Trust Accounting, Solved!
Lawyers must manage trust accounts meticulously to comply with standards and maintain trust. From our extensive work with law firms, we’ve distilled four essential tips that streamline trust accounting and keep records spotless.
Guide for Trust Accounting for Canadian Lawyers
Navigating trust accounting for Canadian law firms helps save a bunch of time and money... and keeps you compliant!
1. Monthly Trust Reconciliations
Per By Law 9 of LSO you need to conduct monthly trust reconciliations and complete them within 25 days of the end of the month. For example, the reconciliation for the month of March (March 1 to March 31) must be prepared by April 25. This ensures that all trust account balances are accurate and discrepancies are identified and resolved promptly. Keeping up with these reconciliations is crucial for compliance and financial accuracy. Using an accounting software to track money in and out by client, record reimbursements, fees etc. makes this much easier.
Pro-tip: You can also generate client ledgers and maintain compliant record keeping through integrations with practice management systems such as Clio, PracticePanther etc. Creating trust ledgers by client that show money in and out and any remaining balance is quite easy once it is setup properly on your cloud accounting software such as QBO / Xero.
2. Separate Trust Accounts
Establish dedicated trust accounts for client funds. Never mix these funds with your firm’s operating or personal accounts. This separation ensures that you don’t accidentally use client funds for your firm’s expenses and helps in maintaining clear and accurate financial records. For instance, retainer fees, settlement funds, and court fees should all be deposited into separate trust accounts.
Pro-tip: Any transfers between the Trust and the General account are recorded once (not twice as that will create duplicates) in the accounting software to ensure reconciliation of both accounts. You can 'pair' the Ledger and Trust account transfers such that your accounting software learns how to treat those transactions going forward and ensures the reconciliation process becomes streamlined.
3. Detailed Record Keeping
This may sound obvious but we see this as an issue with so many clients. Use a cloud accounting software such as Quickbooks Online (QBO)or Xero to meticulously track all transactions related to trust accounts. This includes recording deposits, withdrawals, and transfers both accurately and on time. This also helps in preparing comprehensive and transparent financial statements. Legal software can automate much of this process, reducing the risk of errors. Moreover, using the accounting software for both accounting and meeting your trust obligations helps you meet both objectives on one platform.
Pro-tip: Attaching receipts by emailing/uploading it or snapping a pic on the QBO / Xero app makes life much easier to track your money and also handle any reviews / audits from the CRA with far lower stress levelsa s all the documentary proof is in there.
4. Avoid These Common Errors
-- Commingling Funds: Always keep client funds separate from your own. Also, if you use personal funds to pay for business expenses, that can create a lot of additional work during tax time.
-- Relying only on Excel/Google Sheets: If your monthly reconciliations, expense and revenue management - basically your business is run through spreadsheets - YOU KNOW you need help.
-- I-will-do-it-later: Hoping to take care of your accounting and trust reconciliations at the last possible minute is not going to make it magically go away.
Pro-tip: Regular training and/or enlisting the help of someone well versed with legal accounting can significantly reduce the risk of errors.
Trust accounting does not need to be a headache. And if it is - We can help set the accounting processes in place for your law firm making both trust accounting compliance and accounting and tax planning a breeze :)