Trust accounting is the need to maintain money in a pooled account (“the Client Trust Account”), that isn’t yours, and cannot be spent until it is “earned” (i.e. unearned attorney fees, processing of settlement funds, or advanced case costs). The Client Trust Account is a separate account from a law firm’s operating funds.
Trust accounting is complex and has been known to be a malpractice trap as a result of a myriad of confusing and frustrating bar rules, plus a system of banks and credit card processors that are often ignorant of these rules. One mistake, even inadvertently by you or your bank, could cost a lawyer their license.
What is meant by a “pooled trust account”? A law firm has but one trust account, however, within that account are many, many singular clients whose money is pooled. For example, John Doe may have $10,000; Jane Doe may have $15,000; Tom Smith may have $7,500. Altogether your trust account holds $32,500. However, there must be a methodology to keep the three client accounts pooled as a total yet separate as to each client’s register. If you deposit John’s $10,000 check, and then immediately turn around and write a $5,000 expense check on John’s case (failing to wait for John’s check to clear in say 7-10 days), and then find out John’s $10,000 check bounced, you have committed malpractice by inadvertently utilizing the funds of Jane or Tom to cover John’s $5,000 expense.
Trust accounting, believe it or not, is an area feared by many solo practitioners and boutique/small law firms, and with good reason. There are many stories and first-hand experiences regarding mistakes that have been made in trust accounting which has cost lawyers their state bar license and privilege to practice law. This can happen for a myriad of reasons: the solo practitioner or small/boutique firm lawyer tries to wear many hats: while they may be an excellent attorney, perhaps not such an excellent accountant. Think of it this way: would you hire a plumber to perform electrical work in your house or vice-versa? Attorneys should stick to the practice of law and leave the accounting to experienced law firm accountants. Also, what is important to note is that not all accountants and bookkeepers do well with trust accounting. Trust accounting is a unique animal in and of itself. We too have seen many excellent CPAs and full-charge bookkeepers try to take on the task of trust accounting in a law firm setting, and although they are excellent in the accounting world, having not been inside the legal realm, they too make mistakes.
If you want flawless, mistake-proof trust accounting for your law firm, we “get it”. We keep a flawless set of books and follow the state bar requirements to the letter. This then transitions into great books for your outside accountant, making the job of yearly tax preparation seamless.
Let us take the fear away and help your law firm stay on track and trust account compliant.
Trust Accounting Services Include:
- Accounts Payable & Accounts Receivable – tracking all deposits and paying all bills.
- Payroll processing for what employees a business does have.
- Bank account and credit card reconciliations which allows for the identification of uncashed or lost checks, detection and prevention of excessive or unjustified bank charges, as well as uncovering and precluding embezzlement of funds from within your company.
- Profit & Loss Statements which granularly itemize your business revenues and expenses showing the bottom line of a profit or loss for a month, quarter, or any other time period you desire. You’ll be able to see the tracked revenues and expenses so that you can determine the operating performance of your business, determine what areas of the business are over or under budget, identify items that are causing unexpected expenditures (supplies, phones, etc.), and determine your tax liability.
- Balance Sheets which provides a snapshot of your business’ financial condition at any moment in time.
- General Ledger maintenance and/or clean-up. As the GL is the heart of any company’s financials, and as every transaction is tied through the GL, mistakes in the GL skew a company’s financials. Having the GL reviewed monthly allows for the opportunity to locate discrepancies, rectify the errors, and this in turn allows for accurate and clean books.
- Preparation of year-end 1099s for any non-employee compensation.
- Coordination with your CPAs/Accountants for year-end taxes and tax returns.