Legal bookkeepers need three things: segregated trust ledgers broken down by client, software like Clio or LeanLaw to automate tracking, and monthly reconciliation between bank statements and QuickBooks. State rules vary, so staying current on regulations like California's new requirements matters.
Chapters
This week we're going to talk about mastering the maze that's legal accounting. And really, I'm just going to give you 3 practical tips to be an effective legal bookkeeper. As we all know, if you're working in this industry, or if you're new to this, legal trust accounting is a meticulous way of handling the funds that are prepayments of work to be expected to be done by the law firm. So this is money that's not earned yet, and it's really the cornerstone of the legal profession. They're known for taking this upfront deposit, which is called a retainer, and then they put it in a special bank account. They have a lot of compliance issues, a lot of rules and regulations. You just can go to your local bar and see what the regulations are for your client. But the reason they have these rules is because it's going to ensure transparency, and it's protecting the client's interest, because They're getting— the attorney's getting paid before they do the work, and they're actually putting this money in a special account. And timing is everything here. So trust accounting can sometimes feel like you're really traversing the labyrinth, especially if you get a new client and it's a messy file. So the most important thing is to build a foundation of accuracy, accuracy, and segregation of the funds. That's the number one. It's paramount. So you want to maintain impeccable records. Every financial transaction involving, involving the client trust funds, from deposits to withdrawals to the fees, must all be documented properly. And I like to call this the ledger view. So we make a trust liability account. It's a, it's an account on the, on the balance sheet, because they haven't earned the money. So it's a balance sheet account. It's a liability account. We haven't earned it yet. And then you're gonna sub it out by client so you can track the monies effectively. So it's important to have that hierarchical view. So if the bank holds $100,000 and the client is Linda Artesani, and there's only $10,000 for Linda, it's in there, and you can actually pop open a little ledger like a check register and see the ins and outs of the money that brings it down to that $10,000 balance that's in there. So this is a really important point, because if you've ever gone through a bar audit you know that they're gonna ask to see those trust ledgers. This is why we do this kind of work. I highly recommend when you work with the lawyers to really embrace technology. Sometimes they sit in a space where they're nervous about it or they, they don't wanna spend the money. They don't see the purpose of it. And it's our job to really let them know how important tracking the trust accounting is and why the technology will save a lot of steps. I had a video a long time ago, and I don't know if I can find it for this article, but there was a video that I created for a client because we went back and forth about the technology. He wanted it done manually. And manual processes lead to mistakes. Parts of the job aren't done, parts of the transaction aren't entered, and it's very time-consuming. And I just showed using LeanLaw how you just like one click, you put the name in, and it's now all the accounts are on the, on the balance sheet. The customer account is set up as well. So the AR side of it's done. So really embrace technology. We use Clio and LeanLaw at our firm. Those are the two preferred legal software that work the best for the accounting piece, the work that we do. Obviously there's a lot of other legal tech that the attorneys should be looking into, but Clio and LeanLaw by far are the best of the best, best of breed. They have the best connections, they work the best. And again, I wanna mention that we segregate those client funds. It's a fundamental principle. Make sure that you're doing it that way. Don't lump it all into one. Account. LeanLaw does this for you. Clio, we do a manual push using the reclass tool. And as you start to work with bigger firms, you're gonna understand why you wanna do this and not sort by customer. It's just a messy way of doing it. And if you've been through that audit, you're gonna understand why. So you wanna show those transactions properly. If you use the software, either one of those software, you're gonna find there's a lot of journal entries. Don't be surprised by that. Learn the software so you can help your client. And then you want to do some regular internal audits. And what do I mean by that? Well, I mean reconciling, but a 3-way reconciliation. So that's gonna be your compass through the discrepancy. So know that as you start to work through this intricate maze of trust accounting, that 3-way reconciliation— so you're balancing the bank, you're balancing what's in QuickBooks under that sub-liability column, and then you're balancing that legal technology. Those 3 pieces are what equals this 3-way. And it can't be done in the software. Clio does now have a trust reconciliation function. I've not found it to be successful, especially in an existing client. Maybe you do it from scratch, it's okay. It's kind of like an afterthought. They think they wanted to put it in for whatever reason and it just doesn't work that good. So just know that if your client starts to dip their toes into that window, it's probably not gonna look balanced if they've already been using Clio for some years and just discovered this feature. So just know that that could be a factor. And you really want to gather all the documentation. You want to compare and analyze the accounts, find where there's any discrepancies, and then investigate and resolve those discrepancies. Maybe the client put money in the operating when it was supposed to be in the, in the trust account. That's one of the big ones that happens a lot. Maybe they didn't book the right amount into, into the LegalTech software. They put the wrong amount. Maybe the bank made a mistake. All these things happen. So know that that's a possibility. And then make the corrective actions that you need to give the client. So we do a 3-way reconciliation, and we tell them action item. You need to move the money from operating to trust to properly stated in the books. So you start to put all those pieces together. And here's the uncleared deposits. Here's the uncleared checks that give you that number in the bank that matches the QuickBooks file and software that you're using. So regular reconciliations— and I don't mean quarterly, I mean monthly. I don't care how few transactions are in there. You really want to make sure that you put that together and do it monthly. It's, it's, it's critical to have clean books that way. So regular reconciliation is vital. Stay, stay current with the ever-evolving map of regulations. So recently we had a new rule in California that kind of sent a flurry of work our way because a lot of California clients were struggling with the new rules in the regs. Know the regulations in your area. Log into the website, find out what they are, and stay on top of them. Sign up. You can actually become a member of the bar, a non-lawyer member of the bar, if you're working in one specific area. If you're like us, we work all over the United States. It's a little bit hard to do it that way, but just— you should know every state's specific regulations. For example, in the state of Florida, you have— where I'm from, you have to have both copies of the check. The attorney has to keep a record of that. The cleared check. We have to have a copy of the cleared check of any retainer monies earned, brought into the firm. So that's an important step. California has some new rules. I'm going to have that linked in the article. It's just more regulations on what they have to do for keeping track of the trust. And then you should really embrace ongoing education. Lawyers do it for their CLEs, and we should do it as well. Really stay on top of it. Great way to do that is to join the Law Lab, maybe take the Law Lab course. Or even just join us in the mastermind group just to stay on top of what everybody else is doing. There's so many new software out there, and you want to stay on top of that. I think that's really the most important parts of this. So legal trust accounting is gonna require some meticulous record keeping of the money that's being brought in from the clients, and know that it's why we get paid the big bucks for this, why you should be charging enough to get paid to do this work. It's gonna take you more time than the average client. But know that it's very rewarding work. Lawyers need us. They don't wanna do this anyway. So it's a great marriage between client and legal bookkeeper. So we'll see you all next week. Bye now. Bye.
