Trust Club: Learning how to manage an attorney's trust accounting

Every week, Tyler gave the rules that he and I decided. Gentlemen, welcome to Fight Club. First rule of Fight Club is you do not talk about Fight Club. Second rule of Fight Club is you do not talk about Fight Club. First rule about Trust Club: the bank account has to match the total sum in all the trust accounts. Second rule about Trust Club, the bank account must match all the accounts in the trust account. I'm kidding. I'm having a little fun. Okay, so we're going to talk about trust accounting today. I guess that wasn't overly dramatic. I think I needed a darker room, right, to get the real, real look of it. But honestly, that is the rule about trust accounting, right? So when we talk trust accounts, We have a bank account, and a lot of people think, reconcile my bank account, everything's fabulous. Guess what? Not so fabulous if that bank account balance doesn't equal the sum of every individual sub-account in your trust accounting. So I'm going to take you into my screen. I'm going to show you why if you don't have it exactly to the number, that's an issue. So here we are in the trust account itself. So we came into the The banking tab and right into the register. So I can see my balance on 8/31/19 is $6,766.50, and there's no other transactions here, right? You can see this is a pretty simple one. So not gonna lie, this is not your typical trust account, account that you would be looking at. You're not seeing a bunch of different accounts. I mean, we have some accounts that we work with that have, you know, maybe 200 trust accounts that they're dealing with that are still active and open. We have some that have 2,000. So it gets complicated the more you get. Here it's pretty simple. You can see that there's money in and money out with Mary, Mary Smith, and we don't have a lot here. It's almost all Mary Smith. It appears to be all Mary Smith here. So here's the balance, and this is the final balance here. So you can see the money coming in. She gave a couple of deposits here, the money going out, another, another bit of money coming in. And we've got Michael Bennett. He's a little bit different. And then so we've got individual accounts here and look at the chart of accounts. So the best basic way, actually, the better way to look at it is let's look at the balance sheet. Let's dive into this account and see where in QuickBooks it went wrong and maybe where it is wrong in LeanLaw. So let's take a peek. Here we are. I'm on the trust account. I'm on the balance sheet inside the actual physical QuickBooks account. So what I want to do is go into this bank account and see if it's reconciled. Does it match the bank? Did I reconcile it? Right? So it's reconciled as of 8/13/2019. It's reconciled in full. And I could always come over here and reconcile and see when's the actual ending date of the reconciliation. And it will tell me right here, 8/31/19. So I know that the bank account balance matches that number. So now I have to figure out where's the issue. So I got a few problems here, right? I'm going to come up into LeanLaw and see what LeanLaw says this bank account should have. So if you just come into LeanLaw, and you can click any of these tabs just to kind of make this one pop up. It's not always there when you come on to this account. Just click the trust account and you're going to see there's the trust account bank balance. Here's a liability balance, which we saw on the balance sheet. And here's the client matter balances. So there's a difference in price here, right? And you can see there's a little red Warning button over here that's that's telling me that something's clearly wrong in my balances because it's something's not right, something's not jiving. So the trust account bank balance does not match the liability balance or the total of the client balance. This might be okay. No, it's never okay. But if you're not sure, please check with your accountant. So maybe I think I should tell them at Lean Law like make this like a big like because it's not okay. So let's go back and try to figure this out. Because what's going on here? Why is this— see how I love LeanLaw? Just boom, you hit the little button, it brings you to it. What is going on here? What is this stuff? What is this shipping? And this other amount, and this is held in the parent account. So these are 2 accounts I probably want to clean up. Because this is the Jake Thomas matter. And I need to find out what this is. Maybe it shouldn't even be there. This minus $40, it's a check, it was used, funds were coming out of the trust account. directly for someone's account and it was coded to that. So those are probably 2 transactions that I want to eliminate, find out where they are and fix it. So now we have over here, see if I can make this bigger so we can see dates. So now I have over here and I have another journal entry here for $7,000. So that's interesting. It's the journal entries that came directly out of LeanLaw. So in LeanLaw, if I went up to find Michael Bennett and here's his $7,000. I can see it. I'll click on it to populate it. I'm going to load the transactions to see what's in it. And really simply, there's no open invoices, so I don't have to worry about any AR and see if this is possibly an AR problem. Let's see if there's a reason for the $7,000. So it looks like he— there's a trust transaction, deposited check. Let's just take a peek at his account through QuickBooks. So there it is. He deposited a check for Michael Bennett for estate planning. So he gave them a retainer for estate planning. So why is it not included in my QuickBooks? Well, the most likely problem that you have here is that the bank deposit was never entered. And there's Mary Smith. So it's not that. But why is Mary Smith deposit hanging here and not showing in the bank? So you need to go back and find out, did this check get recorded as a payment but not deposited, which is fine. It's not affecting the bank account just yet because you're holding the check, you haven't cleared the check. But what about Michael Bennett? Let's go back to Michael Bennett and see. 8/19/11, he has a trust transaction and it's for estate planning. So that money should be in the bank account. Why is it not showing in the bank accounts for, for, um, in QuickBooks? So let's go down to his account. So here's the funds held in trust. Let's find Michael Bennett. Oh, there's a $7,000. But it's not showing in the bank because it hasn't been put in. So that's fine. But it's not— it's in here and reflected in the bank account balances. For me, I think it's easier to come right over to your balance sheet and take a look at like kind of summary view of this. So the date is 8/31. You always want an accrual base. I want to see what equals this amount. So we've got our 7, we got our $4,266.50, and then we have this. It probably doesn't belong there. So let's open it up. And let's just change this to all dates so we can see what's in there. Something probably older, obviously older than August. And we've got some older things in here. You've got some shipping documents to a client, and it's really possible that that just came out of the operating account. It was in the wrong account. Now you gotta be really careful if you see this. That should have been a red flag at the end of the year that this didn't clear the bank and it was maybe written on the trust account. So then maybe you can see here, there's a trust account here. This is Jake's. Somebody had made an account, made a bank account for each one of the, each one of the individual trust accounts. Not necessary, but I've seen that where somebody will make a sub-bank account under all of the— under the parent bank account and try to track that information there. So you'd want to fix this and void this out if it's not cleared the bank and make sure that it's— because it's right now affecting your trust account, right? It's been, it's been posted to the parent account. This whole transaction, big X, big wrong balance. So you want to remove that. And then let's go see what else we've got in here. You've got a deposit for trust accounts, the same Jake, Jake Thomas, and it's probably again posted to that weird bank account that's been deleted. So the person had made a parent account, parent trust account, and then subaccounted all the— so they made like little individual bank accounts underneath the parent account. But it's not the way to do it. You have lien law, you don't have to do that that way. So it's another one you want to look at to see why this is. So if we deduct off of the bank balance here, so if we deduct this, that difference in the $17,376.50, if we make these corrections and reduce it by the $6,011, we're still at $11,266.50. We're only supposed to be at $4,266.50. So pretty round number there, right? We're off by $7,000. So where is the $7,000 that we're off by? It's that Michael Bennett, right? So when you look in the bank account, we'll go back to the bank account here. Here's Michael Bennett. So Michael Bennett was deposited, but it was deposited into this account, but it's not accounted for in the trust account. And here's our balance sheet. So you can see this is the balance in that account. And then we'll go down to the individual trust accounts to see what's happening in that account and why the balance is different. So here's the funds, the funds held in trust. That's the parent trust account. Here's the balance of Mary Smith's matter. That's what she's got left in it as of the date of this report, which is 8/31. And then that's all that's in here. It's $4,266.50. Total balance in the trust account is $4,266.50. The bank account clearly has more money. $6,000. $766.50. So it's pretty close in the numbers, but it's off by $2,500. When you do the math, it's off by $2,500. So we need to find out what's going on. Why is it in here? Since our very basic trust— okay, this is not your typical law firm because normally you'd have many trust account balances here that you have to deal with. But this is off by $2,500. So when we go into Mary Trust Register, which I think I have that open, I can just come over here and go to Mary Smith. And see what's going on in her trust account. Let's just go in there and take a peek. So you can access this, access this way. You can actually go over here and grab Mary Smith from here. So here's Mary Smith. It's $2,500 too much in the bank account and not enough in here. So that has to tell you that something is off on this account. So there's a deposit— I mean, a check written out for $2,500. So $2,501 was taken out of this account. That's not the $2,500 though. We're looking for $2,500 even on this. So the balance is $4,266.50, and on the books, the actual bank account balance is $6,766.50. So we're off by $2,500. We need to figure out what is the $2,500 and why is it off. We've got $2,500 more in the bank account. than we do in the trust accounts, which is very bad, right? Because we need to account for every single penny that's in this account. So what is the missing $2,500? So since we're right here in the bank account, we need to figure out what is going on. So we got $7,000 that belongs to Michael Bennett. Didn't see that on the register. So let's go back to the balance sheet here. Let's open up the balance sheet in another tab. So this is what I like about QuickBooks. You can open the tabs up. Because I didn't see that in there. And you want to make sure, because just because we're up by $2,500 doesn't mean that the $2,500 is one transaction. It could be several transactions that the net is $2,500. So let's go to the balance sheet again. And I didn't notice it, but it could have been here. So the only things that are showing in the trust account— so Michael Bennett's not showing here, which is really, really strange. So let's just come up to the funds and trust here. Let's go to Michael Bennett's account and see if we can find out why he's not showing up in the report. So let me just do Michael. Here's Michael Bennett, $7,000. Why is it not showing on my registers? Let's view the register and see what's going on. Okay, the deposit is— the deposit is showing as dated 9/3. Now on the bank account, It's showing that the $7,000— I thought I saw the $7,000 was reconciled. So let's go to the actual bank account. That was included in the bank account. So here's the trust bank account, and there it is. The $7,000 was dated 8/31. So there's an issue right there with the date, right? So this trust account ledger, this transaction dated 9/3 should be dated 8/31. So maybe it didn't make it to the bank that day, but you really want to make sure that this date is 8/31. 31, because it's included. It obviously made it to the bank because you reconciled the bank account and it all tied back. Let's save. Now let's see what that did to our totals. So let's go back to here. So now the bank account's still $6,766.50, but that's going to affect our— where's our balance sheet? Let's go back to the balance sheet. Now we're going to come down here to the The trust accounts. And now Michael Bennett's showing. Now we're at $11,266.50. So obviously that's— now we're going in a different direction. We've got an issue here where there's a difference. Now we've increased the difference. Now you got more money missing, right? Because if it's $11,266.50, why is it not showing in the bank account? That's what the bank account balance should be because that's the total of all the trust accounts. And it should equal the same amount of the money that's in the bank. So we're off by $4,500 now. So you can see how this is like you have to be a super sleuth to figure out what's going on, right? So this bank account balance is off by $4,500. We can go back into this account and see if there's anything in here that's $4,500 in value. You've got $5,000 deposit here on 8/10, and it could be that, and it could be this to get your $4,500. So you're $5,000 in and you're $500 out. So you need to kind of look here and see, see what these transactions are. This just says law firm. So the payee was the law firm. So this is money that was deposited. So you move— this is an account where they move money to the law firm to pay themselves out of the trust account. So it's money out of the trust account, but it should have gone into the bank account. And here it is, it's hitting The trust account balance. So this should have been a transfer of money from the trust account to the bank account. So this should not be showing as this. This should be the bank account, the operating account. This is just a matter of moving money from one account to the other. And it should have been just a transfer from the funds. It shouldn't be hitting the bank account because it was— you're taking the money out, which would happen during the reconciliation of, of in lien law. So let's go up here to the bank account, which we should be able to find. Why it's not in order here. So here's our bank account. We want it to go into the general operating. So now you're taking money out of the trust account, you're paying yourself the money into the operating account. So I'm going to save and close that one. And I bet you any money that the next one is also that. That also said that I'm messing up a reconciliation, reconciliation, which is probably going to be the reconciliation of Mary Smith. So also here. Let's take a look here. So here's another deposit. And this is a deposit of the $5,000 as a journal entry. So let's open up the journal entry and take a peek and see what's in here. So this is funds held in trust. And this is from bank account. This is a deposit. It's in undeposited funds. So let's go to the bank account to see if it's— Showing in the trust account. So now we should be a little closer. So it's not really— it's not really— it's not really in here, this $5,000. See, you can see the $5,000 is here, the $5,000 deposit of Mary Smith in undeposited funds. Let's take a peek. Mary Smith is the journal entry, check 5. 456. So it is in the balance. It is, is a factor of the balance in the, in the trust account. So we have to figure out what happened there. So most likely it was they paid themselves something and it just doesn't show. But let's take a peek. So we can come back here on her trust account. You can see here, here's a journal entry, source check 5456, but there's also a retainer. So she received a retainer and then it looks like She paid $5,000 more. So we need to figure out which one of these, because there's no $5,000— this is accounted for. So we need to figure out what happened here. Did she pay $5,000 twice, really close like that, or is this supposed to be a check written to pay the law firm $5,000? So that's what we need to figure out, because you can see here, this says source retainer, but this one says Source check. So again, this is probably a check to transfer money out of the bank account and into the account. But let's go into LeanLaw and find out what's going on. Let's go into Mary Smith. Here's her account balance. It takes a few seconds on this, this reporting. It's just pulling the data in from LeanLaw. Because we have $5,000 too much. So this is the problem. So you can see here, This is the retainer where she gave us the money. And it looks right here. Don't know what this transaction is. It says source check 456. Can go into her account and find out what that source check 456 is. It doesn't belong in the trust account, which we need to go— it's not showing up here. So there's only one $5,000 showing here, which is this one. So it's the other one that's not accounted for here. So we can see that this is Accounted for us. The 8/10 is accounted for. Check 456 is accounted for. So what is the other one? Where's the retainer? Why isn't it showing up in the bank? So we need to go to the other $5,000. Sometimes it's just easier to come right up here and search and do an advanced search of $5,000. So we want to go by line amount because we— with, with lien law, you know that they're journal entries. So let's do A search on line amounts. And this is going to bring up our Mary Smith, right? So we see the deposit, we see the journal entry. We also see a second journal entry. So something in here isn't jiving because only one of these journal entries is actually showing up, and we know it's not this one. So let's just take a peek. And it says retainer check. Let's go into LeanLaw and find the retainer check 1234. And Here it is. And then the source check. So her account balance is $4,766.50. We go back to the trust accounts. You can see that the balance here, the liability balance is this, the total client balance is this, but the bank balance is this. So we're missing $5,000 in the bank. So we need to figure out why we're missing $5,000 in the bank because now the Liability balances and the matter balances are all matching. So we need to find out where's that $5,000 and why didn't it show up in the bank? Part of our sleuth work is to figure out where this deposit is because we have one deposit showing in that trust account. And it's this one. So it's dated 8/10, source check 456. So let's just look for the other one because there should be 2 Mary Smith deposits. We can see that in the books. As we slide here in the bank recent deposits, here's the 2, 2 accounts. We know we see this one. Where did this one go? In the general business account. Highly unlikely, right? We know it should not be in the general business account. This one should be in the bank account trust account, right? It was a retainer. So why is it being deposited in the trust account? So we found our error, right? So we can come in here. This one. So we're going to take that account, take it out of this account and move it to the trust account, right? Because that's where it belongs. Save and close it. And now our bank balance is $11,766.50. And these 2 deposits here. Now, why didn't this one clear the bank? That's another issue. We got to figure out why. Maybe it did go in the wrong bank account. If your bank account was there, maybe you need to move the money back into the trust account. Maybe it's just not a matter of changing it, you actually need to physically move the money to get it out of the operating account if it was accidentally put there, put it back in the trust account because it's a retainer, it belongs there. But now our bank balances will go into lien law here. Now if we hit the refresh button, we should have a thing of beauty where the bank balance equals the liability balance. They all tie back. So That is doing the detective work on a trust account. So remember the first rule of Trust Club: those bank account balances, that trust account balance, must match the total of all the sub-trust accounts that are listed. All the matters tie back to the parent account. That parent account has to equal. If it doesn't equal, there's an issue, and you have to put your detective hat on and start to figure out why that is. So I hope that was helpful. I know it was a short video. There's so many scenarios for why this would not tie back and not equal out. Believe me, I have seen it all. And maybe I'll do another video on a couple more. If you'd like to see that, let me know. More of some of the things I see when I start to work in trust accounts. There are some things you just see over and over with people who have not done their trust account accounting right. Sometimes it is as easy as moving it over because it was never reconciled. I've seen that too, where they've never reconciled the bank. So if that's happened, you might want to reconcile. And if it's not that, you need to tie back and figure out why it went wrong and where it went wrong and fix it so that you have that thing of beauty where the bank account balance and the trust account balances tie together and you don't have that warning, that little red warning there. So I hope that was helpful, and I will see you all next week. Bye now.