Why are my client trust accounts showing as liabilities on the balance sheet?
Bank account balances, whether trust or business accounts, appear as assets on the balance sheet. The total amount of assets recorded on the left side of the balance sheet must always equal the total amount of equity and liabilities shown on the right side.
When your firm deposits a client retainer or advance fee deposit into a trust bank account, the trust’s asset balance goes up on the balance sheet. This means that an equity or a liability balance must go up by an equal amount in order to ensure that the balance sheet remains in balance.
Equity account balances increase when the owner’s share of the assets increases. Liability account balances increase when the company owes money to a non-owner. Because trust funds deposited into the trust account belong to, and are owed to the client (a non-owner) until earned, the client’s trust funds are recorded as a liability on the balance sheet.