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1 TrusT AccounTing for paralegals

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3 Disclaimer This presentation is based on the law society's paralegal Bookkeeping guide, september it has not been updated to reflect changes, if any, since that date. it is recommended that that you consult a qualified accountant before relying solely on these materials when operating your practice. copyright 2008 AMe learning inc. All rights reserved. This publication and the online program are protected by federal and international copyright and patent laws. no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photo-copying, recording or by any information storage and retrieval system, without prior written permission of the publisher. for more information contact: AMe learning inc Yonge street richmond Hill, on canada l4c 9T3 phone: fax: Toll-free: info@amelearning.com Visit our website at: 3

4 Journals and ledgers in the old days prior to the advent of computers, bookkeepers and accountants maintained all the records of a business in a manual set of books - hence the names Bookkeeping. When there is lots of activity with certain types of transactions such as sales, purchases and bank deposits, it is prudent to maintain a separate book for each of these types of activities. These books were called journals. Here are some examples: Sales Journal. This book maintains a record of sales for the day with details pertaining to the name of the customer, what product or service was purchased, the invoice number and when the amount might be due. Purchase Journal. This book is similar to the sales journal but it records all records of products or services that the business has used for which they owe money. Cash Receipt Journal. This book records all cash that is deposited into the business. sometimes there are transactions that are not recorded in sufficient volume to justify a special journal as illustrated above, so a separate journal is maintained called a general journal. some typical entries that would be entered into the general journal might include: Amortization recording interest paid on overdue accounts Adjustments to prepaid expenses in the period in which they are recognized as an expense correction to a mistake such as changing the account code for an expense already entered All of the entries in the journals are also recorded in a general ledger which sorts all the accounts into separate groups. examples as are follows: 1. sales for one customer may appear in several places in the sales journal so it s important to group all the activity for each customer separately in the ledger. for example, in the ledger, each customer will have a separate record for how much was billed and paid,. When all of these accounts are added up together the account is called the accounts receivable account. 2. When incurring various expenses, the entries will appear in the journal in the sequence that the expenses occurred. (They are recorded on a daily basis in the various journals). furthermore, the names of the vendors will be scrambled in no particular order. These records are recorded again (called posting) in the general ledger which groups all the suppliers together in separate records and all the amounts owing in one record called the accounts payable ledger. 4

5 An entry would not be entered into both a special journal and a general journal. entering this data manually is a labour intensive and since all the records are maintained in different books, it makes the extraction of data very time consuming and cumbersome. in today s modern times of computers, special journals do not exist. The journal is simply a report that is extracted from a large database of information that is called a general ledger. in fact every transaction regardless of its nature is recorded in a general journal. The following section which relates to trust accounting in your practice will teach the subject matter using a manual set of records. This is important to help you understand the process step by step. furthermore, it may help you understand the benefit of investing in computerized accounting software which will save you huge amounts of time. 5

6 Trust Accounting for paralegals is a paralegal. she commences by opening a bank account for the practice and deposits $10,000 of her own savings into the business. Julia knows nothing about bookkeeping and hires you to look after the finances of the practice. she does not have sufficient funds at this time to buy a computer and requests that you maintain a manual set of records until she obtains a more sophisticated system. she has obtained the law society s paralegal Bookkeeping guide and understands that she must comply with the law society s By-law 9." The required journals and ledgers are: Trust accounts: 1. Trust receipts journal which is used to record all receipts into the trust account as they occur regardless from whom they are received. Refer to By-Law 9 ss18 (1). 2. Trust disbursement journal which is used to record all disbursements out of the trust account as they occur regardless to whom cash is disbursed. Refer to By-Law 9 ss18 (2). 3. Mixed trust ledger which is used to record each client s records separately so that all activities relating to each client that has funds deposited in trust can be viewed separately. Refer to By-Law 9 ss18 (3). 4. Trust transfer journal which will be used to maintain all records relating to the transfer of funds from one trust to another trust. Refer to By-Law 9 ss18 (4). We will not address this document in this course. 5. A special trust account that is used for one particular client that is separate from all other clients. 6. A trust bank reconciliation record that compares the trust s bank balance and the client s trust listing totals. Refer to By-Law 9 ss18 (8). Practice s accounts: (GENERAL ACCOUNTS) 1. A general receipts journal that is used to record all amounts received into the practice that is not trust money. Refer to By-Law 9 ss18 (5). 2. A general disbursement journal that is used to record all amounts paid from the practice that is not trust money. Refer to By-Law 9 ss18 (6). 3. A fees journal used to record all amounts billed to clients. Refer to By-Law 9 ss18 (7). 4. An accounts receivable ledger to record all the activity in each client s individual accounts. This record is not required by law but serves as an excellent method of keeping track of each client s financial activities summarized in one account. Note: Trust documents have been colour-coded in yellow. Practice documents are colour-coded in green. 6

7 Julia s $10,000 of capital to finance the practice is recorded in the general receipts journal. Paralegal GENERAL RECEIPTS JOURNAL PRACTICE ACCOUNT Received from Ref # Date (source of funds) Amount Method of payment & details PR 0 Feb , Received from Section 1: Depositing Trust funds into the Mixed Trust Account Julia secures two new clients: Mike Myers and pamela Anderson. each of these new clients wishes to use Julia s paralegal services to negotiate matters but since she is unsure of their credit rating, she requested a retainer from each of them before providing services. Their payments are entered into the trust receipts journal. reference numbers are used so that all activities can be cross-referenced to each document that is used to record the information. TRUST RECEIPTS JOURNAL Ref # Date Funds Received From Client Amount Method of Payment TR1 Jan Mike Myers Mike Myers 3, Cheque # 1872 TR2 Jan Pamela Anderson Pamela Anderson 4, Cheque # 1234 Your bookkeeping function requires that you track the financial activity in each of the client s individual accounts to ensure that there is a track record of all amounts paid and disbursed. This is important because if a client were to request details of their own specific account activity, it would be difficult to find all the details pertaining to each client from the trust receipts journal and the trust disbursement journal, which group all the clients together. The amounts must therefore also be recorded in the mixed trust account for each separate client. (The mixed trust account is one bank account belonging to a number of different clients). Here is an example for Mike Myers trust account. Account: Myers, Mike Ref. # Date Particulars Receipts Disbursements Balance in account TR1 Jan Retainer for legal fees 3, , Section 2: Transferring fees earned from the Trust Account On February 8th Mike Myers calls Julia and spends one hour telling Julia about an issue relating to a breach of contract. Julia bills $200 plus gst to Mr. Myers. Here is an example of an invoice generated to the client for services rendered. 7

8 Paralegal Paralegal Invoice West Main Street Date 15-Feb-08 Suite 100 Bill To Mike Myers Toronto, Ontario M1M 2M3 Address 1400 Beach Street (416) Toronto, Ontario M3M 4M5 Phone (416) Date Hours Description Rate Amount Feb 8, Legal Services relating to case #75444 $ $ Subtotal GST Total for this invoice Less: Transferred from Trust Account Thanks for Letting Us Serve You Balance owing 0 once the invoice has been written, it needs to be recorded in the client s accounts receivable ledger account which keeps track of all amounts billed and paid for each individual client. Bylaw 9 does not require that the practice maintains this record. However, this record is very useful to keep track of all funds deposited and disbursed and the balance owing in each client s account. Paralegal CLIENT GENERAL LEDGER PRACTICE ACCOUNT Account: Myers, Mike Payments Fees & Disbursements from client Balance owed Ref. # Date Particulars Invoice # billed (including tax) by client PF 1 Feb Billed fees However, By-law 9: subsection 18(7) requires that a fee book be maintained in which all billings are recorded in a single journal representing all amounts billed to clients. invoice #121 is recorded in the fees journal as follows: Paralegal FEES JOURNAL Ref # Date Invoice # Client Fees billed Disbursements billed GST billed Total amount billed PF 1 Feb Mike Myers

9 pamela is having an issue with her plastic surgeon. she visits Julia and spends 3 hours explaining her dilemma about a messed-up surgery. she also spent a considerable amount of time on the phone with Julia. on february 10th Julia asks you to bill pamela $1,200 plus gst. (in addition to the invoice generated to pamela, notice that this billing in the fees journal has been added onto the last one billed to Mike). Paralegal FEES JOURNAL Ref # Date Invoice # Client Fees billed Disbursements billed GST billed Total amount billed PF 1 Feb Mike Myers PF 2 Feb Pamela Anderson 1, , Here is Pamela s ledger account in the practice. Account: Anderson, Pamela Payments Fees & Disbursements from client Balance owed Ref. # Date Particulars Invoice # billed (including tax) by client PF 2 Feb Billed fees 122 1, , Until now, 1. Julia has been paid a retainer in anticipation for fees to be billed which is entered into the trust receipts journal and each of the individual client accounts in the mixed trust account. 2. some of the fees have been earned, an invoice written and added to the fees journal in the practice. 3. each of the clients receivable accounts has been updated with amounts owing by the clients. 4. now it s time for the trust to pay the practice the amount owing on the invoice. in other words, fees must be earned before being paid. Therefore, after the practice records have been completed as per the above, the trust records need to be completed. 9

10 Trust records: 1. record the amount to be disbursed from the mixed trust account in the trust disbursements journal. (refer to page 16 of the paralegal Bookkeeping guide). TRUST DISBURSEMENTS JOURNAL Date Method / Ref # Paid To Client Amount Feb Transfer inv # 121 /TD1. Cheque # 1 Mike Myers Feb Transfer inv # 122 /TD2. Cheque # 2 Pamela Anderson 1, enter the amount into the clients trust accounts ledger to ensure that all records are being maintained in the same place. (refer to page 17 of the paralegal Bookkeeping guide). Account: Myers, Mike Ref. # Date Particulars Receipts Disbursements Balance in account TR1 Jan Retainer for legal fees 3, , TC 3 Feb Paid invoice # 121 for services rendered. Cheque # , notice that there is still a significant amount of funds left in Mike s account which will be used for fees relating to the current issues at hand. Account: Anderson, Pamela Ref. # Date Particulars Receipts Disbursements Balance in account TR 2 Jan Retainer for legal fees 4, , TC 4 Feb Paid invoice # 122 for services 1, , rendered. Cheque # 2 3. using a cheque, transfer the funds from the mixed trust account to the general account to settle the invoices that were billed. (either cheques or electronic methods can be used to transfer funds but electronic transfers are subject to special rules. refer to pages of the paralegal Bookkeeping guide). Practice records: 4. record the deposit into the general receipts journal. (refer to page 19 of the paralegal Bookkeeping guide) 10

11 Paralegal GENERAL RECEIPTS JOURNAL PRACTICE ACCOUNT Received from Ref # Date (source of funds) Amount Method of payment & details PR 0 Feb , Received from PR 1 Feb Mike Myers trust Transferred from Mike s account for fees. Cheque # 1 PR 2 Feb Pam Anderson trust 1, Transferred from Pam s account for fees. Cheque # 2 Notice that the examples above include the cheque numbers in the trust disbursement journal, the client trust ledger and the general receipts journal. This is important to ensure that entries can be cross referenced in all future records. 5. Decrease the amount owing in the client s accounts receivable ledger to reflect the payment. (refer to page 21 of the paralegal handout). notice that the outstanding amounts that were billed have now been paid with nothing further owing. Paralegal CLIENT GENERAL LEDGER PRACTICE ACCOUNT Account: Myers, Mike Payments Fees & Disbursements from client Balance owed Ref. # Date Particulars Invoice # billed (including tax) by client PF 1 Feb Billed fees PR 1 Feb Transferred from 121 trust Account: Anderson, Pamela Payments Fees & Disbursements from client Balance owed Ref. # Date Particulars Invoice # billed (including tax) by client PF 2 Feb Billed fees 122 1, , PR 2 Feb Transferred from 122 trust 1, Note: not all the activity will necessarily be the same when comparing the accounts receivable ledger in the practice and the trust account for the client. example: You may bill the client for services rendered that will not be paid from the trust. 11

12 Summary thus far: (Note the important sequence) Trust accounts: 1. Record the deposits in the receipt journal (subsection 18 (1) of By-Law 9). 2. Enter the amounts into each clients trust ledger account in the mixed trust account which reflects all deposits and disbursements and the balance in each clients separate account (subsection 18(3) of By-Law 9). Practice account: 1. Generate an invoice with all details pertaining to the billing. 2. Enter the amount into the fees journal (subsection 18(7) of By-Law 9). 3. Enter the amount into the client s accounts receivable ledger account. Trust account 1. Enter the amount to be disbursed from the trust disbursements journal - (subsection 18 (2 & 3) of By-Law 9). 2. Record the amount in the clients ledger account in the mixed trust account (subsection 18 (3) of By-Law 9). 3. Transfer the funds to the practice. Practice account 1. Enter the amount in the general receipts journal received in the general account (subsection 18 (5) of By-Law 9). 2. Record the amount received in the accounts receivable ledger account and update the amount still owing by the client Section 3: Transferring refundable expenses from the Trust Account When operating a practice, there are many expenses that need to be paid. examples include rent, insurance, law society fees, telephone and payroll. Here are some expenses that need to be recorded in the practice. The following expenses are recorded in the general disbursement journal: Ref # 6. Cadillac Properties for rent - cheque # 10 $1, Bell Canada for the telephone - cheque # Xerox for photo copier expenses - cheque # (partially recoverable) 9. Royal Insurance for insurance premium - cheque # Mary Contrary office manager - cheque # 14 5, FEDEX for courier charges - cheque # (partially recoverable) Total expenses $8,200 some expenses are recoverable from the clients. examples include photocopying, and courier charges. These charges are recorded in a special asset account called Disbursements Recoverable. 12

13 Paralegal GENERAL DISBURSEMENTS JOURNAL PRACTICE ACCOUNT Ref. # Date Paid to Use of funds Amount Method of payment & details PD 1 Feb Cadillac Properties Rent 1, Cheque # 10 PD 2 Feb Bell Canada Telephone and fax Cheque # 11 PD 3 Feb Xerox Photo copier expenses Cheque # 12 photo copier lease ($548) + Disbursements recoverable ($52) PD 4 Feb Royal Insurance Insurance Cheque # 13 PD 5 Feb Mary Contrary Salaries 5, Cheque # 14 general admin staff PD 6 Feb FEDEX Courier charges Cheque # 15 courier charges ($237) + Disbursements recoverable ($63) since Julia is entitled to recover some expenses, she calculated that Mr. Myers needs to reimburse the practice for the following: photo copying and faxes $25 courier charges 75 ref # pf3. february 28th: Total = $100 plus 5% gst Paralegal FEES JOURNAL Ref # Date Invoice # Client Fees billed Disbursements billed GST billed Total amount billed PF 1 Feb Mike Myers PF 2 Feb Pamela Anderson 1, , PF 3 Feb Mike Myers follow the sequence in section 1 above before transferring the funds from the trust account to the general account. (generate a detailed invoice, enter the amount in the fees journal, and the client s accounts receivable account in the practice ledger). remove the money from the trust account (notice that the entry is added to past entries) TRUST DISBURSEMENTS JOURNAL Date Method / Ref # Paid To Client Amount Feb Transfer inv # 121 /TD1. Cheque # 1 Mike Myers Feb Transfer inv # 122 /TD2. Cheque # 2 Pamela Anderson 1, Feb Transfer inv # 123/TD3. Cheque # 3 Mike Myers

14 record it in the client s (trust) ledger account Account: Myers, Mike Paralegal CLIENT GENERAL LEDGER PRACTICE ACCOUNT Ref. # Date Particulars Receipts Disbursements Balance in account TR1 Jan Retainer for legal fees 3, , TC 3 Feb Paid invoice # 121 for , services rendered. Cheque # 1 TC 5 Feb Paid invoice # 123 for out , of pocket expenses. Cheque # 3 and deposit the cheque into the general account. so far, the general receipts journal appears as follows. Totals have been included for purposes to be explained below. Paralegal GENERAL RECEIPTS JOURNAL PRACTICE ACCOUNT Received from Ref # Date (source of funds) Amount Method of payment & details PR 0 Feb , Received from PR 1 Feb Mike Myers trust Transferred from Mike s account for fees. Cheque # 1 PR 2 Feb Pam Anderson trust 1, Transferred from Pam s account for fees. Cheque # 2 PR 3 Feb Mike Myers trust Transferred from Mike s account - expenses. Cheque #3 Total to Date 11, The transfer from the trust account to the general account is accomplished by issuing a cheque from the trust account and recording it in the trust disbursements journal. 14

15 Paralegal GENERAL DISBURSEMENTS JOURNAL PRACTICE ACCOUNT Ref. # Date Paid to Use of funds Amount Method of payment & details PD 1 Feb Cadillac Properties Rent 1, Cheque # 10 PD 2 Feb Bell Canada Telephone and fax Cheque # 11 PD 3 Feb Xerox Photo copier expenses Cheque # 12 photo copier lease ($548) + Disbursements recoverable ($52) PD 4 Feb Royal Insurance Insurance Cheque # 13 PD 5 Feb Mary Contrary Salaries 5, Cheque # 14 general admin staff PD 6 Feb FEDEX Courier charges Cheque # 15 courier charges ($237) + Disbursements recoverable ($63) Total to date 8, The total remaining in the practice bank account is general receipts general disbursements = $11,575 (above) - $8,200 (above) = $3,375. Julia needs to pay some personal expenses and needs to draw some cash from the general account to pay these expenses. since pamela has already made an appointment to visit Julia next week and the money is to be used for services, Julia asks you to transfer $1,000 from pamela s trust account in advance to cover the payment. Julia promises that this will be ok and since she is a paralegal and probably knows the rules (and she s your boss), you feel obliged to do as she says. Note: since this is a proprietary business, the paralegal cannot draw salary as an expense to the practice. Drawings for personal use are deducted directly from the capital account (equity). Discuss this dilemma. 15

16 Section 4: non refundable expenses paid from the Trust Account on March 15, 2008, the bank charged the trust account $21 service charges for maintaining the trust account. However, these charges should be billed to the general account and not the trust account (by way of an instruction to the bank). The bank charges in a mixed trust account are not recoverable from clients. They are a cost of doing business. Note: if a bank deducts banking fees from the mixed trust account, the bank must reverse the fees and bill the practice. The bank charges are entered in the general disbursement journal only. Paralegal GENERAL DISBURSEMENTS JOURNAL PRACTICE ACCOUNT Ref. # Date Paid to Use of funds Amount Method of payment & details PD 1 Feb Cadillac Properties Rent 1, Cheque # 10 PD 2 Feb Bell Canada Telephone and fax Cheque # 11 PD 3 Feb Xerox Photo copier expenses Cheque # 12 photo copier lease ($548) + Disbursements recoverable ($52) PD 4 Feb Royal Insurance Insurance Cheque # 13 PD 5 Feb Mary Contrary Salaries 5, Cheque # 14 general admin staff PD 6 Feb FEDEX Courier charges Cheque # 15 courier charges ($237) + Disbursements recoverable ($63) Total to date 8, PD 7 Mar Trust a/c bank charge Deducted from bank account 16

17 Section 5: Direct Billing to new clients (no trust account entries) During the month of March, Julia performed paralegal services for Mr. song Ke. Accordingly, Julia requested that you bill Mr. Ke $1,000 plus gst for the paralegal services. in addition, certain bills were paid from the practice for photocopies on various dates. Here are the details of the disbursements made on behalf of Mr. Ke. Paralegal GENERAL DISBURSEMENTS JOURNAL PRACTICE ACCOUNT Ref. # Date Paid to Use of funds Amount Method of payment & details PD 1 Feb Cadillac Properties Rent 1, Cheque # 10 PD 2 Feb Bell Canada Telephone and fax Cheque # 11 PD 3 Feb Xerox Photo copier expenses Cheque # 12 photo copier lease ($548) + Disbursements recoverable ($52) PD 4 Feb Royal Insurance Insurance Cheque # 13 PD 5 Feb Mary Contrary Salaries 5, Cheque # 14 general admin staff PD 6 Feb FEDEX Courier charges Cheque # 15 courier charges ($237) + Disbursements recoverable ($63) Total to date 8, PD 7 Mar Trust a/c bank charge Cheque # 7 PD 8 Mar Photocopies Cheque # 8 disbursements recoverable Here is the invoice billed to Mr. Ke reflecting both the amount for services rendered and out of pocket expenses that need to be reimbursed. Paralegal Paralegal Invoice West Main Street Date 15-Feb-08 Suite 100 Bill To Mr. Song.Ke Toronto, Ontario M1M 2M3 Address 150 Yonge Street (416) Toronto, Ontario L4C 8T5 javocar@para.com Phone (416) Date Hours Description Rate Amount Mar Legal Services relating to case #75444 $ $1, Out-of-pocket expenses - photocopies Subtotal 1, GST Total for this invoice 1, Less: Transferred from Trust Account 0 Thanks for Letting Us Serve You Balance owing $1,

18 once the invoice is written, it must be recorded in the fees journal. Paralegal FEES JOURNAL Ref # Date Invoice # Client Fees billed Disbursements billed GST billed Total amount billed PF 1 Feb Mike Myers PF 2 Feb Pamela Anderson 1, , PF 3 Feb Mike Myers PF 4 Mar Pamela Anderson 4, , PF 5 Mar Song Ke 1, , Here is the record of the billing in Mr. Ke s ledger account in the practice to record how much is outstanding on his account. Account: Ke, Song Payments Fees & Disbursements from client Balance owed Ref. # Date Particulars Invoice # billed (including tax) by client PF 5 Mar Billed fees 125 1, , PR 4 Mar Mr. Ke s cheque # 999 1, Mr. Ke pays his account promptly which is recorded in the general receipts journal as well as the accounts receivable ledger account. notice that Mr. Ke paid the bill but left out the gst in error. The accounts receivable ledger account reflects this omission. This example illustrates the importance of maintaining this record failing which many unpaid accounts might go undetected. Mr. Ke will need to be sent a reminder that $52.65 is still outstanding. notice that there was no trust entry for this account since Mr. Ke did not pay any fees up front. Summary of accounting for services rendered and out-of-pocket expenses without a trust account Billing the client: 1 Generate an invoice detailing fees for services billed, out-of-pocket expenses to be reimbursed and GST. 2. Record the full amount in the fees journal. 3. Record the amount owing in the client s accounts receivable ledger account. When the client pays the bill: 1. Record the receipt of the payment in the general receipts journal. 2. Record the payment in the client s general ledger accounts receivable account. 3. Deposit the payment. 18

19 Section 6: separate interest-bearing Trust Accounts on April 1, 2008, you received a cheque from rene Bauer for $10,000. since the amount was so large, you made arrangements with the bank to open a separate interest-bearing trust account. on April 30, interest of $50 was deposited in the account by the bank. on April 28, 2008, registration fees of $20 related to Mr. Bauer s case were paid to the province using cheque number 200. note that the separate interest-bearing trust account has its own cheques, completely separate from the mixed trust account. The following is noted on page 8 of the paralegal Bookkeeping guide: 2. b) Separate Interest Bearing Trust Account This type of trust account holds trust funds for only one client. Typical separate interest bearing accounts are Passbook Accounts, GICs, and Term Deposits. The interest on these accounts belongs to the client and should be recorded in your trust receipt records as it is earned for each client. Similarly, any service charges are charged to the clients and recorded as disbursements for those clients. If you expect you are going to be holding a large sum of money for a client for an extended period of time, you should discuss with the client whether he or she wants interest on the money. You should get the client s instructions in writing as required by section 8(1)(a) of By-Law 9, taking care that the client is not looking to you for investment or financial advice. since you are opening a separate bank account, you will need to maintain separate trust receipts and trust disbursement journals. There are ways of combining the records of an individual account with that of the trust records, but the details are beyond the scope of this document. You must record the deposits in the trust receipts journal maintained for rene Bauer (separate from the trust receipts journal maintained for the mixed trust receipts journal). TRUST RECEIPTS JOURNAL Ref # Date Funds Received From Client Amount Method of Payment TRRB1 April 1, 2008 Rene Bauer Rene Bauer 10, Cheque received TRRB2 April 30, 2008 Bank Rene Bauer Automatic interest deposit from the bank The disbursement is recorded in rene Bauer s trust journal. Again, this is a journal that is separate and distinct from the mixed trust disbursements journal. 19

20 TRUST DISBURSEMENTS JOURNAL RENE BAUER Date Method / Ref # Paid To Client Amount April 28, 2008 Cheque #200 / TDRB 1 Province Rene Bauer The interest received in the amount of $50 less the amount paid to the province results in a surplus in the account of $30 which is owed to the client. unlike the mixed trust account, bank fees paid and interest earned are recorded in the trust account and a surplus is paid to the client rather than the law society. Section 7: refunding unused Trust funds clients deposit cash into a trust fund intended to be used for various purposes. it is quite common for funds to remain unused after completing a case. in this event, the remaining funds must be returned to the client. Step 1. Write a cheque from the trust account to the client recording the cheque number. record the entry in the trust disbursement journal. TRUST DISBURSEMENTS JOURNAL Date Method / Ref # Paid To Client Amount Feb Transfer inv # 121 /TD1. Cheque # 1 Mike Myers Feb Transfer inv # 122 /TD2. Cheque # 2 Pamela Anderson 1, Feb Transfer inv # 123/TD3. Cheque # 3 Mike Myers Mar Refund Mike Myers for Mike Myers Mike Myers 2, unused funds. Cheque # 4 Step 2. Deduct the amount paid from the client s trust ledger account reflecting the cheque number and amount refunded. Account: Myers, Mike Ref. # Date Particulars Receipts Disbursements Balance in account TR1 Jan Retainer for legal fees 3, , TC 3 Feb Paid invoice # 121 for services rendered. Cheque # , TC 5 Feb Paid invoice # 123 for out of , pocket expenses. Cheque # 3 TC 6 Mar Refunded balance in 2, trust to client. Cheque # 4 20

21 refer to page 7 of the paralegal Bookkeeping guide. Avoid trust funds languishing in trust accounts. You should review your client trust ledger accounts monthly. Any amounts that you can bill and transfer to your general account or refund to the client should be done promptly. If your trust reconciliation shows cheques that have been outstanding for more than a few months, follow up with the payees to find out whether they received the cheques. Once a cheque is stale dated, (i.e. has not been cashed within six months from the date of the cheque), you should stop payment on the cheque, re-establish the liability in the client trust ledger account for the applicable client, and reissue the cheque if appropriate. If you are unable to locate the client, despite having made reasonable efforts to do so throughout a period of two years, you can apply to pay the money to the Law Society s Unclaimed Trust Fund. Information on the fund and the Application Form can be found on the Law Society website. Section 8: concerning gst A detailed discussion of gst is beyond the scope of this document. The following is a brief explanation of how gst works. When Julia bills her clients, she must charge her clients the appropriate gst percent. When Julia purchases goods or services, she must pay gst to her suppliers. At the end of each reporting period, if the practice has collected more gst than paid out, the practice must remit the difference to the government. if the practice pays more gst than collected, the government will return the difference. in order to pay to the government or collect a payment due, Julia must file the appropriate forms with the federal government. 21

22 Examples: scenario # 1 reflects gst received from clients in the amount of $ versus gst paid out to suppliers in the amount of $ The difference of $205 represents the amount of gst that needs to be paid to the government. scenario # 2 is the opposite. gst paid exceeds gst collected which means that the practice should expect a refund of $ Scenario #1 Details Amount GST Received Amount GST Paid Billed client #1 1, Billed client #2 1, Billed client # Billed client # Billed client # Billed client # Billed client #7 3, Paid rent 1, Paid for repairs Paid for new computer 1, Paid for printer Paid for consultant Total 7, , Difference owing (to be paid) Scenario #2 Details Amount GST Received Amount GST Paid Billed client #1 1, Billed client # Billed client # Billed client # Billed client # Billed client # Billed client #7 1, Paid rent 1, Paid for moving expenses 1, Paid for course 2, Paid for printimg Paid for consultant Total 5, , Difference owing (to be refunded) ( ) 22

23 Trust Accounting practice exercise Carol started a new paralegal practice This exercise will go through the different scenario s carol will encounter as a paralegal throughout the year. You will need to record the necessary journal entries in your worksheets as we progress through each scenario. note: use the reference numbers provided in all journals and ledgers so that you can cross reference your answers. gst rate of 5% enter the following transactions into their appropriate records. 1. on June 1, 2008, carol started up a new paralegal practice by opening a practice bank account and a trust bank account at her local bank. she deposited her own money in the practice bank account using cheque # 175 for the amount of $25,000. use reference # carol's friend referred two new clients, gloria and Beatrice. They will both pay a retainer to carol in trust. set up the appropriate accounts for each of them. 3. on June 5, gloria gave carol a retainer of $2,000 (reference #2, cheque # 230). Beatrice gave carol a retainer of $4,000 (use reference # 3, cheque # 352). carol deposited the money in the trust bank account. 4. on June 15, gloria telephoned carol, and spent one and one-half hours discussing her traffic violation. carol bills gloria $375 for her time on invoice #221. use reference # on June 16, Beatrice attended a meeting at carol's office and discussed some issues she was having with her import-export business. The meeting lasted four hours. That evening carol spent an additional hour researching Beatrice's issue. carol bills Beatrice $1,000 for her time on invoice #222. use reference # since you have recorded the bills to gloria and Beatrice, transfer the funds from the trust account to the general account. gloria s funds are transferred using cheque # 15, reference # 4. Beatrice s funds are transferred using cheque #16, reference # 5. Then record the deposit in the practice s general bank account. record the appropriate entries in the trust account and general account ledgers dated June The following expenses are paid from the practice s general bank account. record the expenses in the general disbursement journal. 23

24 Record the expenses in the general disbursement journal. 8. record the billing of expenses to clients, and transfer funds from the trust bank account as of June 30, Date 2008 Cheque # Description Amount Notes June Rent 1,200 Fairview Properties June Telephone 400 Paid to bell. $100 of long distance recoverable from Gloria June Photocopies 500 Paid to Xerox $20 recoverable from Gloria June Insurance 1,200 Royal Insurance company June Salaries 6,000 Paid to employees June Courier 200 $20 recoverable from Beatrice. Total 9,500 gloria - invoice # 223, cheque # 17 (use reference # 6) Beatrice - invoice # 224, cheque #18 (use reference # 7) 9. on June 30, the bank deducted $50 from the practice s general account for bank fees related to the trust account. record payment in the appropriate journal(s). 10. on June 30, an old friend contacted carol and discussed a legal problem. carol spent 3 hours related to the problem, and billed robert Vaughan $750. Because robert was an old friend, carol did not require a retainer. use invoice #225, reference # 8 to bill robert Vaughan. 11. on June 30, robert paid one-half of the amount owing. continue this record using reference #8 and cheque # 19 24

25 Trust records Carol Hiltebeitel TRUST RECEIPTS JOURNAL Ref # Date Funds received from Client Amount Method of payment Carol Hiltebeitel TRUST RECEIPTS JOURNAL Ref # Date Funds received from Client Amount Method of payment 25

26 27

27 general records 29

28 Carol Hiltebeitel CLIENT GENERAL LEDGER - PRACTICE ACCOUNT Account: Ref # Date Par culars Invoice # Fees & Disbursements Payments from client (including tax) Balance owed by client Account: Ref # Date Par culars Invoice # Fees & Disbursements Payments from client (including tax) Balance owed by client Account: Ref # Date Par culars Invoice # Fees & Disbursements Payments from client (including tax) Balance owed by client 31

29 Where Do I Record This Entry? (indicate in which journal or ledger a transaction is recorded) Transaction Type Trust Cash Journal Client Trust Ledger Trust Transfer Journal General Receipts Journal General Disbursements Journal Client General Ledger Fees Journal 1. Owner (paralegal deposits cash in the business) 2. Clients give cheques to paralegal for work still to be performed 3. Paralegal bills client 4. Paralegal withdraws cash from trust in payment of fees 5. Paralegal deposits cash directly from client for fees billed on account 6. Paralegal pays expenses of running the business 7. Paralegal bills clients for their share of expenses 8. Paralegal withdraws cash from trust in payment of billed expenses 9. Paralegal deposits cash directly from client for reimbursed expenses 10. Refundable expenses paid from general account 11. Bill client and transfer funds from the trust to pay fees 12. Cheque received directly from client to pay outstanding bill (no balance in trust account) 13. Refund to client from trust account 14. Move funds between one client and another 33

30 use this check list when completing records. Check list when billing clients that have prepaid finds into a mixed trust account Check Trust account 1. Record the deposits in the receipt journal (subsection 18 (1) of By-Law 9). 2. Enter the amounts into each clients trust ledger account in the mixed trust account which reflects all deposits and disbursements and the balance in each clients separate account (subsection 18(3) of By-Law 9). Practice account 1. Generate an invoice with all details pertaining to the billing. 2. Enter the amount into the fees journal (subsection 18 (7) of By-Law 9). 3. Enter the amount into the client s accounts receivable ledger account. Trust account 1. Enter the amount to be disbursed from the trust disbursements journal - (subsection 18 (2 & 3) of By-Law 9). 2. Record the amount in the clients ledger account in the mixed trust account (subsection 18 (3) of By-Law 9). 3. Transfer the funds to the practice. Practice account 1. Enter the amount in the general receipts journal received in the general account (subsection 18 (5) of By-Law 9). 2. Record the amount received in the accounts receivable ledger account and update the amount still owing by the client Check list when billing for services rendered and out-of-pocket expenses without a trust account Billing the client 1. Generate an invoice detailing fees for services billed, out-of-pocket expenses to be reimbursed and GST. 2. Record the full amount in the fees journal. 3. Record the amount owing in the client s accounts receivable ledger account. When the client pays the bill: 1. Record the receipt of the payment in the general receipts journal. 2. Record the payment in the client s general ledger accounts receivable account. 3. Deposit the payment. 35