Updated: Aug 3, 2020
With regards to dealing with your client’s trust accounts, it is critical that your law firm has the correct processes and practices established to ensure safekeeping. In this blog, we will be covering the “do and don’t” of handling the trust account.
So, what should we DO in trust accounting?
DO understand which funds go where. Funds have different types. One is advanced money received from the client for practice and one is income recognized and could be spent on business expenses as well. Despite the fact that money in a trust account could be in your possession, it is not a part of your available resources until the essential tasks completed and you requested payment from your client.
DO analyze and follow the regulations. Trust accounting requirements are not the same as state to state. Make sure you analyze and gain advice from the professionals.
DO have a separation between trust and operating accounts. Funds come into the trust account is still NOT your income recognized, it is just an amount of obligation while money coming into your opening accounts could be recognized as revenue. Expenses must also be kept separately.
DO keep all records and make them accessible. Note every deposit that enters your trust account as well as every withdrawal. It will save time and can be solid proof of any conflicts in the future.
DO reconcile regularly. Monthly reconciliation could be a chance for you to lock your book and review bank statement alongside a reconciled report
DO invest in technology. As an attorney or a law firm, we realize that you could have lots of things to keep track of, so it is necessary that small and large practices alike take proactive steps to bridge the gap between accounting and billing. By using a legal-specific solution, you can rest assured nothing will slip through the cracks, and instead, you can provide clients with the trusted counsel they seek and deserve.
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On the contrary, there are some things that you should NOT do in trust accounting:
DON’T treat the trust account as a piggy bank. Trustees are not allowed to withdraw money from a trust fund to cover their own expenses or those arising from other trust funds. You cannot borrow, lend, or take from a trust fund to pay for unrelated expenses.
DON’T overdraft ledger. Inform your client whenever it comes to the negative amount. Have a system in place that simply shows the balances of each of your accounts and has built-in protections against over drafting.
If you need advice or services on any aspect of bookkeeping, accounting and tax, our specialists are ready to help. Get in touch with us for free quote.