While you don’t want to mismanage any of your accounting records, mismanaging a trust account (IOLTA – Interest on Lawyers Trust Account) can have terrible consequences. Keep in mind, trust funds are not your money, at least not yet.
Common Trust Accounting Mistakes
Not Maintaining Separate Accounts
Keep trust funds in a separate bank account. At no time should operating funds and trust funds commingle. Tracking funds become very difficult if you are using one account for general business and trust transactions. Additionally, mingling funds can lead to the appearance of impropriety.
Some small businesses go so far as to keep trust funds in a different bank from their general business account.
Reconcile
Small business owners often do not reconcile trust funds regularly and balance the trust liability in their balance sheet to the bank statement.
Keep trust funds in a separate bank account
Manual Ledgers
It’s best to use an accounting system, such as QuickBooks, to maintain records instead of a paper-based ledger system. In QuickBooks, it’s easy to provide an audit trail should you need to.
Overdrawing the Account
Make sure to only write checks that you have funds to cover. Overdrawing a trust account is immediately reported to the State and has unpleasant consequences. Don’t let a client talk you into giving them a check that they won’t cash. That never works!
Trust Account Best Practices
Reconcile the Bank IOLTA Account to the IOLTA Liability Account
At least monthly, check to make sure your IOLTA Bank and Liability accounts agree. Yes, they should be identical. If they are not, go transaction by transaction to find the error and adjust. Small errors accidentally occur and the balance could snowball, giving you an unrealistic view of your retainer balances.
Documentation
Make sure you have clear documentation and are transparent with your client on how and when you will move funds from their trust account to your business account.
Maintain Client Sub-Accounts
If you have less than 20 retainers at one time each client should have their own sub-account showing all activity. Each sub-account should be reconciled monthly to ensure there were no mis-postings between clients. Creating sub-accounts is very easy to do in QuickBooks by adding a new account in the Chart of Accounts. Below are the parameters you would use:
Contact us if you need help setting up sub-accounts or creating procedures to manage your trust clients.
Links to Other IOLTA Blogs:
https://www.budgetease.biz/blog/attorneys-are-you-accounting-for-your-interest-on-lawyers-trust-acc…
https://www.budgetease.biz/blog/how-to-set-up-and-process-iolta-accounts-in-quickbooks-online
