This is the first of a series of articles in this blog on how to set up and work with QuickBooks for Windows. The methods presented here will provide you with what we feel are the most efficient ways of handling the needs of a typical small firm. In this article we’ll talk about the proper QuickBooks setup.
Client Trust Accounts
One of the trickiest record-keeping tasks for law firms is the proper handling of client monies held in trust. This article will show how you can handle both client trust activity and the firm’s
You may have more than one Client Trust or IOLTA account, and these can be handled in a single company file, provided proper steps are taken. Please note we will use the terms trust account and IOLTA account interchangeably. While we recognize that there is a difference, the basic processes are the same. It is important to note that QuickBooks will NOT prevent you from overdrawing a single customer’s trust account. It is critical that you monitor individual account balances to prevent this. We will show you reports you can run to help you in a later article.
IOLTA – Interest on Lawyer’s Trust Account. This account is designed to hold funds that will not be held long enough or are not of a large enough amount to separately allocate interest. All interest is removed by the bank and transferred to the state for legal purposes. If an amount will be held for an extended period or is large enough to specifically receive interest, it is a trust account. Some firms will use the term Retainer. It is important to distinguish a Retainer “trust” account from a General Retainer. General Retainers are allowed in some states and is money that is deposited into the operating account but may show as a credit on a client bill.
Each state has rules of professional conduct that govern the handling of client trust funds. Consult your local state Bar Association or counsel to ensure that your setup is consistent with the rules in your state. Failure to abide by state rules could result in severe penalties including possible disbarment.
If you accept credit cards from customers for trust account transactions, and have only one merchant account, you must put all transactions into the trust account and then move the money into the operating account. You should arrange with your merchant service provider to have all fees taken from your operating account. It is important to review these criteria in choosing a merchant service (credit card processing) provider.
You should evaluate QuickBooks to make sure it will meet your specific billing needs. You may want to review the article “Should I use QuickBooks for Billing?” to understand some of the limitations. If you decide to consider other programs for billing make sure to review how the program integrates with QuickBooks.
The vocabulary of our setup will be as follows:
| QuickBooks Term | Meaning in Law Firm Setup |
| Customer | Client of The Firm. |
| Job | Matter, Case, or Project. Note: If you typically have only one matter per customer, you may use customers without jobs. |
| Vendor | Vendor paid by the firm using money from the Firm Checking account or from a Client’s Trust account. The Firm itself is also a Vendor because a Client’s Trust account may pay the Firm for fees and costs. |
| Operating A/P | Accounts Payable account used to record Bills to be paid by the firm, using the firm’s operating funds. |
| Trust A/P | Accounts Payable account used to record bills to be paid by the firm from Trust or IOLTA funds. The use of a Trust A/P account is optional, if you choose to pay bills directly, without tracking with the QuickBooks Accounts Payable system. If you use Trust A/P and you have multiple trust accounts, you may want to setup a Trust A/P account for each trust account. |
| Reimbursed Client Costs | This is an asset account used to track costs paid from the operating account on behalf of a client. These costs will be billed to the client and the firm will be repaid by the client directly or from the client’s trust or IOLTA account. |
| Client Trust Liability | Liability account used to track the funds held in trust for each client. Each trust or IOLTA bank account must have its own Client Trust Liability account. The balance of this account should ALWAYS be equal to the sum of the Trust A/P account and the Trust bank account. |
Please note that all examples and instructions were created using QuickBooks 2013 Premier Professional Edition. If you are using an older version or a different edition some screens may look different and some features may not exist.
Setting up the Chart of Accounts
Start by reviewing your client’s Chart of Accounts to make sure that all the accounts needed for tracking revenue, expenses and trust activity have been created.
Trust/IOLTA Account
If you use one or more Trust or IOLTA accounts to keep client monies to pay client expenses or your fees when earned, you will need to setup a few QuickBooks accounts to track the transactions. You should setup one set of these accounts for each Trust or IOLTA account.
- If you will be using the Accounts Payable system in QuickBooks for Trust transactions, rename the Accounts Payable account to “Operating A/P” to distinguish it from Trust A/P. use this account to track all bills and payments related to operating the firm and for all client expenses that will be paid by the firm and then billed to the client.
- Create a bank account called “Client Trust xxx Checking”, where xxx is the name of the bank, or other name as appropriate. This will be used to track all deposits and payments of client trust funds. Make sure that your bank sets this up as an IOLTA account for proper handling of interest. Check your state rules, but in most states this account cannot have automatic overdraft protection or ATM access.
- If you will be using A/P for client trust account bills, setup an Accounts Payable account called “Trust xxx A/P”, where xxx is the name of the bank. This will be used to track client bills and payments that will be paid from the associated Trust bank account.
- Setup an Other Current Liability account called “Client Trust xxx Liability”, where xxx is the name of the bank. This account will track all client deposits and costs.
General Retainer
If your client is in a state where General Retainers are allowed, it is recommended that you setup a Suspense account to track this retainer. Depending on the rules of the state this account may be a liability account or an income account. The money in this account can be reallocated to the appropriate income or Reimbursed Client Cost accounts when earned.
Setting Up Items
QuickBooks relies on “Items” to help you consistently use the proper accounts in transactions.
Items to Track Legal Services Provided
Determine how the firm wishes to track fee income, whether in one Fee Income account or in separate accounts. This might be based on timekeeper or type of work. You will setup an Item in the Item list for each income type, for Reimbursed Client Costs and for General Retainer if appropriate. It is also possible to setup a single income account and use items to track and report on different types of income. We recommend separate income accounts if needed as it is simpler to see the information.
For the income accounts setup a “double-sided service item” for each type of income. Point the item to the appropriate income account as shown in the example below. The expense should be pointed to the Expense account that will be used if paying a Vendor for this service.
As you’ll see in a later article, you can use time sheets to record the hours for the fee items and then pass the time through to client invoices.
Items to Track Client Law Firm Expenses
Reimbursed Client Costs are costs that are billed to the client but are paid out of the Firm Operating Bank Account. Set up a “double-sided service item” as shown below for each expense provided and paid for by the firm. Each item will point to the Reimbursed Client Costs for income and expense. It is recommend to setup separate Reimbursed Client Cost items for items that will be billed to clients at a rate different than the rate paid to the vendor. The use of these items will facilitate billing to clients if billing is done within QuickBooks. The use of multiple Advanced Client Cost accounts is not necessary and is not recommended.
We recommend the Advanced Client Cost Account be setup as an Other Current Asset account. This will allow you to appropriate manage this account over time and, where necessary, provide proper
Items for Soft Costs
QuickBooks does not have a specific way to track and charge clients for Soft Costs. Soft costs are those costs for which you want to charge a client but do not write a physical check. This typically includes things like copies or faxes.
It is recommended that you set up a “single –sided service item” for each soft cost. This should point to the expense account used for that cost, I.e., copier lease expense, or to a generic soft costs income account if you prefer. If pointed to the expense account, the use of this item will reduce the total expense.
The items should be set with the default description and price. Price Levels can be used if necessary. These items will be added directly to the customer invoice at the time of billing.
Items to Track General Retainers
General Retainers represent money paid by the client for services not yet rendered but allowed by state rules, and Client Retainer Agreement, to be deposited into the Operating Bank Account. Please check with your state Bar Association to see if General Retainers are allowed. Set up a “double-sided service item” as shown below for the General Retainer account. Each item will point to the Suspense/General Retainer account for income and expense. It is generally unnecessary to have multiple General Retainer accounts and we don’t recommend this.
Items for Client Costs Paid Directly from a Trust/IOLTA Account
Depending on your Client Agreement, costs incurred on behalf of the client may be paid from the appropriate IOLTA account rather than from the Firm Operating account. For these expenses you should setup a “double-sided service item” with both the income and expense sides of the item pointed to the Client Trust Liability account. You will need one item for each Trust / IOLTA Bank account held by the firm.
Setting up Jobs (Client Matters)
If your firm typically has a single Matter per Client then you may choose to setup the Matters as Customers without the use of Jobs. If your firm typically has more than one Matter per Client then we recommend the use of Jobs. It is suggested that you be consistent in whichever way you choose.
For each Client setup a Customer in QuickBooks. If you will use Jobs, you will setup a job for each Matter (project or case).
To add a Matter for an existing Client, right click on the Client in the Customer:Job list and select Add Job.
Enter the name of the Matter in the Job Name field on the New Job Screen.
Click the Payment Settings tab of the New Job window and set the Price Level as appropriate. Price Levels will be discussed in a later article. You can also set up online payments preferences for invoices connected to this job. On the Additional Info tab you may use Customer Type to track the Type of Matter for reporting purposes. If there is other specific information you wish to track for the Matter, for example Responsible Attorney, you may setup Custom Fields and fill these in on this screen.
To setup Custom Fields, if not already done, click the Define Fields button on the Additional Information tab of the Customer or the Job. Note that the text entered into the custom field is free-form text so it important to try to communicate and use consistent standards across all employees setting up Customer:Jobs.
Those are the basics of setups, in the next article we’ll talk about transactions.