Is Trust Accounting Hard?
If you just landed your first attorney-client, you may be struggling with some of the terminologies: IOLTA, what the heck is that? Trust Accounting, is that an IOLTA? And what are the best practices around trust accounting?
The perfect structure is important in successfully tracking the individual trust ledgers. We like to see a "parent account" trust liability account and our client ledger accounts listed as "sub-matters" or sub-liability accounts. This perfect structure is automatically created if you use the software LeanLaw. It's an extra manual process if you use the software Clio where you will have to use the reclass tool to create this hierarchy. But it will help you with the transparency of records. Below is a snippet of what it should look like:
Trust accounting is the big compliance piece of the work we do as the law firm bookkeeper or accountant when working with attorneys. The trust bank account has to match to the penny the total of the individual trust liability accounts. If it doesn't, you're not compliant. Noncompliance can cause or trigger an audit of the law firm's books. Nobody wants an audit.The complexity arises when finding that starting point or the last time the books aligned in balancing the client's books.
Find a Starting Point
Do you go back to the very beginning of the opening of the trust bank account? Or do you find a good point where it was matching in a three-way bank reconciliation? That's the million-dollar question. And how do you find that place where it all balanced?
The best place to start is running a balance sheet for all the years the trust account was open. Group it by month and collapse it down to see the balance in the total liability account vs. the bank. Look to see where the balance is super close or spot on. That may be your starting point. Maybe you don't need to go back to the beginning. Here's an example of that balance sheet:
I hope this post takes away a little bit of a mystery surrounding trust accounting. Next week I'll dive into some of the things that caused the trust account not to balance. I'll provide a few scenarios as I think that that will help you figure out how to correct the problems.If you are an attorney and feel you need some extra help from a professional accountant, call us today!