What are the Trust Accounting Rules in Your State?

If you mention ‘trust accounting’ so some lawyers, you’ll likely see an immediate and adverse reaction. This is because trust accounting rules and guidelines can be complex and need to be followed precisely. If trust accounting rules are broken, the consequences can be dire, such as losing your license to practice law. Solo and small law firms need to address trust accounting rules from the moment they open their doors. It’s important to check with the trust accounting rules and regulations in your state. While each state’s trust accounting laws will vary, there are a few general guidelines that can apply to small and solo law firms all over the country.

Trust Accounting Basics

What is a trust account for small or solo law firms? In the simplest of terms, a trust account is a bank account that is separate from an account that’s used to store funds for the basic operation and function of your law firm. When a client provides funds given in trust, such as a retainer or a settlement, it needs to be held in an isolated account and never used to pay for operating costs. And when we say never, we mean never, not even by accident. The foundation of a trust account is indeed trust. The money in a trust account doesn’t legally belong to the law firm yet, it’s still the client’s money. This is why it’s so important to keep it stored in a separate account.

In theory, trust accounting sounds pretty simple, right? Store the money given in trust in a special bank account. Unfortunately, the process of using and maintaining a trust account for a law firm can be complicated. It’s one of the reasons why many solo and small law firms choose to work with experienced accountants as guides for trust accounting. An accidental expenditure of funds from a trust account can lead to significant penalties. It’s imperative that you follow trust accounting rules in your state closely.

Quick Guide for Trust Accounting

Here are a few tips and best practices for trust accounting:

Know your state’s trust accounting rules.
We can’t stress this enough. Checking the fine lines and specific details that the bar sets for your state may seem excessive, but it is necessary. They may appear minor, but these details need to be addressed carefully.

Open a trust account with your financial institution.
After you read and review your state’s trust accounting rules for attorneys, use those rules as a guidebook to open your firm’s trust account. In addition, be sure to talk to your financial institution about supplying you with your trust account statements at the end of each period to keep for your records.

Keep a separate ledger for your trust account.
When a client requests to see a transaction that’s associated with the money in the trust account, you want to be able to prove that the funds exist and they’re protected. You can do this by maintaining a separate ledger for the trust account.

Do NOT spend the money.
We understand the temptation. Maybe you’ve just opened your doors and your budget is tight. By bringing in a new client, you’ve got this large sum of money just sitting there while you have bills to pay. Remember that you can NOT use the money in the trust account. Even if you’re able to refund the money immediately, the record of the transaction alone can result in extreme penalties, such as losing your license and your law firm.

Remember that no interest can be collected.
Attorneys can not collect interest on a trust account. The bar requires that interest collected on trust accounts be submitted into a program called IOLTA, Interest on Lawyer Trust Accounts, which is then turned over to charities that provide legal services for those who can’t afford it.

These basic tips can provide a foundation for understanding trust accounting. However, when it comes to managing a trust account, don’t hesitate to contact JetroTax for aid and assistance with trust accounting for your small or solo law firm. As mentioned numerous times above, even small accidents in spending can lead to major penalties. Don’t risk your ability to practice law over trust accounting mistakes. Contact JetroTax to learn more about trust accounting for small or solo law firms.

What’s the Difference Between Cash Accounting and Accrual Accounting?

What’s the Difference Between Cash Accounting and Accrual Accounting?

The difference between cash accounting and accrual accounting is all about how you record revenue coming in and paying out expenses. Choosing one over the other will depend on factors like the size of your law firm or your record-keeping preference. Let’s take a look at what these accounting methods mean and their pros and cons.

What is Cash Accounting?

Cash basis accounting is when revenue is recorded when cash comes in, and expenses are recorded when cash goes out. Small and solo law firms like to use this method because of its simplicity and ease. Because you only record when cash is received or paid, it’s well known for being straightforward and easy to track. Plus, taxes are not paid on any money that you haven’t yet received. However, this method isn’t always accurate when predicting the growth of a law firm. For instance, cash basis accounting might overstate the amount of cash a law firm has on hand when it could be losing money.

What is Accrual Accounting?

Accrual basis accounting is when revenue and expenses are recorded before cash exchanges hands. Accrual accounting is defined by the expectation that the revenue or expense will happen. For instance, money is recorded as revenue when an invoice is sent out but hasn’t yet been paid. This method can make it a bit difficult to keep track of cash flow and you will pay taxes on money that you haven’t received. However, using an accrual accounting method can help portray a more accurate prediction of the health of a law firm long-term.