Law Firm/Trust Accounting in QuickBooks

While many lawyers are reluctant to use QuickBooks to manage their firm's accounting, there are several advantages to using an industry-standard package like QuickBooks which smaller firms shouldn't overlook.

The chief complaint we've seen from law firms stems from QuickBooks' inability to deal effectively with trust accounting. In fact, QuickBooks can deal well with trust accounting, but you'll need to do a little work to make sure that it is setup properly. Like most accounting-related issues, as long as you take the time to setup trust accounting properly, keeping track of the details becomes a fairly simple task.

Keep in mind that the methodology outlined here isn't the only one for keeping track of trust accounts in QuickBooks. You could, for example, use specific income accounts, classes or even separate company files for each of your trust accounts. This method has the advantage of being easy to track, easy to reconcile when bank statements come, and easy to report on in both QuickBooks and bolt-on applications like BigTime.

Setting Up a Trust Accounts Bank Account

If you haven't already done so, begin by setting up a new bank account from your QuickBooks chart of accounts. From the Lists menu, choose the Chart of Accounts menu item. Choose the Account button and click New (or hit CTRL+N) to add a new account.

ACCOUNT TYPE:Bank
ACCOUNT NAME:Trust Accounts
OPENING BALANCE:$0

This "Trust Accounts" account is just setup so that you can keep your trust account data separate from the firm's other bank accounts. By setting up all of your trust accounts (as separate bank accounts) beneath this single "master account," it's easier to filter out trust account assets when you print out your firm's financial statements.

Setting up Asset/Liability Accounts

In addition to your initial "master" trust account, you should also have an "other current liabilities" account which is used to track deposits to these accounts. Typically, that account is created when you create your QuickBooks company file, but you should verify that it's there (and create it if it's not).

Creating A New Trust Account

Each time a new trust is setup, you'll need to create a new bank account (beneath "Trust Accounts") in QuickBooks. If your state supports IOLTA Accounts, then you can setup a "master IOLTA Account" beneath the Trust Accounts record, but you will still setup separate trusts for each client.

Create new accounts the same way you created the original master account (from the QuickBooks Chart of Accounts). When you're finished, your COA window will look similar to the following.


Notice that we have created a half-dozen trust accounts, each one with an initial balance of ZERO. Most of our trusts are setup as IOLTA trusts, but a few of them are not.

Keep in mind that your state will have rules about your firm's ethical responsibilities related to tracking separate trust accounts, and the number of sub-accounts you create is entirely up to you. A few things to consider as you setup your accounts in QB:

1. You don't have to create a 1:1 relationship between the separate (numbered) bank accounts you open and the bank accounts you create in QuickBooks. The "master" account doesn't have to be a separate physical bank account, and neither do any of the sub-accounts. Make sure the structure you choose complies with your state's tracking requirements.

2. If you have a set of IOLTA accounts, make sure to create two "tracking" sub-accounts in addition to the client accounts: one for keeping track of firm dollars transferred into the account to cover banking fees, and one for tracking interest accrued but not yet transferred out.

Note that (in our screen shot above), we've called those two accounts _IOLTA Interest and _Fees Reserve (the _ will force those two accounts to sort to the top for easy reference).

Once each trust account is setup, you're ready to create initial balances.

Initial Balances

To create an initial balance, you can use the Make Deposits item (in the activities menu) for the trust account in question.

1. Select the trust account from your chart of accounts window in QuickBooks

2. Click on Activity...Make Deposits and you'll see the Deposit window pop up on screen. Note that QuickBooks has already filled in the account into which funds will be deposited (in the top of the screen) based on your selection in the chart of accounts.

3. Select the customer from whom the funds have been received in the Received From column, and choose the "client trust" liability account (from "Other Current Liabilities") as the From Account. Enter the initial deposit amount and click SAVE.

A couple of additional notes:

1. Funds transferred into your IOLTA _Fee Reserve account can be deposited from the firm's primary checking account.

2. No transactions are ever posted to the overall "Trust Accounts" master file. Just to the sub-accounts you've created.

Once you've finished entering opening balances for your trust accounts, you can RECONCILE the overall account (based on your most recent bank statement). The beginning balance for your trust account will be zero dollars, but the ending balance should match your most recent bank statement.

Receiving Client Retainers/Deposits

Once your initial balances have been established, you can use the Make Deposits screen to record retainer/deposit payments. Note that there is a Check Number field which can be filled in as well as a memo. Use both of those fields and your financial reports will contain more detail.

Making Payments from Trust Accounts

Payments can be recorded in QuickBooks as checks and should be paid out of the client's trust account. You'll record any payments just like you do other expenses, but make sure that any payments that are made from the trust account are written from that account.

You should also make sure that each of your checks is entered against the "client trust liabilities" account. This will keep your firm's current liabilities number accurate.

BigTime Sees These Payments Automatically

If you are a BigTime user, then you can setup the trust account for each of your customers/matters. As checks are written against that trust account, the expenses are automatically pulled into BigTime as "pre-paid" expenses (so they will show up as a matter of record on a customer's invoice, but they will not result in a payable for which the customer should be invoiced).

Paying Your Fees from Trust Account Funds Using BigTime

If you're a BigTime user, you can use the system's trust fund accounting feature to (a) create an invoice for your fees and (b) pay that invoice automatically from the client's trust.

If you're not using BigTime, then paying your fees is a little more complicated.

Assume we have a customer called "CustomerX" who has paid us an $10,000 retainer. When we created the initial trust account for that customer, we recorded a $10,000 deposit and a $10,000 "Client Trust Funds" liability.

Now, assume we have $8000 in fees to bill that customer. First, create an invoice in BigTime for $8000.

1. The customer now has a $8000 "balance."

2. The customer's trust fund has a $10,000 balance.

3. The "Client Trust Fund" liabilities account has a $10,000 liability which is linked to the initial deposit.

To Transfer $8000 from the client's trust fund to the firm's account (and, as a result, pay off the invoice), we need to use a QuickBooks journal entry. The screen shot below shows what that journal entry looks like.


We've moved $8000 from the client's trust account to the firm's main bank account. Then, we've move $8000 from the "liability" account used to track client trust funds to the "accounts receivable" journal on behalf of CustomerX. That one journal entry (entered in order to pay the invoice we created for the customer) will set our accounting records straight. All that remains is to physically transfer the $8000 from the trust account to the firm's checking account.

Once the journal entry has been created, we can use it to "credit" the invoice we've created in QuickBooks.

1. Open up the invoice you created for CustomerX.

2. Click the "apply credits" button at the bottom of the page.

3. Check off the credit we created in our journal entry (above) and click OK.

The invoice in QuickBooks will now show PAID.

BigTime Automates Trust Fund Accounting

If your firm uses BigTime to create customer invoices, then you can indicate the trust account you would like to "auto-pay" an invoice out of. BigTime will create all three of the transactions you need (the invoice, the journal entry and the credit) when you "post" your auto-pay invoice to QuickBooks.

In addition, the legal invoice formats that can be downloaded from http://www.BigTimeSoftware.net (for use with BigTime) will show both the automatic payment and the current trust account balance on the cover page of each customer invoice.

Trust Fund Reporting

The advantage of tracking trust funds as described here is the ease with which account reconciliations and registers can be printed.

You can reconcile each of your physical bank accounts by selecting the master/sub account to which the physical account corresponds. Each month, you can print out a bank rec as required by your state.

Each of your bank accounts has a register with the details of each transaction posted to the account. Below is a screen shot of the register for CustomerX (per our example above).


Each customer account has a record of invoices/payments as well, and you can produce a "trial balance" by simply running a quick-report on any of the bank accounts in the system. Each state's reporting requirements are different, but most of your reporting needs should be met via those 3 simple reports in QuickBooks.

Once again, BigTime users can use the matter dashboard to access much of the same information from a customer-centric point-of-view, but BigTime isn't required in order to use QuickBooks to manage your trust accounts.

To download a copy of this article in PDF format, click HERE. For more information about how BigTime can be used to automate law firm accounting, feel free to contact a sales representative at sales@BigTimeSoftware.net