Bookkeeping for Law Firms in Montana: Trust Accounts and Clean Books

A typical service business mainly tracks money belonging to the company. A law firm may also hold settlement proceeds, retainers, filing funds, or other amounts that still belong to a client or third party. Those funds generally should not appear as ordinary operating revenue simply because they reached the firm’s bank account.

This creates two related but different accounting responsibilities. The firm needs regular business books for fees, payroll, rent, technology, insurance, owner compensation, and taxes. It may also need detailed trust accounting records showing how much money is being held for every individual client or matter.

Mistakes can have consequences beyond an inaccurate profit and loss statement. Commingling funds, transferring a retainer too early, or failing to identify a trust shortage can create ethical and regulatory concerns. Montana attorneys should confirm the rules that apply to them with the State Bar of Montana and appropriate legal counsel. A bookkeeper can maintain records, but the attorney remains responsible for compliance and oversight.

The first practical rule is separation. Client money should be kept in the appropriate trust account rather than mixed into the firm’s operating account. The operating account is for money that belongs to the law firm, including earned fees and reimbursements that the firm is entitled to receive. The proper treatment of a particular payment depends on the engagement agreement, the nature of the funds, and applicable professional rules.

Your accounting software should reflect the same separation. Trust deposits generally should not immediately increase fee income. A common accounting approach records the cash in a trust bank account with an offsetting client trust liability. When the fee is earned and properly transferred, the bookkeeping records both the movement of cash and the recognition of revenue.

The firm also needs a reliable process for electronic payments. If a processor deposits funds net of fees, withdraws charges from the wrong account, or allows a chargeback against client money, the trust records may stop matching the bank. Before accepting retainers or other client funds electronically, confirm how processing fees and chargebacks will be handled and whether the provider supports legal trust accounting.

A trust bank balance by itself does not tell you which client owns the money. The firm needs a separate ledger for each client or matter. That ledger should show deposits, payments, earned-fee transfers, refunds, and the remaining amount held. No client ledger should be allowed to fall below zero, because that can indicate that another client’s funds were used to cover the shortage.

Law firms commonly use a three-way reconciliation to compare the trust bank records, the overall trust liability in the accounting system, and the total of all individual client ledgers. These amounts should agree after properly accounting for outstanding checks, deposits in transit, and other timing differences. A standard bank reconciliation that only compares the check register with the statement is not enough.

Complete this process regularly, usually as part of the monthly close, and investigate differences promptly. Old outstanding checks, duplicate transactions, deposits assigned to the wrong matter, and transfers recorded on only one side are common causes of discrepancies. Keep the reconciliation, bank statement, client ledger report, and documentation for corrections together so there is a clear review trail.

Fee income should be recognized according to the firm’s accounting method and when the firm is entitled to the money. If funds are transferred from trust after work is performed, the invoice, time records, transfer approval, and bookkeeping entry should support one another. Moving cash without recording the corresponding revenue can understate income, while recording the initial trust deposit as revenue can overstate it.

Case-related costs also need consistent treatment. Court filing fees, expert witnesses, travel, medical records, and similar expenses may be paid directly by the client, advanced by the firm, or deducted from a later recovery. The correct accounting and tax treatment can vary based on the arrangement and the firm’s accounting method. Do not automatically categorize every case cost as an ordinary office expense.

Set up separate accounts for client cost advances, reimbursed expenses, and nonreimbursable firm expenses. Matter-level tracking can also show how much cash is tied up in open cases. For contingency practices, this information is important for cash flow planning because the firm may spend money well before it receives a fee. Your tax professional should review the treatment of advanced costs for your specific practice.

Law firms often pay a mix of employees, owners, co-counsel, contract attorneys, investigators, and other professionals. These payments should not all be placed in one broad labor category. Employee wages run through payroll, owner draws or distributions are generally equity transactions rather than business expenses, and contractor payments may create information-reporting responsibilities.

Worker classification deserves particular attention. Calling someone an independent contractor does not make it so. The actual working relationship, control over the work, financial arrangement, and other facts matter under federal and state standards. Misclassification can lead to payroll tax, unemployment, wage, and benefit issues, so uncertain arrangements should be reviewed before payments begin.

Entity structure also affects owner compensation. For example, an owner working in an S corporation generally cannot treat every withdrawal as a distribution while ignoring payroll responsibilities. Partnerships and sole proprietorships follow different compensation rules. Maintain separate accounts for wages, payroll taxes, owner distributions, guaranteed payments when applicable, and reimbursed business expenses so the tax return can be prepared from understandable records.

A strong monthly process should include reconciling every bank and credit card account, completing the trust reconciliation, reviewing client ledger balances, entering loan activity, checking unpaid bills, and examining accounts receivable. The firm should also review uncategorized transactions and confirm that owner or personal spending has not been buried in business expenses.

Useful reports go beyond total revenue. Firm owners may want to monitor collected fees by practice area, payroll as a percentage of revenue, overhead, work in progress, outstanding invoices, client cost advances, and operating cash. Reports are only meaningful when transactions are recorded consistently, so it is better to use a manageable chart of accounts than an overly detailed system no one maintains.

If you are hiring bookkeeping help in Billings or elsewhere in Montana, ask whether the provider understands trust liabilities, individual client ledgers, three-way reconciliations, owner compensation, and tax-ready reporting. Marlow Accounting offers bookkeeping starting at $300 per month, with the actual scope depending on transaction volume and complexity. Cory Marlow is an IRS Enrolled Agent, federally licensed by the U.S. Treasury, and can help connect the firm’s bookkeeping with federal tax preparation and planning.

This article is general information and is not tax, legal, or accounting advice for your specific situation. Trust accounting requirements and the treatment of retainers, client costs, owner compensation, and workers depend on the facts, governing professional rules, and your firm’s tax structure.

Confirm your trust accounting responsibilities with the State Bar of Montana and qualified legal counsel. For help building tax-ready books or cleaning up your law firm’s accounting records, call Marlow Accounting at (406) 290-1214 or schedule a free consult with Marlow Accounting.