Law Firm Chart of Accounts: A Sample, With Trust Money Kept Separate

A law firm chart of accounts is the numbered list of every account in the firm’s general ledger, grouped into assets, liabilities, equity, income and expenses. It looks much like any business’s chart, except that money held for clients gets its own trust bank account and a matching liability, so it is never counted as the firm’s cash or income.

The sample below shows one layout for a small firm. Its account numbers and names are illustrative; a firm’s accountant and its software will have their own.

What a law firm chart of accounts contains

The five groups are the same as in any business. Assets are what the firm owns or is owed. Liabilities are what it owes. Equity is the owners’ stake. Income is what the firm earns, and expenses are what it spends to earn it.

In a numbered chart, accounts run by group, so the chart sorts itself: 1000s for assets, 2000s for liabilities and so on. Gaps between numbers leave room to add accounts later.

A law firm’s chart usually includes:

• A trust bank account for client money, such as an IOLTA account, kept apart from the operating bank account.
• A client trust liability, the total the firm owes back to clients. It matches the trust bank account’s balance in the books.
• Advanced client costs, for filing fees and other costs the firm pays on a client’s behalf and bills back.
• Owners’ capital and draws, for partners or a sole owner.
• Fee income by type, such as hourly, flat-fee and contingency fees, which shows where the firm’s revenue comes from.

Why trust money gets its own accounts

Client money is not the firm’s money. The ABA’s model rule, which binds only where a state adopts it, keeps client property separate from the lawyer’s own, with client funds in a separate account ABA Model Rule 1.15(a) [1]. New York treats a lawyer holding other people’s money as a fiduciary and bars commingling it New York, 22 NYCRR 1200.0 Rule 1.15(a) [2]. Florida requires a separate, clearly labeled trust account R. Regulating Fla. Bar 5-1.1(a)(1) [3], and Texas a separate account designated trust or escrow Tex. Disciplinary R. Prof'l Conduct 1.15(a) [1.14(a)] [4].

That is why the chart pairs a trust bank account with a liability. A deposit into trust raises both. A payment out of trust, to a client, a third party or the firm for an earned fee, lowers both. Money in trust is not the firm’s income until it is earned. On a cash basis the fee is recorded when it moves to the operating account; on an accrual basis, when it is billed. Under the ABA model, advance fees stay in trust until they are earned ABA Model Rule 1.15(c) [1].

One liability account, a ledger for each client

The sample has one client trust liability account per trust bank account. Each client’s share is kept in a ledger beneath it. The ABA’s model records rules call for a ledger for each trust client ABA Model Trust Account Records Rule 1(b) [5], and Florida for a ledger card or page for each client or matter R. Regulating Fla. Bar 5-1.2(b)(7) [6]. Florida also compares the total of the client ledgers with the reconciled trust balance every month R. Regulating Fla. Bar 5-1.2(d)(1)(B) [6].

A client whose money can earn interest for the client may get a separate trust account. The State Bar of California’s IOLTA FAQ says larger or longer-held funds go in a separate interest-bearing account for the client California, IOLTA FAQ, 'What is IOLTA?' [7]. Illinois’s rule sends client funds that can earn net income for the client to a separate interest-bearing account Ill. RPC 1.15B(a) [8]. In a chart like the sample, each such account gets its own pair of lines.

Interest, bank charges and card fees

Under the IOLTA model, interest on the account does not reach the firm. The ABA describes a pooled account whose interest the bank sends to the state IOLTA program ABA Overview, 'How Does IOLTA Work?' [9], and New Jersey’s Office of Attorney Ethics says the attorney may never receive interest on client funds in trust New Jersey, OAE outline Part II.A.7(a), p. 7 (PDF p. 10) [10]. So the sample has no interest income account for trust.

The firm’s own money in trust is limited. The ABA model allows it only to pay bank service charges on the account ABA Model Rule 1.15(b) [1], and California only as much as reasonably covers bank charges Cal. RPC 1.15(c)(1) [11].

Card processing fees on trust payments can also end up on the operating side. A Florida ethics opinion says that, unless lawyer and client agree otherwise, the lawyer pays transaction fees and they are not taken from trust funds Fla. Bar Ethics Op. 21-2, Conclusion 3 [12]. That is why the sample keeps a bank and card fees expense account.

Sample law firm chart of accounts

The three figures agree, which is what a three-way reconciliation checks against the bank statement. Illinois sets out those steps in its rule: the figures from the check register, the client ledgers and the journals must all agree with the adjusted bank statement balance Ill. RPC 1.15A(c) [13]. If account 2100 ever differed from the client ledgers, the difference would point to an entry missing or posted to the wrong place.

No income account in the sample touches trust money directly. Advanced client costs sit under assets, not expenses, because the firm bills them back.

Where software fits

Legal accounting software keeps the client ledgers that sit beneath the trust liability, and some products keep the whole chart of accounts as well.

Legal products with their own ledger. Clio Accounting keeps a chart of accounts with journal entries [14]. PracticePanther has a customizable chart of accounts on Business Pro only [15], CosmoLex on Pro only [16], and MyCase in its MyCase Accounting add-on [17].

QuickBooks Online with a legal product. QuickBooks Online allows up to 250 accounts on Simple Start, Essentials and Plus, with no limit on Advanced [18]. Intuit’s help records client retainers in a liability account with the detail type “Trust Accounts - Liabilities”, and a separate trust bank account where the firm keeps the money apart [19]. Intuit tracks each customer’s retainer balance with a report [19]; legal products keep a trust ledger for each client or matter. LeanLaw posts its trust entries to the firm’s trust bank and liability accounts in QuickBooks Online [20], and PracticePanther posts trust payments to a trust liabilities account [21].

The law firm bookkeeping software comparison costs each product with a general ledger. QuickBooks for lawyers covers the QuickBooks Online route, and the trust accounting software comparison covers client ledgers and reconciliation. All routes are costed together in the law firm accounting software comparison.