This article is part of a six part section on finance. The pages in this section will take you through the basics of trust and general accounting, including a sample Chart of Accounts for a solo or small law firm, some comments about buying accounting software and some accounting tips.
What lawyers refer to as trust accounting is not really accounting at all, just bookkeeping - recording the receipt and disbursement of trust money in a journal and posting these transactions to the ledger accounts of the clients or other persons to whom the money belongs.
Trust accounting can be boiled down to one basic, simple rule:
It's not your money!
You have to be ready at all times to prove who is entitled to the money in your trust account and to give it to the person who is entitled to it. The law society rules for trust accounting are designed to help you create the audit trail you will need if you are ever challenged to prove that you have complied with the basic rule.
Books and records
In trust accounting in a law office, there is no math more complicated than adding and subtracting.
The basic books and records used in trust accounting are
- a duplicate or triplicate receipt book
- a bank deposit book that contains duplicate bank deposit forms stamped by the bank
- the trust journal, that is, an accounting record in which all trust transactions are posted in chronological order
- the trust ledger, that is, an accounting record in which all trust transactions are posted by client or file
- the trust reconciliation, including the trust listing (a list of all trust ledger accounts showing the balances in each account and the total)
Until recently, the trust journal, ledger and reconciliation were physical books that were posted by hand, but law office accounting software has now replaced books in almost all law offices. The advantage of software is accuracy, speed and convenience, because transactions are posted to the journal and ledger simultaneously.
Receiving Trust Funds
The steps involved in receiving trust funds are
- receive the funds and issue a receipt
- prepare a bank deposit slip and deposit the funds in your trust bank account
- post the deposit to the trust journal, showing the running balance of the funds in trust
- post the deposit to the client's account in the trust ledger, showing the outstanding balance of funds in trust for this client
Disbursing Trust Funds
The steps involved in disbursing trust funds are
- prepare a cheque requisition (not needed in a solo or very small practice where there is not a separate accounting department)
- prepare the cheque
- post the cheque to the trust journal, showing the running balance of the funds in trust
- post the cheque to the trust ledger, showing the outstanding balance of funds in trust for this client
- present the cheque to the lawyer for signing (should be accompanied by a copy of the trust ledger so the lawyer can be satisfied that there are sufficient funds in trust for the client to cover the cheque)
The Trust Reconciliation
You should do your trust reconciliation at least monthly. To prepare, you gather together the trust receipts book, trust deposit book, cancelled cheques, bank statement, trust journal and trust ledger. You will also need a trust listing - a list of all the trust balances by client or file. The following 3 numbers must reconcile:
- the balance shown on your trust bank statement, adjusted for any unprocessed deposits or cheques
- the running balance shown in your trust journal
- the total of the balances in the accounts shown on your trust listing