Trust accounting for law firm

Updated: Aug 3, 2020

It is not at all unusual for attorneys to handle client trust account. Nearly every lawyer will hold client funds. The money in a trust account does not belong to the attorney or law firm. Instead, the attorney is holding the money “in trust” for the client until it is distributed. Anytime a law firm holds funds in a trust account, it must be accounted for, which is where Trust Accounting comes in to play.

Let’s think of your client sending you an amount of money “in trust”.

The basic concept of a trust account is to keep our property separate from the property of the client or the third party. When you

and your client start a practice, based on your agreement, the client will provide you an advanced amount

of money. The amount will be deposited into your bank as a trust account. Whenever you have expenses relating to the client’s practice, it is important to run the money from that account. At the end of the practice, based on your work, the final invoice will be sent to client for payment.

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Remember that the funds in your trust account are NOT your company’s funds, that is the reason why we need to use the trust accounting.

Trust accounting is simply bookkeeping of a trust account by state tax and accounting requirements. It involves separating the expenses of trust in different categories. If there are any business expenses carried on by a trust account, they are required to identify and offset against into when it comes to the calculation of the business profit. Because the funds in a trust account are not our money, expenses for trust accounting management must also be recorded carefully.

Nevertheless, requirements for trust accounting is different from state to state, there are some specific ones, which are used to maintain the accuracy for both the attorney and the client. Trust Accounting requires:

  • Tracking of all deposits and disbursements made through the account.

  • A detailed ledger that notes every monetary transaction for each particular client.

  • An accounting journal for each account, tracking each transaction through the account.

  • Monthly reconciliation of the account.

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.

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