Why is my Trust Account Not Balanced?
As you dig deeper into trust accounting, this is the age-old question. Why is my trust accounting not balanced?
We see this all the time with clients. They’ll tell us that their trust account is balanced and they reconcile the bank. But just by reconciling the bank, doesn’t mean the client ledgers are balanced. There are multiple reasons for imbalances in trust accounting or your IOLTA account.
Top 5 Reasons your Trust Accounts are Not Balanced:
- You collected a retainer but it was deposited into the operating account.
- In your legal software, you have recorded the invoice and applied the trust retainer but never move the funds to operating. Yes, this happens.
- Your accounting platform is not connected to your legal time and billing software and there’s no way to validate the figures and ensure that amounts should be cross-referenced with the ultimate source of truth, the trust bank account.
- You have a bookkeeper that doesn’t understand trust accounting and is entering transfers in and transfers out for trust account matters. These are just bank-to-bank transfers and there’s no recognition of revenue at any time. Even if you’re not using software there are some steps that need to happen to show the transfer and show the recognition of revenue on the attorney side.
- You are using bank feeds to track your income, cash basis accounting, in the transactions, are not being tracked in a proper accounting format.
The most important takeaway is that you must perform a three-way reconciliation. It’s typically required by most bar associations in the state(s) where you practice law. It just takes one cranky client who questions you were accounting and you may be subject to a bar audit. Bar audit could end up costing you money to defend yourself because as you know improper accounting of the client ledgers can result in a loss of your license to practice law. Serious stuff.
In the video, I show you how to spot these common errors and the ways to make the corrections and balance your books properly.
Are you an attorney with messy trust accounting? That is our specialty!
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