This guide explains the best practices for managing trust and operating accounts. It is designed to help legal professionals keep their financial records accurate, stay in compliance with legal accounting rules, and avoid common mistakes that can lead to issues with state bar audits or client trust violations.
Managing your trust and operating accounts correctly is important because these two types of funds are used for different things. Trust accounts hold client money that doesn’t belong to your firm. Operating accounts are used for the money your firm earns and spends. Keeping these separate and recorded properly ensures your firm stays in good standing.
By following these best practices, you'll create clear records that are easy to understand, pass audits with confidence, and spend less time worrying about accounting.
Best Practices for Trust Accounting:
Trust accounting is a critical responsibility for any law firm that handles client funds. Mishandling trust funds can lead to serious ethical and legal consequences, so it’s important to keep this process clean, clear, and compliant.
Never mix trust and operating funds.
Keep client trust funds in a separate, designated trust bank account. These funds do not belong to the firm until they are earned, and should never be used for firm expenses.
Always keep client money in the trust account until it’s earned.
Only transfer funds to the operating account after the work has been completed, invoiced, and the client has received the bill.
Record trust transactions promptly.
Enter all deposit and withdrawal payments in PracticePanther as soon as they occur.
Track trust funds by the correct client and matter.
Make sure every dollar in the trust account is linked to a client and matter.
Reconcile the trust account every month.
Use the built-in, three-way reconciliation tool in PantherAccounting Plus to match your bank statement, trust ledger balance and individual client and matter trust balances.
Never let the trust balance drop below the client’s balance.
Don’t pay out more than the client has in trust. If you do, it can cause compliance issues.
Best Practices for Operating Accounting:
Your firm’s operating account is used to manage everyday business expenses and revenue. While not subject to the same regulatory scrutiny as trust funds, it's just as important to manage this account accurately.
Deposit earned fees only into the operating account.
Only transfer funds to the operating account after the work has been completed, invoiced, and the client has received the bill.
Record all firm expenses clearly.
Use firm payments from your operating account in PracticePanther to track office rent, salaries, or other business costs.
Track and manage credit card transactions.
Set up your credit cards as accounts in PracticePanther to track charges and payments made against your firm credit cards.
Use categories for income and expenses.
Assign each transaction to the appropriate category (e.g. rent, software) to help you track where your money is coming from and where it’s going.
Keep personal and business money separate.
Don’t mix your personal funds with firm funds in the operating account.
Reconcile operating accounts regularly
Similar to your trust account, your operating accounts should be reconciled each month against your bank statement to ensure accurate recording and accounting of all transactions.