You may have already heard about trust accounting when dealing with finances. We all know that a trust legally designates a trustee asset management of a grantor who is either deceased or incapacitated. Trust accounting, on the other hand, records both the trust’s income and expenses. The record also includes taxes, disbursements, fees, compensation, and expenses.
To set up your legal trust accounts, you can follow these steps and areas:
1. Chart of Accounts
To start, you’ll need two bank accounts. The first account will be an operating or checking account. The second account will be an IOLTA bank account. The second will be where the trust money is deposited. Next, you’ll need a liability account to prepare your QuickBooks online account for the trust account. This liability account will balance out the bank account. Also, it always has to be balanced. Lastly, the liability account keeps track of money owed and to whom.
2. Record a Trust Deposit
Firstly, one must add a client to QuickBooks. The chart of accounts must then have a sub-account under “funds held in trust” for that newly added client. Next, another liability account must be created and should have the detail type of the trust account liabilities. The sub-account then allows us to see the amount of money owed for that specific client. This gets us ready to receive a retainer from that client.
The following step is to make a deposit into the IOLTA or trust account. We’ll say it came from the client, and here’s the key: the account for this deposit line item must be the sub-account from the sub-liability account we just set up. This helps to preserve accurate financial records. Let’s imagine we clicked “received retainer,” and the check was for $5000. Now we can go to the chart of accounts and see that we have $5000 in our bank account and $5000 under the client, which indicates they have $5000 in our trust account.
Let’s take, for another example, another client for who we’ll create an account under the liabilities account, sub-account of “funds held in trust.” Then, let’s clear another deposit for our second client, and for this client, we’ll change the account to their account under “funds held in trust,” as it’s a retainer. Assuming we get $2000 from them and the $5000 from the previous sample client, we now have a total of $7000.
3. Record a Trust Deposit
Now, let’s create an invoice for a transaction of $2000, and you currently have $5000 on the trust account. If you’re going to check your trust balance on QuickBooks online, you go to the “accounting” tab. You can then put it on the memo field to communicate how the invoice can be paid to the client. This will then become your notice that you’ll be paying it via the trust accountant. You also have to remember that you’ll need to manually update the memo field to reflect the correct trust account balance.
Now, let’s assume that there’s an open invoice worth $2000 and we want to pay it with the trust. We’ll do a check, pick a client, then pick the IOLTA account, and add a line item. We then reference the liability account for that specific client. After that, you have to record the payment of the invoice.
For example, we have the $2000 payment invoice. Let’s say that the client has no balance in his account. You go to your chart of accounts and see that you have $6000 in your IOLTA and $2000 on the operating account. $2000 is transferred from the trust to the operating account, which is now the lawyer’s money. On the other hand, we see that the client’s liability is down to $3000, which is how much he has left.
5. Trust Statements
Last but not least, you must be ready for audits. These audits should always record the amount of money that comes in and out. More importantly, there must be detailed statements for each transaction. Then, if you want to view the summary of the balance of clients for the trust account, you can find this in the chart of accounts’ list of liability sub-accounts. But if you want to view detailed transactions for a specific client, you can find this by clicking on their liability account.
All in all, setting up a trust account can be confusing if it’s still your first time. Fortunately, you can get help from experts and professionals, such as ours at Prestige Accounting Solutions. Let us help you set up your account today!