IOLTA Accounting With QuickBooks and Without
LeanLaw’s deep integration with QuickBooks Online means that your law firm accounting software and QuickBooks Online are no longer out of balance. You don’t have to sync because LeanLaw syncs automatically in real time. Manual reconciliation is a thing of the past.
Three-way reconciliation
Bank accounts, trust accounts and QuickBooks Online are in continuous sync and in-line with state bar association standards, so you are well positioned for your weekly or monthly three-way reconciliation. That’s less time spent on your law firm’s end.
Even better: IOLTA accounting is built into the invoicing workflow: You can make legal trust deposits and pay invoices using from trust liability account using LeanLaw. What used to be a daunting 12-step trust accounting process in QuickBooks Online is now just a few clicks.
Watch this video to see how easy Trust accounting can be:
If you’re not ready to engage LeanLaw, but you work in QuickBooks Online, here’s a video that will explain how to set up your Chart of Accounts without the help of LeanLaw (the hard way):
With LeanLaw and QuickBooks Online, you can eliminate errors in trust fund accounting by removing the need for duplicate data entry or reviewing bank statements. LeanLaw is cloud-based and therefore, always in sync with QBO and bank accounts, automatically. (Please note: LeanLaw does not work with QuickBooks Desktop.)
LeanLaw is a time tracking, invoicing, and accounting software for law firms. It is the only premier legal app in Intuit’s QuickBooks Online app store.
Why Does My Law Office Need an IOLTA?
Below is a breakdown of both videos:
The Easy, LeanLaw Way to set up your Trust Accounts:
LeanLaw will show you how to setup and use trust accounting in QuickBooks Online with and without LeanLaw. Your law practice can do it the hard way, without LeanLaw, or you can do it the easy way. When you know how much is your time worth, the decision will be clear.
We will cover 5 areas:
- chart of accounts
- deposits
- creating invoices
- paying invoices
- trust account statements.
Setting Up an IOLTA Account – Is It as Easy as They Make it Look?
1. Chart of accounts.
You have two bank accounts: your operating bank account or checking account and the IOLTA bank account where you keep client funds. It’s marked as a “detail type trust account” — that’s important. So, that’s the starting point: two bank accounts.
To set up a trust account with the help of LeanLaw, you go to the QuickBooks Online integration setup and LeanLaw immediately spots the IOLTA bank account and our operating or checking account. When you click “setup,” it will create the correct liability account. It’s a one-click operation in LeanLaw to get trust set up correctly.
LeanLaw Accounting Pros are QuickBooks ProAdvisors with Law Practice Expertise
2. Record a Trust Deposit
Through LeanLaw you can record a trust deposit by going to the trust account tab, where you see your trust account balance: click “deposit,” pick the client, pick the amount, click “record deposit.” When you refresh QuickBooks Online, you see that it created that liability account with the correct types and it created a deposit with all the correct references to the client’s records. LeanLaw really helps to keep this correct.
3. Invoices
When you have a time entry for a client, you can create an invoice. Without any setup, LeanLaw will spot that there’s a trust balance for this client and matter and put the before and after trust balance on the invoice. This information will be in the memo field when you submit this to QuickBooks Online.
4. Payment
In LeanLaw, when we go to Trust Account, you see you have a trust balance with an overview. If the trust balance is $1000 for a client and he has $400 that he owes you, you click in and see the invoice. Click “record payment” and the green button. These few clicks recorded a payment in QuickBooks and also a transaction that updated the trust bank and liability accounts to reflect that the invoice was paid from there. So again, one or two clicks in LeanLaw did all that correctly.
5. Trust Statements
At any moment, you have to be audit ready. That includes always being able to account for the money in the trust account, and giving a detailed statements of transactions for each client. This is really simple with LeanLaw due to the way the accounts are organized. You’ll be looking at the statement in QuickBooks Online, but you saved a lot of time getting there with LeanLaw. If you want to see the summary of all the law firm clients balances for your trust account, you click the chart of accounts showing a list of liability sub-accounts. And if you want to see the detailed transactions for a specific client or matter, you just click on their liability account.
LeanLaw provides an easy way to see the overview of clients balances along with the receivables for those clients. So that you can see quickly what funds you are holding for the client along with what they owe, so that you might ask clients to replenish their trust funds if they are running low.
There are rules that differ by state with regard to how money is received. It’s important to go over these rules with your accountant or bookkeeper.
The Hard Way: Trust Accounting without the Help of LeanLaw
The following explains trust accounting in QuickBooks Online without the help of LeanLaw.
Again, we’ll cover five areas:
- chart of accounts
- deposits
- creating invoices
- paying invoices
- And trust account statements.
1. Chart of accounts.
You have two bank accounts: an operating account or checking account and the IOLTA bank account where you keep client trust money. It’s marked as a “detail type trust account” — that’s important. So, that’s the starting point: two bank accounts.
To prepare QuickBooks Online for trust accounting, you need to create the liability account. That’s a detailed trust account liabilities that we’ll call “Funds held in trust.” This liability account balances out the bank account — they always need to be in balance. But we use the liability account to keep track of to which client we owe which money. So that’s the chart of accounts.
2. Record a Trust Deposit
The first step is to add a client in QuickBooks Online. The temptation here, is to do a “receive payment” or maybe a “credit memo” but that is not the way to do it. What we have to do is first prepare the chart of accounts so that there’s a sub-account under “funds held in trust” for that client.
We then create another liability account, with the detail type of Trust account liabilities. We’ll name it for the client: “Sample Client” — and then the key thing is to make it a sub-account under the “funds held in trust” liability account. Now, we have a sub-account and as we take money from clients, sub-accounts will appear under the “funds held in trust” and we can immediately see how much money out of the bank account we account for which client. That prepares us for receiving a retainer from that client.
Next, we create a deposit into the IOLTA or trust account. We say that it’s received from our sample client and here’s the key: the account for this deposit line item needs to be the sub-account under sub-liability account that we just created. This is important to keep track of the money correctly. We click, “received retainer.” Let’s say it was a check in the amount of $5000. Press “save.” Now, we can go to the chart of accounts to see that we have $5000 in our bank account and that we show $5000 under the sample client, so it means that they have $5000 in our trust account.
Let’s create “another client” and then we’ll create an account for them under the liability account, sub-account of “funds held in trust.” Press Save. Let’s clear another deposit and for this client, we now set the account to their account under “funds held in trust.” It’s another retainer. Let’s say we got $2000 from them. Now, we have a clear picture of the trust account. $7000 total. $2000 from the other client and $5000 from the sample client. That was the hard way of recording trust deposits.
3. Invoices
We create an invoice: New transaction invoice, $2000 worth of work. Now, we have $5000 in the trust account, but it doesn’t show up in QuickBooks Online. In QuickBooks Online, it’s difficult to see in the right places what the balance is.
To see the balance of the trust account, you have to go over to the accounting tab and see that this client has $5000 available. I want to put that on the invoice. The only option is to use the memo field to say, “Current retainer balance $5000. Balance after invoice payment, $3000.” We put into the memo field what we want to communicate to the client in terms of how this should be paid. This becomes a notice that we’re going to be paying this through the trust account. You need to update manually the memo field to correctly reflect what the trust account balance is.
4. Payment
There’s an open invoice for $2000 and I want to pay it through the trust. We do a check where we pick the client, sample client, and we pick the IOLTA account as the bank account and then we add a line item where we reference the liability account for that client, and say “Payment of invoice.” $2000 Client, Sample Client. And then the 2nd step we need to do is record a payment of the invoice.
So we insert, for example, check, payment invoice $2000, save. Let’s look at what that did in terms of our balances. Now, the Sample Client – his account balance is zero. And when you go to the chart of accounts, the IOLTA bank account balance is $6000 and the operating account balance is $2000. We transfer $2000 essentially from the trust account to our operating account. So now, it’s the lawyer’s money. On the liability side, we now see that the client’s liability is down to $3000. So he has $3000 left that we’re holding in trust for this one. It’s all accurate.
The key thing is to have those two transactions go in and then also, we need to then transfer the money from the bank account. So that’s a payment. It’s two transactions.
5. Trust Statements
At any moment, you have to be audit ready. That includes always being able to account for the money in the trust account, and giving detailed statements of transactions for each client. If you want to see the summary of all the clients balances for your trust account, you click the chart of accounts showing a list of liability sub-accounts. And if you want to see the detailed transactions for a specific client or matter, you just click on their liability account.
There are some rules that differ by state with regard to how money is received. It’s important to go over these rules with your accountant or bookkeeper.
And that’s trust accounting in QuickBooks Online without the help of LeanLaw.
