Professional License Lawyer in North Carolina

Check Out Why Trust Accounting Is So Important For Attorneys

Check Out Why Trust Accounting Is So Important For Attorneys

One of the most important things that an attorney has to do is keep their trust account balanced and perform trust account reconciliations once a month.

What is Trust Accounting?

Trust accounting is the receiving, holding, and disbursement by lawyers of client funds to third parties with the representation of clients.  2017 TA Handbook

“To reduce the possibility of theft, misappropriation, or mishandling of client funds, the North Carolina State Bar established trust accounting standards in Rule 1.15 of the Rules of Professional Conduct, and implemented a program of random audits of lawyers’ trust accounts.”
2017 TA Handbook

What Are Some Key Concepts Highlighted in The Trust Accounting Handbook?

1. Separate Clients are Separate Accounts
Client A’s money has nothing to do with Client B’s money. Even when you keep them in a general trust account (also known as an IOLTA account), each client’s funds are completely separate from those of all your other clients. In other words, you are NEVER allowed to use one client’s money to pay another client’s or your own obligations.
2. You Can’t Spend What You Don’t Have
Each client has only his or her own funds available to cover their expenses, no matter how much money belonging to other clients is in your general trust account
3. There’s No Such Thing as a “Negative Balance”
It’s not uncommon in personal checkbooks for people to write checks against money they haven’t deposited yet or a check that has not cleared yet, and show this as a “negative balance.” In client trust accounting, there’s no such thing as a negative balance. A “negative balance” is at best a sign of negligence and, at worst, a sign of theft.
4. Timing is Everything
The time it takes for trust account funds to become available after deposit depends on the form in which you deposit them. Every bank has different procedures, so when you open your trust account, get the bank’s schedule of when funds are available for withdrawal.
5. You Can’t Play the Game Unless You Know the Score
Maintaining a running balance for a client is simple. Every time you make a deposit on behalf of a client, you write the amount of the deposit in the client ledger and add it to the previous balance. Every time you make a payment on behalf of the client, you write the amount in the client ledger and subtract it from the previous balance. The result is the running balance. That’s how much money the client has left to spend.
6. The Final Score is Always Zero
The goal in client trust accounting is to make sure that every dollar you receive on behalf of a client is ultimately paid out to the client at the conclusion of the representation or to third parties on the client’s behalf. What comes in for each client must equal what goes out for that client; no more, no less.
7. Always Maintain an Audit Trail
An “audit trail” is the series of bank‐created records, like canceled checks, bank statements, etc., that make it possible to trace what happened to the money you handled. An audit trail should start whenever you receive funds on behalf of a client and should continue through the final check you issue against them. Without an audit trail, you have no way to show that you have taken proper care of your clients’ money, or to explain what you did with the money if any questions come up. The audit trail is also an important tool for tracking down accounting errors
Have Questions?
Contact Nick Dowgul, at 919-521-8810 for more information and any other legal assistance
Nothing in this blog post is legal advice or establishes the attorney-client relationship. This is for informational purposes only. If you’d like to learn more about professional licensing issues in North Carolina check out our site at or our YouTube site here. 919-521-8810 is the direct line to North State Law.
Written by BréLeigh Stragand, Marketing Assistant