Client Trust (aka IOLTA) Accounting in QuickBooks – Make Separate Deposits, Trust Me On This

If you have a services business that bills by the hour, few things will complicate your life more than taking client deposits or retainers and holding them in a trust bank account, such as an IOLTA account. Your accounting must be precise, and it is an inherently complex situation. You must use a multi-step process to make deposits to your trust bank account, and a different multi-step process to make withdrawals so that you can pay yourself for your work.

QuickBooks is pretty good at handling all of this, but it is tricky. You must constantly be sure to code the debits and credits correctly at each step of the deposit, and at each step of the withdrawal. You must keep a checklist and refer to it often, like a pilot preparing for take off.

Let’s say you have just started a new services business that bills by the hour, and your business takes client deposits/retainers before beginning the work. Client A gave you a $1,000 retainer check, and Client B gave you a $600 retainer check, and Client C gave you a $500 retainer check. Assume you are holding in your hand these three checks, and you want to go to the bank and deposit them all.

Before you go to the bank, you have to make decisions on three aspects of your trust accounting. For each decision, there is an easy way, and a hard way. In a perfect world, you would pick the easy way for all three, but I have bad news. You can only pick two.

1. How do you want to make your deposits? Batch deposits (the easy way) or separate deposits (the hard way)?

The easiest thing is to do a batch deposit with all of the retainer checks given to you by clients (i.e. one deposit slip for $2,100 in our example above). If you do it this way, you can use the Undeposited Funds account in QB to allow you to make a single actual deposit into your trust bank account look as though it were several separate deposits into your trust bank account, so that you can code each such separate deposit with the name of the client from whom the funds were received. Coding the client’s name on each separate deposit allows you to run a Client Ledger Report to use in tracking the funds held in trust for each client.

However, using batch deposits will make reconciliations of the trust bank account bank statements a bit tricky because the trust bank account statement will show a deposit of $2,100 whereas QB will show three deposits into the trust bank account for $1,000, $600, and $500.

For the same reason, you will not be able to import your data electronically from your bank online. The imported data will show one deposit to the trust bank account for $2,100, whereas QB will show (one deposit to Undeposited Funds for $2,100 followed by) three separate deposits from Undeposited Funds into the trust bank account for $1,000, $600, and $500.

(Read this only if you still need convincing that importing your data electronically won’t work.) If you import the data electronically, you will just have to delete it and re-enter it manually using the Customers / Receive Payments box so that the funds are debited to Undeposited Funds so that when you open the Banking / Make Deposits box it will prompt you saying you have "Payments to Deposit" and then you can allocate that batch deposit as separate deposits into the trust bank account. This may sound complex. It is. And if you by chance had deleted your Undeposited Funds account when you set up QB, foolishly thinking that you would not need it, and then recreated a new account called Undeposited Funds, which QB failed to recognize as the real Undeposited Funds account, well, you are in a heap of trouble. In that case, here is how you restore the Undeposited Funds account in a manner that will be recognized by QB. Or better yet, just don’t use the Undeposited Funds account at all. You only need it if you need to split your deposits. Instead, just make separate deposits, as described below under "Bottom Line."

2. How do you want to bring the transactional data for your trust bank account into QB? Online import (the easy way) or manual entry (the hard way)?

The easiest thing is to import your transaction data from your bank via the internet. This will work fine if you are doing separate deposits, but it will not work if you are doing batch deposits, as discussed above.

3. How do you want to report/track your client by client numbers from QB? Client ledger report (the easy way) or separate sub-accounts (the hard way)?

The easiest thing to do is use a Client Ledger Report. This allows you to just have one trust bank account listed in QB’s Chart of Accounts, and all trust deposits from all clients go into that account. The alternative is to edit the Chart of Accounts in QB to add a sub-account for each client under the trust bank account. This creates an ever growing plethora of sub-accounts and junks up your Chart of Accounts. It also requires you manually to sort each deposit into the correct sub-account.

Having a bunch of sub-accounts also makes reconciling the bank statement for the trust bank account difficult. Instead of showing deposits into the trust bank account (which is where they actually went, and what the statement says), QB shows deposits into a plethora of accounts, one for each client.

Bottom line: My advice is to deposit each retainer check as a separate deposit. It may irritate your banker when you show up with twenty checks to deposit and insist that they each be deposited as a separate deposit with a separate deposit slip, but it’s worth it. Because making separate deposits allows you to choose "the easy way" on data input and client by client reporting.