Running a successful law firm requires more than just legal expertise. It also requires proper financial management, especially when it comes to trust accounting. As the Founder and Chief Executive Officer of Total Sum LLC, Karyn Andersen knows this all too well. With over 25 years of experience in the legal industry, Karyn has become an expert in law firm bookkeeping, particularly in trust accounting. In this article, she shares her top tips for mastering law firm and trust bookkeeping.
The Importance of Trust Accounting for Law Firms
Trust accounting is a crucial aspect of law firm bookkeeping. It involves managing and tracking client funds held in trust, such as retainers and settlements. Failure to properly manage trust accounts can result in serious consequences, including disciplinary action and even legal penalties. This is why it is essential for law firms to have a solid understanding of trust accounting best practices.
Understanding the Basics of Trust Accounting
According to Karyn, the first step to mastering trust accounting is understanding the basics. This includes knowing the difference between trust and operating accounts, as well as the rules and regulations set by the state bar association. It is also important to have a clear understanding of the trust accounting software being used, such as QuickBooks Online, Clio or Leanlaw.
Implementing Proper Record-Keeping Procedures
Proper record-keeping is crucial for trust accounting. Karyn recommends implementing a system that tracks all trust account activity, including deposits, withdrawals, and transfers. This should also include a detailed record of all client funds and their designated purpose. By keeping accurate and organized records, law firms can easily track and reconcile trust account activity, ensuring compliance with state bar regulations.
Separating Trust and Operating Accounts
One of the most common mistakes made by law firms is commingling trust and operating funds. Karyn stresses the importance of keeping these accounts separate and never using trust funds for business expenses. This not only ensures compliance but also makes it easier to track and manage trust account activity.
Utilizing Technology for Trust Accounting
As a Certified QuickBooks Online ProAdvisor, Karyn understands the benefits of using technology for trust accounting. She recommends using a cloud-based accounting software, such as QuickBooks Online and Leanlaw, to streamline the process and ensure accuracy. These tools allow for real-time tracking of trust account activity and provide detailed reports for easy reconciliation.
Regular Reconciliation and Review
Regular reconciliation and review of trust accounts is crucial for identifying any discrepancies or errors. Karyn suggests performing a 3 way reconciliation of trust accounts on a monthly basis and reviewing them with a second set of eyes to catch any mistakes. This not only ensures compliance but also helps maintain the integrity of the trust account.
Seek Professional Help When Needed
While law firms can handle their own trust accounting, Karyn recommends seeking professional help when needed. This is especially important for complex transactions or when facing an audit. An experienced bookkeeper or accountant with experience in trust accounting can provide valuable guidance and ensure compliance with state bar regulations. With today’s technology, you have access to experienced law firm bookkeepers nationwide. Total Sum services law firms from coast to coast.
Final Thoughts
As the legal industry continues to evolve, proper trust accounting practices are more important than ever. By following these best practices, law firms can ensure compliance, maintain the integrity of their trust accounts, and, ultimately, run a successful and reputable business. As Karyn Andersen says, “Mastering trust accounting is not just about following the rules, it’s about protecting your clients’ funds and your firm’s reputation.”
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