To exercise attorney competence in the management of client trust accounting, a basic understanding of the double entry accounting system is helpful. In a double entry accounting system, every transaction is entered into the company’s books twice: once as a credit in one account, and once as a debit in another account. If the debits and credits are entered correctly, they will equal one another, or balance out, at the end of each accounting period; if the debits and credits do not balance out, then there is an error somewhere in the accounting.
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Before we continue, I want to emphasize one very important point to keep in mind: A credit is not always an increase in an account, and a debit is not always a decrease; instead, forget everything you know about debiting and crediting your bank accounts, or invoices, or anything else. For purposes of this discussion, think of debits and credits as nothing more than Column 1 and Column 2. For every entry in Column 1, there must be a matching entry in Column 2, and that’s all that debits and credits refer to.
For client trust accounting, two accounts are typically involved: (1) the client trust bank account; and (2) a liability account, usually called Client Trust Liability (or something similar). When a client deposits funds into a trust account, the bookkeeper makes two entries: one to the Trust Bank Account, and one to the Client Trust Liability account. When you make a deposit into your Trust Account, your accounting software will ask you what other account you want to adjust. For example, let’s assume a client makes a $10,000.00 advance fee deposit. The bookkeeper will record the transaction as follows:
| Account | Column 1 (Debit) | Column 2 (Credit) | Explanation |
| Trust Bank Account | $10,000.00 | Client 1’s Initial Trust Deposit | |
| Client Trust Liability | $10,000.00 |
This will tell your bookkeeper (and the bar association![1]) that your Trust Bank Account now has $10,000.00 of client funds in it, and that you have a liability to that client in the same amount, with the liability shown in the Client Trust Liability account.
As you can see in the example above, so long as the accounting entries are made correctly, Column 1 (Debit) always equals Column 2 (Credit). To further illustrate this concept, let’s add another trust deposit in the amount of $5,000.00:
| Account | Column 1 (Debit) | Column 2 (Credit) | Explanation |
| Trust Bank Account | $10,000.00 | Client 1’s Initial Trust Deposit | |
| Client Trust Liability | $10,000.00 | ||
| Trust Bank Account | $5,000.00 | Client 2’s Initial Trust Deposit | |
| Client Trust Liability | $5,000.00 |
Just as before, the total in Column 1 (Debit) is $15,000.00, and the total in Column 2 (Credit) is $15,000.00, and the two columns balance one another.
Now, let’s assume the $5,000.00 from Client 2 is withdrawn to apply to an invoice. First, the bookkeeper will withdraw the funds from the bank account by entering the following transactions:
| Account | Column 1 (Debit) | Column 2 (Credit) | Explanation |
| Trust Bank Account | $10,000.00 | Client 1’s Initial Trust Deposit | |
| Client Trust Liability | $10,000.00 | ||
| Trust Bank Account | $5,000.00 | Client 2’s Initial Trust Deposit | |
| Client Trust Liability | $5,000.00 | ||
| Trust Bank Account | $5,000.00 | Withdrawal of Client 2 Funds From Trust | |
| Client Trust Liability | $5,000.00 |
Again, the total in each column balances. Now, the bookkeeper must apply the funds to the invoice. Assuming the funds are deposited into the firm’s operating bank account, the bookkeeper enters the following transactions:
| Account | Column 1 (Debit) | Column 2 (Credit) | Explanation |
| Trust Bank Account | $10,000.00 | Client 1’s Initial Trust Deposit | |
| Client Trust Liability | $10,000.00 | ||
| Trust Bank Account | $5,000.00 | Client 2’s Initial Trust Deposit | |
| Client Trust Liability | $5,000.00 | ||
| Trust Bank Account | $5,000.00 | Withdrawal of Client 2 Funds | |
| Client Trust Liability | $5,000.00 | ||
| Firm Operating Bank Acct | $5,000.00 | Application of Client 2 Funds to Pay Invoice | |
| Income | $5,000.00 |
Although it’s beginning to get slightly more complex at this point, with different accounts involved, it’s easy to see
that the debits and credits still balance. This is proper double entry accounting.
[1] Many states require that banks report negative client trust account balances to the state bar.
Awesome!