Linda Artesani shows how to fix QuickBooks bank feeds so checks don't default to "Uncategorized Expense," which creates tax and accounting problems. She walks through trust-to-operating transfers in law firms and explains why accurate categorization from the start saves hours of cleanup later.
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Hi there, Linda Artesani from the Accountants Law Lab. Well, this week we're going to shift gears a little bit and talk about recording transactions into QuickBooks, specifically using the bank feeds and a little tip I like to use, which is the default expense category. Now that one's a little bit hidden, so I want to I'll show you where that is exactly in QuickBooks. But bank feeds can— it's an important part of the work we do. Obviously, it's if we get the data in correctly, we're not having to go back and make changes. But it also can be time— it can be a time-consuming task and a little bit of a tedious one. Streamlining your processes is important when working as a bookkeeper, especially in legal accounting. We want to get these things right. And QuickBooks, although the tool helps us, sometimes it does a really bad job at guessing. Let me show you on our demo file. Here we are inside the demo file, and as you can see, QuickBooks is guessing that all of these checks go to uncategorized expense. And if you've ever worked with, uh, I'm sure if you've worked with a lot of clients, you'll know that you'll see this in the book sometimes, that there's transactions booked to uncategorized, and that's from them coming over and just kind of going, oh, okay, QuickBooks knows where these go. Maybe that's where they're supposed to go. Maybe the bookkeeper will figure it out and they accept them all and it puts them in the wrong place. So we don't want anything in Uncategorized. And here I've got classes turned on, so it's kind of warning me that they're not classified, which is something you want to make sure that you do. If you have classes, have that little piece turned on so that the classes will come through. You don't miss any. You don't want to have anything unclassified if you're using classes. But as you can see, that's what a client would do. They just kind of populate, populate the entries in there and they'll be incorrect. They'll be sitting in uncategorized expense, which means nothing to a tax professional. As we go down here, we can see that the deposit has paired with another transaction, which is probably a trust transaction where the client transferred funds from trust to operating. But in law firm accounting, You can't book that in that way. When that moment happens, when it moves from trust to operating, there's two things that happen. The money comes outta trust, and the second thing that happens is that it moves outta trust and there's an invoice entered and a payment entered. So then that shows the positive side of deposit into the operating account. So money outta trust, it comes outta the trust account and the specific trust account for the client. And then it will move over to the operating. But in that case, you're gonna create an invoice, create a payment. If you're using software like LeanLaw or Clio, you just have that happen in the back end. You don't really even have to do those transactions, but it's something that you wanna know what's happening when you do these transactions. Anytime you've ever had a client, perhaps, that was working in like a PI firm or something like that, you might be entering those things manually. As you see these deposits, and this is what causes a lot of issues for attorneys when they start to— when you get messy books, you'll see that all these transactions, regardless of if they've got outside software, sometimes they don't connect it, and then they'll just deposit everything to income. Hopefully not product income. But this is what QuickBooks thinks it should go to. And usually attorneys don't sell products, they sell services. So you want to take a look at their file for that. But if you just come in here and click saying, oh, QuickBooks is right, this is not a way to enter the income for the law firm in, into QuickBooks. So you want to— in this case it would be creating the invoice, creating the client payment, and it would go hand in hand with that journal entry to transfer the money out of trust and out of the trust account for the client. And you can see the same thing for merchant service account. Deposits. Obviously Seth David loves us and he's giving us lots of money. That's what QuickBooks remembered, the last transaction. I don't know if you've ever had a client call you up and saying, Something's wrong with my QuickBooks. They've got the same client saying they're paying me and that's not correct. You're doing something wrong. And then you realize that that's what happened. You can show them. If I entered a, a payment
