Bookkeeping for Lawyers - Overcoming the Trickiness of the Trust account and how to Record income, Trust Liabilities and Reimbursable Case Costs Correctly.
It has become apparent over the last few years that not all bookkeepers know how to correctly record income that Lawyers received if they are paid a retainer. Here are three examples of how to record income correctly if (1) you receive a retainer and record all income to one category, (2) you receive. a retainer and record income earned to different categories in stages or (3) you are paid after the settlement of a case.
Example 1:
You are a Lawyer, have a Trust Account and an Operating Account and your legal software is not Synced with Quickbooks Online. You record all income under one category
Client pays you a retainer & Money is Deposited into your Trust Account :
In Quickbooks, Client is invoiced and the retainer is deposited into the Trust Account.
On the invoice the “Retainer” is mapped to the Trust Liability account
Work is Completed and Money is transferred into the Operating account.
In Online Banking, transfer money from the Trust Account to the Operating account one transfer per client write which client the transfer is for
In the Trust Account bank feed, money is recorded as a transfer to the Operating Account
In the Operating Account this transfer is MATCHED
At the end of the month a journal entry is created to record income earned for the month.
Add up all withdrawals from the Trust account
DR “Trust Liabilities”
CR “Lawyer fee Income”
Example 2
You are a Lawyer, have a Trust Account and an Operating Account and your legal software is not Synced with Quickbooks Online. You record income under different categories and your retainer is earned in stages.
Client pays you a retainer:
Money is deposited into your Trust Account
Work is completed (in Stages)
Money is transferred from the Trust Account to the Operating Account
End of Month - Record Income
Money is deposited into your trust Account
In the Trust Account bank feed transaction is processed to the Trust Liability Account (current Liability account)
Work is completed (in Stages)
Stage one of work is completed.
Create an invoice for the client for the work that has been completed (this will not be sent to the client) and the “services” are mapped to the Income account(s). “Receive payment” and “deposit to’ “Funds From Retainer” (current asset account).
Transfer money from the Trust account to the Operating account.
When transferring funds in online banking, transfer amounts by client and make a note of which client it is for.
In the Trust Account bank feed, money is recorded as a transfer to the Operating Account
In the Operating Account this transfer is MATCHED
Repeat the process for all client work completed.
END of Month - Record income
At the end of the month create a journal entry
Dr Trust Liabilities
CR Funds From Retainer
to clear out the “Funds from Retainer” account and reduce the Trust Liabilities account
Make sure that an invoice has been created for any work completed that month and that there is a matching transfer of money. Also check that any money transferred from the Trust account has a matching invoice that records the income.
Example 3:
You are a Lawyer who is paid when the case is settled, have a Trust Account, an Operating Account and a Cost Account
Your Legal software is synced with Quickboks.
Smaller costs where the vendor cannot wait until after the case is settled will be paid out of the Cost Account and the Customer’s name recorded in the customer field. Once the case settles, this account will be “reimbursed” from the funds of the settlement
Once the case is settled:
Money is deposited into theTrust Account and recorded in Legal Software
Vendors are paid
Case Costs are reimbursed
Your fee is reimbursed
The remaining amount is sent to the Client
Settlement Money Received
The check received is recorded in FileVine and synced with QBO
Check is deposited into the Trust account
When deposit appears in the Trust account bank feed in QBO, it is Matched to the Deposit information that was downloaded from FileVine
Vendors are paid:
In FileVine, checks to the vendors that have agreed to be paid once the case settles are recorded. The information downloads into Quickbooks and the checks are printed and sent from the Trust account. When the checks are presented, the withdrawal of funds from the Trust Account will appear in the bank feed and the transaction MATCHED
Case Costs are reimbursed -
Check information is recorded in FileVine (check number will be “ACH” as fund will be transferred from the trust account to the Cost account. FileVine is synced with QBO and the check information is downloaded.
Monies are transferred to the Cost Account.
When transfer shows up in the Trust account bank feed, it is MATCHED to the Check ACH.
In the Cost Account all deposits and withdrawals are recorded to the “Advanced Case Cost” account (acurrent asset account).
Attorney fee is paid
Check information is recorded in FileVine (check number will be “ACH” as fund will be transferred from the Trust account to the Operating account, FileVine is synced with QBO and the check information is downloaded.
In Online Banking transfer money from the Trut Account to the Operating Account.
In the Trust account bank feed, it is MATCHED to the Check ACH.
In the Operating account bank feed the money transferred from the Trust account is recorded as Legal Fee Income
Unsure if your income has been recorded correctly? Don’t delay in knowing for sure- we offer a “Review of Accounts” package. Start today by setting up a FREE discovery call.
It has become apparent over the last few years that not all bookkeepers know how to correctly record income that Lawyers received if they are paid a retainer. Here are three examples of how to record income correctly if (1) you receive a retainer and record all income to one category, (2) you receive. a retainer and record income earned to different categories in stages or (3) you are paid after the settlement of a case.
If you are not sure if your income has been recorded correctly, we offer a “Review of Account” package. Start today by setting up a FREE discovery call.