Bookkeeping for Law Firms: Trust Accounting (IOLTA) Basics

Bookkeeping for a law firm is not like bookkeeping for most small businesses. On top of normal income, expenses and payroll, attorneys hold money that belongs to clients, such as retainers, settlement proceeds and filing-fee advances. That money must sit in a trust account and be tracked to the penny. A small trust accounting mistake can turn into a disciplinary problem. This guide covers the basics every small firm and solo practitioner should know.

This article is general information, not legal or ethics advice. Trust account rules are set by each state, so always follow your state’s Rules of Professional Conduct and your lawyer regulation office’s guidance.

What Is an IOLTA Account?

IOLTA stands for Interest on Lawyers’ Trust Accounts. It is a pooled trust account used for client funds that are small in amount or held for a short time. Because the interest on any one client’s money would be too small to pay out, the interest is sent to the state’s IOLTA program, which funds legal aid. Larger sums held for longer periods may belong in a separate interest-bearing trust account for that specific client.

The key principle: money in the trust account is not the firm’s money until it is earned and properly transferred.

Operating Account vs. Trust Account

	Operating account	Trust (IOLTA) account
Whose money	The firm’s	Clients’ and third parties’
Typical deposits	Earned fees, firm income	Retainers, unearned fees, settlements, cost advances
Typical payments	Rent, payroll, software, firm expenses	Payments to or for a specific client, earned fees transferred to operating
Can you pay firm bills from it?	Yes	Never

Required Trust Account Records

Most states base their rules on ABA Model Rule 1.15. In Minnesota, for example, Rule 1.15 of the Minnesota Rules of Professional Conduct and Appendix 1 list the required books and records. Typical requirements include:

• A check register or general journal recording every trust deposit and disbursement
• A separate ledger for each client showing every dollar received and paid on that client’s behalf. A client ledger should never go negative.
• A monthly reconciliation and trial balance proving the bank, the check register and the total of all client ledgers agree
• Supporting records such as bank statements, deposit slips, canceled checks and wire confirmations
• Record retention for the period your state requires. Minnesota requires six years.

Three-Way Reconciliation, Explained

A three-way reconciliation compares three numbers at the end of every month:

1. The adjusted bank statement balance (bank balance plus deposits in transit, minus outstanding checks)
2. The trust account check register balance
3. The total of all individual client ledger balances

All three must match. If they do not, something is wrong: a missed entry, a posting to the wrong client, a bank error, or in the worst case, a shortage. Finding and fixing differences every month keeps small errors from turning into serious problems.

Common Law Firm Bookkeeping Mistakes

• Commingling: depositing firm money into trust, or client money into the operating account
• Paying firm expenses from trust, even temporarily
• Moving fees before they are earned or without an invoice showing the work
• Leaving earned fees in trust too long, which can also be a commingling issue
• Negative client balances: paying out for one client using another client’s money
• Skipping monthly reconciliations or reconciling only the bank balance, not the client ledgers
• Recording retainers as income in the accounting software before they are earned

Setting Up Trust Accounting in QuickBooks Online

QuickBooks Online can track trust activity if it is set up carefully. A common approach is to set up the trust bank account, a liability account for client trust funds, and a way to track each client’s balance, such as sub-accounts, customer tracking or classes. Retainers are recorded as liabilities, not income. When fees are earned and invoiced, the amount is moved from trust to operating and recognized as income. Many firms also use dedicated legal practice-management software for client ledgers. Either way, your monthly three-way reconciliation is the control that proves everything is right.

Monthly Bookkeeping Checklist for Law Firms

• Record all trust deposits and disbursements to the correct client
• Transfer earned fees from trust to operating, with invoices to support each transfer
• Reconcile the trust account and complete the three-way reconciliation
• Review client ledgers for negative or stale balances
• Reconcile operating bank and credit card accounts
• Review accounts receivable and unbilled time
• Run payroll and record payroll taxes
• Review the monthly profit and loss statement

Should Your Law Firm Outsource Bookkeeping?

Most attorneys did not go to law school to reconcile bank statements. An experienced bookkeeper keeps the operating side clean, prepares your monthly reconciliations, and flags trust issues early, while you stay responsible for compliance with your state’s rules. Our monthly bookkeeping service includes monthly reconciliations and financial statements, and if your books are behind, our catch-up bookkeeping service can bring them current.

Frequently Asked Questions