Maintaining client trust accounts is an extremely significant task of a lawyer. Any payment, retainer, settlement or fee belonging to a client should be secure, is traceable and complies with state bar regulations. Audits, fines or ethical issues can be brought about by a minor slip. That is why the concept of trust accounting is regarded as the essential component of the bookkeeping of a law firm rather than the auxiliary one.

The client money is held as trust account pending its earning or refund.

Since that money is not the property of the lawyer or the firm, it should be as accurately recorded as possible and in the most transparent manner. The following subsections have described how attorneys achieve this and remain fully compliant.

Division of the Trust Money and Firm Money

Separated client money and operating money This is the first rule of trust accounting where the money of clients and the money of the firm are to be entirely distinct. Confusion between trust money and business money, even unintentionally, is referred to as commingling and is a grave offense in most jurisdictions. A special IOLTA or client trust account is typically used by lawyers. Clients in any type of retainers, settlement checks, and unused balances are deposited there. Separation facilitates the ease of keeping records and auditing.

Documenting All the transactions in the Real Time

Inaccurate records are to be avoided as trust funds are moved frequently. All the deposits, withdrawals or transfers have to be registered immediately. Including the date, the name of the client or the case number, the reason the deposit was made or disbursement was made and the balance left after the transaction. Real time recording allows the lawyers to know all the dollars and a client will never run negative. Good record keeping also safeguards the firm in case of audit, disputes/ questions by clients.

Maintaining Individual Client Records

Although the lawyer may have all the client monies in a single account, he or she still has to maintain a ledger per client. The ledger is used as a mini bank statement with the precise amount the client has. Every ledger typically records the opening balance, deposits on behalf of the client, payments to the client, fees earned transferred to the operating account and the balance. This method of book keeping will help in the ease of observing whether sufficient money is present prior to any withdrawal.

There will be no withdrawals prior to the earning of fees

The common failure of many individuals is to withdraw legal fees prematurely out of the trust account. A lawyer is only able to transfer money in the trust account to the operating account after work has been performed and recorded. The amount earned should be used to develop invoices and then transferred to the operating account after having reviewed the invoices. This ensures that the firm stays within the fold and lawyers do not use client funds to pay firm bills as it is against professional regulations.

Monthly Reconcilment of Trust Account

This is a best practice of the attorneys to have a monthly reconciliation. It refers to balance of the trust bank statement, the trust ledger and all the individual client ledger. All three must match exactly. In case of differences, they have to be corrected immediately. Periodic reconciliation prevents mistakes such as doubled entries, deposits or balances that are missing. In most states, the rules include reconciliation monthly or quarterly.

Ensuring Records are Detailed and Ready to Audit

The law firms should maintain records of trust account that are easy to retrieve. The records can consist of bank statements, deposit slips, client ledger, reconciliation report, receipts and invoices, written authorization to withdraw. Having these records in place will ensure that the firm is prepared to be audited unexpectedly or ask a client a question. Properly maintained documents also reduce the possibility of misperception in a dispute.

Working with the Legal-Specific Accounting Systems

General accounting programs may be able to follow money, but legal trust accounting may frequently require programs designed to work with law firms. Compliance is facilitated by software that is able to support trust rules, automated ledger and reconciliation tools. That is the reason why most companies apply sophisticated tools or employ skilled bookkeepers. Technology eliminates human error and assists to maintain trust accounts ethical and right.

Outsourcing The Trust Accounting to Professionals

Even senior lawyers can be overwhelmed with trust accounting. Rules are not fixed, money is fast and errors are minor problems but can result in major issues. Thus numerous companies entrust accounting of trust to professionals that are knowledgeable about the legal field. The trust account remains compliant, accurate, and monitored by professional assistance of professionals trained in bookkeeping of law firms.

Internal Reviews and Policy Changes on a regular basis

Companies that deal with high client money tend to conduct internal audits. Such reviews identify issues at first, educate the personnel on new processes and maintain sanity in financial operations. The policies should be revised as frequently as possible to ensure that all the individuals in the team understand how to use the trust money appropriately.

Final Thoughts

The proper handling of trust accounts requires time, precision and proper understanding of legal financial regulations. Trust accounting when properly done safeguards both the clients and the law firm. With proper records, keeping the funds separate, reconciling monthly and use good tools, lawyers will be able to maintain full compliance without additional stress.