Linda Artesani walks through trust accounting for law firms, showing why it's hard when client books are messy and how to fix it. The key: a three-way reconciliation between bank statements, the parent liability account, and individual trust ledgers. Many practice management apps like Clio dump transactions into QuickBooks headers, so you need to reclassify them to see client-level detail.
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Hi there. Linda Artesani, Artesani Accounting. So we're going to ponder a question today, and is the question quite simply, is trust accounting hard? Is it complex? Absolutely. Especially when it becomes messy. And most of the clients that come to you probably going to be bringing you some messy books. The complexity lies in the fact that you have to have that 3-way reconciliation. You have to have it match the bank statement. You have to have it match the parent liability account if you're using the hierarchical format that I recommend, and you have to equal all the trust ledgers. When any of those go awry or wrong, then we have an issue where we need to figure out where it went wrong. And that's the key, figuring out the starting point, right? If you can find that starting point, that's where you're going to go forward with cleaning up the trust accounting. Let me share my screen. I'm going to show you exactly what I mean by the hierarchical view of trust accounting, and then you can get an idea of why this is a better method. A lot of the platforms just dump into the header into QuickBooks. So QuickBooks is kind of like an aftereffect. They believe that all what's inside of their app is pure and clean. So I'm talking like an application like Clio, for example. Clio has You know, that's where you want the client activity to live. However, I like to validate to the bank, so we do make that Clio connection to QuickBooks, but then Clio dumps into the header. And when it dumps into the header, now I've got an additional step. I have to go into my reclass tool and I start to create this view like I get in LeanLaw that will show the client accounts transparently. I want to see the ins and the outs of the accounts. And make sure that I can see that there's no negative balances and that it all equals. So that's the main key, right? With trust accounting, has to equal right to the penny. You can't just write off a penny. I've had people ask me, can I just write it off? It's only a penny. No, even if it's a penny, you have to return to the client. It's still required that you return the penny. Let me share my screen. I'll show you what I mean by the hierarchical view. So here we are in QuickBooks. I just pulled up a balance sheet in this file. I probably should take some time to do a little bit of data on this. So you can see, but as you look on this report, I did all dates so I could show it— show you. And here's my parent account, which is the client trust account liability account. And this is what a lot of the, of the apps that do connect with QuickBooks will dump into. They'll dump everything in, it'll have a customer name, and then you can pick that account out and you can obviously group by client. If that's another way you can kind of have that transparency of seeing instead of doing the reclass. I prefer the reclass because it's more hard, fast way to keep it looking like this and use the reclass tool. You'll dump down. Whenever we have a problem when our staff is working on an account, we just don't know where something goes, we'll put it in the header. So it's still in the trust account, we still can balance. But if we need to ask the client about something, we'll dump this amount into the header line and then have them— we'll reach out to them and say, okay, this was in the header, we still balance in the account, but I don't know what client this goes to. And then if that's— that happens a lot with the other softwares that maybe a Panther or, like I said, the ones that connect to Clio where the client maybe didn't enter the— well, maybe they entered the transaction because it wouldn't be here, but maybe there's a problem with the way it was entered and we need to find out who this was for. Maybe it came through the bank feed and it never was entered into the software. That happens a lot with a lot of the clients that even in LeanLaw, all clients that they We'll find money will come in through the bank, but we don't see it at all. Most of the time what we'll do is we will leave it in the trust ledger, uh, trust bank feed, and reach out to the client and say, hey, these are here, but we don't know who they are because you never entered it in the, in the legal software. So you can see William Aldridge divorce and the balance that he has, and this will be his line. Now you notice here I've got some money in the header line that should not be in the header line. So this is a sample file, so I've got some things in here so you can see. So it should not be in the header. If this was for another matter, we should have listed another matter underneath. or does it belong in the divorce column? So we want that to show that it should be in there. Now, when you come in, like Seth David here, we'll go into his account. And I think he doesn't have it showing. You can see here that here's the transactions that go under here. So we can see that there was $5,000 in, $4,000 out, and another $10,000 that came into the trust account. So we see the transactions per client. We are responsible. We have a— the attorneys have a fiduciary responsibility to hold this money and account for it. So this is the way that you can see this. Obviously, if you use a software like LeanLaw, and I'll tally over there for a moment here, we'll go over here. If you have software like LeanLaw, this will bring you to the transaction report, but this will all come on the invoice, which is kind of where you save a lot of money. So you can see that we had a deposit and we have a negative deposit for some reason. Like I said, there's a lot of things in here that aren't exactly from me playing around. But if you can see, this is where you want to— this is where you're going to see a little transaction history. Now, when I go to invoice him for the estate planning, if I have any billable time, I do an invoice. It's going to give me that little ledger line that's going to show me, and I'll show you what that looks like here under the settings. You have the ability to go into invoice presentation. You can sort this out and you can see like this will show the hour summary. And then there's also under trust accounting. In LeanLaw, you have the ability to redo these words so you can show how you want this presented to the client if there's a partial payment. And here's the fields that you can use, so you can actually modify this on the fly for yourself, for your own firm, depending on the practice area that you have, which is really cool that this is customizable. So I hope that helps explain a little bit about some of the softwares and why things go where they go inside of Inside of QuickBooks. Some go into the header and you might have that extra step of using your accounting tool, your reclass tool to mimic what LeanLaw does with the parent and the sub-level. And some just like LeanLaw drop right in for you and you can really see very transparently the ins and outs. And then if there's an issue, you're able to spot it right away. And that is the reason why you want to have that hierarchical view. Remember, compliance is king when working with attorneys. So yes, trust accounting can be complex. If you need to find your starting point, I recommend opening up a balance sheet, all dates, and maybe doing it by month, grouping it by month, and then collapsing down all the transactions. So you just see the bank at the top level and the total on the liabilities, and try to find a point where it's either really super close, where maybe you can figure it out, or it's not just close, it's dead on. And then you know that that's a great place to go forward to rebuild and figure out what's wrong. sometimes rebuilding may mean starting a new file. So know that sometimes if it's really messy, you might want to start a new QuickBooks file for the client. So on that note, I hope these tips are helpful. If you have any questions or comments, feel free to reach out to me. If you're an attorney or a law firm that needs some help with your trust accounting, if it's messy, reach out. This is our specialty. We have a full team that can handle it pretty quickly for you. If you are an accountant or bookkeeper and you're just new to the industry and you want to learn, we have a private group called The Accountants Law Lab. It's actually a free Facebook group and a private group you can join for more one-on-one with me and Sarah. So I hope that's helpful, and I'll see you all next week. Bye now.
