2. Required Records
The two most fundamental accounting records that are needed for each and every transaction on a trust bank account are the book(s) of original entry and the individual client trust ledgers for each client matter [Rule 5-43(1)]. These records may be referred to by other names if you use an electronic accounting software.
You will use the book(s) of original entry to record each trust transaction and the individual client trust ledgers to record each trust transaction related to that client matter. They are key records.
a) Book(s) of Original Entry
A book of original entry is defined in Rule 5-41 as a book or books used to capture each and every financial transaction that takes place in the law firm for all client matters, in chronological order and in full detail. The term “book of original entry” is not a commonly used term in accounting, and this record is commonly referred to as the journal in accounting language as well as in some accounting software for law firms.
The plural, ‘books’ of original entry means it is possible that a member may use a number of books together as the permanent records.
The number of books of original entry you use is up to you.
According to Rule 5-43(6), if your book of original entry is in hard copy then each entry must be recorded in ink.
All entries are recorded in the book of original entry at the time the transaction is done – no backdating allowed. No erasures, deletions or corrections are permitted to be made on an existing entry. So, to correct an error (such as cancelling a trust cheque) do not change the original entry. Instead, make a new entry using the current date, in a negative dollar amount. The new “reversing” entry cancels the original entry.
Every time you have a transaction, you must record it right away, as Rule 5-43(7) requires the trust records to be current at all times.
Examples of entries that will be recorded in a book of original entry include a receipt from a client, a trust cheque you are writing to another lawyer, or a transfer you need to make between client matters.
Rule 5-41 requires you to record the “form in which the trust money is received” in your book of original entry. If someone gives you money, you ‘receive’ it. Examples of the form of money you may receive include cash, cheque, bank draft, wire transfer or an interac e-transfer. This is the ‘form’ of receipt, and you must record the form of receipt in your book of original entry for each and every receipt of trust money.
You can find a sample of a book of original entry completed for sample fact scenarios here.
b) Client Trust Ledgers
Keeping track of the trust money specific to the client matter.
A book of original entry will track everything that happens in the pooled trust account for all clients together. However, you still need to track the transaction for each client matter separately from all other matters, even if the matter is for the same client [Rule 5-43(1)].
For this, you use client trust ledgers.
In the client trust ledger (as well as in the book of original entry), you must record the full details of a transaction as it happens, keep the transactions in chronological order, and ink must be used if entries are hand written [Rules 5-41, 5-43(6) and (7)].
You may not make erasures for corrections or adjustments.
In addition to tracking every transaction, the client trust ledger must also show the running balance of the client’s share of the pooled trust account after each transaction is recorded [Rule 5-41].
Under Law Society Rule 5-44(1)(g), you are not allowed to overdraw a client’s trust ledger because you cannot use money from the pooled trust account that belongs to other clients to make up one client’s shortfall. You must always check the client trust ledger before disbursing any money on behalf of the client to be sure that there is enough money in that client ledger to cover the payment you want to make.
You can find sample fact scenarios with a number of completed client trust ledgers here.
c) Transferring Funds Between Client Ledgers
One of the unique accounting needs in a law firm relates to making transfers between client trust ledgers. Sometimes, money needs to be transferred from one client trust ledger to another client trust ledger.
Transfers are generally not a daily occurrence, especially in a new practice.
From a bookkeeping perspective, the transfers must be recorded in both the book of original entry, as well as the affected client trust ledgers [Rule 5-41]. Remember that full details must be recorded.
Transfers can be between two different matters for the same client, or two different clients. Although the bookkeeping effect is the same, the requirements that precede the transfer differ, as set out below.
i. Transfers between two different matters for the same client
No money held in one client trust ledger may be transferred to another client trust ledger to pay a statement of account without the client’s prior informed consent in writing or verbal consent confirmed in writing.
ii. Transfers between two different clients
For transfers between one client’s client trust ledger and a different client’s client trust ledger, you must have prior authorization of the client and it must be in writing or confirmed in writing.
d) Duplicate Receipt Book
Many members use a duplicate receipt book whenever money is received from a client. A duplicate receipt book allows a copy to be given to the client for their records, and a copy to remain in the duplicate receipt book for the member’s accounting purposes.
If a client pays with a cheque or bank draft, you have the option of using a receipt book or not, as it is not required by the rules for non-cash receipts. It is a good business practice to give a receipt for a cheque too; it helps you keep track of all trust money. Based on the unique nature of bank drafts discussed earlier, it is also a good practice to receipt bank drafts.
e) Receipts for Cash
However, if a client provides you with cash, a duplicate receipt book must be used. Each receipt must identify or contain the following regarding the cash that is received [Rule 5-45(2)]:
i. the date;
ii. the payor name;
iii. the amount;
iv. the client name;
v. the file number;
vi. two signatures – one from the person receiving the money on behalf of the firm AND one from the person providing the money.
It is also important to note that both the payor AND the client name are required. While this is often the same person, law firm staff must be alert to also document the name of the payor in circumstances where it is different than the client.
f) Supporting Documentation
When you opened your pooled trust account, you would have made arrangements with your savings institution to get a statement every month with a full record of all activity on the pooled trust account. This includes cheque images of the front and back of each pooled trust cheque that the bank processes for payment. These are essential records for the trust account that must be obtained or received from your savings institution at least monthly.
In addition to the book of original entry, client trust ledgers, and monthly reconciliations, you must maintain supporting documentation for all pooled, restricted and specific investment trust accounts, as well as the general account [Rules 5-43(1) and 5-48(1)].
Such supporting documentation includes, but is not limited to, deposit slips, bank statements/passbooks, receipt books, statements of account issued by the firm, third party invoices/receipts and negotiated/cleared cheques (either as originals or cheque images).