More than 90%* of law firms utilizing QuickBooks Online for trust accounting have it set up incorrectly. If you are not using a dedicated system to manage your trust accounting and want it integrated with QBO, you’re in the right place.
Whether your desire is to keep all of your financials in one place or are wanting a back-up for checks and balances, this may be an option for you. I’m going to show you how to set up and enter your transactions in QBO while staying in compliance with bar regulations.
QuickBooks Online For Trust Accounting Setup
Believe it or not, this is the easy part of managing your trust accounting within QBO. This strictly consists of having the proper accounts in your chart of accounts.
Your IOLTA account should be set up as a bank account. This should be linked to your bank so your transactions are automatically fed into the system. This will allow you to stay on top of everything going in and out of your bank account.
Next, you need to create a liability account – “IOLTA Liabilities.” Nothing should be coded to this account as it’s a parent. Each client that has money in trust should be a sub-account. So if John Doe pays you a retainer, you should have an account labeled “John Doe” and is marked as a sub-account of IOLTA Liabilities.
Deposits and Disbursements
There are two methods to this. One involves the use of undeposited funds and the other does not. My rule of thumb is if someone has made a payment, but it hasn’t been deposited, I use undeposited funds. This is 99% of the transactions I encounter so it’s my preferred method. However, I will give you an alternative to bypass this step should you choose to do so.
- Create a new journal entry.
- Code the first line to undeposited funds and place enter the amount in the debit column.
- Code the second line to the client’s IOLTA Liability account (as mentioned above).
- I like to include the client’s name in the “name” column of the transaction to allow for other ways to search for the transaction.
- Now your transaction is ready to be deposited.
- Once the funds are deposited into the bank, you can create a new deposited in QBO.
- On the deposit screen you will choose the journal entry you created in the previous steps.
- If you bypassed the undeposited funds, you will scroll to the bottom of the bank deposit page and enter the transaction manually.
When making a payment from the trust account, you must code the transaction to the client’s IOLTA Liability account. These include disbursements to or on behalf of the client.
- Create an expense or check transaction (whichever is appropriate).
- Enter the typical information such as payee, date, amount, etc.
- Each line item on the expense, or check, MUST be coded to the client’s IOLTA Liability account.
The biggest part of trust accounts is the use of client funds to pay your firm for earned work. This is a three step process in QBO.
Step One: Money Leaves Trust
- Create an expense by using the steps explained under disbursements.
- There should only be ONE expense for the entire trust transfer.
- I like to create a payee that is specific to trust transfers such as the firm’s name followed by “Trust Transfers.”
- This needs to be marked as paid out of the trust bank account.
- Each line should be coded to each client’s IOLTA Liability account.
Step Two: Invoice Payment
This step is no different than creating any other invoice payment, with the exception that it MUST be paid to the undeposited funds account.
Step Three: Money Goes into Ops
As explained above, create a bank deposit and select all the invoice payments that are part of this trust transfer.