Trust Accounting
Trust accounting is a specialized bookkeeping system for managing money held on behalf of others. Professionals like lawyers, real estate agents, and property managers often receive funds that don't belong to them — client retainers, earnest money, security deposits — and must keep these funds separ
Trust Accounting Definition
Trust accounting is a specialized bookkeeping system for managing money held on behalf of others. Professionals like lawyers, real estate agents, and property managers often receive funds that don't belong to them — client retainers, earnest money, security deposits — and must keep these funds separate from their own business accounts. Trust accounting ensures proper stewardship of these fiduciary responsibilities.
Trust Accounting in Practice — Example
A law firm receives a $10,000 retainer from a client for an upcoming case. This money goes into the firm's trust account (a separate bank account) and is recorded as a liability — they owe the client either legal services or a refund. As the attorney works, they transfer funds from trust to operating accounts based on time billed. When $3,000 in work is completed, $3,000 moves from the trust liability to earned revenue, and the remaining $7,000 stays in trust.
Why Trust Accounting Matters for Your Books
Trust accounting is a legal requirement for many licensed professionals. Commingling trust funds with business funds can result in disciplinary action, license suspension, or disbarment. Proper trust accounting protects both the professional and their clients.
The funds held in trust aren't your revenue until they're earned. Recording a client retainer as immediate income is both incorrect accounting and a violation of professional ethics. Trust accounting keeps these distinctions clear.
Trust funds also don't belong to your business for cash flow purposes. Even though they might sit in "your" account, they can't be used for business expenses. Proper tracking prevents the temptation to "borrow" from trust accounts during cash crunches.
How Trust Accounting Shows Up in QuickBooks
In QuickBooks Online, set up a separate trust account under Chart of Accounts (Bank → Trust Account). Create a corresponding "Trust Liability" account under Other Current Liabilities. When you receive trust funds, record a deposit to the trust bank account and a credit to the trust liability. As funds are earned, journal the amount from trust liability to revenue and transfer the cash from trust to operating accounts. Never record trust receipts directly as income.
Common Mistakes
FAQ
Q: Do all businesses need trust accounting? A: No — only businesses that hold money on behalf of others. This includes lawyers, real estate agents, property managers, investment advisors, and some contractors who collect deposits for future work.
Q: Can I use trust funds for business expenses temporarily? A: Absolutely not. Trust funds belong to clients and can only be used for their intended purposes. Using trust funds for business expenses, even temporarily, is misappropriation and can result in serious legal consequences.
Related Terms
> Need help making sense of your books? Ketchup cleans up your QuickBooks in 3–7 business days. Get your price →
Related Terms
An estimate is a document sent to a potential customer that outlines the expected cost of goods or services before work begins. It's not a binding invoice—it's a proposal that helps the customer understand pricing and scope. Once the customer approves, the estimate typically converts into an invoice
Net realizable value (NRV) is the estimated amount a business expects to collect from an asset, typically inventory or accounts receivable, after subtracting any costs required to sell or collect it. For inventory, it's the expected selling price minus selling costs. For receivables, it's the face v
A sub-ledger (or subsidiary ledger) is a detailed record that breaks down the transactions within a single general ledger account. Instead of showing one lump sum for "accounts receivable," the sub-ledger lists every customer who owes you money and how much each one owes. Common sub-ledgers include
An outstanding check is a check that has been written and recorded in your books but hasn't been cashed or cleared by the bank yet. Until the recipient deposits it and the bank processes it, the check remains "outstanding." This creates a temporary difference between your book balance and your bank
Need these terms applied to your books?
Accounting Ketchup catches up your QuickBooks so the glossary becomes your reality. Flat rate.