If your law firm maintains an IOLTA account, there are three numbers I want you to look at regularly.
Not just one.
Three.
- Your IOLTA bank balance
- Your IOLTA liability balance in your accounting records
- The total of your individual client trust balances
Ideally, those three numbers should agree.
It sounds simple, but this comparison is one of the most important habits you can build into your law firm’s trust accounting process.
As a bookkeeper, I know how easy it is to look at the bank balance and think everything is fine.
There’s money in the IOLTA account.
The bank reconciles.
Nothing looks obviously wrong.
But with trust accounting, that’s not enough.
The question isn’t simply, “How much money is in the bank?”
The bigger question is:
That’s why I want law firm owners to understand these three numbers and how they work together.
Number 1: Your IOLTA Bank Balance
Let’s start with the most obvious number.
Your IOLTA bank balance represents the actual money sitting in the trust account.
Suppose your bank statement shows:
IOLTA bank balance: $42,500
At first glance, that may seem like all the information you need.
There is $42,500 in the account.
But remember something very important about an IOLTA account:
That $42,500 is generally not your law firm’s money.
The account may be under the firm’s control, but the funds are being held in trust.
That means simply knowing the bank balance doesn’t tell you enough.
You still need to know why $42,500 is there.
Which clients does it belong to?
How much belongs to each client?
Have any funds been earned and should they have been transferred out?
Were any payments made from the account?
Were they applied to the correct client?
Did any bank fees or other transactions affect the account?
The bank statement tells you what happened at the bank.
It doesn’t necessarily tell you whether those transactions were recorded correctly in your bookkeeping.
That’s why we need the second number.
Number 2: Your IOLTA Liability Balance
When client funds are being held in trust, the corresponding amount is generally represented in the accounting records as a liability.
Why a liability?
Because the firm is holding money that belongs to someone else.
Let’s use our example again.
Your IOLTA bank account shows:
$42,500
Your books should also reflect the firm’s obligation related to those trust funds.
Suppose your accounting records show:
IOLTA trust liability: $42,500
Good.
Now we have two numbers that agree.
But let’s say instead your books show:
IOLTA bank balance: $42,500
IOLTA liability balance: $39,800
Now we have a $2,700 difference.
That difference deserves attention.
It doesn’t automatically tell us exactly what went wrong. But it tells us that something needs to be investigated.
Maybe a transaction was categorized incorrectly.
Maybe earned funds were transferred to the operating account but the liability wasn’t reduced properly.
Maybe a client deposit was recorded in the bank account but wasn’t recorded correctly against the trust liability.
Maybe something was duplicated.
Maybe an old transaction was changed.
The point is that the bank balance and the trust liability should tell a consistent story.
The bank account tells us how much money is physically being held.
The liability tells us how much the books say the firm is obligated to hold.
But we’re still missing one important question.
Who does the money belong to?
That’s where the third number comes in.
Number 3: The Total of Your Individual Client Trust Balances
This is the number I especially want law firm owners to pay attention to.
You should be able to identify the individual clients whose money makes up the total trust balance.
Let’s say your records show:
- Client A: $12,000
- Client B: $8,500
- Client C: $15,000
- Client D: $7,000
Total:
$42,500
Now compare all three numbers:
- IOLTA bank balance: $42,500
- IOLTA liability balance: $42,500
- Total individual client trust balances: $42,500
That’s what we’re looking for.
The money in the bank agrees with the trust liability, and the individual client records explain exactly who that $42,500 belongs to.
This is often referred to as a three way reconciliation.
And this is where trust accounting goes beyond an ordinary bank reconciliation.
Why a Regular Bank Reconciliation Isn’t Enough
A standard bank reconciliation is extremely important.
You should absolutely reconcile the IOLTA bank account.
But a bank reconciliation generally answers a specific question:
Does the activity recorded in the accounting system reconcile to the bank statement?
That’s important, but trust accounting requires another layer.
You also need to verify that the total amount being held agrees with the individual client balances.
Here’s a simple example.
Imagine your bank account reconciles perfectly to $50,000.
Your trust liability also shows $50,000.
Great.
But then you add up the individual client trust balances and get:
$47,500.
Now you have a $2,500 problem.
The bank may be reconciled.
Your general ledger may appear correct.
But you still cannot fully explain who owns all the money.
That’s why I would never stop at, “The bank account reconciles.”
With an IOLTA account, I want all three numbers.
What If the Three Numbers Don’t Match?
Don’t simply create an adjustment to force them to match.
That’s one of the most important things I can tell you.
A difference is information.
It is telling you that something happened.
Your job is to find out what.
Start by determining when the numbers stopped agreeing.
If they matched at the end of January but didn’t match at the end of February, that’s useful information.
Now you have a much smaller period to investigate.
Look at the transactions during February.
Were new client funds deposited?
Were funds transferred to the operating account?
Were client expenses paid from trust?
Were refunds issued?
Was a transaction entered under the wrong client?
Was something recorded twice?
Was something deleted?
Was a deposit entered for the wrong amount?
Was there a bank fee or other unexpected transaction?
Don’t assume the difference is just a QuickBooks problem.
QuickBooks is recording what it was told to record.
You need to determine what actually happened.
Watch for Negative Client Trust Balances
When reviewing individual client trust balances, don’t just look at the total.
Look at the individual clients too.
Suppose your total client trust balance agrees perfectly with the IOLTA bank account.
That sounds great.
But imagine the detail looks like this:
- Client A: $10,000
- Client B: $7,000
- Client C: negative $2,000
- Client D: $5,000
Total: $20,000
And your IOLTA bank balance is also $20,000.
The totals agree.
But Client C has a negative balance.
That’s something that needs immediate attention.
A total can hide problems inside the detail.
This is why trust accounting isn’t simply about making one big number match another big number.
You need to understand the client level activity behind the total.
Be Careful When Moving Earned Fees to Operating
Another area that deserves careful attention is the transfer of earned fees from IOLTA to the firm’s operating account.
Suppose you’re holding $5,000 for a client.
The firm earns $1,500 and is entitled to transfer those funds according to the applicable agreement and trust accounting requirements.
After the transfer, the client’s trust balance should reflect the remaining amount.
If the client had $5,000 and $1,500 was properly transferred, the remaining trust balance would be $3,500.
Your accounting records need to reflect both sides of what happened.
The actual money left the IOLTA account.
And the amount you are holding for that client decreased.
If one side is recorded but the other isn’t, your three numbers may stop matching.
This is why having a consistent process for trust transactions matters so much.
Don’t Treat IOLTA Like Your Operating Account
Your operating account and your IOLTA account serve very different purposes.
The operating account contains the firm’s money.
Your IOLTA account contains funds the firm is holding in trust.
That distinction should be reflected in your bookkeeping.
Trust deposits shouldn’t simply be recorded as ordinary revenue when they enter the IOLTA account.
Similarly, moving money between IOLTA and operating shouldn’t automatically be treated as a random transfer without considering what the transaction represents.
You need to know which client the transaction relates to and why the money moved.
Good IOLTA bookkeeping should allow you to follow the money.
Where did it come from?
Which client did it belong to?
Why was it held?
When did it leave?
Where did it go?
And what is the remaining client balance?
Make This a Monthly Habit
If you own a law firm, I would make this comparison part of your regular bookkeeping routine.
Every month, look at:
- 1. The reconciled IOLTA bank balance
- 2. The IOLTA liability balance
- 3. The total of all individual client trust balances
Then ask:
Do all three agree?
If the answer is yes, great.
If the answer is no, investigate the difference before moving forward.
The longer an IOLTA discrepancy sits unresolved, the harder it can become to determine what caused it.
A transaction from two weeks ago is much easier to investigate than something that happened fourteen months ago.
This is one reason consistent monthly bookkeeping is so valuable.
You’re not just keeping QuickBooks organized.
You’re creating a financial trail that can be followed and verified.
Your Bookkeeping Should Be Able to Answer “Whose Money Is This?”
I think this is one of the simplest ways to understand good IOLTA bookkeeping.
If I point to the balance in your IOLTA account and ask:
“Whose money is this?”
Your records should be able to answer.
Not approximately.
Not, “I think most of it belongs to these clients.”
Your client trust records should explain the balance.
If your IOLTA account contains $63,742.18, the individual client balances should tell you who makes up that $63,742.18.
And those individual balances should agree with the trust liability recorded in your books.
And that liability should agree with the reconciled bank balance.
That’s the connection between the three numbers.
QuickBooks Can Help, But the Setup Matters
QuickBooks Online can be used as part of a law firm’s bookkeeping system, but the way the accounts and workflows are set up matters.
If trust deposits are being recorded incorrectly from the beginning, your reports may not give you the information you need.
If client funds aren’t being tracked consistently, you may have trouble determining individual balances.
If transfers between IOLTA and operating aren’t recorded correctly, the bank balance and liability can get out of sync.
And if the account isn’t reconciled regularly, small errors can accumulate.
Software doesn’t replace a good trust accounting process.
It supports one.
That’s why I encourage law firm owners to understand the basic logic behind their IOLTA bookkeeping even if someone else handles the day to day bookkeeping.
You don’t have to personally enter every transaction.
But you should understand what the numbers are telling you.
Three Numbers. One Story.
At the end of the month, your IOLTA records should tell one consistent story.
The bank says how much money is there.
The liability says how much money the firm is holding for others.
The individual client balances explain exactly who that money belongs to.
Those three numbers work together.
If one of them doesn’t agree with the others, don’t ignore it.
Find out why.
Because when it comes to an IOLTA account, accurate bookkeeping isn’t just about having clean financial reports.
It’s about being able to account for the funds your clients have entrusted to your firm.
Need Help With IOLTA Bookkeeping in QuickBooks?
If your law firm’s IOLTA account doesn’t reconcile, your trust liability doesn’t match the bank balance, or you’re having trouble tracking individual client balances, it may be time to take a closer look at the bookkeeping.
At CityScape Bookkeeping, I help small law firms with QuickBooks Online bookkeeping, IOLTA bookkeeping, account reconciliation, bookkeeping cleanup, and ongoing monthly bookkeeping support.
The goal is not simply to make QuickBooks look organized.
It’s to create a bookkeeping system where the numbers make sense and you can understand what they represent.
For your IOLTA account, start with these three:
Your bank balance. Your trust liability. Your individual client trust balances.
Then make sure they’re telling you the same story.