions. The first tip stresses the creation and maintenance of client‑level sub‑ledgers (or sub‑liabilities) within a single trust bank account, enabling precise tracking of each client’s balance and facilitating audit readiness. The second tip focuses on the timing of moving money from the trust account to the operating account: funds should only be transferred when earned, respecting state‑specific cushion allowances and avoiding non‑compliance. The third tip advises a rigorous monthly three‑way reconciliation—matching the bank statement, the trust liability ledger, and the accounting software (e.g., QuickBooks, Clio, LeanLaw)—instead of a quarterly or ad‑hoc approach, to ensure internal control and quick response to bar audits. Throughout, the presenter stresses transparency, ethical stewardship, and practical tools to help law firms stay compliant.
Chapters
What are the 3 must-know tips when working as a legal bookkeeper? Or if you're a generalist and you're, you've landed here on the blog post and you wanna know what you need to know to work with an attorney-client, what's the most important 3 things when it comes to being and working with trust accounting? You've landed in the right place. So I'm gonna scale this down to 3 tips, but over the next couple of weeks, I'm gonna also be talking about other parts of this when it comes to being an IOLTA bookkeeper or a trust bookkeeper so that you're able to distill the knowledge down and really nail this down. So when you're working with your client, you just know this stuff inside and out. And so I'm sure you want to streamline your management, the financial management of the file, but you also know there's some ethical standards that all attorneys must adhere to. That's probably the part that becomes scary because, you know, if you make a mistake, it's almost like if you're doing sales tax reporting or payroll, when you work in payroll, it's a heavy burden on us to make sure that the client remains compliant. And that's what our job is, to help our clients remain compliant. They're not doing the work themselves. We can handle it when errors happen and we fix the errors. So I think the biggest piece of it is understanding the ethical financial management of it. It's maintaining ethical standards. It's just paramount to this industry. The attorneys know this, but sometimes they get lost in a little bit of knowing what this means and what they need to do. But if they fail to adhere to the ethical guidelines, the punishment can be severe. There can be sanctions, there can be fines, and they can even lose their license if they mismanage their client funds. So let's start with the very basic. What is an IOLTA account? It's a special bank account where the attorneys put the client funds in, and they track that at the sub-ledger level. So meaning there's one bank account with holding all their clients' amounts, and they need to know exactly to the penny what each piece of that total pie equals to for each client. So that's where we come in with tracking the ins and outs of each account. I like to think of it as one giant check ledger, but also sub-ledgers. So little check registers for each client. If you kind of conceptualize it that way, It makes it easier to follow and understand. So know that being effective in the management of this part of the business that the attorneys do is really a way to safeguard the client's property. The money received that goes into a trust account is not owned by the law firm until it's earned, and that's the biggest piece of this. So when you're taking on and mastering IOLTA bookkeeping, you can demonstrate a higher commitment to those ethical practices and provide transparency in the financial transactions. You know, your client can say to you, you know, "Joe Smith, what amount does he have left in trust? I need to return it." You're going to be able to dial that in, pull up the records, pull up the balance sheet, see George Smith's name, and then be able to give him that total as well as an accounting. So if you ever get, if your client ever gets that audit happening in the file, and those can happen randomly, you're going to be able to provide the client with that ledger, which is what the Bar Association is going to need from you and from the client. So the first thing is the subledgers. You really need to track it that way. There's a lot of talk around Clio and not needing to take that trust liability account and break it out. A lot of people just break it out by the customer. If you're working with larger clients, that, that method fails more times than not. You You wanna have a way to manage each subledger, which we believe in using the sub-liability method and then taking each piece. So you have the liability of the parent account, client funds held in trust. And then as you start to put the monies in, as they start to come in as retainers, the upfront deposits, you're going to take that money and place it in the account under the person's name. So it's subbed under that total. You can collapse it to see the total amount that's in the bank account, but you'll also have a way of expanding it to see how much How much does George Smith have? How much does Mary Jones have? And so on. So it's really essential to maintain those separate IOLTA accounts or subledgers and having that segregation of the movement of the funds in and out where you're getting that little subledger, which I can tell you, I've been through many of these audits with the Bar Association. That's what they're going to want. So make sure you have the records represented the way the Bar would want to see them. If they are audited, it makes it a breeze when it comes to that. The other big piece of this when working with attorneys and law firms, and I've seen this so many times, is the timing of the movement of the funds. That's where an attorney can get in some deep trouble if they move the funds out of the client account into the operating account to their operating as earned funds if they haven't actually done the work. So the best way to look at that is the client is hired, the law firm's clients hired, they collect an upfront deposit, which is called a retainer. That's put into the bank account, the trust liability, the trust account, bank account. And then you create the trust liability account for that client. As the money gets earned. So as the attorney does the work every month, they do a bill for the time that they've done the work for, or fixed fee billing, whatever billing type they have. And then that money gets applied to that bill. Out of the retainer account or the trust liability account and then pays the bill and then gets pushed into the operating account. So timing's everything. And actually the thing I see more often than not with attorneys is they don't know what the amounts are that's in the trust account. They know they have $10,000, but they don't know that each person that has $1,000 in there, there might be 10 individuals with $1,000, but they don't know who owes what and who has what in there. So they just leave the money there and they're too afraid to transfer it over for fear of taking the wrong amount. And when that happens, they just leave it there. They're outta compliance when that happens because you have to move that money out when earned. You can't leave it there as a quote unquote cushion, which I've been told by many attorneys, well, I just leave it there for a cushion. You are allowed in most jurisdictions, and this is where you have to look up the state regulations to see the amount that the attorney can put in there from their operating as a cushion for like bank fees or checks. If they have, if they buy checks, they sometimes get withdrawn outta the trust account. So those are things we have to kind of track for the attorney. But you— it's usually a nominal amount like $250 or less, and it depends on the state. Some states say no, no money there. Some states allow for a small amount. It's not $10,000. So know that the timing is really critical, and it's also part of their duty that you make sure that they bill timely and that the money is transferred timely as well. And the third big tip that I'm going to give you in this, this particular video is to balance this account. Don't do it quarterly, even if the— even if you're in North Carolina and they say quarterly is fine, you want to pick and do it monthly. Look at your bar rules, see what the state requires. Most of them don't require an accounting every month, uh, be— to be reported to them, but you have to have an internal process of reconciling and having that paperwork ready if they do call on you and want to see the three-way bank reconciliation. Done plenty of articles on the three-way, so you can see them, uh, throughout my blog posts here at the Accountants Law Lab. But I want you really think about doing that 3-way. The 3 ways of the bank reconciled— of the bank account reconciled— this bank statement plus or minus any transactions in transit, the trust liability, the one where we scoop it up and flatten it out, and the QuickBooks bank account. Those 3 balances must batch— match. And that way you know that your 3-way bank account is reconciled. It's not just an action of reconciling it to the bank, in QuickBooks. There's more to it. And if they have a, a program like Clio or LeanLaw, you gotta reconcile it there too. So that amount in that outside software has to match those other balances. So you gotta balance to the, the bank account, bank statement in QuickBooks. You wanna balance it to the liability. The sub-liabilities must, must mirror whatever the software says. If there's no software, the spreadsheet, or however they're doing it, Try to get them away from spreadsheets. Those aren't good practices either. So that's this week's video, and we hope to see you next week. Bye now.
