Staying Compliant With Your Trust Accounting
In working with law firms we see lots of trust accounts, along with processes that firms are using to ensure they are staying compliant with trust accounting rules.
We want to make sure you are staying compliant too!
Here is a list of the most common trust accounting mistakes we see law firms make, and how to avoid them:
Not Reconciling The Trust Bank Account
Every single month you should perform a bank reconciliation for all trust accounts. A bank reconciliation is where you are comparing what is recorded in your trust ledger with what has actually cleared the bank.
When this is completed properly you will have a Bank Reconciliation report. It should total all the deposits that came in and all checks that have cleared the bank. Then you will have a section for outstanding deposits and outstanding checks.
You should review the outstanding section every month to see what has not cleared the bank, and why it hasn’t. Was the check really mailed? Did it get lost? Should you reissue a new check? These are all items that you should revisit each month and take action on.
Client Trust Ledgers Don’t Balance With The Bank Account
For every client that has funds in your trust bank account you must have an individual client trust ledger. This ledger must show all trust deposits made on behalf of the client, all disbursements made on behalf of the client, and an ending trust balance.
Then you would compare the total of all individual client trust ledgers to the amount from your bank reconciliation to ensure you have the proper trust funds in the bank account.
For example, if you have 5 clients with money in trust and they all have $10,000, then your trust bank account should have $50,000 in it.
Maintaining An Admin Balance In Trust
You are allowed to maintain a “reasonably sufficient” balance in your trust account to cover any bank charges, such as wire fees, returned deposit fees, etc.
Doing this will ensure that you are never using client trust funds to pay these fees. We recommend a firm maintaining anywhere from $100 to $250.
Keep in mind, you should also have an “Admin” trust ledger for these funds so you know at all times how much funds are in the trust account that belong to the law firm.
Keeping Copies Of Cancelled Checks
The Florida Bar accounting requirements for trust accounts include keeping a copy of each cancelled check, front AND back.
We strongly suggest working with a bank that will give you images of the front and back of each check on your monthly bank statement. This is much easier than going into your online banking system and printing the front and back of each check.
Keeping Copies Of Deposit Slips
The Florida Bar accounting requirements for trust accounts include keeping a copy of each deposit slip.
Your bank deposit slip should include the date, source of all funds, and the client or matter the funds are for.
We recommend saving a copy of your deposit slip, along with each check included in the deposit.
Using A Practice Management Software
This is where we see the most errors.
A firm starts using a practice management software that tracks client trust balances, but they don’t compare the trust balance from the software to the trust balance tracked in their accounting system.
What we see happen the most is that a firm will go into the practice management software and record trust transactions, but then they will forget to print a check or transfer funds.
For example, in your software you pay a client’s invoice with trust funds. It’s recorded. But then you get busy and forget to actually transfer the funds from Trust to Operating. Then you end up with different client trust balances than what is actually being held.
This becomes a trust nightmare if you don’t compare the two systems with each other every single month.
We recommend printing the trust balance reports from your practice management system and then comparing those balances to your accounting system trust balances.
These are all common mistakes we see. We hope that this helps you to not make these same mistakes!
If you would like to talk about your trust accounting and how we can help you stay in compliance, book a free consultation here.
I help solo and small law firms, and other service professionals, by providing accounting, tax preparation and proactive tax planning services.
I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease.