This article is general guidance, not legal or tax advice. Trust accounting rules are detailed and consequential. Confirm specifics with The Florida Bar, your malpractice carrier, and an attorney or ethics counsel familiar with current rules.
What a law firm trust account is
A trust account (commonly called IOLTA — Interest on Lawyers' Trust Accounts — in most U.S. jurisdictions) is a separate bank account where attorneys hold money that belongs to clients or third parties. Examples include:
- Retainers paid by clients for future work
- Settlement funds received on behalf of clients
- Money to be held for closings, distributions, or other client matters
- Court fees and costs advanced by clients
The defining feature: the money in the trust account is not the firm's money. The firm is holding it on behalf of someone else, in a fiduciary capacity. Every dollar must be identifiable to a specific client matter.
The core rules — broad strokes
The Florida Bar publishes detailed trust accounting rules; this is a summary of the principles, not a substitute for the actual rules:
- Separation — trust funds must be in accounts separate from the firm's operating funds
- No commingling — even small amounts of operating money in the trust account is a violation, with very limited exceptions
- Identification — every dollar must be tied to a specific client matter
- Prompt deposit and disbursement — funds must be deposited within required timeframes and disbursed only when earned or authorized
- Three-way reconciliation — monthly reconciliation of bank balance, trust ledger, and individual client matter balances
- Recordkeeping retention — records must be kept for the period specified by current Bar rules
- No use of one client's funds for another — even temporarily
- Interest treatment — IOLTA interest typically goes to the Florida Bar Foundation, not the firm or the client (with specific exceptions for substantial deposits held long-term)
Confirm the current specific rules with The Florida Bar. Rules are updated periodically.
The three-way reconciliation
This is the most important monthly task. Three numbers must agree:
- The bank statement balance (as of month-end, adjusted for outstanding items)
- The trust account ledger balance in the firm's accounting records
- The sum of all client matter balances in the firm's client ledger
All three must match exactly. Differences need to be investigated and resolved, not papered over.
Why three-way? Because two-way reconciliation (bank vs. ledger) catches errors between the bank and your records but doesn't catch errors between your overall ledger and what's owed to each individual client. The sum of individual client balances must equal the total in the trust account.
Operating account vs. trust account
Every law firm needs both:
Operating account
Holds the firm's own money. Fees that have been earned. Operating expenses are paid from here. Salaries, rent, utilities, office supplies. This is the firm's normal business account.
Trust account (IOLTA)
Holds client money. Retainers before they're earned. Settlement money before it's distributed. Cost advances before they're spent. No firm operating expenses ever come from this account.
Money moves from trust to operating only when:
- Fees are earned (typically based on time billed) and properly invoiced to the client
- The client has been notified of the transfer
- The client hasn't disputed the transfer within any required notice period
How to set up the bookkeeping
Two separate sets of accounts
Most law firm bookkeeping setups maintain the trust account as a liability — you have the cash on the asset side and you owe it to clients on the liability side. The two should always equal each other.
Client matter ledgers
Each client matter has its own sub-ledger tracking deposits in, disbursements out, and current balance. The sum of all client matter balances equals the trust account balance.
Practice management software vs. accounting software
Most law firms use legal-specific practice management software (Clio, MyCase, PracticePanther, Smokeball) that handles client trust ledgers. The practice management system integrates with QuickBooks (or similar) for the firm's overall accounting.
The integration matters. Trust transactions tracked in practice management software need to reconcile to the trust account in QuickBooks. Many firms have the practice management software running cleanly but never reconciled to accounting — which means audits find discrepancies that no one knew existed.
Common trust accounting violations
Commingling
Firm money in the trust account or trust money in the operating account. Even an accidental commingling — like the bank deducting a monthly service fee from the trust account — needs immediate correction and documentation.
Withdrawing fees before they're earned
Pulling money from trust to operating before the work justifying the fee has actually been performed. Even with a signed retainer agreement, the fee transfer should happen as services are rendered, not upfront.
Using one client's money for another
If Client A has $10,000 in trust and Client B has $5,000, and you pay $7,000 to a third party for Client B, you've used Client A's money. The total may balance, but the individual ledger now shows Client B at negative $2,000 — which is a violation.
Failing to reconcile monthly
The single biggest predictor of audit findings. Months without reconciliation means months of potential undetected errors compounding.
Not maintaining individual client ledgers
"I know what's in the account total" isn't enough. The Bar wants to see per-client records.
Letting trust money sit indefinitely after the matter closes
Once a matter is fully resolved, residual trust funds need to be returned to the client. Money that lingers in trust for years can become an escheatment problem (unclaimed property turned over to the state).
What Bar audits look for
Trust account audits (random and triggered) typically request:
- Bank statements for the trust account for the audit period
- Monthly three-way reconciliations
- Trust ledger and individual client ledgers
- Source documents — deposit slips, retainer agreements, disbursement authorizations
- Records of any matter where there were unusual events (large deposits, refunds, court-ordered distributions)
Organized, current documents make audits routine. Disorganized or missing documents turn audits into investigations.
Operating account bookkeeping for law firms
Beyond the trust account, the firm's operating bookkeeping has its own characteristics:
Revenue recognition
Most law firms operate on cash basis for tax purposes (with some restrictions for larger firms). Revenue is recognized when received, not when billed. But practice management software tracks WIP (work in progress) and unbilled time, which doesn't hit the books as revenue until invoiced and collected.
Cost advances
When the firm advances costs (court filing fees, expert witness fees, court reporter fees) on a client's behalf, the treatment depends on the firm's policy:
- Treat as an asset (expected to be recovered)
- Treat as an expense (deducted now, with reimbursement as offsetting income later)
Either is acceptable; consistency matters.
Contingency fee revenue
For contingency-based firms, revenue is lumpy — large fees recognized when settlements come in, with months of work before that. Cash flow management is critical.
Partner draws and distributions
For partnerships and PLLCs taxed as partnerships, partner compensation flows through guaranteed payments and distributions. The bookkeeping needs to track each partner's capital account.
Common operating bookkeeping mistakes
1. Mixing trust and operating in the same accounting system without clear separation
Sub-account separation isn't enough — the trust account needs to be visibly distinct in the chart of accounts and on reports.
2. Not tracking cost advances correctly
Cost advances that the firm pays and later recovers shouldn't be revenue when recovered — they're return of an asset (or offset to the original expense, depending on treatment).
3. Treating retainers as immediate revenue
Retainers held in trust aren't revenue until earned. Treating them as revenue when deposited creates both bookkeeping and ethical problems.
4. Year-end without partner allocations
Multi-partner firms need partner-level allocations at year-end for tax purposes. Skipping these creates problems with the K-1 process.
Frequently asked questions
Only if they hold client funds. A solo practitioner who only takes paid-in-arrears fees and never holds client money may not need one. But most firms do at some point — retainers, court costs, settlements. If you'll hold client money at any time, set it up before you need it.
Yes — bookkeeping mechanics can be delegated. But the attorney remains professionally responsible for compliance. The attorney's signature should appear on the monthly reconciliation, indicating they've reviewed and approved it.
IOLTA refers to a specific type of trust account where interest goes to the state bar foundation for legal services to the indigent. Non-IOLTA trust accounts (less common) can be used for specific situations where interest belongs to a particular client. For routine small deposits held briefly, IOLTA is standard.
This is a known headache. The deposit appears in trust, the firm draws against it (perhaps disbursing to another party), then the check returns NSF. The firm has now effectively used another client's money. Resolution requires immediate replenishment from firm funds. Many firms have policies against drawing on uncollected funds for this reason.
How we help
SoFlo360 supports Florida law firms with monthly bookkeeping for both operating and trust accounts, three-way reconciliation, and integration between practice management software and QuickBooks. We don't provide legal ethics advice — for that you need ethics counsel — but we can keep the books in the shape that makes compliance reviews straightforward. Spanish-friendly support available.