Law Firm Accounting: Should you use Separated Trust Account and Data File Method ?
Aug 14, 2023For many firm owners and bookkeepers who employ the trust accounting system, correctly understanding how to segregate the trust account from their other data files is essential for tracking financials. The advent of modern accounting software has made this an easy task that requires little additional effort.
This blog post will provide helpful information and tips about using the separated trust account method in law firm accounting so that you can track client transactions more accurately and understand where funds are being allocated. We'll outline key considerations when setting up the process, talk about what types of accounts should be classified as either “trust” or “operating” accounts, discuss potential software options available for implementing your firm's specified procedure, and look at ways to streamline processes within your law office's existing bookkeeping structure.
One File System:
Advantages:
Keeping the files separate ensures the segregation of trust ledgers and trust funds from your accounting. It is important to remember that the funds provided by clients are retainers and only belong to you once the revenue is earned. Subsequently, these funds are transferred from the trust bank account to the operating bank account. Many accountants prefer to maintain this separation, not revealing the attorney's clients' trust bank account or trust ledgers in the attorney's books. Since it's not the attorney's money, dividing the files into different ones makes sense.
This methodology keeps the two files organized and distinct, instilling the appropriate mindset regarding your attorney-client relationship.
Two File System:
When we encounter a scenario where a two-file system is already in place, we often observe attorneys working within their legal software for trust ledgers, invoicing clients, and inputting transactions. However, there is only sometimes a foolproof method to demonstrate the actual transfer of funds.
Sure, you can reconcile the trust account with the bank, but if you need access to the other side, how can you prove that the funds have been transferred? Imagine a situation where a client account is completed, and all the money in the trust has been earned. You create an invoice and a payment to recognize revenue, all of which transpires on the trust side. You inadvertently omitted to move the money to the operating bank account. While the bank's side of reconciliation may appear balanced, the trust bank account will show an outstanding transaction. As the files are separate, there is no way to obtain a clear view of this issue – the failure to transfer the funds.
One popular software among attorneys is PracticePanther. In the numerous files I've reviewed on PracticePanther, almost every attorney proclaims, "My files are flawless – I ensure the utmost accuracy in Panther." However, they often neglect the crucial aspect of reconciliation. The reconciliation process can be somewhat cumbersome, making it easy to inadvertently uncheck a cleared transaction without any means of realizing this error. I have yet to come across a PracticePanther file that is valid.
Accounting for a law firm is complicated, but it can be more manageable with the right strategies and processes. Using a separate trust account QuickBooks file and a separate data file method can be more work and does not validate the data seamlessly.
By adhering to the one-file method, firms can rest assured that their finances are properly managed and balanced. Additionally, streamlining your workflow will make any day-to-day activities more efficient. As you continue navigating through this complicated process, remember that you are not alone - reach out to us at The Accountant's Law Lab for guidance and resources. Join our mastermind group today to benefit from peer support and valuable advice from peers and industry experts eager to support the most complex accounting needs.
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