Trust Club: Fixing the Errors in Trust Accounting
The first rule of Fight Club is You do not talk about Fight Club. The second rule of Fight Club is You do not talk about Fight Club.
The first rule about Trust Club the trust account bank balance must match the trust account liability. The second rule about Trust Club the trust account bank balance must match the trust account
It’s imperative to understand this RULE when it comes to working with attorneys and trust accounting. It all boils down to a few simple rules:
Imagine that every client held trust is like its own account register for the client. That’s how you will set up a liability accounts. They will be sub-accounts of the parent trust account liability. They’ll all have a register. The sum of all of the registers will total in the parent account. This account must match the bank account balance. There is no if and or buts about it. If it doesn’t match, you need to drill down to find out why.
Fixing the Errors
In the video below, you will see that I’ve investigated several scenarios. Some are date driven errors, which can easily happen. Some can be just simple accounts receivable transactions that posted to the trust account in error. I show one where the client made sub-bank accounts as well as trust liability accounts. Another scenario is a trust account deposit that is entered into QuickBooks into the operating account. Once you find that error, it must be corrected immediately. It can be as easy as changing the bank account at the drop-down list or even more complicated if the bank funds ended up in the wrong bank account. Fixing these mistakes is where a ton of notes and transparency in the correction need to take place. Because these funds are never the law firm‘s funds until the revenue is recognized. The record keeping needs to be handled with these proper accounting steps, so it is a smooth process. The simplicity of workflow is what I love about LeanLaw. The whole trust management from start to finish is pretty smooth and seamless.
I’m trying to break this out as clearly as possible. I think simplicity in the workflow will help guide you in handling these funds appropriately.
Note: Click the box on the bottom right corner of the flowchart (next to the gear) to expand this flowchart to its own page. There are clickable links to video's embedded in the chart. Just double-click on the stars to connect to the downloadable videos.
With LeanLaw, when working with trust accounts, the workflow is demonstrated clearly. There is a page in LeanLaw that I show in the video with the trust account bank balance and the trust account balances. These are the balances that all need to jive. If they don’t jive, you have to figure it out. It can sometimes make you feel like a detective, especially if you’re a bookkeeper working with a new client that inadvertently mishandled the funds. You have to dig in and figure it out. There are no shortcuts.
As demonstrated in the graph below, you can see the proper flow of the funds. It is this basic and straightforward. For example, if it is a basic account receivable transaction (no trust), it can be a matter of billing a client a flat fee. Maybe it is for a service that’s just a legal service that has nothing to do with trust account., like a corporate tax filing. When it’s not trust-related, it’s only a simple accounts receivable transaction-- an invoice the client is billed, and the customer payment is received. This transaction will have nothing to do with a pre-payment on the account. Once you get your head wrapped around that particular flow, the trust account flow will make more sense.
As a bookkeeper or an accountant working in the space of law firm accounting, it’s sometimes digging through a tangled web. Once detangled, make sure you lock out the previously closed periods with the password. Don’t let that client get into what you have fixed and mess things up. I cannot tell you how many times I’ve had a new client that tells me that bank‘s trust account is balanced, but when I look at them, I discover the trust bank account in no way matches the trust liabilities total. Sometimes these issues will involve going back to transactions from many, many years back. Not easy detective work for sure!
Of course, if you need assistance in any way, or help with trust accounting, reach out to my firm and will help you get it untangled. Call us at 239-349-2004.
For more posts on trust accounting, see here.