Trust accounting is at the heart of the fiduciary responsibility a lawyer has with their client. When done inaccurately, the consequences of bad trust accounting can be severe. But with the right tools, trust accounting can be a less scary responsibility.  In this blog post, I will guide you to do accurate QuickBooks trust accounting with Clio.

Why you should use Clio and QuickBooks Online

Enjoy exclusive trust accounting features with Clio

Although QuickBooks trust accounting makes trust accounting a little easier for legal professionals like yourself, there are several trust accounting features built into Clio that do not exist in QuickBooks Online. These features are designed to keep you compliant with state bar rules and regulations. You can enhance your QuickBooks trust accounting experience using Clio with QuickBooks Online can help you ensure your trust funds are kept in balance.

Clio helps ensure you aren’t using more money than what is in trust

Your client ledger report lists the client’s individual deposits and withdrawals activities for their specific trust account. When you invoice a client in Clio and pay the invoice with trust funds, Clio will not allow you to apply a payment from the trust for more money than the client has in trust. 

For example, if a client has a matter trust balance of $3,500, and this month’s invoice is for $3,752. When you pay with trust funds, Clio will only allow you to apply $3,500 toward the invoice payment. After the trust payment is applied, the client will have an outstanding balance owed of $252.00. QuickBooks Online does not have a feature to prevent the firm from applying more trust funds than a client has available.  

Without this protective feature, a client’s ledger report can show a negative balance. When this happens, it says the firm spent more money out of trust then the client had in trust. This means one client was using another client’s money—signaling a violation of your fiduciary responsibilities. 

Clio helps ensure you’re including a client’s trust balance in their invoice

Clio has another trust accounting feature that is frequently required by state bar associations: Including a client’s trust balance on their invoice. In Clio, choose a bill theme that automatically includes the current trust balance that you want on the invoice. QuickBooks Online does not offer this option on an invoice. It would need to be manually calculated and added to each client’s invoice.

QuickBooks Online also does not offer this option on an invoice. It would need to be manually calculated and added to each client’s invoice.

Monitor your financials easily

The matter dashboard in Clio gives you an instant overview of the financials, like work in process, outstanding balance, and matter trust funds. In QuickBooks Online, it would take three different reports to see these amounts.

Financial data management and reporting is simple and accurate

By using Clio with QuickBooks Online, you can sync trust transactions, along with contacts, invoices, and financial information seamlessly between both tools—eliminating repeat data entry. You can also understand staff performance and determine compensation by linking staff names to billable hours and exporting to QuickBooks Online. An automated trust workflow ensures that amounts in trust are reconciled between Clio, QuickBooks Online, and your associated bank accounts. Transaction syncs are fast and accurate—ensuring that end-of-month financing is pain-free and your finances are handled in line with legal ethics requirements.

Set up a new trust account in QuickBooks Online 

Start the QuickBooks trust accounting process In QuickBooks Online by setting up a trust account by either adding or modifying your trust bank account. The chart of accounts is found under “Accounting” on the black menu bar along the left side of the screen. To set up a new trust bank account, go into your chart of accounts and click on the green “new” button in the upper right of the screen. Set the account type to be “bank,” and the detail type to “trust account.” You can name the account “Trust Account” or “IOLTA Account.” 

If you are modifying a current bank account, you will also do this in your chart of accounts screen. In the far right column beside the bank account name, click the black downtick beside the View register, and then click on edit. From the pop-up screen, you will be able to edit the Detail Type to “trust account.”

The most important detail in setting up or modifying the account is to have the account detail type: Trust account. When you integrate Clio and QuickBooks Online trust accounts, if the account detail type is not Trust account, you will not see the account in the Clio sync screen.

Add your trust liability account in QuickBooks Online

Next, you will need to add your trust liability account in QuickBooks Online.  For the trust liability account, the account type is Other Current Liabilities, and the account detail type is Trust Accounts – Liabilities. Again, if the detail type is not set up as Trust Accounts – Liabilities, you will not see the account in the Clio sync screen.

Set up an advanced client cost account

Now let us talk about the costs you pay on behalf of your clients. Hard costs are the costs incurred by your firm, whereby you directly pay the vendor on your client’s behalf. Soft costs are the cost that cannot be tracked directly back to your client because you did not directly pay the vendor on behalf of your client. Examples of hard costs would be filing fees or medical records. Soft costs could be some type of postage or copies.

Hard costs entered into QuickBooks Online will automatically push back into Clio, providing you have the feature set up. To set up an advanced client cost account in QuickBooks Online, add a new account. The account can be called many different names. To be clear, these are the costs you have paid on behalf of your client that expect to be reimbursed. The account type is: Other Current Assets account. The account detail type is: Loan to Others

When you pay a client’s expense on their behalf and expect reimbursement at a future point in time, you are loaning the client money. For example, your firm pays a filing fee in August and puts the expense on the client’s September bill/invoice. You have loaned the client the amount of the filing fees you paid. It is not an expense to your firm. It is a loan to your client.

Rules for managing trust accounts

According to The ABA Model Rules of Professional Conduct Rule 1.15: Safekeeping Property, there are 3 requirements for trust accounts that most lawyers have to deal with: 

  1. You need to keep your trust account separate from your own property
  2. Your trust account needs to be in the same state as your legal office (whether you work from a physical or remote office)
  3. You need to keep complete records of your trust account funds for about 5 years (or as long as 10 years)

Although these sound like fairly simple rules, they can be tougher to implement than you think. But the right trust accounting tool can help you make sure you remain compliant while practicing.

Keep a client ledger for each client’s funds

We are often asked if you have to open a separate trust account for each client. The quick answer is: You do not. Also, most law firms use an IOLTA (Interest on Lawyer Trust Accounts) account for their trust account. An IOLTA account puts all their law firm’s client’s money together. Although this isn’t wrong, you have an additional responsibility to distinguish one client’s money from another. 

To do this, you have to be able to generate a report that shows whose money is in the trust bank account by client. It is not enough to say your trust bank statement agrees with the QuickBooks Online Trust bank balance. You also need to keep a client ledge of each individual client’s funds. A client ledger will tell you how much money belongs to a client, how much money you’ve paid out on behalf of that client, and how much money you have left in the trust account for the client. 

For example, if you have 10 clients with trust funds, you need to maintain 10 separate client ledgers. The more clients you have, the more successful you are at retaining clients. However, this also means you’re giving yourself more paperwork. 

Check the rules for your state

Since every state has their own requirements regarding trust accounts, make sure you look up rules for your jurisdiction. For example, North Carolina’s trust account handbook states that a trust account must be “an interest or dividend-bearing account” approved by the North Carolina IOLTA commission. You must also notify the commission when you’re opening or closing the trust account—by filing the right kind of paperwork for each of these actions.

Make sure your financial institution is approved by your State Bar

A Financial Institution has to be approved by the State Bar to offer an IOLTA account to a law firm. Part of the approval process a bank goes through includes an agreement with the state bar that if an IOLTA account is overdrawn, the state bar will immediately be notified. It is not only possible, but probable your state bar will know at the same time you know if your IOLTA account has an overdraft(s). Accuracy in maintaining your trust account is paramount. 

How to manage trust accounts in QuickBooks Online and Clio

Follow these steps below to make QuickBooks trust accounting with Clio as smooth as possible. To start, Clio makes it easy to manage all funds held in trust on behalf of your clients. Most jurisdictions require that law firms address three primary requirements when managing client funds (be sure to check with your local authority for rules that apply to your law firm):

  • Account identification. Law firms must deposit funds into an account specifically labeled as a trust account.
  • Segregation of accounts. Law firms must keep client funds separate from a lawyer’s own funds.
  • Accounting records. Law firms must create and maintain appropriate records of funds belonging to their clients.

Here, we’ll look at how Clio helps you meet all of these requirements with its trust accounting features and workflows.

Bank accounts in Clio

IOLTA Trust

In Clio, you will need to establish two separate bank accounts. One for your operating account and one for your trust accounts. Typically, these are the accounts your Clio trainer setup with you during your initial training session. To see these accounts from Clio, on the black menu bar along the left side of your screen, click on accounts. 

Microledgers

The “Transactions” subtabs within both a Matter and a Contact card will give you a microledger of the transactions in and out of a given account for that Matter or Contact. These microledgers are where you are going to be doing the bulk of the recording of incoming Client Trust funds and viewing the line items to ensure the funds are accurate. 

For more information on how to enter client funds into trust from within a Matter, this support article will help.

Reporting

Clio trust ledger report

A firm’s client ledger report can be created in Clio. On the black menu bar on the left of your screen, click on “Reports,” then go to the section Client Reports. The report that will show the client’s detailed activities of their trust funds, it is called the Trust Ledger.  There is also a report that will show just the client’s balance of their trust funds called the Trust Listing.

A firm’s client ledger report can also be created in QuickBooks online, using the Trust liability account you created. We will discuss the importance of being able to create your client ledger report in QuickBooks Online when we discuss the three-way reconciliation process below.

Transfer

transfer funds in Clio

If the deposited Trust Funds require a transfer between accounts, from the Transactions tab within the Contact or Matter, click “Transfer funds” on the right-hand side. In the “Transfer funds” window, add the information for your transfer. Here, you can specify the Source account where the funds are coming from, the Destination account where the funds are moving to, the amount that should be moved, and any other pertinent details. Once finished, click Record Transfer.

Viewing trust information in an invoice

As mentioned above, Clio has another account feature—one that is frequently a requirement of state bar associations—that includes a client’s trust balance on their invoice. 

To do this in Clio, choose a bill theme that automatically includes the current trust balance to be shown on the invoice.     

Three-way account reconciliation

A three-way reconciliation is the process by which a firm validates the bank statement agrees with the QuickBooks Online trust bank account balance, and the QuickBooks Online trust bank account balance agrees with the trust liability account and the trust liability account agrees with Clio’s trust ledger report.

The trust bank statement is considered the source of truth. The financial institution has no stake in your law firm and is only documenting what has happened at the Bank. Three-way reconciliations should be done monthly when you reconcile the bank statement, and many state bars require copies of the reconciliations.

Trust funds in Clio can be held at either the client level or the matter level.

Clio and QuickBooks Online = The perfect trust accounting partners

There are many benefits to managing QuickBooks trust accounting with Clio and QuickBooks Online, including:

  • Making sure you are doing accurate, compliant trust accounting
  • Ensuring you’re including a client’s trust balance in their invoice
  • Ensuring you aren’t using more money than what is in trust. 

QuickBooks Online is key as it provides the financial platform. But using it with Clio makes it specific to your legal workflows, as Clio provides the legal practice management platforms to run your business of law. It’s no wonder why QuickBooks for lawyers is the top trust accounting software choice among legal professionals. 

When setting up a trust account in QuickBooks Online and Clio, make sure you’re using the right QuickBooks Online subscription. Be sure to go through the steps mentioned above for setting up a new trust account. To ensure you are managing your accounts in a way that’s ethical and compliant, always check the rules for managing trust accounts in your jurisdiction. 

QuickBooks trust accounting with QuickBooks Online and Clio is easy. I hope this blog post has given you a better understanding of how to do accurate trust accounting using Clio and QuickBooks Online.