Attorney Bookkeeping: Entering Historical Opening Client Trust and Accounts Receivable Balances

The Client Trust liability account in QuickBooks Online when you work with attorneys is a critical account. It is an account that should be entered with a history. This post will explain why the full accounting history needs to be entered into the client trust liability account as part of the opening balance process and the steps to do this.  

 Note:  If you've been following along in the past series of videos, don't miss the other essential steps to set up your attorney accounting in QuickBooks Online properly.

There are many reasons to start a new file or new records.  One is when the law partners part ways and create a new law firm altogether. Another reason could be that your law firm client has decided it is time to move off of old-school software-maybe it is desktop-centric, and you have made the critical decision to move forward to having a future-ready law practice.

Entering the Trust Balances

Don't guess! Moving the balances over is not as simple as one journal entry booking a debit to the trust account and a credit to all the individual trust ledgers. Whenever a partnership dissolves or if partners separate and move onto another company, it's critical that you get guidance from the tax professional to know exactly how to set this up.

The line in the sand is essential. When you stop using one software and move to another, it must be an exact move when it comes to trust accounting and compliance.  There has to be complete transparency.  In our example, we are considering that the same law firm is moving from one software to QuickBooks online. The move happened on January 1 in the new tax year.


Let's assume it is the same company, and we are upgrading their processes to cloud-based from desktop software. But it's a new data file. You need to enter the opening balances of accounts receivable and the individual trust ledgers to finalize the opening entries of the new company file. Remember, these are your liability accounts. Entering the balances is not as simple as debiting the trust bank and crediting the individual trust ledgers. The account balances are not just going to carry forward. You will need the back history of what transpired to get to those balances, or in this case, the beginning balance is in a new file.

You may be asking yourself, why is she making me do all this extra work when the date is in the old desktop software? I'm a firm believer in having the data entirely in the new company file. Yes, you could end it off on one date, start it fresh with a new date, and refer back to the old software. I believe in a complete company file. I never like to be in any redundant systems.

Entering the data

My example below shows that the client Chris Hemsworth had a balance in the old software that ended at $5000 in the retainer balance. When I look at the old software, I can see that his file started in 2020. He initially gave the firm $10,000 as the opening retainer. The attorneys did some work for Chris in 2020, resulting in an invoice for billing time equivalent to two separate invoices of $2500. The attorneys moved the funds from trust to operating to recognize their revenue for the work that they had done for Chris.

The net result of the retainer balance at the fiscal year-end of 2020 was $5000. I need to show the opening balance of $5000, but I want to re-create in QuickBooks how that balance came about. I'll need to enter the original retainer received of $10,000, dated on the date he paid it. Then I'll need to also enter the two invoices for $2500 each.  Lastly, I enter the payments of those invoices and the funds moving out of trust bank to operating.

Entering all of these transactions is much manual work, but it's crucial to have these details in place for compliance purposes. We also make these entries so that if the client questions the balance at any time, you won't have to revert to the old software.

If an old firm moves IOLTA trust funds to a new firm, you must book that opening entry by debiting the trust bank and crediting client trust ledgers. Since the firms changed, there would most likely be no back-building of trust ledgers. Again, using the guidance of your tax professional is of extreme importance to ensure proper accounting from one law firm to the new firm.

The same is going to hold true for entering accounts receivable that are open in the file. We need to show what is still unpaid, so we continue in 2021 we're trying to collect.  99% of the attorneys we work with are filing their tax returns on a cash basis. They live in a hybrid world. Most live on an accrual basis during the year, and it's only at tax  time do we do that switch over to a cash basis. Because of this, we need to show that opening accounts receivable when we start a new file as it will not be in the opening tax return entry.

I hope this is helpful and getting the meat of your data in place to start working in your QuickBooks online file.

Next Week

We will dive into processing the transactions. We will get into some of the other features in QuickBooks that you'll need to know to move forward.

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If you are an attorney trying to set up your books by yourself, I hope this series of articles is helpful. If you need more help doing this work, we are experts! We've done this work many times over.