How do law firms handle trust accounting and bookkeeping?
Trust accounting is one of the most regulated aspects of running a law practice. State bar associations require attorneys to keep client funds completely separate from the firm’s operating money. Violate these rules and you’re looking at discipline, malpractice claims, or disbarment.
The foundation is an IOLTA account (Interest on Lawyers Trust Accounts). This pooled trust account holds client retainers, settlement proceeds, and any other funds you’re holding on behalf of clients. The money doesn’t belong to the firm until it’s earned. When someone pays a $15,000 retainer, that money sits in trust. You transfer funds to your operating account only as you bill time and earn fees.
Bookkeeping for trust accounts goes beyond standard small business bookkeeping because you’re tracking two layers. The trust account itself needs reconciliation like any bank account. But you also need individual client ledgers within that account showing exactly how much belongs to each client at any moment. You should be able to say “Client A has $4,200 in trust, Client B has $8,500” and have those numbers add up to your total trust balance.
Three-way reconciliation is the standard. You compare the bank statement balance against your trust account ledger balance and against the sum of all individual client ledgers. All three numbers must match. When they don’t, you have an error that needs to be found immediately. Monthly reconciliations are the minimum. Many firms reconcile more frequently.
Common mistakes include transferring funds before they’re earned, failing to maintain accurate client ledgers, and sloppy documentation. Your records should show what came in, from whom, for what matter, and where it went. State bars can audit these records, and incomplete documentation creates problems even when money is handled correctly.
Most professional services firms like law practices work with accountants who understand trust accounting rules specifically. The consequences of getting this wrong go beyond financial penalties, so proper setup and ongoing oversight are worth the investment. Someone unfamiliar with bar requirements can create compliance problems even with good intentions.
The Treasure Valley's Tax and Accounting Team
The Next Step:
A Short Conversation
Tell us what you're dealing with. We'll listen, answer your questions, and give you a straightforward quote.
More Questions
Can restaurant owners deduct employee meals?
Yes, meals provided to employees during their shifts are generally 100% deductible when furnished for the employer's convenience. For restaurants, this test is typically easy to meet since staff need to stay on-site during service.
Read answerShould my restaurant be an LLC or corporation?
Most restaurants start as LLCs and that's usually the right call. An LLC provides liability protection with less paperwork, and you can elect S-Corp tax treatment later when profits justify the extra requirements.
Read answerHow do I handle change orders in my accounting?
Record change orders as soon as they're approved, tracking both the additional revenue and the associated costs separately from the original contract. This lets you see whether change orders are actually profitable.
Read answerHow do I choose between standard and itemized deductions?
Pick whichever one is higher. Add up your itemized deductions and compare them to the standard deduction for your filing status. Most people take the standard deduction because the 2017 tax law nearly doubled it.
Read answerHow do I register for Idaho sales tax?
Register through the Idaho State Tax Commission's Taxpayer Access Point (TAP) online. You'll need your EIN, business details, and ownership information. Complete registration before making your first taxable sale.
Read answerHow do I track mileage for my real estate business?
Use a mileage tracking app that runs in the background and log every trip immediately. Record the date, destination, business purpose, and miles for each drive. Know what qualifies as deductible business driving versus commuting.
Read answer
