Logiframe

Guide

QuickBooks Online can hold a firm’s trust account. It cannot keep the client ledgers the bar will ask for.

Many law firms run their operating books in QuickBooks Online, and most of them hold client money in an IOLTA or other trust account. QuickBooks records the trust bank account and the total owed to clients. What it does not do is keep a running ledger for each client and stop a payment that would take one client below zero. That job belongs to practice management software, and the setup that works is the two systems doing their own jobs and reconciling to each other every month.

Book a free 30-minute call Who keeps what

The limitation

What QuickBooks Does Not Do

QuickBooks Online has no built-in trust accounting module. It is a general ledger, and a trust account needs a ledger per client.

State rules based on ABA Model Rule 1.15 require a lawyer to keep client money separate from the firm’s own money and to keep records of each client’s funds. The details vary by state, including how long records are kept and how often reconciliations must be done, so the state bar’s own rules are the ones that apply.

In practice that means three things QuickBooks Online does not do on its own: keep a running balance per client and per matter, block a disbursement that would overdraw one client’s funds even when the account as a whole has money, and produce the client ledger report a bar auditor asks for. A firm can try to fake per-client tracking with sub-accounts or customers, but it is easy to get wrong and hard to evidence.

Not legal advice

This guide covers the bookkeeping. Your state bar’s trust account rules decide what is required, and an ethics question belongs with your bar or ethics counsel.

The build

Who Keeps What

The workable setup splits the job: practice management software keeps the client ledgers, and QuickBooks Online keeps the firm’s books, including the trust bank account and the total liability to clients.

RecordKept in
Client and matter trust ledgers Practice management software, such as Clio Manage or LeanLaw
Trust bank account and its reconciliation QuickBooks Online, as its own bank account
Total owed to clients QuickBooks Online, as a client trust liability account
Operating income, expenses and payroll QuickBooks Online

Clio Manage and LeanLaw both connect to QuickBooks Online. LeanLaw is built around QuickBooks Online and handles trust within it; Clio keeps trust ledgers in Clio and syncs to QuickBooks. Either way, the rule is the same: each trust transaction is entered once, in the system that owns client ledgers, and reaches QuickBooks through the integration or a matching entry. Entering it in both by hand is how the two drift apart.

Chart of accounts

Setting Up the Trust Account

  • A separate bank account in QuickBooks for each trust account. The IOLTA, and any separate interest-bearing trust account for a single client, each get their own bank account in the chart. Never a sub-account of operating.
  • A client trust liability account. An other current liability that holds the total the firm owes to all clients. Every trust deposit increases it and every trust disbursement reduces it.
  • The two always match. At any point, the trust bank balance in QuickBooks equals the client trust liability. If they differ, something has been coded to income or expense that should have gone to the liability, or the other way round.
  • No income or expense accounts touch trust. Client money in trust is not firm revenue. It becomes revenue only when it is earned and moved to operating.

IOLTA interest is paid by the bank to the state’s IOLTA program, not to the firm or the client. It should not be recorded as firm income.

Money in and out

Deposits, Fees and Disbursements

EventPractice managementQuickBooks Online
Retainer deposited to trust Credit to the client’s trust ledger Debit trust bank, credit client trust liability
Fee earned and transferred Invoice paid from trust, client ledger reduced Debit client trust liability, credit trust bank; operating bank receives the transfer against the invoice
Cost paid on the client’s behalf Disbursement from the client’s ledger Debit client trust liability, credit trust bank
Settlement received and distributed Credit, then disbursements to client, lienholders and fee Liability rises on receipt and falls with each payment

Move earned fees out of trust promptly, under whatever timing your state requires. Leaving the firm’s earned money in trust is commingling, the same as putting client money in operating. And pay firm expenses from operating, never from trust, even for a day.

Card payments need care. A card processor that deducts its fee from the deposit to trust leaves the client ledger short. Use a processor set up for law firms that takes fees from the operating account, and check that refunds and chargebacks do not reach client funds.

The control

Three-Way Reconciliation

A three-way reconciliation proves three records agree on the same date: the bank statement, the trust account register, and the total of every client ledger.

  • One: the bank statement. The balance the bank reports, adjusted for outstanding checks and deposits in transit.
  • Two: the trust register. The trust bank account in QuickBooks, reconciled to the statement in the usual way.
  • Three: the client ledgers. The sum of every client’s trust balance from practice management, which also equals the client trust liability in QuickBooks.

All three must agree. Then check that no client ledger is negative, because a negative balance means one client’s money paid for another client, even when the totals tie. Many states require this reconciliation monthly or quarterly; doing it every month and keeping the signed report is the record an auditor wants to see.

The quiet risk

Bank Feeds and Trust Money

QuickBooks bank feeds are a convenience on the operating account and a risk on the trust account.

The danger is a trust deposit accepted from the feed as income, or a bank rule built for operating that matches a trust transaction. Either one moves client money into the firm’s revenue on paper, and the trust bank balance stops matching the client trust liability.

  • Do not auto-add trust transactions. Every trust line should be matched to an entry that came from practice management, not categorized from the feed.
  • Keep bank rules off the trust account. Or restrict them to the operating account only.
  • Check the liability every month. The trust bank balance equals the client trust liability. Any difference is the first thing to fix.

The failure modes

Where Trust Accounting Goes Wrong

  • Retainers recorded as income on receipt. Revenue and taxable income are overstated, and the trust liability is understated.
  • Client ledgers kept in a spreadsheet. They drift from the bank, and nobody finds out until the reconciliation fails.
  • Earned fees left in trust. Commingling, and a common bar finding.
  • Card fees taken from trust deposits. The client ledger is short by the fee.
  • A negative client balance hidden by a positive total. Only a ledger-by-ledger check finds it.
  • Trust transactions entered twice. Once in practice management and again by hand in QuickBooks, with neither quite matching.
  • No signed reconciliation on file. The work may have been done, but there is no evidence it was.

Questions

Commonly Asked

Does QuickBooks Online have trust accounting for law firms?
No. QuickBooks Online has no built-in trust accounting module. It can hold the trust bank account and a client trust liability account for the total owed to clients, but it does not keep a running ledger per client or block a disbursement that would overdraw one client. Most firms keep client ledgers in practice management software such as Clio Manage or LeanLaw, which connect to QuickBooks Online.
How do I set up an IOLTA account in QuickBooks Online?
Add the IOLTA as its own bank account, never a sub-account of operating, and create a client trust liability account as an other current liability. Each trust deposit debits the trust bank and credits the liability, and each disbursement does the reverse. The trust bank balance should always equal the liability. No income or expense account should touch trust until a fee is earned and moved to operating.
What is a three-way trust reconciliation?
A check that three records agree on the same date: the adjusted bank statement balance, the trust account register, and the total of all client ledgers. All three must match, and no individual client ledger can be negative. Many states require it monthly or quarterly. Keep a signed copy of each reconciliation as evidence.
Can I use bank feeds on a trust account in QuickBooks?
You can, but with care. Do not let trust transactions be added straight from the feed or caught by bank rules built for operating, because a trust deposit categorized as income moves client money into revenue on paper. Match each trust line to an entry that came from practice management, and check monthly that the trust bank balance equals the client trust liability.
Who gets the interest on an IOLTA account?
The bank pays IOLTA interest to the state’s IOLTA program, which funds legal aid and related purposes. It does not belong to the firm or the client and should not be recorded as firm income. A large or long-held deposit for one client may instead belong in a separate interest-bearing trust account for that client, under the state’s rules.
Is this guide legal advice?
No. It covers the bookkeeping. Trust account rules are set by each state, generally based on ABA Model Rule 1.15, and your state bar’s rules decide what is required. Ethics questions belong with your bar or ethics counsel.
QuickBooks ProAdvisor, Elite A team certified in QuickBooks Online, Intuit Enterprise Suite and Workforce.
Xero Gold Partner Certified advisors, with Xero as the platform our depth genuinely sits in.
13+ years in practice Across accounting outsourcing, ERP and accounting software work.

Next

Where to Go Next

Guide IOLTA Trust Reconciliation The trust rules in more depth, whichever software you run. Who we serve Law Firms How the rest of a firm’s books fit around trust. QuickBooks QuickBooks Bookkeeping How we run QuickBooks Online and Intuit Enterprise Suite files. QuickBooks service Monthly Bookkeeping The monthly cycle, including the three-way reconciliation. QuickBooks service Catch-Up & Clean-Up Untangling trust money that was coded to income. Guide Invite Your Accountant to QuickBooks Online Giving us access without sharing a login.

Does your trust account tie out three ways?

If the bank, QuickBooks and your client ledgers do not agree every month, the gap grows quietly. Tell us how your firm handles trust today.

Book a free 30-minute call How we work with law firms