For attorneys, client trust accounts are among the most closely scrutinized aspects of a law practice. Keeping these accounts accurate and compliant is essential, not only for protecting client funds, but also for maintaining proper financial records and avoiding problems down the road.
The good news is that staying on top of your trust account doesn’t have to require a significant time commitment. The key is consistency.
By making a few important tasks part of your monthly routine, you can catch discrepancies early, keep your records organized, and make year-end reporting much easier.
Here are five things every attorney should do each month.
Don’t let trust account reconciliations pile up.
A monthly reconciliation gives you an opportunity to review activity regularly and identify errors or discrepancies before they become bigger problems. Waiting several months, or until the end of the year, can make it much more difficult to determine when or why an issue occurred.
Making reconciliation part of your monthly routine can also make month-end and year-end financial tasks significantly easier.
A two-way reconciliation compares your bank statement with your trust account ledger.
The goal is to make sure the balance reflected by the bank agrees with the balance in your accounting records. If the two don’t match, investigate the difference rather than simply carrying it forward.
Differences can occur for a variety of reasons, including outstanding checks, deposits that have not yet cleared, or recording errors. Identifying these discrepancies promptly can help prevent them from becoming more difficult to resolve later.
A three-way reconciliation takes the process one step further.
You should compare:
All three should agree.
This is one of the most important steps in maintaining proper trust account records because it helps confirm that the total amount being held in the account is supported by the individual client balances recorded in your books.
Regular three-way reconciliations can also help identify issues that may not be apparent from reviewing the bank statement and trust account ledger alone.
Your monthly review should also include a closer look at outstanding checks, older client balances, and funds that have been sitting in the trust account for an extended period.
Follow up on items that need attention and determine whether any action is necessary.
You should also review earned fees and transfer them from the trust account to your operating account when appropriate under your engagement agreement and applicable rules.
There can also be tax implications to consider. For a cash-basis attorney, once fees are earned and you have an unrestricted right to withdraw them from the trust account, those fees are generally considered income in that year, even if you delay transferring the funds.
Because trust account and tax rules can vary based on your circumstances and applicable professional rules, consult your attorney, accountant, or other appropriate professional when questions arise.
Good recordkeeping is an important part of trust account management.
Each month, save your:
Keeping these records organized can make audits, reviews, and future questions much easier to handle. It also gives you a clear record of how client funds were accounted for over time.
Trust account compliance doesn’t have to be a once-a-year project.
Spending time each month reviewing your accounts, investigating discrepancies, and maintaining organized records can help prevent hours of corrections later.
If you’re unsure whether your trust account reconciliations are being completed correctly, Alloy Silverstein can help. We work with attorneys and professional service firms to keep their bookkeeping accurate, organized, and compliant, giving you more time to focus on serving your clients.
Contact an Alloy Silverstein professional to learn more about how we support Professional Service Firms today.
Associate Partner
Anne provides personalized tax and accounting services to a wide variety of clients including law firms, medical practices, engineering firms, retail businesses, and other service industries.
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