A Primer on Business and Trust Accounting for Solo/Small Firms

Trust AccountsEvery lawyer knows their license is on the line if they keep sloppy books.  Poor accounting, poor 3-way reconciliation (yeah, bet that one threw you for a loop), and negligent handling of your IOLTA account can pretty much destroy your practice and your livelihood because 1) you don’t have a handle on your finances, 2) you could be violating all types of rules regarding the handling of your clients’ funds, and 3) everything in your business flows from having a tight, ethically-compliant grip on your finances and cash flow.

So, let’s start with a primer:

IOLTA Account:

If you’re a lawyer and clients give you money you must have a system in place for maintaining and properly recording all transactions related to the funds now in your possession. There are absolutely no excuses for not having a system in place.  It is required. The one account unique to the legal profession, however, is the IOLTA account.

  • “IOLTA” is an acronym which stands for “Interest on Lawyers’ Trust Accounts”;

  • An IOLTA account functions as an escrow account, for any retainer received by you against future legal services. Interest earned on an IOLTA account generates revenue for the state’s legal aid fund so eyeballs are watching.

  • Lawyers are generally required to send itemized bills to clients at the time the lawyer withdraws funds from a trust account to pay themselves for services. (Best practices, however, is not to withdraw funds until 10 days after sending an invoice to give time for client to review/dispute charges – a tacit agreement to the charges should be written into your retainer agreement if invoice not challenged within 10 days.)

  • These itemized bills should indicate:

    • services provided with a description and dollar amount;

    • amount withdrawn from the client’s trust account to pay the bill;

    • amount of funds the lawyer continues to hold in the client’s trust account after withdrawal for payment of the invoice.

  • Lawyers should never make a withdrawal from an IOLTA account via ATM or checks made payable to “Cash”.  Lawyers should also be using pre-numbered checks.

Trust Accounting:

You will need the following:

  • The trust bank account balance must match the trust liability account balance.

  • A ledger for each client’s trust balance, the total of which must equal the trust bank account balance.

  • A detailed ledger, for each client, showing all the transactions involving trust monies – inflows and outflows.

3-Way Reconciliation to avoid Defalcation (Embezzlement):

There is an accounting requirement that affects lawyers and other legal professionals which rarely exists outside our profession. It is called a 3-way reconciliation report. The Rules of Professional Conduct require lawyers to demonstrate that their financial records accurately reflect all of the transactions regarding monies entrusted to you by your client – ‘trust monies’ held in escrow in your IOLTA account.   The “3-way” reconciliation is the process where by you ultimately compare the total of the individual client ledgers and the bank charges with the balance in the check register. Both amounts should be exactly the same.

To complete the 3-way match you first reconcile the Checkbook Register (which is usually on line today) to the Bank Statement.  The Bank Statement must match the Checkbook Register after taking into account all deposits and withdrawals yet to clear with the bank.  Most lawyers will be familiar with this process as it is the same as balancing your personal checkbook. (Oh, you don’t do that?)

Once this is done, you need to make sure the Checkbook Register matches the total on the IOLTA Balance Register.

Step One shows you’ve recorded in your checkbook all the transactions that cleared the bank.  Step Two shows you’ve recorded all the transactions which affect the client’s IOLTA balance.

Now that you’ve had a primer on Trust Accounting, are you a little nervous?  Just a little?

cosmolex-500x375v3That’s why we are so pleased to announce our newest sponsor, CosmoLex.  CosmoLex is law practice management software BUT with a very important twist. They spend morning, noon, and night focusing on the smooth and seamless management of business and trust accounting for the solo/small firm lawyer through their state-of-the art practice management software so that you don’t get in trouble.

CosmoLex takes a decidedly different approach to law firm practice management.  They focus on those areas you are most likely to have a problem with (read grievance/disbarment) if not handled correctly:  Business and Trust Accounting.

Take Notes:

CosmoLex has complete business and trust accounting is built-in within its software so everything you need to do happens automatically. So, as users use the system such as cut checks for matter cost or receive invoice payments, correct accounting just happens for you. You do not need to go to another software or leave paperwork trail for your bookkeeper to sort out.

CosmoLex accounting is not just general business accounting, it is legal compliant accounting. Legal specific chart of accounts, proper set of trust account rules, cost accounting rules, even income recognition rules are all built-in, out of the box.

That right.  All the trust (IOLTA) accounting functions are included within the system. (Yay!)  They help manage client funds and print checks, deposit slips, and bank statements. The activity log keeps detailed information on past reconciliations, and three-way reconciliation reports are available on a monthly basis.

The document management in CosmoLex organizes digital records and files so they’re easy to locate. It currently integrates with Dropbox, but the team at CosmoLex is also building integrations to GoogleDrive and NetDocs.

Since CosmoLex is completely web-based, it can be accessed from a browser on any secure internet device. It’s completely mobile so there are no excuses for not entering all the information wherever you might be. They’re a great fit for smaller and solo practices across a variety of practice areas.

It’s time to get rid of those business and trust accounting headaches .  And here is the easiest, most cost-effective

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