Did you know that accounting and bookkeeping for law firms is actually different from accounting and bookkeeping that is done for other, standardized businesses? This is so because the money comes into law firms from all directions, resulting in them handling their client’s money more than many other businesses. As a result, bookkeepers that work for law firms spend a lot of time tracking what money is earned by the firm, what money needs to go to clients, what money needs to go to courts, and so forth. This is a lot for an attorney to handle by him/herself, while also holding a practice open, and dealing with all that comes with it – that is why Sound Bookkeepers is here to help.
Trust accounts are used by the majority of law firms to hold onto the money of your client that you have not yet earned or which is to be used for a 3rd party. Common reasons for law firms to have CTA accounts include managing a client’s estate, holding settlements, or holding legal fee prepayments. On a side note, a lot of CTA’s can also earn interest for the client’s benefit. Since the money in a CTA isn’t yours right away, you can get into trouble if you withdraw funds from CTA’s while they are still unearned. It is your responsibility to exercise the highest standard of care with your client’s money. Another key point is that because the funds in the CTA aren’t earned yet, but instead simply held, they must be recorded as a liability on your balance sheet. Similar to other types of bank accounts, CTA’s come with bank service charges, and the rules and regulations regarding those differ between states, so it is important to stay in the know for those rules regarding your state.
As alluded to previously, many CTA’s earn interest in the clients benefit, however, an IOLTA, which is also a type of CTA, is one where the earned interest goes towards state-sponsored programs which fund law school scholarships in addition to law services for those who are of moderate means. The state pools funds from different IOLTA’s to generate enough revenue to fund the programs mentioned before. That being said, law firms will still want to use standard CTA’s for deposits that are substantial in sum or that will be held for long periods of time. Keep in mind, however, that some states have certain rules and protocols for when to use IOLTA’s, so again make sure that you are up to date on that. The good news is that you can take a breath and become more at ease because here at Sound Bookkeepers, we offer IOLTA management, so you have one less thing to worry about.
It is vital to remember that unlike other industries your business funds cannot be in the same account as your client’s funds. As a law firm, you cannot keep your client’s prepayments in your operating account or use that money to fund projects. As such, it is important that your bookkeeper knows this, and won’t make this mistake. The repercussions for this are hefty – you can become suspended or disbarred. This is why it is so important to have someone who really knows what they’re doing to be in charge of your bookkeeping. Your license is at stake, even if you’re not the one doing it.