Client trust accounts and invoicing for lawyers/attorneys

I am going to address a question that you mentioned, but did not list. I use QuickBooks to keep track of my billable time by client and then create bills from this information. I use the Enter Time>Use Weekly Timesheet feature to track my time. I have different hourly rates for different types of clients and so I have set-up different employees with different bill rates (even though they are all me). I do not pay myself a paycheck since I am a sole proprietor. I just use the feature to do my time billing. Then when I go to invoice a client, I click on Time/Billing at the top of the invoice screen to add the billable hours.

Now to your questions.

1) You shouldn't need any other programs.

2) Yes

3) QuickBooks has the ability to give you cash basis information even when you use accrual basis accounting (like using the invoice feature). If you set your reports up to be cash basis, QuickBooks will report the income when the payment is received.

4) You must NEVER have a negative trust balance for a customer. If there is not enough money in the retainer fund, only take what belongs to that client and leave the rest as Accounts Receivable (an unpaid balance on the invoice) until the money is received from the client. VERY IMPORTANT!!

5) Did you read the posts about the fact that the invoice procedure and the trust check writing procedure are two separate steps in the process? I will give you a quick synopsis - invoice customer to record A/R & Income; write check from Trust fund to decrease client trust bank balance and trust liability balance; deposit money into business account to decrease A/R and increase business bank account.

Thank you for the reply. I'm going to experiment tomorrow by creating a fictional client and client trust account.

Using sample files is a great way to test things out. Your QuickBooks program should have come with a sample file for you to play around with.

I have been running a solo law office on qb since 1999. I found it was the only program that allowed me to manage my trust account and bill clients.
I set up a "Bank" account call "Client Trust Account" and then for each client that I made a deposit for into this trust account, I set up a sub account of the Client Trust Account and named the subaccount with the client's name. At any time I can run a report of my trust account and see exactly who the money in the account belongs to. Once a file is closed I simply make that client's sub account inactive so my list is never too cumbersome. Ehtically, I have to always be able to provide who the money belongs to. I have a Trust Liability account set up that I check often to be sure it is the same balance as my trust account.
I have been using the billing add on in my QB and bill my client's monthly. I set up items to assist me in billing for reimbursable costs as well as an item for billing rates. If I have a retainer, I simply cut the check from trust and apply it to the bill. At the same time I am able to supply the client with a report of their trust balance and if money was taken from trust, there is always a bill to support it.
I have spent the last three years assisting lawyers set up their accounting systems so please feel free to write me if you have any questions.
Having everything in one system has been a valuable time saver.

Here are minor points, based on years of attorney and Realtor trust (escrow) accounting and exams, plus taking the Bar trust accounting course while serving on a Bar grievance committee.

I hate to see you make accounts inactive because it can be done prematurely. It is wrong to void old checks and deposits after a bank reconciliation date, as this throws off original bank and trust payable reconciliations. (The preferred method is to create a bogus deposit for a check you want to reverse and a bogus check for a deposit you want to reverse and to then clear the old check or deposit and the bogus entry in the same current period. You can even do this in a second bank rec for the same period.) If you void an entry for a prior period, or if you simply want to run your old trust payable list after accounts are made inactive, you usually have a big problem. It is far better to use an old trust payable parent account. You then  move current zero balance trust payable subaccounts, so they are a subsidiary of this old trust payable account, instead of making them inactive.

You also should like a series of memorized trust account reports like the ones we have. The first is a monthly balance sheet for the current and prior year. It only lists trust bank and payable accounts, so it quickly shows when you first went out of balance. The second report is a similar daily balance sheet, which you adjust for the error month. We then use a memorized list report for the first day of the error. It totals to the error and has offsetting amounts, except for one or more transactions that equal the error. These reports often let us find years of errors in minutes and fix them almost as quickly.

Every trust accounting discussion should include one income tax point. Attorneys can delay recognition of income by not transferring trust account balances to operating accounts. Once everything needed has been done, and the balance belongs to the attorney, it is unethical and illegal to do this. This is a top agenda item in the IRS manual on tax exams of attorneys. My other Bar grievance committee members did not know this,  but I quickly confirmed many IRS and state Bar references.

I've been trying to properly account for trust accounts with very confusing results. I note however that QB handles "normal" deposits/overpayments with aplomb. My issue is that having to separate out the trust accounting from the sales accounting means that I effectively have to create two transactions where only one has occurred in the real world.

Is it possible to simply receive a client retainer using the receive payment function, and let QB consider it a "credit" on the client's account? That way, as I invoice the client, I can apply the credit toward the invoice. And it seems like this still keeps track of client funds perfectly fine. It actually would be easier for me, since everything gets tracked in one place.

Using the oft-described "workaround" I've been able to keep track of client funds, but then when I've transferred money to an operating account (once the fee is earned), QB isn't showing those funds as income earned. Having to invoice separately from tracking the trust funds seems to create more problems for me. I can track client funds fine using the chart of accounts register, but I can't figure out how it's supposed to tie-in with the invoicing function.

I'm working in Texas, so my question is two part:

1) Is it ethically permissible to track client funds in the way I'm describing in Texas? and

2) Is there some other reason I shouldn't treat client trust funds (retainers) just like any other deposit in QB (with the exception of those funds being deposited to the trust account and not an operating account)?

I am not sure about Texas law, but, in most circumstances, trust accounting needs to be tracked with more accuracy and detail that you would think.

If you have a separate bank account for trust funds, you will also have a separate liability account, detailing who those funds belong to (customer:job tracking can do this for you)

When you receive trust money, you deposit it into the trust bank account, offsetting the trust liability account, with the customer:job name attached.

When you cut a check from the trust bank account, you need to hit the liability account, with the customer:job name attached.

The only transactions to/from the trust bank and liability accounts are to/from each other. NO EXCEPTIONS!!!!

Then, when you deposit that check into the Operating account, you use Lawyer Fee Income as the offsetting account.

If you are actually creating invoices for the customers, you would receive payments against those before depositing the money in the operating account.

Hope this clarifies the process. There are no shortcuts to this with trust accounting.

Laura

Thanks, that helps a lot actually. I think I've got the order

1. receive retainer ---> deposit to trust account & offset client trust liability account

2. perform work ---> invoice for work

3. write check to firm from trust account (offset client trust liability account)

4. receive payment of check and apply against invoice

Does that sound right? I went through the process with a test client and it seemed to work out: bank IOLTA account shows the originally increased liability, then shows it decreased when check is written out; client trust liability account shows a liability upon initial deposit of funds, which is reduced by the amount of the check written, and it appears that income was produced for that same amount when the check was applied to the invoice..... does that sound right? My this is complicated!

So new question: settlement funds. I think I can see how that would work in a similar vein, is there anything different I need to do?

Sounds like you are getting it correctly. . .

You just might want to set up some memorized reports to indicate how much funds you have for each client.

A report on client balance totals should match your bank reconciliation for the month.

I suggest that you run the report every time you reconcile and attach it to your bank rec.

If you are ever audited, this will be needed.

Laura

Another problem I've had with Quick Books is that you can't really use it as a cash-based business to properly account for client trust funds where a balance is due.

Typical scenario: Client Joe Smith provides a retainer of $3,000. This is easy to enough to track in QB: You deposit it in a bank account called "Client Trust Account" and make a liability account for "Client Trust Account Payable: Smith, Joe." You "owe" the client $3,000.00 in trust funds. The problem comes when you bill Joe Smith for $3,250.00 after you've used up his retainer and there's actually a balance due from the client of $250.00. According to my state's bar rules, after invoicing/billing the client, I can take the $3,000 from the client's trust account and then apply it to fees/expenses. I can take the $3,000 and deposit it into my business checking account. However, most state bar associations require attorneys to keep exact records of client trust funds, and having a negative balance is forbidden. So, using Quick Books to show a negative balance is out of the question because knowing the actual balance of the trust account is critical. You have to reduce the client trust account to zero and then keep track of the balance due from the client someplace else (I use a three-ring binder).

I still haven't found a way to properly use QB to do what I want as an attorney. It's very frustrating.

First of all, you don't really need to enter an invoice for that customer for the funds in the trust account. You can just write yourself a check as long as you have backup to justify the payment.

Then, you can invoice the customer for the balance if you want.

Or, if you invoice for $3500 and the trust account/liability pays the $3000, the remaining balance due is a receivable on your books and doesn't affect the liability account at all.

I am not sure why this is a problem. You would have a complete accounting of all activity which hit the customer trust account. (You invoiced the customer, the customer paid a portion from the trust. . .the invoice didn't hit the trust or the liability account, only the payment)

Unless I am missing something in what you are saying,

Laura

I'm fairly new to QuickBooks and I hope someone can inform me if I'm off base, but I was considering setting up a seperate "company" within QuickBooks to keep track of funds held in trust. It seems to me that this would lead to more clarity and better information on the profit-loss and balance sheet for the law firm and provide seperate reports for the trust funds. This also seems to more accurately reflect the reality of the transactions because it's not the law firm's money until the appropriate time. Are there flaws to this system?

You are correct in that the trust fund should be treated as a separate entity. . however, it isn't necessary to set up a new company file for this.

You have a separate bank account for the trust funds, yes?

Call that 1100 IOLTA Trust Account, or whatever. . .

Then, set up a current liability account called 2200 IOLTA Liability Account, or whatever.

Any transactions between the two ONLY affect the two. . .and their balances are ALWAYS reconciled to each other.

Track your clients by customers . .

That is the basic idea. .. .search for more posts on this topic. . .there is a lot of good ideas on this and other forums.

It is important to be able to run a report to justify all the funds in the trust account. . .matching it all to individual clients. ..

Hope this helps,

Laura D

Laura D, Thanks for the feedback. I believe our firm is has been accounting for trust funds as you've described (offsetting asset and liability accounts). From a business management perspective, however, the balance sheet is supposed to be an accurate snapshot of where the business stands. I have been frustrated when I look at our balance sheet and it contains all the trust data that distorts our assets and liabilities.
So I guess my real question is, what are the drawbacks to setting up a seperate "company" to account for trust funds? Will we be doing double the work? Will we have to set up client profiles in both companies or can we use a shared database of any kind? Is it difficult to move from one company to another?
Thank you in advance for your input!
-Nutmeger (go Friars!)

If your trust account is set up as I described with your liability account always matching your trust bank account, there shouldn't be a problem with financials. . .it is a 'wash'. . .

If you want, you can run a Balance Sheet, go to Modify>Filters>accounts. Select accounts.. ..manually select all, then deselect the trust and the liability accounts.

Memorize this report for next time. .. if your assets and liabilities do not equal each other, then the problem is with your trust bank and liaility accounts.

I wouldn't want them in two separate files, unless you share your customer list via Outlook (which, I hear, is do-able, but I have never done it)

Hope this helps,

Laura D

David. . .I am curious to know your thoughts regarding my last post to you. . .

Always learning,

Laura D

What receipt do you prepare for the customer each month to show the balance used/left in their retainer? The accounts receivalbe report will show the amounts invoiced if the portion of the retainer that is used is invoiced. However, it will not show an available balance unless you credit A/R when a retainer is received. I understand that there's no need to "invoice" a client for amounts they've paid up front, but then how do you report available balances to the client? Help...and thanks!

Check this thread for my procedures and reports.

ldion, "Paying myself from the Trust Account" #8, 17 Oct 2007 4:04 am

> specifically, posts # 8 and 10

Hope this helps,

Laura D

the only time my client trust liability account equals my client trust bank account is when all invoices are paid...I invoice other customers on behalf of my client with the items set with the client's trust liability account. Unfortunately when I create an invoice, it automatically shows up in the liability account, before it is paid. Anyone run into this before? any insight?

I set up trust accounting procedures differently, but here is my first thought -

Run your report on a cash basis. Do the two accounts equal each other? If not, this indicates a problem with your setup.

Does this help?

If this answers your question, please mark this post as 'solved'. Otherwise, submit a comment for clarification.

Laura D

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