Demystifying Bookkeeping for Lawyers: How to Handle Trust Account Balances in QBO
Jun 19, 2023I came across this question on Facebook, and it's an important one to address, especially for bookkeepers unfamiliar with bookkeeping for lawyers. Let's break it down and explain it in simpler terms.
The Scenario
The attorney in question has a small practice and uses QuickBooks Online (QBO) for bookkeeping. He recently sent an invoice to a client requesting replenishment of funds for their trust account (IOLTA) using QBO. However, the client did not pay the invoice by the end of the month, resulting in a higher Trust liability balance in QBO.
The bookkeeper wonders if this is acceptable that he invoices for retainers and how does she handle it within QBO? She also asked about pointing the invoices to a different account and using journal entries (JE) to transfer them to the liability account when they are paid.
The Fix
Let's start by addressing what the attorney is doing wrong. While it may seem logical to use an invoice to request funds from a client, simply creating an invoice and linking it to the Trust Liability Account won't solve the issue of an unbalanced trust account if the invoice remains unpaid. In the example mentioned, when the attorney sends out the invoice and uses an item pointing to the trust liability account, the account will increase if the invoice remains unpaid. This creates an imbalance because the money hasn't been received yet, and the bank account will reflect a lower amount than the trust liability account.
To avoid this situation when using QuickBooks only as a standalone solution, one suggestion is to create the invoice but then delete it. By doing this, the client won't be aware of the deleted invoice and won't affect the trust liability account. When the money is received from the bank, you can simply record that amount in the trust liability account.
However, deleting the invoice is not an option if you're using the QuickBooks payment link feature, as the client won't be able to pay it. This presents a dilemma.
I suggest using the estimates feature in QuickBooks. You can edit the template to look like the picture below. This is a non-posting transaction, and you can embed a Gravity Legal link in it and send it to your client for trust replenishment purposes. When the client pays, simply change the estimate to an invoice and apply the payment. You can embed that link in the body of the email that goes with the estimate.
Software to the Rescue!
This is why I recommend using legal billing software like LeanLaw. It allows you to send a trust request on behalf of the client, and they receive an invoice to be paid without affecting the accounting until the payment is made. This solves the problem effectively.
Workaround
If you're not using external legal billing software, you must find a workaround to represent this transaction in a three-way bank reconciliation accurately. One possible solution is to indicate that the invoice has been cleared and reverse the transaction during the reconciliation process. However, this workflow is not ideal.
Another option, if the client uses separate legal software such as Law Pay or Gravity Legal, is to create a payment link on an invoice, allowing the client to pay it easily.
In my experience, I believe in the value of legal billing software. It saves a significant amount of time for legal bookkeepers and organizes data efficiently. Even for a small firm, the benefits of maintaining properly balanced and compliant books outweigh the cost of investing in software like Clio or LeanLaw, which can be around $60 monthly.
I hope you find this explanation helpful. In the coming months, I'll address more challenging transactions like this, as they can benefit those who work with lawyers or have lawyer clients and find these workarounds helpful.
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