Trust Accounting is Easy!

Trust accounting is easy. Okay, that's about as clickbaity as I can get. Isn't it supposed to be trust accounting is complex? Isn't that the one process that kind of trips up the attorneys and sometimes trips up bookkeepers that are not legal bookkeepers that are new to legal accounting? Yeah, that's true. It's true on all accounts. It can trip up the attorneys, it can trip the tax person, it can trip up the bookkeeper that just doesn't do work with attorneys. That's what makes our job so invaluable. It's what's going to make make our job going forward in the future. We're kind of future-proof right now as far as that goes, even with AI nipping at our heels. So one of the things I can tell you in the most basic form is it has to be maintained. So don't think that, okay, the bar says— I think it's North Carolina— you only have to do reconciliations quarterly. It's not a good practice. It's hard to find mistakes by doing it quarterly. So you want to do this monthly. You want to stay on top of this. You want to know the rules of your jurisdiction. You don't want to be looking that up after the fact. So first things first, you become a bookkeeper working for an attorney, head over to the local bar rules, memorize them, look at the rules around trust accounting, what's involved. State of Florida, we need the copy if somebody pays by check or proof of retainer. You have to have proof of retainer, so that could be front and back of a check that you've deposited. It could be however they paid. You want to have some kind of a tracking system there. Hopefully you're not using checks, your attorney's not using checks, but if they are, you need to have that. I'm going to provide a link to the different states that will provide you a link to each state that I think most of them are covered here. So it was a cool graphic by MyCase and it's still around today. And then you can pick your state and kind of look and pick and choose. If you're a cloud bookkeeper or cloud accountant, you can really see all the states and kind of see the differences. Some things are the same, but there's a lot of differences. It's just a really cool way to get access to all the different bar rules. So what do you need to know about trust accounting? At its most basic level, it's the initial funds received by a client, so prepayment of services that are yet to be rendered. It's a retainer. We call it a retainer. It's put into a special bank account called an IOLTA bank account typically. Sometimes it can be an escrow account, but there is a special bank account that this money has to be held. It has to be tracked. So it's pooled money with other with other clients. So you need to know if there's $20,516.37, you need to know all the amounts of the individual client money that's there that equals that total at any given time. So an audit can happen. If you want, go back and listen to the audit one I just did, what can happen in an audit. So when the retainer comes in, if you're using software, LeanLaw Plus, enter retainer, you know, enter trust deposit. Using Clio, you can do this very similar. But if you're using just QuickBooks, you're going to need to make a client, you need to make a matter, you're going to need to show that deposit coming in. And typically, it's going to be a debit in the trust bank account to show the money coming in, debits on an asset, raise the asset, some money is deposited in, and then the credit is going to go to the client trust liability. We like to show it in a format of client trust liability account, then you have the trust, the client name, and then you're going to have the matter underneath that. So the money would land in the matter. So that's important that you're crediting that account. That's at its most simplest level. That's how you're showing the money coming in as a retainer. So now, depending on the software, you just track it that way and you're going to see it land in that balance sheet. If you're using Clio, you're going to have to take it out of that trust liability header account and push it down to show that same level of accounting. That's what we do. Even though LeanLaw does it automatically, Clio does not, but we, we still push it down using the reclass tool every month to kind of show how that looks. Okay. So we have that beautiful accordion view that we can close up. But anytime you can expand it and see all the detail of, of what's in the bank account at any given time. So once that happens, you want to show if there's any expenses. When we're talking about client expenses, and I've got plenty of articles on client expenses, but in some states client expenses can be paid by the attorney right directly out of the trust account. So you might have retainer money there and the client expense comes up and they're actually paying for it out of the trust account. So then that's the flip side, the money's going out of the trust account. So you're going to be hitting that liability account with the debit and then the credit is going to be going to the— They'll be coming out of the bank account. So you're taking that money out of the bank account, but you're going to hit that level, that line item. So if you are using the debits and credits, I mean, that's something you can find in QuickBooks by looking at any transaction If it's being pushed through by Clio, you can actually pull up the transaction and hit that more button and see the journal, the audit under the audit section, you can see that. So know that anytime if you're really a debit and credit kind of person, you can see that view by clicking into that transaction. I think as you start to look at this and you start to balance this and you're using the software, it's going to push the details in and you're going to be matching all those transactions at the bank feed level. There's manual ways to do this. I have a free course on that in the Artesani blog if you want to see how to do it manually with QuickBooks Online. I do not recommend that. In fact, I really strongly do not recommend that. I have it there for helping people, but it really is just silly not to buy the software and use the software with law firms. You want to make sure you provide that law firm every month a 3-way bank reconciliation. That is part of your compliance. You're reconciling to the bank balance plus or minus any transactions in transit. So if the client put a deposit in on the very last day of the month but it doesn't hit the bank till the following month, you want to have that be a factor in the total. You want to be able to see in Clio, this is my balances on this date, and then you want to be able to see those balances in that accordion, uh, account, which should collapse up to the top level into the trust liability account and see that total. All three of those totals should match. So that's an important piece too. If you want to automate that part, you can go to LiveFlow and sign up to use their product, and then you can use the proper trust 3-way bank rec, which can connect to Clio or LeanLaw and save a boatload of time there. So that's available, and know that that's available. There's lots of software out there that you can use. If you're in an all-in-one product like Cosmolex, that's actually baked in. It's one of the fewer ones that have that 3-way. Clio has an all-in-one, but it's really for very small clients that don't even need a bookkeeper, but that's also out there for that. So that would be baked into the product 'cause everything's in one piece, in one place. You just have to bank rec it. But if the account is just reconciled to the bank, that does not mean it's 3-way bank reconciled. So know your rules, look up your bar rules, really understand what you're doing here. Join our group, take the course. We're here to help. The Law Lab is a great resource for that. Listen to our podcast. So on that note, We hope to see you next week and have a great weekend. And summer's halfway over. Take care. Bye-bye. Bye-bye.