How to Set Up QuickBooks Chart of Accounts for Law Firms explained by professional Forex trading experts the “ForexSQ” FX trading team.
How to Set Up QuickBooks Chart of Accounts for Law Firms
Many small law firms and practicing attorneys use QuickBook, which is the most popular small business accounting software on the market today. If your law firm has chosen to use this program, the first task will be to set up the chart of accounts to track the transactions. However, you will have to tailor your chart of accounts to comply with your state’s Interest on Lawyer’s Trust Accounts (IOTLA) program .
Interest on Lawyers Trust Accounts (IOTLA)
Interest on Lawyers Trust Accounts (IOLTA) is an innovative way to increase access to justice for individuals and families living in poverty and support improvements to the justice system through the use of interest earned on certain lawyer trust accounts. IOLTA programs is a public service, and what makes it unique is that this service is provided without taxing the public, and is provided without cost to either your or your clients.
How IOTLA Works
Through IOTLA, as a lawyer, when you receive money that belongs to a client, you must place that money in a trust account. The trust account must not be commingled with your law firm’s funds; your clients’ money must be held in a separate trust account that is separate from the bank account used for your firm’s day-to-day operating activities. You must deposit your clients’ funds in an IOLTA account when the funds cannot earn enough income for the client to be more than the cost of securing that income.
These funds get pooled together, generating interest revenue that is greater than the fees to administer the account, and the pooled interest is then transferred to the IOLTA program. However, if clients funds are large enough, such that net interest is sufficient so that the client will benefit, then you as the attorney have a fiduciary duty to put those funds into a separate bank account so that your client will receive this interest.
IOTLA Programs Rules Vary by State
The rules of professional conduct that govern the handling of client trust funds vary from state to state. While the general principles are the same throughout the U.S., the specific administrative requirements and details are not the same. Therefore, you should consult your local state Bar Association or general counsel to ensure that your QuickBooks setup is consistent with the rules in your state. Failure to abide by the rules regarding trust accounts is a violation of state rules and the rules of the American Bar Association. These violations may result in severe penalties, which include civil and criminal sanctions.
Regulation of IOTLA Accounts
Proper management of your law firm’s IOLTA, also commonly referred to as a “Trust Account,” is highly regulated by your State Bar. IOLTA management is a key management skill in the operation of a law firm. The accounting principle is based on principles of double-entry bookkeeping, with additional safeguards designed to enhance the audit trail.
How to Set up Law Firm Chart of Accounts in QuickBooks
To set up your law firm’s chart of accounts, follow these steps:
- Create a separate bank account called “Client Trust Fund Checking”. This account will be used to track all deposits and payments from your clients’ trust funds.
- Set this checking account up as an IOLTA account at financial institution approved to offer IOLTA accounts. Practical advice: You should check with your banker to confirm that the IOLTA account has automatic overdraft protection and does not have ATM access. These rules apply to IOLTA programs in all states, including the District of Columbia and U.S. Virgin Islands.
- To distinguish your law firm’s payables from your client’s payables, you will need to set up separate liability accounts in QuickBooks. You should rename the Accounts Payable account to “Accounts Payable – Operating”. This payable account will be used to bills and payments of your law firm’s day-to-day operations.
- Set up another Accounts Payable account called “Accounts Payable – Trust”. This payable account will be used to track bills and payments related to your client’s.
- Set up an Other Current Liability called “Client Trust Liability”. This liability account will be used to track all deposits from your clients and other costs.
These the steps needed for you to set up the accounts needed in QuickBooks if you have IOTLA accounts where you keep your client’s money for use in paying their expenses.
How to Set Up QuickBooks Chart of Accounts for Law Firms Conclusion
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