Trust Accounting 101 for Law Firms
Sam's List Editorial | 2026-06-27
Trust Accounting 101 for Law Firms A trust account is where a law firm holds money that belongs to clients, retainers, settlement funds, and similar, separately from the firm's own operating money, until it is earned or disbursed. Handling it correctly is not optional; trust accounting errors are among the fastest ways to draw a bar complaint. Here is a plain-language introduction to what a trust account is, the core rules, and why reconciliation matters so much. Rules vary by state bar, so this is an overview, not a substitute for your jurisdiction's specific requirements. But the principles are consistent enough to give any new or solo attorney a solid foundation. What a Trust Account Is When a client gives you money before you have earned it, an advance fee or retainer, or money that belongs to them, like settlement proceeds, that money is not yours yet. It belongs to the client and must be held in a separate trust account, often an IOLTA (Interest on Lawyers' Trust Accounts) account, depending on your jurisdiction and the funds involved. The defining idea is simple: client money and firm money never mix. The trust account exists to keep that line absolute. The Core Rules A few principles sit at the heart of trust accounting: No commingling. Client trust funds must never be mixed with the firm's operating funds. This is the cardinal rule. Only withdraw what is earned. Money becomes the firm's only as it is earned or as costs are incurred, and moving it requires care and proper records. Track each client separately. You must always be able to show exactly how much of the trust account belongs to each client. Never go negative. An individual client's balance within the trust account must never drop below zero, which would mean you used another client's money. Violating any of these, even unintentionally, can become an ethics issue, which is why the rules are treated so seriously. Three-Way Reconciliation The central discipline of trust accounting is three-way reconciliation, performed regularly, typically monthly. It confirms that three figures all agree: The trust bank account balance The trust balance in your books The total of every individual client's ledger balance When all three match, your trust records are in order. When they do not, there is an error to find and fix immediately. Doing this monthly catches small discrepancies before they grow into the kind of shortfall that is hard to explain to a bar reviewer. Why It Matters So Much For most businesses, a bookkeeping error means inaccurate reports. For a law firm, a trust accounting error can...
