QuickBooks Online for Law Firms: How to Set Up Trust Accounting

Is QuickBooks Online good for law firms?

Yes, as a general ledger. It reconciles bank accounts and takes bank feeds, which covers a lot of what a small law firm needs from accounting software.

Practice management software, Filevine and Clio in my work, handles the case side (matters, billing, case costs), and QuickBooks Online holds the books.

Intuit's own help article on retainers and deposits does not cover 3 way reconciliation, IOLTA interest, or state rules. That part is on you, or on whoever keeps your books.

What do trust records need to show?

The ABA Model Rules for Client Trust Account Records ask for a ledger for each trust client, plus journals of deposits and disbursements, bank statements, and copies of trial balances and reconciliations. States choose their own numbers, so check yours.

The ABA comment calls monthly reconciliation the preferred practice. A trial balance is the sum of every client ledger balance, so your QuickBooks setup has to produce each client's balance, the trust total, and a bank reconciliation. The steps below do that.

How to set up trust accounting in QuickBooks Online

These steps follow Intuit's article, Record a retainer or deposit, with 1 change. Intuit's article lists the trust bank account under a liability type. A trust bank account holds cash, so set it up as a Bank type account and reconcile it to the bank statement each month.

1. Create the trust bank account. Add a new account with Bank as the account type and a name nobody can mistake for operating. Connect the bank feed. Done looks like this: the account shows up in your reconcile list.
2. Create the trust liability account. Add an account with the type Other Current Liabilities and the detail type Trust Accounts - Liabilities. Intuit's example name is Trust Liabilities. Client money sits here because the firm holds it but has not earned it.
3. Set up each client as a customer. Make 1 customer per client. Intuit's per client view runs on customers, so every trust entry needs a customer.
4. Create a retainer item. Add a service item named Retainer whose income account is the trust liability account, not an income account.
5. Record the retainer deposit. Enter a sales receipt for the client with the Retainer item and deposit it to the trust bank account. The trust bank balance and the trust liability both go up, and the client's name is on the entry.
6. Apply the earned fee. When you bill, apply the retainer as a negative line on the client's invoice. That moves the amount from the trust liability to income. ABA Rule 1.15(c) lets a lawyer withdraw advance fees only as they are earned.
7. Transfer the earned amount to operating. Use a Transfer from the trust bank account to the operating account once the fee is earned. California, for example, says at the earliest reasonable time. Done looks like this: the earned amount no longer sits in trust.
8. Pay client costs from trust. Turn on Track expenses and items by customer. Create an item whose expense account is the trust liability account, such as Medical expenses or Net settlement, which are Intuit's own examples. Write the expense from the trust bank account with that item and the client. Intuit's example is a law firm paying a client's medical expenses from a settlement. It lowers the liability and the bank balance without touching your expense accounts.

For a trust check memo, I use the client, the payment type, and the reference number from the provider's letter, like [Client] - Medical - Reference No: [number]. If the letter has no reference number, I leave it off. More on that in Settlement Disbursement Statement.

How do I see each client's trust balance in QuickBooks Online?

Run the Balance Sheet and open the transaction report for the trust liability account. Then go to Customize, Rows/Columns, and choose Group by Customer. That is Intuit's method, and it shows what the firm holds for each customer.

It only works if every trust entry carries a customer. An entry with no customer has no client to belong to.

How does an IOLTA account work in QuickBooks?

IOLTA stands for Interest on Lawyers' Trust Accounts. According to the ABA Commission on IOLTA, nominal or short term client funds go into a single pooled, interest bearing account. The bank sends the interest to the state IOLTA program, which funds legal aid. The client does not earn it and neither does the lawyer.

Large or long held funds for 1 client can go in a trust account where the interest is earned for that client.

For setup, I treat an IOLTA like any other trust bank account: step 1 above. The bank pays the interest to the state program, so the firm does not receive it. Ask your CPA how your state program reports it.

What is the monthly trust routine in QuickBooks Online?

1. Reconcile the trust bank account. Tie it to the bank statement to the cent.
2. Run the client balances. Use the Group by Customer report from the section above.
3. Compare 3 numbers. The reconciled bank balance, the trust account in the books, and the total of all client balances should agree. This is the 3 way check, and it is covered in the 3 way reconciliation guide.
4. Look for any negative client balance. If the bank and books match but 1 client is negative, a client's money covered another client's cost. Explain it and fix it in the same month.
5. Keep the reports. The ABA records rules list trial balances and reconciliations as records to keep.

Some states set the frequency for you. California requires a monthly reconciliation, and Florida requires a monthly reconciliation plus a comparison to the client ledgers. The full picture is in the Law Firm Trust Accounting guide.

What are the common trust setup mistakes in QuickBooks?

• 1 account for operating and trust. The ABA rule requires client property to be kept separate from the lawyer's own. See Commingling Client Funds.
• Trust as a liability only, with no bank account. Nothing reconciles to the bank statement, so the 3 way check has nothing to check.
• Earned fees left in trust. The lawyer's own money in the trust account is commingling, except for bank service charges.
• No customer on trust entries. The client balances report cannot group what has no client.
• Client costs paid with an expense category. Intuit's method uses an item tied to the liability account, so the client's balance goes down with the payment.

How do I keep bank feeds and cards clean around trust?

Trust checks can clear weeks after they are written, so I match them on check number plus amount, not on date. Every other bank feed match needs the bank date and book date within 2 days. A human signs off before anything posts. The full rules are in QuickBooks Online Bank Feed Rules.

When 1 card statement covers a parent card and its sub cards, I reconcile the parent account. See Reconcile a Credit Card With Sub Accounts.

FAQ

Can QuickBooks do trust accounting?

Yes, with the right setup. A trust bank account, a trust liability account, and a customer for each client give you the pieces, and Intuit's retainer steps show how to record deposits, earned fees, and client costs. It does not replace your state's trust rules.

Do I need separate QuickBooks files for trust?

Not under Intuit's method. Its retainer steps keep the trust bank account, the trust liability account, and the operating account in the same company file, and the earned fee moves by a Transfer. Check your state bar if you have other questions about your setup.

How do I see each client's trust balance?

Open the transaction report for the trust liability account, then choose Customize, Rows/Columns, Group by Customer. Each customer's held balance shows up. Every trust entry needs a customer for this to work.

Does a law firm earn interest on an IOLTA account?

No. The bank sends the interest to the state IOLTA program, so the firm does not receive it. Ask your CPA how your state program reports it.

Should I use QuickBooks or practice management software?

Both. Practice management software handles the case side: matters, billing, and case costs. QuickBooks Online holds the books, including the trust accounts and reconciliations.