The Accounting Process
Even though you will likely delegate most of the accounting functions to others, you must have a basic understanding of your accounting system. You are ultimately responsible to ensure all duties under the Uniform Trust Account Rules under the Law Society Act, 1996, herinafter the "Rules" are carried out. You cannot rely on your bank or your staff to take responsibility for you.
Be cautious about taking advice from your bank and always verify that the advice conforms to the Rules. Some bank information may be unintentionally misleading.
There are three basic steps in the accounting process:
Record transactions in the accounting records.
Confirm the accuracy of the recording (balance/reconciliation).
Produce financial information and filings such as financial statements, government filings for GST/HST, income tax, etc.
There are four basic accounting records in a lawyer's accounting system, but many more are mandated by the Rules.
The basics are:
1. Books of Original Entry (a.k.a. Records of Original Entry), such as the general cash book and trust cash book, are where transactions are first recorded. The information that goes into these books comes from all the source documents that your firm handles (e.g., bank deposit receipts, cancelled cheques, credit card slips, invoices, lawyers' bills).
The purpose of the Books of Original Entry is to summarize information so that it may be posted to the subsidiary ledgers.
2. Accounts Receivable/Disbursement Ledger (a.k.a. AR/Disb Ledger) is the subsidiary ledger (i.e., a separate record/ledger for each client) where you record any bill delivered to a client; any disbursement made on behalf of a client; any transfers from trust; and any other receipts from or for a client.
3. Trust Ledger is the subsidiary ledger (i.e., a separate record/ledger for each client) where you record receipts and withdrawals of trust funds made on behalf of that client.
4. General Ledger (not to be confused with your general account) is the hub of your accounting records. After all your Books of Original Entry have been balanced, the total amounts from the Books of Original Entry and the two subsidiary ledgers (AR/Disb and Trust Ledgers) are posted to the General Ledger.
The General Ledger is then used to create a trial balance. The trial balance lists balances in each account, whether they are a debit or a credit, in the general ledger. For the books to be "in balance’, the total of debits must match the grand total of credits.
The funds and accounting records for trust accounts must not be commingled with your general funds. This is why it is necessary for you to keep separate records for trust transactions, and in particular a separate:
trust cash book (a Book of Original Entry); and
trust ledger card for each client trust matter (cumulatively the trust ledger).
All non-trust transactions are recorded first in the general cash book (a Book of Original Entry) and the totals posted to the applicable accounts receivable ledger cards (cumulatively the AR/Disb Ledger).