How to set up a law firm chart of accounts around the trust account
A small law firm's chart of accounts is a normal business chart plus one matched pair: a trust bank account and a Client trust funds liability that should always equal it. Add an asset for client costs advanced, revenue split by fee type and one capital and draws pair per partner. Each state bar sets its own trust rules, so read yours as well.
This is bookkeeping practice, not legal or ethics advice. The account numbers below are fictional.
Which accounts does a law firm need first?
Step 1: The bank accounts, named by purpose
One asset per real account, with the last four digits in the name: Operating checking 3307, IOLTA trust 8812. When a statement line reads "TRANSFER TO CHK 3307", nobody has to guess where the money went. A separate interest-bearing trust account for one large client deposit gets its own line as well.
Step 2: The trust liability
Create Client trust funds as a liability. Every dollar in the trust account belongs to a client, so the liability and the trust balance should match on every statement date. Deposits raise it. Disbursements and earned fees lower it. Firms with two trust accounts are better off with a liability for each.
Step 3: Client costs advanced
This is an asset. Filing fees, expert fees and records charges paid for a client sit here until the client repays. Booking them as expenses makes them appear twice on the profit and loss, once as a cost and again as income when the client pays.
How should revenue, expenses and equity look?
Step 4: Legal fees by fee type
Hourly, flat fee and contingency, or whatever matches how the firm bills. A fee becomes revenue when it is earned and moved out of trust, or when the client pays operating directly.
Step 5: The expenses a firm really has
- Malpractice insurance
- Bar dues and CLE
- Legal research and practice software
- Merchant fees, charged to operating and never to trust
- Rent, payroll and general overhead
Step 6: Equity per partner
A capital account and a draws account for each partner. A solo practice needs one of each.
| Account | Type | Moves when |
|---|---|---|
| Operating checking 3307 | Asset | Fees paid to operating, overhead paid |
| IOLTA trust 8812 | Asset | Client money in or out of trust |
| Client trust funds | Liability | Same amount as trust, every time |
| Client costs advanced | Asset | Firm pays a cost for a client; client repays |
| Legal fees › Contingency | Income | Earned fee moves from trust to operating |
| Partner draws | Equity | A partner takes money out |
Fictional account numbers. Trust and the trust liability should agree on every statement date.
Nothing on the trust statement should ever land in revenue directly. Earned fees move to operating first.
How do you test the chart before relying on it?
Step 7: Write two rules beside it
Every trust statement line goes to Client trust funds, except transfers to operating. And no trust line goes straight to revenue. Whoever codes transactions should read both rules first.
Step 8: Code one real month
Take last month's trust statement and code each line. Every deposit and check should land in Client trust funds, and each transfer to operating should pair with a line on the operating statement. A line with no obvious home means an account is missing.
What doesn't the chart hold?
Each client's individual balance. The chart holds the total owed to all clients. The client-by-client breakdown lives in trust accounting or practice management software, and at month end its total is compared with the liability and the statement.
Key takeaways
- Pair the trust bank account with a Client trust funds liability that always matches it.
- Costs paid for clients are an asset until repaid, not an expense.
- Split legal fees by how the firm bills, and keep merchant fees on operating.
- Code one real trust statement against the chart before trusting it.
FAQ
Does the chart of accounts replace client trust ledgers?
No. It carries the total owed to clients. Each client's balance is kept in trust accounting or practice management software.
Where does an earned fee go?
Transfer it from trust to operating, then record one entry that lowers Client trust funds and raises Legal fees.
Can bank fees come out of the trust account?
Many state bars treat a firm cost paid from trust as a problem. Restore it from operating and ask the bank to charge operating. Check your own bar's rules.
The full guide, with this chart and a worked month of an IOLTA account, is at ZeraBooks: bookkeeping for law firms.
Disclosure: I'm the founder of ZeraBooks. ZeraBooks bookkeeping services keep the operating account, the trust account and the trust liability, proven against each statement, from $150 a month in U.S. dollars after a free call. We don't keep client trust ledgers and there is no bank feed.
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