Managing Trust Accounts with QuickBooks

For lawyers and real estate agents—
Managing Trust Accounts (Iolta Accounts) with QuickBooks®
Attorneys and real estate agents often hold client or third party funds in trust and are responsible for tracking the receipt and dispensation of these funds. The purpose is to safeguard these funds from loss. The monies belong to the clients/third parties and cannot be co-mingled with company funds. A separate bank account is set up to hold the funds. Careful record-keeping is required to demonstrate that no improprieties occur in the handling and managing of these funds. If such were to happen, penalties are severe even to the point of suspension of licenses or disbarment.
As many law firms and real estate agencies use QuickBooks® for bookkeeping, we’ve developed a Chart of Accounts and procedures for our clients to use to satisfy their bookkeeping needs for these accounts.
 

CHART OF ACCOUNTS
Because the trust funds cannot be comingled with company funds, open a separate bank account and list it separately in the Chart of Accounts, i.e. Client Trust Account. This is a bank account that will be reconciled each month. An immediately realized problem is that this bank account may hold funds from a large number of clients/third parties. How do you track each party’s funds and know their individual balances at any given time? You may be required to give an accounting of the fund transactions for a given client at any time. We recommend setting up a subaccount of the Client Trust Account for each separate client.

 Chart of Accounts
 Acct No               Account                              Type          Balance
1000        Checking – Operating Funds         Bank         12,300.00
1010        Savings Account                            Bank         25,000.00
1100        Client Trust Account                       Bank         55,000.00
                1105        Andersen, Robert           Bank         10,000.00
                1110        Cardian Corporation       Bank         25,000.00
                1160        Logan, John                    Bank          7,010.00
                1190        Wilkins, Mary & Ralph     Bank        12,990.00
 

Because these monies cannot be comingled with company funds, there must be a liability account to offset the asset account (Client Trust Account). Name that account “Client Trust Liability” and set up matching subaccounts that correspond to the subaccounts under Client Trust Account.

Chart of Accounts
 Acct No           Account                                                    Type              Balance
1000               Checking – Operating Funds                    Bank            12,300.00
1010               Savings Account                                       Bank            25,000.00
1100               Client Trust Account                                 Bank            55,000.00
                        1105               Andersen, Robert              Bank             10,000.00
                        1110               Cardian Corporation         Bank             25,000.00
                        1160              Logan, John                        Bank              7,010.00
                        1190              Wilkins, Mary & Ralph       Bank            12,990.00
2000             Accounts Payable                                        Liab               -7500.00*
2100             Client Trust Liability                                   Liab              -55,000.00*
                      2105             Andersen, Robert                  Liab               -10,000.00*
                       2110             Cardian Corporation             Liab              -25,000.00*
                       2160             Logan, John                            Liab               -7,010.00*
                       2190             Wilkins, Mary & Ralph         Liab                -12,990.00*

*The minus signs on the liability accounts are just there to remind you that liabilities are credits while assets are debits, so on the Balance Sheet, they will zero out. In your QuickBooks® Chart of Accounts, none of these accounts will actually have a minus sign in front of the balances.

The balances in the Client Trust Liability accounts must always match the balances in the Client Trust accounts. If not, find and correct the transaction(s). Once you understand what the transactions are, you’ll know how to fix them.

SAMPLE TRANSACTIONS
1. You receive a $5000 check from Robert Andersen to be deposited into the trust account. Record a bank deposit into Client Trust subaccount 1105 Andersen, Robert, crediting Client Trust Liability subaccount 2105 Andersen, Robert.
2. You invoice a client for your services and withdraw funds from the Trust account to pay the invoice.

Your invoice will record the following transaction: Debit Credit
Accounts Receivable 1000.00
Legal Services 1000.00

Receive a customer payment:
Undeposited Funds 1000.00
Accounts Receivable 1000.00

Record a bank deposit entering the following debits and credits:
Checking – Operating Funds 1000.00
Undeposited Funds 1000.00
Client Trust Liability:Andersen, Robert 1000.00
Client Trust Account:Andersen, Robert 1000.00

3. Client receives a judgment for $8500 against him that must be paid to John Smith. Pay the judgment out of the trust account with a check payable to John Smith:

Client Trust Liability:Andersen, Robert 8500.00
Client Trust Account:Andersen, Robert 8500.00

4. Now that the case is closed, return the remaining $500 in the trust account to the client:

Client Trust Liability:Andersen, Robert 500.00
Client Trust Account:Andersen, Robert 500.00

Notice that every transaction in or out of the bank account, Client Trust Account:(Subaccount,) has a corresponding debit or credit to the Client Trust Liability:(Subaccount), so that the balances in these accounts always equal each another, one as a debit and one as a credit.

Describe every entry in detail in the Memo fields of the transactions. If required to report the activity of the trust account(s), customize, memorize and print a Customer Transaction Detail report formatted per this example:

Robert Andersen Trust Account Ledger

Type Date Num Name Memo Clr Debit Credit Balance
Client Trust Account
Andersen, Robert
Deposit 01/02/2012 Client check #1000 deposited into Trust account  10,000.00 10,000.00
Deposit 01/31/2012 3457 Andersen, Robert Paid Legal Fees for representation in court Smith vs Andersen  1,000.00 9,000.00
Check 02/18/2012 3458 John Smith Paid court awarded settle to John Smith Case #49776  8,500.00 500.00
Check 02/18/2012 3459 Andersen, Robert Return remainder of trust funds to client  500.00 0.00
Total Andersen, Robert 10,000.00 10,000.00 0.00
Total Client Trust Account 10,000.00 10,000.00 0.00
Client Trust Liability
Andersen, Robert
Deposit 01/02/2012 1000 Andersen, Robert Client check #1000 deposited into Trust account 10,000.00 -10,000.00
Deposit 01/31/2012 3457 Andersen, Robert Paid Legal Fees for representation in court Smith vs Andersen 1,000.00 -9,000.00
Check 02/18/2012 3458 John Smith Paid court awarded settle to John Smith Case #49776 8,500.00 -500.00
Check 02/18/2012 3459 Andersen, Robert Return remainder of trust funds to client 500.00 0.00
Total Andersen, Robert 10,000.00 10,000.00 0.00
Total Client Trust Liability 10,000.00 10,000.00 0.00
TOTAL 20,000.00 20,000.00 0.00

Once a client’s trust account is closed, make the corresponding subaccounts inactive. This will prevent clutter in your Chart of Accounts. By purposeful design of the Chart of Accounts, carefully positioning accounts and subaccounts, you can make use of a “collapsed” Balance Sheet or “expanded” Balance Sheet. An “expanded” Balance Sheet, showing all the individuals’ trust accounts is good for verifying that trust and trust liability accounts have matching totals. A “collapsed” Balance Sheet would not list the individual trust accounts. There would only be a total balance for the Client Trust Account and the Client Trust Liability account. This form of Balance Sheet is more suitable for partners or lenders reviewing the firm’s financials.