IOLTA Accounting in QuickBooks – Product Overview

QuickBooks, whether desktop or online, is the most commonly used accounting program for small and medium sized businesses in the United States. I am often asked by law firms, “Can I use QuickBooks for my firm?” The answer is a qualified yes. You can use QuickBooks, but whether or not you should is more difficult to answer. I have written elsewhere about the limitations of QuickBooks for billing, http://www.timeandcents.com/should-i-use-quickbooks-for-billing/, so I won’t repeat that. Here we will focus on using QuickBooks for IOLTA accounting.

QuickBooks is a stand-alone solution, it doesn’t have practice management capabilities and it has limited billing flexibility. It does offer integration with many of the top billing and practice management solutions, so it may be a good choice for accounting in that situation. If you are looking at QuickBooks integrating with your other programs, there are some questions you should ask. First, you want to find out what versions your program integrates with. This means desktop vs. QBO; Pro/Premier or Enterprise; and what year version if desktop. You also need to understand what the vendor means by integration. Some programs share detailed information about the customers and the billing, but don’t exchange IOLTA information. Other integrations may be one way or be only cash based or only accrual based. The more detailed you get before you start, the better you will be prepared.

If you are linking QuickBooks to another program it is important to understand what functions will take place in each program. For IOLTA accounting, generally, printing of checks and bank reconciliation will occur in QuickBooks. This means that you will want to track IOLTA balances by client in both the billing program and QuickBooks to make sure that they are in agreement. If the billing program is tracking IOLTA activity and recording payments to the invoice it will usually insure that an individual client’s IOLTA balance is not overdrawn. If you are doing this in QuickBooks, you must personally do this as QuickBooks will not prevent over-drafting a particular client account. You will also need to manually make sure that the IOLTA bank account and the IOLTA liability account match at all times.

The way I recommend tracking IOLTA in QuickBooks is with a few simple rules and memorized reports. While some will use sub-bank or sub-liability accounts for each customer, I don’t recommend this method as the chart of accounts gets long, bank reconciliation is more difficult, and it easier to make mistakes. There’s a trade-off between the “convenience” of a glance at the balance sheet to check on a client balance rather than quickly running a report. Given the risks and rewards, I recommend a single bank account and liability account for each real IOLTA bank account, no sub-accounts used.

If you take my approach and follow two rules, it is easy to create reports in QuickBooks to see client balances. Rule 1 – every withdrawal will credit the IOLTA bank account and debit the IOLTA liability account and every deposit will debit the IOLTA bank account and credit the IOLTA liability account. Rule 2 – every IOLTA transaction will include a customer or customer:job. If it is a deposit, this goes in the Received from field, if a withdrawal, this goes in the customer:job field. Note that QuickBooks will not force you to include a customer so you must “self-police”.

Using this approach, you can create user-defined custom summary and detail reports in QuickBooks desktop edition that filter for the liability accounts and total by customer to show how much each customer has in IOLTA. Similar reports can be created in QBO, with one exception. The total by customer report will not show a grand total. You can send to excel and total there, but it is an extra step. We care about these reports for several reasons. One is to make sure a client’s balance is correct either specifically or as compared to our billing program and that we are not about to overdraw a client’s account. If you are not using other billing software, these reports can be filtered for an individual client to show the IOLTA activity in their account Finally, these reports are important if you need to create a three-way reconciliation report, often required as part of a State Bar audit.

QuickBooks can’t create a three-way reconciliation report as a single report. Instead you must use a combination of the bank reconciliation report with a list of uncleared checks and deposits, and a customer report to show that the bank balance matches your firm book balance and matches the balance by client.

One other factor to consider in using QuickBooks is security. Think about who needs to access the database and what functionality they should have. If you want limited access based on client, or if you are using a single QuickBooks file for operating and IOLTA and want to limit access to specific bank accounts, you may find that QuickBooks can’t meet your security requirements.

In summary, QuickBooks can be used to track IOLTA balances, either in conjunction with another program or one its own. You will need to do create some custom reports and you will need to make sure that a client’s IOLTA account is not overdrawn. Is the work and risk worthwhile for your firm?

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