I'm an office manager at a law firm and this year we have started to receive settlements when a percentage belongs to the firm and the balance goes to the client. I am having issues allocating the funds. For example, let's say we receive a settlement in the amount of $100,000 for "ABC client" and the funds have been deposited into a bank account which we set up called "ABC Bank Account". The split for this client would be (65/35). How do enter receiving the initial settlement payment? Then when I wire the client's percentage how do I record the payment. Finally, when I move our portion from "ABC Bank Account" to "Operating Account" how do I record our portion to show it as income?
Sorry I know it's a lot.
You deposited the settlement in the ABC escrow account
1. do a transfer for the full amount from the ABC fund account to the operating account
2. write the client the check on the operating account
line one: the ABC expense account for the full amount
line two: your income account for the amount of your income as a negative number
You usually don't have one bank account per client. You have a Trust Bank. Everything that goes in and out of Trust Bank is only related to Liability for that client name. That is how you can audit that Trust Bank = Liability balance by names.
You get a settlement check or a retainer, so you set up a Service item for Settlement and one for Retainers. They link to one Client Liability account. You use that charge item on a Sales Receipt for the client name when you get the funds and deposit to Trust Bank.
Now you are ready to Charge them for fees, advanced costs, etc, and that is an Invoice for the client.
You use Check from Trust bank and you enter the details for the clients having trust banking Outflow, using the same Liability item that put the funds into Liability and Trust. That payee is your Operations Account. The Amount(s) are what they owe you. That means one Trust Bank Check is all you need, for the monthly charges, with split details and Tracked for that name:
Retainer $500 Jones
Retainer $1,000 Smith
Settlement $5,000 Johnson
= $6,500 going from Trust bank to Operating account to reflect the firm has been Paid. You process each Split as a Receive Payment.
To pay out the Client share, you list them as payee check on the Trust check, you enter the same Charge item to show it is paying out that liability. Example
Payee = Johnson
Check detail is the Settlement item for the rest of their funds and track it as Johnson.
You set up and save some custom reports, one for the Liability account as All Activities and one titled on and filtered for Cleared Status = No and titled Current Balances. Total by Name. Manage the Liability account, when you see a name is 0 balance, by reconciling always and only to an ending balance of 0, to mark as cleared that client's activities. This is why there are two versions of your report. This is how you avoid over- or under-crediting the client their funds.
You manage the Trust Bank using the bank statements. But you should always be able to show trust bank = liability by name.
I have not figure out how to add more than just one attachment, so I included only the example where someone used a Credit Memo in error, throwing that client's balance for liability out of balance.
I value your feedback. Still not clear on how to move settlement funds to client and/or others. Can you attach the sample please?
"Still not clear on how to move settlement funds to client and/or others."
The settlement is Deposited to Trust Bank and that Sales Receipt is where you list the Liability item.
To Pay out to Others, and the Client, you Write Checks on the Trust Bank. On the items tab, you list Only the Liability item with the client name on that detail line. This way, the Trust Bank and Liability balance match. Every activity in and out of Trust Bank is supposed to Only change Liability.
You Invoice for your fee. Write a check from Trust Bank payable to the Firm. On it, you still Only List the Liability item for that Client name. Now process that detail as if that is Receive Payment. Apply it to the invoice for your own Fees and Costs.