1 of 4
Chart of Accounts supplied by Caren Schwartz
Chart of Accounts
2 of 4
Intuit - Sample Law Firm: QuickBooks Enterprise 14
Typical Client Trust Funds Receipt (using a Sales Receipt)
3 of 4
Intuit - Sample Law Firm: QuickBooks Enterprise 14
Typical Client Trust Funds Item
4 of 4
Intuit - Sample Law Firm: QuickBooks Enterprise 14
Sample Disbursement from Client Trust Funds (using a check)
Insurance companies, Real Estate companies, Decorators, Law Firms and many other types of businesses get money from clients in advance of doing work and need to carefully track these funds. For some firms, like lawyers, improper tracking can lead to severe penalties even if there money is all there. But for any firm, problems in this area can hurt your client reputation. Whether you refer to these funds as deposits, retainer, IOLTA or trust funds the tracking process and recommended reports are the same. For convenience I will use the term Client Funds Account in this article.
Whether you are using another program for billing and linking to QuickBooks or doing your billing in QuickBooks, you may want to track your Client Funds accounts in QuickBooks. Tracking balances in QuickBooks will allow you to reconcile with your other program and prepare reports if your licensing association or the state comes to audit. Since you will likely be doing your bank statement reconciliation in QuickBooks, it is especially important to have reports that insure you can account for every dollar by client.
The core premise when working with Client Funds Accounts is “the money in these accounts is generally speaking not your money.” Therefore it should have no net effect on your Balance Sheet. To accomplish this there should be one Bank Account (Figure 1) and one Liability Account for each Client Funds Account maintained by the firm. When all transactions are completed, the balances in the Bank Account and the corresponding Liability Account should always be equal. All transactions posted to the Bank Account must “hit” the Liability Account, and vice-a-versa.
Another critical point is that, in order to properly track the money EVERY transaction that is entered into the Client Funds Bank Account and Client Funds Liability Account will have a Customer or Customer:Job assisgned.
With those basic principles established we can look at a transaction. In our next article, we will discuss reports.
Some programs that link with QuickBooks can bill for the Client Funds payment and, when received, send the information to QuickBooks. How those are posted to QuickBooks will depend on the program but you want to make sure that Payments received Debit the Client Funds Bank Account or Undeposited Funds Account and Credit the Client Funds Liability Account.
Using QuickBooks money can be received into the Client Funds Account from a Payment on an invoice, a Sales Receipt (Figure 2) or a simple deposit. If you are invoicing the client for the funds or using a Sales Receipt you will need to setup an Item. (Figure 3) The Item will link to the Client Funds Liability Account. Be aware that using an invoice will make this a receivable on your Balance Sheet. Since the customer may not really be obligated to pay this you may want to set up a separate AR account for purposes of tracking these funds. If you use invoices the amount in the Client Funds Liability Account will be equal to the total of the amount in the Client Fund Bank Account (after all receipts are deposited) PLUS the amount in the separate AR account.
One way to “invoice” the customer without creating a receivable is to use a Sales Order. You can customize the Sales Order to look like an Invoice and then send this to the Customer. When the Customer sends the money create a Sales Receipt or Make a Deposit into the Client Funds Bank Account and mark the Sales Order as closed.
When you take money out of the Client Funds Account you can simply write a check. You should do this regardless of who the payee is – your firm, an outside vendor, or the customer if returning the funds. You will want to make sure that the Account on the check (or item if using items) is the Client Funds Liability Account. Don’t forget to include the Customer so you can track balances.
If you are taking the money of the Client Funds Account to pay your firm, I recommend two separate transactions. Transaction one is the check to take the money out of the Client Trust Bank Account. (Figure 4) Transaction two is the receipt of payment for your firm – either a Payment on an Invoice or a Sales Receipt for the appropriate income.
Sometimes your company may put money into the Client Funds Account. This could be to open the account, cover wire charges or other expenses. Where possible it is recommended you work with your bank to have fees taken out of your Operating Account instead of the Client Funds Account. However, you may still need to have some of your firm money in the account. I recommend setting your firm up as a customer and using this customer to track firm investment with transactions recorded the same as any other customer. This serves two purposes (1) you always know how much money the firm has tied up in the Client Funds Account and (2) when you run reports and see No Name, you know a transaction was recorded without a customer.
In the case of IOLTA accounts for law firms where interest is deposited and withdrawn, you can setup a separate customer for the interest and treat it like any other customer. This helps to facilitate bank reconciliation, especially if the interest paid in and withdrawn dates go across bank statements.
Using these steps will keep you out of trouble and make sure you always know who has money in the Client Funds Account. In Part 2 of this mini-series we will learn about reports you can run to quickly see who the money in the Client Funds Account belongs to.