Negative trust balances

Hey, Linda Ardisani, Ardisani Bookkeeping. So this week is all about negative trust accounts. It's something that I see on a lot of books, and especially when someone's new coming to me and we try to figure out what caused the negative accounts. So we'll just circle back a little bit to what is a retainer. So an attorney accepts retainers, a deposit, upfront deposit. For work that's going to be performed. And as they perform the work, then the money gets moved from the trust account to the lawyer's operating account. There's a few scenarios that will cause a negative trust account. One of the more common ones is when an attorney deposits a retainer and then has some upfront expenses. So the upfront expenses happen in the process of the retainer clearing the bank, and then the Bank says the check isn't valid and the check bounces. And now the attorney has upfront costs that are— he's paid, he or she has paid for. And then the client has not paid the retainer because they bounced the check. So that's one of the more common ones. Another thing that happens a lot, we see it a lot, is commingling. So they'll commingle the funds and it's mostly born out of a place where the, maybe the people taking care of the records aren't aware that you can't really commingle funds. So that is something that's really important to know, that a trust account mistake can end a legal career, especially if it's committed by an attorney. They will disbar them. It's important to know that even if a paralegal or a bookkeeper makes a mistake, sometimes they— the lawyer will be on the hook for that money. So it's really important to track the money exactly. If you had a bad bookkeeper and then you had some problems there, attorneys really have to be careful at who they trust to handle taking care of those transactions. So another thing is if it's not tracked properly, and I'm going to take you to my file to show you where a place where it was not tracked properly. And then we can get into exactly what happened, why it happened. It's some of the fun things that my business partner Sarah and I work on. We're trying to figure out what happened in this file. And I'll show you how we kind of really drill down to find out where the issue is. It's one of the things we automatically do. We look in the list every month. Where is their negative trust accounting? Making sure that our team has put together the right balance and has reconciled each and every trust account. I like to think of them as little mini checkbooks. So it's a checkbook that belongs to the client until the revenue is earned and then it moves over to the attorney's file. So let me take you to my file. I'll show you what I'm talking about. One of the first places we go to when we're trying to figure out exactly where the issue is, if one of our team members comes to us and says like, this is not balancing, can you help me? is we'll grab the balance sheet and we'll look for negative accounts. I've seen it where there's been some pretty creative things done by a client when we first get a file. But this is one of the places that I will go to first. I go to my balance sheet and just take a look in QuickBooks. How do my trust accounts look? So I'm going to pull down to my trust account. So there's my parent account, funds held in trust. That's the total. There's nothing coded there. I always like to look there too, because sometimes it'll be unbalanced because somebody coded to the parent. And then I'll just kind of come down here and I'll see that here, Michael Bennett He's had a negative trust account balance. So why is that? You click into the account, we come into Michael Bennett's personal ledger. And here you can see that we— here we have a journal entry, the funds held in trust. We received a $7,000 retainer back in August. And then we had a check that was— some monies were spent on the account. We received some revenue by moving the revenue over. The attorneys earned this revenue. And then we received another retainer deposit of $5,000. And then we get down here and we return $12,000. We return the retainer, but we had some costs. So those costs— we should not have returned $12,000. We should have only returned $10,545.50 because we had some expenses on this account. Now, I don't know the whole backstory. You'd have to talk to the attorney to find out why we return the retainer. And there may be a reason for it. And if that's the case, then we're gonna need to move some of that, make an adjustment here on the books to explain why the account— we have to zero it out. So if we did return, return the $12,000, we're gonna have to adjust it to take that extra money of $1,454.50 and move that down as an expense for the attorney, because now they've incurred that as an operating expense, in essence, because they're not going to get that money back. And maybe they need to invoice the client for that. So maybe they should not return the $12,000, they should return the other amount but invoice for the difference. So those are some of the things— this is kind of an accounting error that you'll find. If there's a bounced check, you'll see that you have to do a lot of entries to correct a bounced check. And generally, I'd say 99.9% of the time, they get— the client will be like, I'm sorry, I didn't realize that happened. And they will give you the money to recoup those funds. But that's just a few of the ways that that will happen. And I'll go into a little bit more detail on some of the other scenarios that are possible, possible ways that you can have a negative trust account. Should never really have a negative trust account. PI attorneys will tend to have expenses, and sometimes they take a retainer, sometimes they don't. A little bit different scenario. So that usually when the insurance check comes in from when they win the case, then they'll disburse it out. And that's a really tricky one. We should make sure that all the expenses are in before the money's disbursed to the client. But there's a lot of scenarios. That's why trust accounting is so important. It's key to know this stuff to be able to go forward with your client and learn a good way of doing the books and making sure it's accurate because it's critical to a law firm that every penny is accounted for in the trust account. So thank you for watching. I appreciate that you're following me and you're watching these videos, and I hope you have a wonderful, wonderful day. Bye now.