Bookkeeping and Client Trust Accounts

Transcription

1 Bookkeeping and Client Trust Accounts G INGER S. BOCK, ESQ. PO BOX C INCINNATI, OH GBOCK@ GINGERBOCKLAW. COM WWW. GINGERBOCKLAW. COM Bookkeeping: Cash v. Accrual Bookkeeping = recording financial transactions Two bookkeeping systems Cash Revenue is recorded when money is received. Expenses are recorded when money is paid. Accrual Revenue is recorded when money becomes due. Expenses are recorded when obligations arise, regardless of when they are paid. 1

2 Bookkeeping: Cash v. Accrual Example 1 Gus provides legal services to Shawn. Gus sends Shawn an invoice for $2,000 on October 4. Shawn pays in full on November 3. Cash: Gus records $2,000 on November 3. Accrual: Gus records $2,000 on October 4. Example 2 Saul purchases $500 in supplies from Los Pollos Hermanos on June 15. Los Pollos Hermanos invoices Saul, and he pays the invoice on July 31. Cash: Saul records a $500 expense on July 31. Accrual: Saul records $500 expense on June 15. Bookkeeping: Single-Entry Method Transactions are recorded on one line in chronological order. Business name: Central & Perk Law Firm Date Reference Description Income Rent Supplies Advertising Salary Total Balance 3/1/2014 Beginning Balance $10, $10, /4/2014 Invoice 1234 Geller payment $2, $2, $13, /5/2014 Check 4012 Green Office Management -$1, $1, $11, /8/2014 Invoice 1235 Bing payment $2, $2, $13, /10/2014 Direct Deposit Paycheck for Janice Hosenstein -$3, $3, $10, /15/2014 Credit Card Buffay Design, Inc. -$ $ $9, /24/2014 Invoice 1236 Tribbiani - invoice payment $6, $6, $15, /31/2014 Credit Card Green Industries: Printer paper -$ $ $15, Totals $10, $1, $ $ $3,

3 Bookkeeping: Double-Entry Method Each entry to an account requires a corresponding entry to a different account because every transaction has two effects. EG: Sheldon buys cheesecake from Penny. Sheldon s cash balance decreases; his cheesecake supply increases. Penny s cheesecake inventory decreases; her cash balance increases. Sheldon: Penny: Debit $5 Increased asset (cheesecake) Debit $5 Increased asset (cash) Credit ($5) Decreased asset (cash) Credit ($5) Decreased asset (Cheesecake) Attorneys unfamiliar with accounting should hire a bookkeeper or accountant to use double-entry method. Chart of Accounts (Credit: State Bar of Georgia) Assets 504 Other Non-Owner Employees 100 Cash in Bank 510 FICA & Unemployment Taxes 109 Petty Cash 514 Employee Retirement Benefits 120 Client Advances-Unbilled-CTRL 518 Employee Training & Education 130 Client Advances-Billed-CTRL 519 Other Employee Costs 140 Other Receivables, Deposits, etc. Occupancy 150 Furniture, Fixtures & Equipment 520 Office Rent 160 Leasehold Improvements 521 Parking 170 Real Property 523 Real Estate Taxes & Insurance 180 Reserve: Depreciation & 525 Utilities Other Than Telephone Amortization 527 Cleaning/Housekeeping -- Office 190 Other Assets 530 Depreciation/Amortization -- Office 198 Client Billings-CTRL 531 Maintenance & Repairs -- Office 199 Lawyer Billings-CTRL Office Operations Liabilities 540 Supplies, Stationery & Printing 200 Accounts Payable 541 Postage & Delivery 210 Federal Income Tax Withheld 542 Library & Subscriptions 211 State Income Tax Withheld 543 Telephone/Communications 212 Employee FICA Tax Withheld 545 Photocopy Expense 220 Employee Medical/Retirement 546 Computer Equipment Segregated Liabilities 548 Equipment Rental 298 Client Trust Funds-CTRL 550 Depreciation: Furniture, Fixtures & 299 Liability: Client Trust Funds- CTRL Equipment Owners Equity 551 Other Maintenance Repairs 300 Equity Account: Owner #1 (et al.)professional/promotion 301 Drawing Account: Owner #1 (et al.) 570 Travel & Related Expense Profit/Loss Accounts 571 Professional Dues & CLE 400 Fees: Income from Clients-CTRL 572 Recruiting: Professional Staff 460 Other Income/Receipts 573 Entertainment 480 Costs: Income-Producing Property 574 Promotion & Advertising Compensation Costs Other Costs/Expenses 500 Secretarial 580 Insurance: Professional/Other 501 Word Processing 581 Other Taxes and Similar Costs 502 Paralegals/Clerks 582 Client Advances Written Off-CTRL 503 Lawyers 590 Miscellaneous Expenses 3

4 Income Statement Income and expenses for a particular time period (EG: Month, year) Snapshot of how you are doing at a particular point in time Revenues Debit Credit Gross Revenues (Fees and Interest) $341, Expenses Advertising/Marketing $5, Bank and Credit Card Fees $ Professional services $ Meals and entertainment $2, Insurance $ Memberships and subscriptions $2, CLE $ Licensing fees $ Printing and postage $1, Office supplies $ Rent $14, Telephone/Website $3, Payroll $256, Total expenses ($288,272) Net income $52, Client Trust Accounts Overview Mismanaging client funds is a top reason for attorney discipline. Attorney has fiduciary duties. Attorney CANNOT discharge duties, even if an accountant, bookkeeper, or other person misuses the funds, rather than you. YOU must be vigilant to ensure that your client trust account is handled properly. 4

5 Attorneys Duties re: Trust Accounts Duty to account Duty to keep client informed Duty to safeguard client property Duty to act with honesty and good faith Attorney Checking Accounts Attorney must have separate checking accounts for operating account and client trust account. Client money is deposited in trust account; attorney money is deposited in operating account. Trust account must be an interest-bearing account. Work with bank to get bank fees waived for trust accounts. Otherwise, you may deposit your own money into the trust account to cover those fees. Open your client trust account BEFORE a client gives you money!! Remember: the client owns the funds until the attorney earns them. 5

6 Two Types of Trust Accounts 1. Separate Client Accounts Use when the client can earn more than nominal interest income. Consider: Amount of funds deposited Duration of deposit Interest rate The costs involved for establishing and administering account 2. Pooled Accounts IOLTA (Interest on Lawyer Trust Accounts) Use if interest would be nominal. When in doubt, deposit client funds into IOLTA. You must register your IOLTA account with the Supreme Court. Interest from IOLTA accounts is transferred by the bank to Ohio s legal aid fund. It is UNETHICAL and ILLEGAL to use or otherwise benefit from interest earned from client funds entrusted to the attorney. Funds in Trust: Retainers Retainer has two meanings. A retainer is treated differently depending on which meaning. True retainer: client pays an attorney to be available and to forego all possible conflicts. Money is deposited into operating account. Advance on services: client pays an attorney for a specific matter before the attorney earns the fees. Money is deposited into trust account. Example 1: Grace pays Will to be available to represent her on unspecified matters arising in the future. Will agrees to forego conflicting representation. True retainer. Will deposits money into his operating account. Example 2: Prior to Linden completing any work, Holder pays her $10,000 to represent him on a drug charge. Advance on services. Linden deposits money into her trust account until the money is earned. 6

7 Funds in Trust: Settlement Attorney deposits settlement funds in client trust account when funds are received. After the settlement check clears, attorney divides funds and disburses. Funds in Trust: Checks Held Until Cleared Attorney deposits into trust any funds that go through the attorney until after the check clears. Example: Your client George writes you a check for him to purchase Vandalay Industries. You deposit the check into your trust account until it clears. If you do not wait until checks clear, you risk misappropriating funds belonging to other clients. ALWAYS wait for check to clear! 7

8 Moving money out of trust accounts If a fee dispute exists, keep the disputed funds in the trust account until the dispute is finalized. Attorney may transfer money from the client trust account into operating account ONLY after fees are earned or expenses are incurred on behalf of the client. State in your written legal services contract when you may withdraw funds from trust. EG: Samantha s legal services agreement gives a client 30 days to object to an invoice before funds will be transferred out of the trust account. Samantha sends Jake an invoice on June 1. If Jake does not object, Samantha may transfer funds out of Jake s trust account on July 1. Be sure the client s check clears before withdrawing. Tell the client that you are transferring funds out of the trust account. Keep a copy of that letter and any bank paperwork. Tracking Trust Accounts You may want to employ an accountant or bookkeeper to assist you. Remember: YOU are responsible for ensuring that client funds are separated and properly safeguarded. Accounting software: various types are listed in your take-home materials. For each client, track for every transaction: Date Amount of deposit/withdrawal Payee/payor Purpose of transaction Balance of trust account Keep copies of invoices, letters to clients about funds, receipts, deposit slips, individual client accounting. Retain accounting records for seven years. 8