Keeping track of trust accounts is one of the biggest challenges when dealing with accounting in a law firm. Each client’s trust account is essentially a separate bank account, with the law firm holding their money to pay out expenses after they are incurred.
How trust accounting works in a law firm
The trust account, also known as an Interest on Lawyers Trust Account (IOLTA) must be completely separated from the attorney’s business account. Additionally, the trust funds must be clearly identified, and not just put with other client’s trust monies. Although every state has its own legislation governing how trust funds are reported and handled, lawyers can never use the accounting law firm’s trust fund monies to operate their day-to-day business transactions, or borrow money from it.
Accounting in a law firm –reconciling trust funds
The easiest way to reconcile trust fund accounts is by using software designed for that purpose, provided a lawyer wants to do his or her own accounting. As well, there is software that performs the accounting for a law firm’s daily operations.
With accounting for law firms, if an attorney’s client has more than one trust fund account because they have more than one file, the trust money must be differentiated into subaccounts. While the subaccount will be attached to the client’s main trust account, every transaction must be recorded separately.
Legal sanctions if trust accounting in a law firm is not done properly
How client trust accounts are handled is so important that if a lawyer makes an accounting error in an accounting law firm, even unknowingly, he or she can face legal sanctions; he or she can even get disbarred—and it doesn’t matter how much money is involved.
Trust accounting in a law firm – trust monies are not revenue
Trust fund monies are never revenue, and they are not there for the benefit of attorneys. As well, whenever funds in a trust account are used, the accounting law firm has to document why and to whom the money was withdrawn, including the clients name and the lawyer.
If there is ever any doubt about how an attorney used trust monies, the accounting law firm department has to provide accurate records, proving the money was never used for a disallowed reason.
Trust accounting system
A system has to be put in place in the trust accounting law firm department that separates trust account funds from other accounts. As well, there has to be a system in place to track the accounts.
By following the above-noted steps while doing the trust accounting in a law firm, attorneys can rest assured that the proper separation between general funds and client trust accounts will be properly separated, as stipulated by law.
But, to be on the safe side, it may be a better plan to have an outside professional accounting firm take a look at the trust accounting practices in the law firm to make sure the procedures are fool-proof. This way, if there is the potential for any serious problem, they can be identified to make sure there is no threat of sanctions from the government.