Keeping Clients Trust Accounts with QuickBooks 2010 Professional

Transcription

1 Keeping Clients Trust Accounts with QuickBooks 2010 Professional Minnesota State Bar Association Mike Trittipo, Director of Technology Copyright 1998, 1999, 2007, 2010 Minnesota State Bar Association. The MSBA licenses each of its members to reproduce one copy of this guide for the member s own use, but not for resale or further distribution.

2 Table of Contents Introduction... 1 The Rules and Required Books... 1 Computerized vs. handwritten accounting...2 General principles for all trust accounting by computer... 3 Two ways of meeting the rules and the principles... 3 Options for Handling Firm s Funds and Interest... 5 Relation to your Business Accounts... 5 Preparation for Initial Set-Up... 6 Beginning: Setting Up the Needed Accounts... 6 Completing the Interview... 6 The next steps... 7 Creating Asset Side Accounts... 8 Entering Initial Balances of Client Funds Held in Trust Reconciliation of Initial Balances Entering Transactions New Client Receipt of Money for Client Disbursements Payment of Your Fees (Split Disbursements) IOLTA Interest Income and Payment Reconciliation Reports: Monthly Print-outs Mistakes Miscellaneous Tips Closing Request... 42

3 Introduction This guide shows a way to maintain client trust accounts using QuickBooks 2010 from Intuit. The guide begins with the rules that apply in Minnesota. It then maps an approach that can be used with any double-entry accounting program, in terms of a chart of accounts. That desired end result provides the context for all later command-by-command details specific to operating QuickBooks 2010 itself. The Rules and Required Books The current rules for Minnesota lawyers are found in two places: Rules of Professional Conduct (RPC) Rule 1.15 on Safekeeping property and RPC Appendix 1. One should reread both every year, because they are regularly amended. 1 Rule 1.15(h) requires lawyers who handle client funds to keep books and records sufficient... to establish compliance with the rule s paragraphs (a) through (f). Paragraph (i) requires the Lawyers Professional Responsibility Board (LPRB) to say annually what books and records are required by paragraph (h). The LPRB does so via Appendix 1. All funds of clients or third persons must be deposited in identifiable trust accounts. RPC 1.15(a), (c)(5). Trust accounts may be of two kinds: an IOLTA account under RPC 1.15(e) or a non-iolta one under Rule 1.15(f). Non-IOLTA accounts come in two subtypes. RPC 1.15(g) tells how to decide which to use. This guide focuses on IOLTA accounts, but the same methods work on accounts in which net interest goes to clients. Some records are required outside the accounting per se. Appendix 1 requires records identifying all trust accounts maintained. These must include the bank name, date opened, account number, account name, and the bank agreement. App. 1, I.1. They must also show the account type i.e., type 1.15(e), 1.15(f)(1), or 1.15(f)(2) whether money is pooled and net interest paid to the IOLTA program, money pooled and net interest allocated among clients, or for a single named client. These identifying records are best kept in a document outside the accounting program itself. The name printed on trust account checks should include the words trust account spelled out (not just the abbreviation IOLTA ). As for accounting records specifically, Appendix 1 requires the following: 1. A separate check register for each account, showing all deposits and checks chronologically with a running balance, and the details of the date, amount, client identity, payee (if a check), and purpose of the deposit or check. App. 1, I.2. 1 As of this writing, the most recent amendments were effective July 1, 2010, related to a transfer of former LTAB responsibilities to the Legal Services Advisory Committee. A 2008 amendment requires keeping copies of wire and electronic funds transfer confirmations and images of electronic deposits by substitute checks. Minnesota State Bar Association Page 1 of 42

4 2. A separate subsidiary ledger for each client matter, showing each receipt and disbursement, its date, amount, purpose, payee and check number (for disbursements), and the running balance. There should also be separate subsidiary ledgers for a small amount of the firm s own funds to cover reasonable bank charges, and for interest accrued but not transferred by the bank to the IOLTA program in the same month as credited. App. 1, I A monthly trial balance of the subsidiary ledgers. This means a report showing all client matter balances, i.e., identifying each client matter, the balance for each one at the end of each month, and the total of them all. App. 1, I A monthly reconciliation of three balances: the adjusted bank statement s, the checkbook s, and the subsidiary ledger trial balance total. Reconciliation means accounting for outstanding deposits and checks, and for transactions shown on bank statements but not already entered in your records (e.g., interest and service charges). App. 1, I Certain monthly print-outs are required if a lawyer uses a computer to keep trust account records. These are (a) the checkbook register (with all required detail), (b) the trial balance of the subsidiary ledgers, and (c) the reconciliation report. App. 1, I.7. Of course, base records must be kept: bank statements, cancelled checks or copies, wire or EFT confirmations and authorization memoranda (depending on the direction), duplicate deposit slips, receipts, and image statements for deposits via substitute checks. App. 1 I.6. But items 1 through 5 are the ones to keep in mind when using a computer. Computerized vs. handwritten accounting No rule requires you to use a computer. All required records can be kept with ink and paper, using methods dating to the 13 th century: debits on the left, credits on the right, with every amount entered twice once as a debit and once as a credit, to separate accounts; and money moving from the credit (right) side of one account to the debit (left) side of another. Indeed, the LPRB offers guides showing how to keep the required books manually. One writer specifically advises lawyers to keep trust account books with ink and paper by hand for a while to thoroughly learn the hows and whys before computerizing or hiring a bookkeeper. [Jay Foonberg, The ABA Guide to Lawyer Trust Accounts, 1996, p. 90] The fact that one can keep handwritten accounts should be reassuring. It shows how simple the task is. There is no math beyond third grade: only addition and subtraction, nothing more. (The only higher math is in the interest, but the bank will calculate that and tell you the result; you need only add or subtract the amount it tells you.) This being so, you could keep the accounts using just a simple spreadsheet program. A former director of the LPRB does so. Using a spreadsheet instead of ink and paper increases the records legibility, reduces math mistakes, and allows electronic backup. Minnesota State Bar Association Page 2 of 42

5 But using a program dedicated to accounting has advantages. You can set the program to remind you of monthly tasks like reconciliation and printing. A program like QuickBooks takes care of the double in double-entry book-keeping, avoiding transcription mistakes. (Your specification of the source and destination accounts tells the program where to make the two entries.) If you conscientiously make the entries for the check register, item 1 listed above, the program can take care of items 2 and 3, while making items 4 and 5 a snap. General principles for all trust accounting by computer A few basic ideas inform the method this guide shows. 1. Every penny must be assigned to someone (i.e., to their account): a specific client, your firm, or the IOLTA program (since July 1, 2010 administered by the Legal Services Advisory Committee (LSAC), no longer the Lawyer Trust Account Board. There should never be any unassigned amount. 2. No one can spend money they don t have. So client A s money can t be used to cover disbursing more for client B than client B has in trust, even though no overdraft occurs on the trust account overall. Appendix 1 I.3.a and I.4 prohibit negative balances in client matters. Nor can the firm s funds be negative: client money would be covering the shortfall. 3. Keep it simple. One Minnesota accountant once promoted a system showing all trust accounts as accounts receivable with negative balances. She argued that a Negative Accounts Receivable is a Positive Accounts Payable, and that one could make positive numbers after the fact by exporting into Excel, then multiplying by negative one (-1). Such need for work-arounds reflects a bad system. Accounts should be clear as actually kept. 4. Keep your trust accounts separate from your business accounts if using a generalpurpose accounting program rather than a full-featured law practice management system (which separates them for you behind the scenes). In QuickBooks terms, use a separate company. The program allows as many companies as you want; use that freedom. 5. Trust accounts are cash basis, not accrual. 6. Don t rely on any program s built-in accounts. Make your own. Avoid any temptation to think that some magic or expertise inheres in the program. Proper books result from consistently following a reliable method and knowing why, not from some mysterious abracadabra supposedly programmed in. The program did it is never an excuse. Two ways of meeting the rules and the principles There are two basic recommendable ways to use any general accounting program to meet the trust accounting rules and principles just outlined. Other ways are possible, but they are less simple or are program-specific. Some variation in a couple details is possible, but it is minor. Some programs might be limited in ways requiring work-arounds; but the aim of the work-arounds is to provide an analogue to one of these two basic ways. Minnesota State Bar Association Page 3 of 42

6 1. Track the IOLTA trust account balance with a single asset account (corresponding to the actual bank account), and use an umbrella trust liability account on the other side subdivided into multiple trust liability subaccounts, one for each client (and matter, if necessary). The asset accounts (in blue below) correspond to real bank accounts. Overall, the chart of accounts looks like this (omitting details as to non-iolta accounts): Assets Trust Account: IOLTA Trust Account: non-iolta 1 indiv. Trust Account: non-iolta 2 pooled Liabilities IOLTA trust liability Apple trust liability Baker trust liability Charlie matter 1 trust liability Charlie matter 2 trust liability Firm s Funds (limited) Interest Non-IOLTA trust liability 1 Non-IOLTA trust liability 2 The asset and liability sides must balance. Every deposit to the trust account must be matched by an increase in the appropriate Trust Liability subaccount, never by an unassigned increase in the umbrella trust liability; and every disbursement from the trust account matched with a reduction in the proper liability subaccount. There must never be any amount not assigned to one of the specific liability subaccounts, i.e., no loose money. 2. Track total IOLTA trust account liability to all clients in a single liability account, and use an umbrella bank account on the asset side with multiple subaccounts, one for each client and matter. The asset accounts shown in blue in the chart of accounts illustrated below correspond to real numbered bank accounts just as with method 1; the ones in green are purely accounting-program accounts, known to you as the lawyer in your accounting books but not to the bank. Assets Trust Account: IOLTA Firm s Funds (limited) Interest Client funds Apple s funds Baker s funds Charlie matter 1 funds Charlie matter 2 funds Trust Account: non-iolta 1 indiv. Trust Account: non-iolta 2 pooled Liabilities IOLTA trust liability Non-IOLTA trust liability 1 Non-IOLTA trust liability 2 Under method 2, every deposit to the trust account must be into a specific client subaccount on the asset side (never into the trust account at large for IOLTA funds), and must be from the single relevant (IOLTA or non-) liability account. Likewise, every disbursement must be from a specific asset/bank subaccount, not just from the bank account in general; but every disbursement reduces the liability balance. Minnesota State Bar Association Page 4 of 42

7 These methods hew closely to reality: every penny received in trust creates or increases one s liability; every proper disbursement reduces that liability. Which method to choose depends in part on what a program allows (some may not allow liability accounts to have subaccounts; others may not allow bank accounts to have subaccounts), and in part on which you find more natural. Programs allowing the first method are more likely to make it easy to enter split transactions (e.g., writing a single check to your firm for fees earned or reimbursement of costs, for several clients at once). QuickBooks 2010 allows this. In a sense, this guide has already told you all you need to know of the big picture to figure out how to use any general-purpose accounting program with reasonable features for your trust accounts. Take any program, figure out how to produce one of the two charts of accounts, enter several pretend deposits and withdrawals or checks respecting the rules about what account to use for the matching credit/debit entry, then display test reports to be sure the results are sane. If there are negative numbers, or extra accounts created with balances that only grow over time, or anything that doesn t match what would result on paper, figure out why and change approach or methods accordingly. This guide is based on the MSBA s experience having done that with QuickBooks The rest of the guide will show what commands and icons will create the accounts shown above, record transactions in them, reconcile them, and print the required reports. It is not the only possible way, but it works and is simple and consistent. Options for Handling Firm s Funds and Interest RPC 1.15(a)(1) lets you keep a small amount of your own money in the same bank account as the client funds, reasonably sufficient to cover expectable bank charges. The LPRB recommends a balance under $100 for trust accounts with light to moderate activity, only enough to ensure that such charges always come out of your money, never clients. The LPRB recommends tracking interest in a separate subaccount when possible. Doing so is facilitated when a bank does not assess regular monthly service charges or transaction fees on IOLTA accounts. Many such banks exist and it is worth your time to use one. But if a bank does assess such charges, they may exceed the interest earned in a given month. To be sure the excess comes out of the firm s funds, not clients, one can record interest earned for and paid to the IOLTA program in the same subaccount as the firm s funds. This guide will use a separate interest account, as is preferred. Relation to your Business Accounts In theory, one could do all one s business and trust accounting in a single QuickBooks company. But in practice doing so would be significantly more complicated, increasing the risk of mistakes. It would require creating many customized filters and reports to keep reporting on both sets of accounts accurate. As QuickBooks allows an unlimited number of companies, there s no reason not to keep them separate. Minnesota State Bar Association Page 5 of 42

8 Preparation for Initial Set-Up Before you begin, you need to know the exact balance of all existing amounts held in trust. In principle, you could determine these at any time. In practice, it is easiest to set up initial balances as of the date of your most recent bank statement. Reconcile existing accounts with the bank statement, so that every penny in the account has a known ownership, as does every penny of any outstanding items. If any payments from an existing account are outstanding, leave them outstanding when setting up QuickBooks (i.e., set up the initial balances as if the outstanding items had not been written), and only after that record the outstanding items. That way, your reconciliation with the next month s statement will be easier when the check clears. Also, if the check remains outstanding even then, your accounts will reflect the fact. If your bank does not impose monthly charges and always has offsetting entries in the same amount for interest earned and interest paid over to the IOLTA program, you can leave the initial balance for interest at zero. But some banks may accrue interest for some time, then pay it over at a later date, so the earned and paid amounts are not perfectly offsetting. If so, set the initial interest amount to the last interest earned balance, and ignore any interest that the most recent bank statement shows was already paid. Beginning: Setting Up the Needed Accounts Completing the Interview After installation, QuickBooks 2010 shows a Welcome screen with four choices: taking a tutorial, practicing with a sample company, opening an existing one (after an upgrade), and creating a new one. This guide creates a new company. Clicking on the New company 2 button in the Welcome screen or, in the program at any time, clicking on the File>New Company command will bring up an EasyStep interview. It offers two choices: to start the interview or to skip it. Either way works; they just involve different numbers of questions and give different charts of accounts. Either way, delete all the accounts they create, or hide them if they cannot be deleted, and make your own from scratch. Either way, the first step is to name the company. Something like Client Trust Accounts, perhaps preceded by your law firm s name, would identify the records clearly enough. If you go through the full interview, choose other/none for the type of company. Your first fiscal month is irrelevant; use January. Setting an administrator password is a good idea but remember it. The default location for the data files will be fine usually. Select services only as what you sell (of course, trust accounts sell nothing, but this choice reduces the number of accounts to delete later). Don t charge sales tax, estimates, sales 2 Words that match the labels on screen elements of the program are in bold hereafter. Minnesota State Bar Association Page 6 of 42

9 receipts, or billing statements. Say no to progress invoicing, managing bills, credit cards, tracking time, employees, and multiple currencies. Choose a starting date close to your last bank statement s. Choose to add a bank account later. Then delete all the income and expense accounts that QuickBooks proposes. (Delete by clicking the line to uncheck the suggested accounts; use the vertical scrollbar to go up or down the list to uncheck all twenty or so.) After you finish the interview, open up the Chart of Accounts by typing the combination ctrl-a or clicking the icon so named in the upper right of the Home (Explore Workflow) desktop. QuickBooks will have made the following ones. Delete them all (by right-clicking on each and choosing delete ). There is no magic built in to the one named Client Trust Account ; you can make your own from scratch. The skip interview choice doesn t skip it, but does shorten it. Choose the company name, its organization ( other/none ), the fiscal year s first month, and industry. Choosing other/none as your industry still results in a chart of accounts that includes four you won t need for client trust accounting, as shown here. You will not be able to delete the two payroll accounts. But you can make them inactive, hiding them from view. To do so, right-click and choose Make Inactive. The next steps Consistent with the schema for method 1, the beginning steps in using QuickBooks for your trust accounting (before entering any monetary amounts) are to: 1. Create an umbrella account for client (and other) money held in trust. This is not a real, numbered bank account, merely an accounting device. Minnesota State Bar Association Page 7 of 42

10 2. Under this umbrella account, create a subaccount for an IOLTA bank account in which several clients funds are pooled, with interest going to the IOLTA program under Rule 1.15(e); and optionally create one or more non-iolta subaccounts if needed under RPC 1.15(f). Each of these will correspond to a real, numbered, bank account. 3. Create an umbrella balance sheet account on the liability side for all client trust liability (pooled or not, IOLTA or not). 4. Create subaccounts to the client trust liability account, one for each client and separately billable matter, and one each for the firm s funds and the IOLTA interest. After that setup, this guide will walk through the entry of beginning balances and some typical transactions and reconciling the books and the bank statement, as well as how to produce required monthly reports and guard against errors. Creating Asset Side Accounts With the company open (the program title bar always shows what company one s working in), open the chart of accounts by clicking its icon on the desktop or using the menu Company > Chart of Accounts (both circled in red). Doing so brings up the Chart of Accounts window shown below. Minnesota State Bar Association Page 8 of 42

11 Click the Account button at its bottom left to open its menu, then the menu s top line New (highlighted in blue as shown in the illustration above) to show the Add New Account: Choose Account Type screen. Click the radio button for Bank as the type as circled in red above, then Continue to get the following Add New Account details screen: Enter a name ( Client Money here) and a description to flag its umbrella nature. Do not enter an opening balance, nor a bank account or routing number; this is an umbrella account only, not corresponding to a real-world one. The reason for choosing Bank as the Minnesota State Bar Association Page 9 of 42

12 type is that QuickBooks 2010 Pro requires subaccounts to match their parent type. With the name and description entered, press Save and Close or Save and New (buttons not shown). When there are multiple accounts to create, the latter option is handy. Next create the QuickBooks account corresponding to the real, numbered IOLTA bank account. Obviously, this will be a Bank type. As you have already seen the steps for adding a new account, they need not all be shown again. So the following illustration shows just the final entries in the fields. Comments on their content follow the illustration. The account name is limited to 31 characters including spaces. It need not exactly match the name on the checks; only clearly identify the account. Putting a checkmark in the Subaccount of box allows use of the drop-down menu to choose the parent account from existing ones (here, the Client Money account just created), avoiding retyping and mistakes. Unlike the name field, the Description is not limited to 31 characters. As this is a real-world account, enter the bank account and routing numbers. Do not enter an opening balance. Press the Save and Close button (not shown at the bottom). Similar steps (not needing re-illustration) will create non-iolta bank accounts as needed for some clients. All would still be subaccounts of Client Money. Use the Description field to show whether the account is individual or pooled under RPC 1.15(f); if for a single client or matter, use the client or matter name in the name and description. Each time, saving the account updates the chart of accounts. Note in the chart of accounts shown below that all balances are still zero. That is because all entries of amounts must be tied to matching entries in the liability accounts that are not yet created. For any Minnesota State Bar Association Page 10 of 42

13 general purpose accounting program, not just QuickBooks, the MSBA recommends this order: first create the accounts, then enter money amounts. Creating Liability Side Accounts One begins making the liability side accounts the same way as the asset side ones. Open the Chart of Accounts. This time, ignore the choices offered and choose instead Other Account Types, then use the drop-down menu to choose Other Current Liability, then press Continue, all as seen in the following illustration. As on the asset side, this initial account is an umbrella one that can be named Trust Liability on the next screen (shown below). Nothing beyond the Account name and the Description need be filled in before pressing Save and New. Minnesota State Bar Association Page 11 of 42

14 The next steps will be to create a subaccount for client trust liability held in IOLTA accounts, and one for client trust liability held in non-iolta ones. In the illustration that follows, In IOLTA1 was entered as the Account Name, referring to the mirror asset account, and made it a subaccount of the Trust Liability account just created. The Description field also cross-references the associated bank and account number. The Account No. and Routing Number fields are left blank. If you have one or more clients with money held in a non-iolta account, create a Trust Liab. (non-iolta) account the same way, i.e., also as a subaccount of the umbrella Trust Liability, and with a description identifying the relevant asset account and bank information, and a client name if appropriate under RPC 1.15(f)(1). The last step to finish the chart of accounts before entering balances is to create clientspecific subaccounts under the IOLTA liability account: one for each client (and matter if needed), and for the firm s funds and IOLTA interest. These subaccounts will all be Other Account Type, specifically Other Current Liability, like their parent account ( In IOLTA1 ). As with the asset accounts, do not enter any opening balances. Minnesota State Bar Association Page 12 of 42

15 Following this paragraph is an image of the by-now familiar Add New Account window, part-way through creating the first of three client subaccounts for this guide. Note that the Subaccount of box was checked and the parent account filled in. Note also that the client is named in full in the Description field, alongside a description of the matter. You could also enter your own client file numbers into the Description field. You could also use conventions for your account names and descriptions that would allow sorting in reports either alphabetically or numerically. For this guide, in which Apple, Baker, and Charlie all come alphabetically before Firm s Funds and Interest, there is no need for such refinements. But when you have a hundred active clients, you will want to give some thought to your account names and descriptions. The eventual result for this guide s three clients subaccounts should look as follows. Next make a liability subaccount for interest earned but not yet paid to the IOLTA program. It fits the asset and liability schema, because every penny earned in interest (possibly less bank charges) is owed to the IOLTA program, thus a liability. So use the Other Current Liability type, and as with the clients, leave its initial balance zero. Finally, create a subaccount for the firm s funds, making it, too, an Other Current Liability, because if you stopped practicing and all money were disbursed from the trust Minnesota State Bar Association Page 13 of 42

16 account, this amount would be owed to your firm rather than a client or the IOLTA program. The completed chart of accounts appears as follows; all balances are still zero. Entering Initial Balances of Client Funds Held in Trust The next step is to enter the balances for individual clients within the pooled IOLTA account, as they were on the beginning date. Assume initial trust account balances to carry forward for Apple, Baker, and Charlie of $800, $2,000, and $3,000 respectively. One way to make a deposit is by highlighting the account (here, the IOLTA1 bank account, the real-world one with checks), and right-clicking for a menu that includes Make Deposits as shown. Minnesota State Bar Association Page 14 of 42

17 One can also use the Activities drop-down menu at the bottom of the Chart of Accounts window to reach the Make Deposits command, as shown below. Either way opens up a Make Deposits window, shown below. The Deposit To entry will be the IOLTA1 account if it was highlighted, as shown above. But as the illustration also shows, one could use the drop-down menu on the Deposit To box to be sure one had selected the right account for the deposit. To enter the $800 that is Apple s balance, use the calendar for the Date box to set the correct initial date. Edit the Memo box to the right to change it from the default Deposit text to be more informative, sufficient to meet the requirement that the purpose be stated, as shown below, circled in red. (The abbreviation c/f means carried forward. ) Minnesota State Bar Association Page 15 of 42

18 In the Received from column of the striped register part, click Add new. A dialogue box appears asking the type, as shown below. Choose Other. Vendor and Employee do not apply, and the Customer type is built for operating accounts (how much your client owes you for your services), not trust accounts (how much you owe the client an accounting for). Using it could create traps. For example, the dialogue for new Customers asks for an Opening Balance. Filling it in would be a mistake, as an entry there would mean the amount this customer owed you as of your start date, the opposite of what it should. (The meaning is explained if one clicks the How do I determine the opening balance? line.) Hence use of the Other type. This guide enters only the client s name as shown in the following illustration but the window has fields (not shown) where you could enter other contact information. Clicking OK closes the window and returns to the Make Deposits screen. Minnesota State Bar Association Page 16 of 42

19 Next drop down the From Account window, to see a pick list as shown below. Here, choose the Apple liability subaccount. Then go to the next column, the ledger s Memo field, and note the purpose. Note that the Make Deposits window has two areas, each called the same: Memo. You should always fill each of them in, because different reports draw on one or the other, and you want to be sure that all reports show the purpose of the entry as Appendix 1 requires. Nothing need be entered in the Chk No. or Pmt Meth. columns. Enters the carried-forward balance of $800, then click the Save and Close button at the bottom of the Make Deposits window. The result appears in the Chart of Accounts as follows. This shows one of the benefits of a dedicated accounting program over manual double entry on paper or in a spreadsheet. Without having to write the amount twice, the entry of $800 appears on both the asset side and the liability side, balancing, and without any need for manual arithmetic or formulas the balances for the parent accounts are updated too. Minnesota State Bar Association Page 17 of 42

20 Enter the initial balances for Baker and Charlie the same way: highlight the IOLTA1 account, bring up the Make Deposits window, use the drop-down in the ledger s Received from and Add new of a type other to identify the client, enter the purpose in both Memo fields, and make the From account ledger field identify the right Trust Liability:In IOLTA1 subaccount. The last point bears emphasis: this method depends on always using a subaccount of Trust Liability for all money in or out, and on every client having his, her, or its own subaccount. Any amount in Trust Liability that is not in a subaccount, i.e., that is free-floating or unallocated, indicates a mistake that needs immediate correction. That is true of the firm s own small amount of funds, and interest amounts, too: give them specific subaccounts (or a shared one), do not treat them as whatever is unassigned in the overall account. Doing it any other way deprives you of important warning signs. After entry of three initial client balances, the Chart of Accounts looks as follows: Two more initial balances are needed: one for the limited amount of firm s funds that are kept in the bank account to cover service charges and the like; and another for any interest earned but not yet paid to the IOLTA program. Whether there is an initial balance for the interest will depend on the bank s payment schedule. Some credit the interest and pay the net after any transaction charges to the IOLTA program both on the same day, so there is never a non-zero balance. This guide assumes interest being credited to the account earlier than it is paid over to the IOLTA program. This guide handles the firm s funds and the interest amounts by creating liability subaccounts like the clients subaccounts. One could treat them differently, as income and expense, but treating them just like clients money lets you to use the same steps for any and all money in or out, allowing consistency and reducing the risk of errors. Thus, the Minnesota State Bar Association Page 18 of 42

21 initial balance for the firm s funds is entered the same way, i.e., using the Firm s Funds liability subaccount as the From Account entry in the ledger. Likewise, the beginning balance for interest is entered by setting the From Account in the Make Deposits ledger as the Interest liability subaccount. The Chart of Accounts after entry of the firm s funds and interest initial balances looks as follows. Reconciliation of Initial Balances To reconcile the IOLTA bank account, highlight it (the one that corresponds to a real bank account, here IOLTA1 ), then click the Activities button and Reconcile. Minnesota State Bar Association Page 19 of 42

22 In the Begin Reconciliation window that appears, the Ending Balance box is blank to begin with, and the Statement Date box shows today s date. Enter the ending balance as shown on your bank statement: $ in this guide s example, below. There will be no service charge or interest earned yet, as these are initial balances. But even later, it is best to enter charges and interest in the register, not here, for better records. So click Continue. A Reconcile window appears as shown on the next page. Minnesota State Bar Association Page 20 of 42

23 Clicking on a transaction there clears it. (The screen image above shows the first two amounts cleared, and a difference of $ left. At the end, the Difference between the QuickBooks and bank statement totals should be zero, as below. Minnesota State Bar Association Page 21 of 42

24 If the difference is not zero, you need to find out why and correct it. QuickBooks lets you edit transactions. Even from the Reconcile window, you can right-click on a particular line (e.g., any of the four deposits shown in the window above) to see the full transaction details and edit them to make them correct. When all amounts are correct and the difference is zero, press the Reconcile Now button to generate an initial reconciliation report. QuickBooks offers a Summary or Detail report, each shown below. Print them as your first reconciliation and keep them. Minnesota State Bar Association Page 22 of 42

25 Entering Transactions New Client A new client Dave Dude came in on July 6 and (after you made conflict checks and decided to take the client) gave you a retainer of $1,250. You could proceed the same way as when entering the initial balances, by going to the Chart of Accounts, making a new client liability subaccount under In IOLTA1, and after its creation entering the retainer. But you can also begin by highlighting the IOLTA1 account, then clicking Activities to go to the Make Deposits window first. In that window s Received From box, choose Add New to enter Dave Dude as a new other type, and then in the From account box also choose Add New, as shown below circled in red. In the resulting Add New Account window choose Other Account Type and Other Current Liability, then Continue. Call the account Dude, being sure to make it a subaccount of In IOLTA1, not just of Trust Liability, then Save and Close. Do not enter an opening balance; you will record the amount as part of the transaction. Minnesota State Bar Association Page 23 of 42

26 Pressing Save and Close returns to the Make Deposits window. There, fill in both Memo fields with the purpose of the transaction. Then enter the amount. Press the Save and Close button (not shown) and the Chart of Accounts is updated. The only differences between this entry for receipt of a retainer for a new client, and the entry of the initial balances, were the date of the transaction and the memo indicating the purpose (an initial retainer, not a starting balance transfer). The Received From entry was still a subaccount of the In IOLTA1 subaccount of Trust Liability. Receipt of Money for Client On July 7, you receive a settlement or payment of an award in Apple s matter, of $18,000. Highlight the IOLTA1 banking trust account; click on the Activities button and then Make Deposits. If the banking account is not already chosen in the Deposit To window, use the drop-down menu to select it. Enter the date, and make an entry in the Memo field beyond just the default (and redundant) notation Deposit : remember that the rules require not just the date, amount, and client identity, but also the purpose of the deposit. An entry like Apple recovery in hotel matter is thus better. You could leave the Received From column of the ledger Minnesota State Bar Association Page 24 of 42

27 blank, but can also use <Add New> to enter the name of the party adverse to Apple, as a supplement helping further to make clear the source and purpose of the transaction. In the From Account column of the ledger, use the Apple subaccount. Finish by using the ledger s Memo field to record the source and purpose, entering the amount in the Amount column, then clicking save & close. As always, the entry uses a specific client subaccount, and fills in both memo fields. After this deposit, the Chart of Accounts appears as follows. Disbursements This guide is about using QuickBooks for trust accounting, not about all issues that can arise with trust accounts and your practice. However, one practice tip may not be out of place. Do not write checks out of the trust account based on deposits such as the one just made (or indeed any deposit) until you are sure that the funds are not only available, but have also been the subject of final settlement by the proper payor/drawee bank. Many lawyers have been stung due to not knowing or being careful about the difference. Being sure final settlement has happened is harder with foreign banks (who may not exist, or whose supposed phone number on a check may be an accomplice s, and whose magnetic and optical routing numbers may have been forged and may be inconsistent with Minnesota State Bar Association Page 25 of 42

28 each other and with the printed name) than with domestic ones. But even domestic banks (real or fake) have been used in such scams, and transactions undone weeks later. For now, the guide will assume all due diligence and confirmed final settlement by the drawee bank. Now assume payment should be made from Apple s account of $1,250 to an expert witness, $900 to a document examiner, and $4,400 to you for services rendered. To record these, highlight the IOLTA1 account in the Chart of Accounts, and use the Activities button at the bottom of the chart window to Write Checks. (A right-click with IOLTA1 highlighted would produce a menu with the same Write Checks command available.) The Write Checks window appears as shown in part below. In the Write Checks window, fill in the payee (using the Add New line to record the payee expert as a vendor type), enter the amount of the check (you need only enter it in the top-right field after the $ symbol; the program will fill in the words on the Dollars line), fill in the Memo field on the check to identify the client and the purpose of the check. After entering the amount, put the cursor in the first line of the Account column of the ledger that appears under the image of the check. A drop-down arrow will appear, letting you choose the Apple trust liability subaccount as shown on the next page. Minnesota State Bar Association Page 26 of 42

29 Then enter a memo of the disbursement s purpose in the Memo field of the register or ledger as shown above. As always, enter the purpose of the check in both Memo fields. Some reports pull from one, some from the other. Leave the Customer:Job and Billable? columns blank. When done, click the Save & Close button at the bottom of the. Then use the same procedure for the checks to the document examiner and to your own firm. After verifying the result in the Chart of Accounts, double-click on the Apple liability subaccount in the Chart of Accounts to verify all entries and its balance. Minnesota State Bar Association Page 27 of 42

30 The balance is $12,250. Write a check for that amount to Apple. The Account is the right liability subaccount (Apple s), and both Memo fields are filled in. The result in the Chart of Accounts is shown below. The amount of trust liability to Apple is properly shown as zero. Over time, as clients come and go, you can hide zerobalance accounts no longer needed, by making them inactive. Payment of Your Fees (Split Disbursements) Assume that Baker owes you $720 in fees and Charlie owes you $440. QuickBooks lets you write a single check rather than two, by splitting the counterpart account entries. Instead of starting in the image of the check in the Write Checks window, start by making entries in the ledger or register lines below the check as shown on the next page, where the Baker trust liability subaccount is highlighted. Minnesota State Bar Association Page 28 of 42

31 QuickBooks automatically adds the amounts entered in all the register lines that are filled in (so you could use one check to pay a dozen clients fees in one check) and uses the total to fill in the check s amount in numbers and words. In the following picture, the total on the check is still just the amount from the entry for Baker, because the cursor has not yet left the ledger s Amount column for Charlie in order to create the right total. Minnesota State Bar Association Page 29 of 42

32 Once the focus goes to the next (the Memo ) column of the register to enter the purpose for Charlie s payment, the check s amount increases automatically to $1,160. As with all trust account transactions whether in or out, the amounts are matched with specific client subaccounts of the In IOLTA1 trust liability account using the Account column. Before clicking Save and Close, be sure to make an entry in the Memo field of the check, as QuickBooks will not concatenate the ledger Memo contents into the check. Going back to the Chart of Accounts and opening up (expanding the detail of) Baker s and Charlie s subaccounts shows the allocation of the entries properly to each. IOLTA Interest Income and Payment On July 30, you receive the trust account s bank statement. It shows that the previous accrued balance of $4.89 was paid to the IOLTA program on July 6, and $3.02 of interest was credited to the account on July 29. You need to make corresponding entries in your records before reconciling them with the bank statement. So far, all entries have been made as deposits or checks the latter corresponding to real, physical checks issued to the payees. There are two ways to handle this new situation, where you issue no physical check on the IOLTA checking account. One is to use the journal directly. Indeed, were you keeping books on paper or in a spreadsheet, that would be how even physical checks would get recorded. The second is to use the check-writing screens as all previous payments have done, but without any physical check number being used. The MSBA recommends the second method, but will first walk through the first. Showing each method will show both (1) what happens behind the scenes, in the way any accountant you work with will more likely work, and (2) why the second method (writing a non-printed check) will be better and safer for you in daily use. Minnesota State Bar Association Page 30 of 42

33 Journal process just for information (or experts not needing this guide) Begin in the Chart of Accounts. Highlight the IOLTA1 checking account. The Activities or right-click menus include a command to Make General Journal Entries. (It is also available via the top menu sequence Company > Make General Journal Entries. ) In the named window, shown below, choose the interest liability subaccount in the first line of the first column, Account, as in the following illustration. That done, enter $4.89 in the second column (headed Debit ), state the purpose in the Memo column of the journal, and set the correct date, all as shown next. As soon as the cursor moves from having made the debit entry, a $4.89 entry appears in the Credit column on the second line, as every debit must be matched by a credit. The account to specify for the second line of the Account column, the credit, is theiolta1 bank checking account itself. Finally, the purpose of the transaction should be recorded in the Memo column again. The Name and Billable? columns can be left blank. Minnesota State Bar Association Page 31 of 42

34 Saving the entries drops both accounts balances by a matching $4.89. Similar entries in the journal can record the new accrued interest amount of $3.02, only this time by a debit to the checking account and credit to the liability account. Minnesota State Bar Association Page 32 of 42

35 The result in the Chart of Accounts reflects the $3.02 increase in both accounts. The check register reflects the entries with a GENJRNL entry for the type, instead of DEP or CHK, as shown below. To see the register, highlight the IOLTA1 Account and right-click or use the Activities button to show the Use Register command.. Just as the check register shows the journal entries, so too the journal would show the deposits and checks made the other ways this guide has shown. The journal can be viewed by going to Reports in the top menu, then Accountants and taxes to get to Journal. But without training and regular practice, not everyone finds it natural that a credit should reduce a checking account balance and a debit increase it. Nor is it efficient to double-check one s results in the Chart of Accounts and Journal each time. Fortunately, QuickBooks allows use of the second method noted at the outset: using the check-writing window as though one had oneself written a check to the IOLTA program, instead of the bank having done so, but not actually using a numbered physical check. The MSBA recommends the following friendly way, not the journal entries of debit and credit, for most lawyers. Leave the journal view to the accountants. Check-writing without a check more user-friendly, same results In the Chart of Accounts, highlight the IOLTA1 checking account. Use the Write Checks activity as for other payments out of the account. That is possible because the Write Checks screens do not enforce the writing or printing of an actual, physical check. Use the familiar Add New command on the payee line to add the IOLTA program as an Other and enter the July 6 date to agree with your bank statement. Enter the $4.89 Minnesota State Bar Association Page 33 of 42

36 amount, not forgetting to make Memo entries both places and to specify the IOLTA interest liability subaccount always a subaccount and never the main umbrella one then make sure the To be printed box is empty, and click Save and Close. Then use the familiar Make Deposits activity already shown several times to deposit the $3.02 as of July 29. A look at the interest liability subaccount (by double-clicking on it in the Chart of Accounts) shows the net effect. Minnesota State Bar Association Page 34 of 42

37 The Chart of Accounts now shows the same result as obtained by direct journal entries, but without any risk of confusion about which accounts to debit or credit. If you feel comfortable making direct journal entries, you may. Probably most accountants who might work on your trust account records would prefer using the journal themselves. But most lawyers are likely to find the notions of checks and deposits and their use in the QuickBooks interface easier to work with. Reconciliation Once all transactions shown on the bank statement but not in QuickBooks have been entered, you should reconcile the QuickBooks records and the bank statement and print a reconciliation report to keep. Highlight the IOLTA1 checking account, choose Activities, and then Reconcile. Assume the ending balance on your statement is $5, Enter that amount in the Ending Balance field as shown below, then click continue. (Ignore the lines for Service Charge and Interest Earned amounts.) As you click on each verified item, it is check-marked to show it is cleared, and the difference between your records and the bank statement s ending balance is adjusted. Minnesota State Bar Association Page 35 of 42

38 The difference should end up zero. As seen below, it did not; there is a difference of $22.50 (negative) shown lower right. A re-comparison of our books entries and the bank statement finds the difference. A charge for printing checks is shown on the bank statement, but was not transferred into QuickBooks before beginning the reconciliation. The $22.50 charge occurred on July 20. Press Leave to close the reconciliation screen. In the Chart of Accounts, highlight the IOLTA1 checking account, and enter the check now, using the methods used before. The first column account to enter will be the Firm s Funds liability subaccount. Return to the reconciliation window. It should show only the new entry bold and unchecked; QuickBooks remembers what items were already cleared. Minnesota State Bar Association Page 36 of 42

39 Click the new entry to clear it. With the difference now zero, click Reconcile Now. The program will offer to show summary and detail reconciliation reports. The latter is shown below. Print it to keep as required by Appendix 1 I.5. Minnesota State Bar Association Page 37 of 42

40 One final note about reconciliation. The Service Charge and Interest Earned lines in the reconciliation window work only for a single service charge and only for interest earned, just as stated, not for interest paid out. Given that you would have to make an entry outside the reconciliation window for the interest paid to the state IOLTA program anyway, and that there may be more than one charge to transfer into QuickBooks of a character that would not be paid out of interest earned and thus needs to come from the firm s funds, it is better to just develop the habit of using the bank statement to find all such items anyway and enter them into QuickBooks yourself, before going to the reconciliation window. Reports: Monthly Print-outs Appendix 1 I.7 requires lawyers who keep trust account records by computer to print every month the checkbook register, the trial balance of the subsidiary ledgers, and the reconciliation report. RPC 1.15(h) requires that the records be kept at least six years after completion of the employment to which they relate. The previous section just showed how to do the reconciliation and to print a dated reconciliation report. So the remaining questions are how to print client the trial balance of the subsidiary ledgers, and the check register. Trial balance is a technical term. It shows all accounts with debit or credit entries and their totals in corresponding columns, also summed. In manual systems, a trial balance tests for non-matched debit and credit entries. In QuickBooks, begin in the top menu line and follow the sequence Reports > Accountant and Taxes > Trial Balance. It can be reached from the Chart of Accounts Reports button via the sequence Reports on all Accounts > Other > Trial balance. It appears as follows. It shows the balance for each liability subaccount on the credit side, and for each trust account on the debit side. Any non-zero amount for a liability account on the debit side represents an error to investigate and fix a key reason to run this report every month. Minnesota State Bar Association Page 38 of 42

41 To see the check register,, highlight the IOLTA1 checking account and right-click or use the Activities button to show the Use Register command. The following illustration shows an excerpt from the register. The check register for the IOLTA1 checking account thus shows, as Appendix 1 I.2.a requires, each deposit s date and amount, the identity of the client(s) for whom the funds were deposited, and its purpose, if the Memo field is filled in as it always should be. And for every disbursement, the register shows as required by Appendix 1 I.2.b, the check s date the check was issued, the payee, the amount, the identity of the client for whom the check was issued, via the choice of liability subaccount, and its purpose (as entered in the memo field of the check, not just the memo field in the bottom half of the screen: it is needed in both places, once for the register to meet the rules, and once in the bottom half, for the subsidiary trial ledgers to meet the rules). Of course, you can customize the QuickBooks reports and save your customizations, in case you prefer the reports to look different in font or page layout. You should explore the various reports available to see how they look and which ones you want to use as the beginning for customization. Such options, as well as some minor alternate ways of doing some things (e.g., treatment of interest and IOLTA program payments as income and expense, or using the service charges and interest options built into the reconciliation screen, or using journal entries instead of the check writing window), are beyond the purpose of this guide, which was to provide a method that can be used consistently regardless whether the entry at issue is for a client s money, interest earned, or your own funds. Using liability subaccounts provides that consistency in method. Minnesota State Bar Association Page 39 of 42

42 Mistakes Suppose that instead of writing Apple her check for $12,250, it had by mistake been entered in the ledger as being for $12,260. In the Chart of Accounts, one would see a negative balance for the Apple subaccount, as shown below. Of course the negative balance would show up in the check register or ledger view of Apple s subaccount, as shown in the following illustration, where it appears in red. In the trial balance, the error is conspicuous because the negative amount appears in the debit column on the left, despite Apple being a liability subaccount for which positive balances ought to appear only on the right in the credit column, as shown in the following illustration. Minnesota State Bar Association Page 40 of 42

43 This is why the rules require monthly printing of the trial balance of the subsidiary ledgers, i.e., a listing of the balance in each individual client subaccounts and their total alongside the asset account balances: the trial balance is where you will see errors from typical accidents such as typos or inadvertent use of the wrong account or subaccount. Miscellaneous Tips QuickBooks by default does not highlight negative numbers in reports. But it can be set to do so. Set the option from the main menu by following the path: Edit > Preferences > Reports and Graphs > {Company Preferences tab} > Format button > {Fonts & Numbers tab} > Show Negative Numbers box > In Bright Red and of course a closing OK. As alert as you may be for negative numbers, the color clue will not hurt. This guide has named the clients in a way handy for an alphabetical sort. You can also use your own client and matter numbers either before or after the client names, depending how you want to be able to sort most often. Many accountants recommend using numbered accounts in your Chart of Accounts. That recommendation probably is more important for your operating accounts than for the trust accounts. But QuickBooks does support using account numbers. QuickBooks makes it easy to create backup copies. It prudently recommends that you create your backup copies on some medium physically separate and distant from your working copy, and have multiple backups. One never wants to write over (erase) one s only good backup with one that goes wrong. Although this guide used umbrella accounts on the asset and liability sides, one does not need to, so long as a separate company is used for the trust accounts. But one rule remains: there must never be any money on the liability side that is not in a specific identified client account or in the firm s funds or interest, and never any money on the asset side not in a specific bank account. Any loose money floating around is an error. Closing It is always a good idea with any software to experiment with it and try things out before committing real data to it. So it is with QuickBooks 2010 as well. You should work through the examples in this guide, and add others of your own, before beginning to move your clients records into the program. Since you can make as many companies as you want in the program, you can even keep a sandbox or trial company around at all times, so you can try out the steps in a more complicated transaction. Likewise, if you want to explore some of the minor adjustments to the program that have been noted as possible, you could use such a sandbox company to test the results. Almost always, the best quick check of the results is not a balance sheet report, but rather the Quick Reports and subsidiary ledgers, where one subaccount can t cover for another one. Minnesota State Bar Association Page 41 of 42

44 Request If you notice any mistakes in this guide, or know of a better way to use QuickBooks 2010 to keep clients trust accounts, please contact the Minnesota State Bar Association so the MSBA can help other members with the corrections and improved recommendations. Minnesota State Bar Association Page 42 of 42