Reconciling Trust Accounts - Accounting Software Secrets
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Reconciling Trust Accounts

Reconciling Trust Accounts

Ask the Expert – Reconciling Trust Accounts

Q – I work for a small law firm that provides incorporation services to the clients. For that reason, there is always a lot of small dollar activity in the trust account. My question is two fold: first, my accountant has told me that my trust checking account and my trust liability account should always be the same. Mine are not. Where do I start to try to find the difference? And second, how do I know what money I have in trust from each client? I had originally started using sub-accounts as the QuickBooks help suggested, but my list is getting so long there must be a better way. Thanks in advance for your help.

A – First, confirm that every entry in the trust checking account has been coded to the trust liability account. Aside from possibly some interest (which the State Bar Association typically receives) there should not be any entries that are not coded between these two accounts. Typically that will solve the problem with the balance. Occasionally there will be so much activity that this approach is not practical. In that case, or if there have obviously been errors from check written from the wrong account or deposits co-mingled, the approach of reconciling what the balance per client should be may be more efficient. This leads directly into the second part of the question.

To create a report for the trust liability account that shows the balance held in trust by client, it is very important that each transaction be coded to the appropriate customer:job. To confirm, go to Reports > Accountant & Taxes > Transaction Detail by Account (if using 2003, make sure the report is expanded) > Modify the report to add the source name column and filter the report for only the trust liability account and change the date to all. Scroll through the list and confirm that for any check, bill, or credit card charge that the name and source name are different (i.e. the name should be the client; the source name should be the vendor). For any that are not, double click on the line from the report and add the customer:job name to the form. Once that has been completed, scroll to the bottom of the report and note the balance. Now change the “total by” at the top of the report from account list to customer and confirm the total at the bottom of the report is the same as the balance noted previously. If it is not, there are still transactions that have not been coded to a customer:job. Change it back to “total by” account list and find/correct the transactions as needed. Don”t forget once the account is balanced, to modify the header/footer as appropriate and memorize the report for future use. This report can now be used to double check each client balance for accuracy. Once all the client balances appear to be correct, the balance from this report will hopefully match the balance in the trust checking account. If it does not, the money will need to be contributed or withdrawn as income to balance the two accounts.

To create a manageable trust liability account report, reconcile the liability account using the Banking > Reconcile. The beginning and ending balances will be zero; you will see the original client trust deposit and then the deductions as the trust money is disbursed. Place a check mark next to each related transaction and confirm the difference is zero at the bottom of the reconcile screen. Filter the report described above for only cleared “no” transactions. This will eliminate the client activity that has already been reconciled from the report. The first reconciliation is usually easiest if you print the report described above even though it may be very long. Then manually place a checkmark on the printed report as you check the amounts on the screen. After that, complete the reconciliation procedures regularly.

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