Generate these seven trust accounting reports to stay compliant, be ready for audits, and always know where you stand.
Trust accounting is a critical area for law firm practice management. This is both a significant responsibility and an ethical duty, and maintaining compliance should be one of the top priorities of a law firm. It’s critical firms have an organized reporting system and employ internal checks to spot any errors.
Trust accounting is also complex, and even an organized and well-intentioned firm can make mistakes. If errors are quickly identified and rectified, then little harm is done. If systems are not properly monitored, however, mistakes can snowball, and untangling the history of transactions in a trust account can become more and more difficult.
In a nightmare scenario, a firm is surprised by a trust account audit when it’s trying to sort an account history out—or, perhaps even worse, a firm doesn’t realize that a trust account is riddled with errors until the auditors come knocking. This can result in significant fines and damage to a firm’s reputation.
In order to be prepared for audits and avoid making mistakes, it is important to run trust accounting reports regularly. Here are the seven types of reports you should use.
This basic type of trust report has several components. A bank journal should include combined receipt and disbursement books that list all entries—including voids. Entries should include the date, payee and payor, amount, purpose, and client identification. These journals should also include a running balance to demonstrate that no account overdrafts took place and be sure to list a matter for every transaction.
Trust Receipts Journal
In addition to a bank journal, records should include a trust receipts journal. This document is a record of only deposits for a specific bank account. It is important to have a record of deposits because it is easier to compare deposit activity or look for a specific item when deposits are separated from disbursements/withdrawals.
Trust Disbursements Journal
A trust disbursement journal, likewise, is a record of only disbursements for a given bank account. This ledger can be helpful when reconciling checks or looking for specific items.
A trust listing is also known as a trust ledger balance report. This ledger lists all matters along with their respective balances.
This report is helpful because it clearly points out negative ledger balances. It also shows cleared and uncleared balances, making it easy to see what funds are available. This type of report also includes last activity records, which can help identify files that may be closed and funds need to be returned.
Client Trust Ledger
A client trust ledger is like a mini bank account for each matter. These ledgers show transaction breakdown per matter. A client trust ledger must also include a running balance to illustrate that there have been no overdrafts on the account.
Trust Transfer Record
Trust transfer records are helpful if you need to shift funds from one ledger to another. Even if these shifts happen within the same bank account, records need to show when and why a transfer was made.
Trust Reconciliation Reports
Trust reconciliation reports are a core part of trust accounting. These should include a reconciliation summary that shows balanced records and lists cleared and uncleared items in order to help keep tabs on long-term unclear items.
Three-way reconciliation reports are also critical. This report compares a ledger balance and a bank balance with the sum of individual client ledgers. The total of the individual client ledgers must match the balances of the ledger and the bank statement.
Wondering how to run a three-way reconciliation? Check out What is 3 Way Reconciliation?
Trust accounting is critical—and it can be complicated. Thankfully, understanding these seven essential reports (and running them regularly) can help you stay organized, compliant, and prepared.