In this tutorial, Linda Artesani explains what Interest on Lawyer Trust Accounts (IOLTA) are, why they exist, and how the interest earned is used to fund legal aid for low‑income or disabled individuals. She emphasizes that the interest is not the law firm’s income and therefore must never appear on the profit‑and‑loss statement. The video walks through a step‑by‑step bookkeeping method using an "Interest Payable" other‑current‑liability account in accounting software (e.g., QuickBooks). She shows how to create the liability account, set up a vendor named "IOLTA Interest," record the interest deposit into the trust bank account, and then record the sweep out as a check, keeping the balance sheet unchanged. Artesani also mentions an alternative "clearing account" approach advocated by her business partner, noting that both methods avoid affecting firm profitability. The overall message is that handling IOLTA interest is simple if the proper liability account is used, and that many firms mistakenly record it as interest income or expense, which should be avoided.
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Hi there, Linda Artesani, Artesani Bookkeeping. This week's all about IOLTA accounts. What is an IOLTA account? IOLTA stands for Interest on Lawyer Trust Accounts. So if you're familiar with working with attorneys, you know that they have to have a trust bank account and it's separate from their operating account. Attorneys typically take a deposit and it's called a retainer. It's upfront monies that they collect for work that would be performed in the future. They put that money in the bank account and these special bank accounts earn interest. That interest is not theirs because it's not their money that's in the bank account. So this was something that was mandated a long time ago. All 50 states have this mandate. Some require it, some It's voluntary. So it depends on your state. And as always, it's always important if you work with an attorney, whatever state they're in, you need to look at their local bar association and find out what the rules are, just so that you can keep your client compliant. So the money is in— the attorney has to get the bank account. They're just starting out, they have to get their bank account. Generally, it's from a specific bank that's on a list of approved banks that can have this IOLTA account, this type of account. And the money that's accrued will get deposited into the bank account of— into this trust account, and then the bank will actually sweep that money out and it's put to a fund. And what's really nice about this is the fund is used— the state collects the monies and the fund is used to help people that live below the poverty line. A lot of times it's used for tenants that are being evicted, and that money is used to help represent them because they don't have the funds to represent them. So they Are paid— the funds are paid out of that account to the attorney representing the people who live below the poverty line or if they're disabled. So it's a really good reasoning behind the bank account and where the money goes, the IOLTA account. So let me share my screen and show you how you handle this in accounting, right, because it's, it's handled in a specific way because the money is not interest income. So we'll get that right off the table. It's not interest income. It is interest income. It's not interest income recorded on the attorney's books because it's not their, their money. So let me show you on my screen how this can be handled. And there's a couple of schools of thought. So I'll show you one of the ways that I think is— it's a great way to represent it. So I'm going to show you that one way, which is creating an interest payable account. So let me share my screen. But here we are on my sample law firm accounts, a demo account. And if you need to create the account to start off with, you need to create that interest payable account, you're just going to come over here to the Accounting tab. It will take you to the chart of accounts, and I already created it, so I'll show you. You just hit New, and then you would take— I think this is a great way to do it. You're going to create an interest— you're going to create an other current liability. So you're just going to select Other Current Liabilities. And then the detail type again will be Other Current Liabilities. The interest payable account is right here underneath the line of credit, 2420. I numbered it. I like to put numbers on charts of accounts, and that's a whole nother topic for discussion. Now you need to show this as it comes into the trust bank account and out of the trust bank account. So I'm going to take you up to my trust bank account here and view the register. The money will come in as a deposit. So as you can see here, I created a deposit. I actually made a vendor name called IOLTA Interest so you can use it over and over again as you start to put these transactions in month over month. The reason why I like this payable account method is because sometimes— and I'll tag you back to an article that my friend Brandy Derrick did for From the Future— sometimes the money is deposited on the very last day of the month, but it's not swept out of the account until the next day. Depends on the bank and how they do it. So this way it brings the money in and money out. My business partner Sarah believes it should be a clearing account. So you have 2 schools of thought. Both thought both ways are good because they are Both methods are good because they never hit anywhere on the profit and loss. So that's why you don't want to put it as interest income. You don't want to put it as interest expense. I see that a lot of times on people's books, and that's the wrong way to do it, even though it's zero. You just don't ever want to see that coming on for accounting purposes. You don't want to see that account, any of that money ever hitting anywhere on the financials for the profitability of the firm. So we just keep it up on the balance sheet here. So interest payable, you put the deposit in here. And I just like to use a name so it's in there. And then when the money comes out, you can just put it in as a check. The money's coming out of the trust account, it's coming right out. It's a zero effect on the books. I like to put the check number as its transfer so that way it's in there. Use the same IOLTA interest account for the bank account, for the, for the name on the account. And that's it. It's just as simple as that. You've tagged it. There's no effect. As you can see here, the balance was $69,338.50 when before the interest came in and came out, and it's the same balance. So it's that simple to really do that kind of transaction. It's not complicated, but a lot of people can kind of make it more complex. Well, I just wanted to do this short video. There's a question that came up in our little group, and I thought it was a great way to kind of illustrate how to handle that transaction. So until next week, thank you for watching, and thank you for following me, and I hope to see you on the next video. Bye now.
