In this instructional video, Linda Artesani of Artesani Accounting walks through the five most common reasons a law firm’s trust (IOLTA) account becomes out of balance, using a live demonstration in LeanLaw and QuickBooks. She shows how missing bank transfers, misposted transactions to the wrong liability subledger, disconnected legal‑software integrations, failure to reconcile bank feeds, and manual bank‑to‑bank transfers without proper journal entries each create discrepancies. Throughout, she highlights the role of the undeposited funds account, the challenges of handling multiple IOLTAs, and the importance of backups (e.g., Rewind) and expert setup. The video concludes with a call to join the Accountant’s Law Lab community for further support.
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Hi there, Linda Artesani, Artesani Accounting. This week we're going to talk about my top 5 reasons that a trust account will go out of balance, and it's based on experience. It's based on what I see repeatedly with different clients, and it's just some of the pitfalls of trying to track trust accounting when you've got the attorney working in the legal software and then maybe the admin entering some parts of it, or we're working in the product. Where do you see it go awry? I'm going to take you right into QuickBooks. I'm going to show you the places that I see it, take you into LeanLaw and show you where I have a broken account and how to kind of navigate and figure it out. Let me share my screen. So I'm going to pop right into LeanLaw, and I just wanted to show you that the trust button doesn't always show here. When you log into LeanLaw, but if you come over to your info in the settings, and I have it set so that my starting tab's always billing. So if my starting tab's always billing, it exposes the trust account. So that's what I'm trying to look at. So I'm gonna go over to trust and we'll see how my trust account's doing now that transactions have been processed. And I can see it's not doing very well. When you see these 2 triangles, you know that the balance is off. I can see that the real estate account is off by $9,281 and it should be zero. And then I've got some issues in IOLTA that this doesn't align. at all. I've got a negative balance. And at a high level, I can see that there's problems. Obviously, Mariette Martinez is way— her balance is way off. So that's one I know I need to look at. I'm going to look at— you can see here, Chris Helmsworth. If I look here, I can see where his funds are, you know, what balance it's in. I can go to the trust account here and just take a look at how his trust account is looking. Sometimes in the settings you can have it set so that every transaction processes it individually so that you can have it go right into the right IOLTA account, especially if you have one. It's a real simple process. With multiple IOLTAs, you really have to be careful and use the— use the undeposited fund account. Most of my clients do end up having to use the undeposited fund account as they start the process, and you have to make sure— so my number one way that I've seen issues in a trust account is when somebody doesn't put the bank transfer. So when you make the backend transaction, so the invoice has been processed by the attorney and you've pushed it into QuickBooks, and then you're receiving the revenue by taking the money out of trust by recording the payment from trust, it populates a couple of interest entries in the backend. And when those entries are put in, if it goes into undeposited funds, you have to make sure that that money that's recognized as revenue goes into operating. If it doesn't go into operating, you have a problem. So you can see here, Here's the payment on the, on the account, and I can see it's going into the IOLTA. So it needs to go to the operating account. It's basically as simple as doing that, save and close. But obviously, as you could see in this file, there's a lot of things wrong in my demo file. It's completely out of balance. So I need to look at maybe Mariette's account and see what's going on. So to look at Mariette's, because it's such a high negative balance— you don't ever want to see a negative balance in IOLTA. That means that you've either taken out too many funds, which with lien law that shouldn't happen because it's very transparent. It's like that even with Clio, you're not going to see that negative happen. It's going to warn you. But here, clearly somebody's made an entry that's not correct. So let's look in Mariette's account to see what happened. So she's got a negative $73. I'm going to look right in the matter to find out what went wrong. And I can see that she gave me a $5,000 retainer. And then there's an amount out of here for this $74. So I need to take a look at this transaction to figure out exactly what it's for, what happened wrong, did it belong to her. It was made to the law firm, so clearly this is not the right transaction in the right place. It came out of IOLTA. So now I'm going to have to investigate this. There's no class, there's no customer here. It got booked into her, her, uh, account, so we have to figure out why that is. So something being misposted to the wrong, uh, liability account, the subledger or the client ledger as I like to call it, can also cause a problem. So that is my top reason that I see a lot of times. Somebody will take in a retainer and maybe the attorney receives the money and then takes it to the bank and plunks it into the operating account and it's in the wrong bank account. So we have to bring that in. I still have to apply it to the IOLTA account because it belongs there. It's that client ledger, right, that subledger that belongs there, but it's not in the IOLTA bank account. And then once the attorney moves that fund over from operating to IOLTA to put it in the correct bank account, then it's just a bank-to-bank transfer. But that's another thing that we see all the time that happens with trust accounting. Another thing that I see happen with attorneys and trust accounting that happens quite a bit is that the attorney will not connect the You know, they'll come to me and they don't have— they may be using LeanLaw. That doesn't happen as much with LeanLaw, but Clio, any of the other platforms— and Clio and LeanLaw are the only 2 we use at our firm. We don't want to get involved in mastering other ones. Our staff knows those 2, and they're the biggest, right? They're the big players in the game, and they're also the best. So they're the best, they have the best connections to QuickBooks. But I see it sometimes with Clio clients that they're like, oh, I want to keep my Clio completely separated. Or maybe they started to use Clio after they had been using other software switched over and then they're afraid to connect it because they're afraid of what might happen, the ramifications of connecting the stuff— the software to the accounting platform. That should definitely be done by an expert. It is not for the faint of heart. It's really important that you lock down QuickBooks so it doesn't bring in transactions from a prior period. It can make a mess. So I recommend, especially if you're using QuickBooks Online Advanced, to make that backup of your file, make that backup of the data, and make sure that you have that. I actually like Rewind a little bit better than and the backup that's inside of QuickBooks, but it is included in QuickBooks Online Advanced. It's something to consider. So get that person that knows how to backcode it into QuickBooks. You really wanna have it connected to QuickBooks. You wanna be pulling those transactions in. That's the power behind Clio to get those transactions to be populating so we can track what happens. So in Clio, we also find oftentimes in, in LeanLaw, That the client may be entering something into Clio or maybe doesn't enter or enters it into Clio or enters it into LeanLaw and then doesn't make the transfer. So they do all the steps to create the invoice, record the accounts receivable, move the money from trust to operating in the accounting software and in actually in the legal software, and then it pushes into the accounting software. But then if you don't reconcile the bank, you don't notice that it never happened at the bank level. It's another thing that we see happen often, that they do all the work and have good intentions, but then they don't pay themselves. So we have to go to the client and say, hey, we're reconciling the bank. We saw this bank feed come in— this— we don't see the bank feed coming in, and we're wondering why the funds weren't transferred. We see that you intended on doing that. And then it's just a matter of following back up with the client and saying, hey, need to move this money. You did the transactions, but you forgot to move the money, the most important piece. But it happens sometimes. The attorneys get busy. So that happens on occasion. So you want to make sure that you figure out exactly why it's missing. So when you're reconciling, you want to know— you'll notice that if there's a missing transaction, you'll have it hanging at the end of the month. So it's important to reconcile, of course, you know, IOLTA, all the bank accounts, any loans Advanced client costs. Those are the biggies. So another way that we see this happen in a client account— this is the last tip— is you see somebody will not be using outside software at all, and they will just move funds. So they took the money into IOLTA, they bring it in and they book it in, and they book it into the subledger, but then they move it out into operating from IOLTA, and they make the transfer at the bank. So they go bank to bank. So you'd want to see the 2 transactions. You want to see the invoice because you've got to recognize the revenue. You've got to show the revenue coming in. You've got to show that the legal services have been earned. You have to have the invoice. You have to have the invoice payment. But then behind the scenes, you need to move the funds out of IOLTA. So receiving the payment and the invoice, you're going to book that right into the bank operating bank account. That's your receiving the funds. That's that work that you've done and you're getting paid for it. But then in the background, you also have to do a journal entry, and that journal entry has to be— you need to make it hit the subledger line. So you have to have it hit the subledger line. As the debit, you're reducing that out of the subledger, that liability, and then the asset of the bank account has to be credited. So you're reducing the asset as well because you're taking it out of the asset and you're moving it out, which is where that transfer— that's this, but you have to do it in the 2 transactions. Super important to get the accounting right when you work with law firms. So I hope that answers some of the questions on what we see when we see these errors inside of trust accounting. If you're new to this industry and you're just looking at it and you're trying to figure out what the heck happened, what transpired, these are the kind of major reasons. And I outline it all in the blog post that accompanies this. But I wanted you at least to know and see a little bit of a visual of what we see in some of the books that make mistakes. There's plenty more. I could probably write a whole book or course on how to correct the errors that we see as we look into people's records that have been maybe doing it themselves, or maybe having that admin that's not as familiar with the software, which is why you want to hire a legal professional, legal accountant that knows the industry, knows how to use the software. Like I said, we just use 2, so those are the 2 that we have mastered. You need to find somebody— if you're looking, find somebody that can help you in that way. If you are an accountant and bookkeeper and you want— or bookkeeper and looking to have a little bit of help with this kind of work, reach out to us. We'd be more than happy to help you. We have a private Facebook group. It's called the Accountant's Law Lab. Anybody can join. It's free. And then we also have a private one-on-one group, a mastermind group where we help each other collectively as a group. But we also have one-on-one time with Sarah and I. We also pick a topic and we dive in deep in the topics, and it's, it's a lot of fun. It's a really good supportive group. If you are an attorney or a law firm and you'd like to get some help with this kind of work, we love fixing messy account— IOLTA accounts. So reach out. And if you are following me, hit the subscribe button, and that way you won't miss any of these videos. So on that note, I hope you have a wonderful week. Bye now.
