“Overdrawn client trust ledger accounts” is third on the list of common errors found by the LSUC’s spot audit program. These types of errors could easily happen in the old paper ledgers, but accounting software should have all but eliminated the possibility of this occurring. System Settings in PCLaw normally prevents you from entering an amount which will create a negative trust ledger balance. However, if this feature is turned off, negative balances can and do occur.
Why was the feature turned off? A person may wish to correct or make adjustments to previous entries, and may need to pause this feature in order to do so. The problems will occur when the person forgets to turn the protection back on when their task has been completed.
Voiding a client’s NSF cheque that was deposited into trust can cause the client’s ledger to have a negative trust balance. Perhaps you have already paid for some disbursements. If the client’s ledger is in a negative balance, you must transfer funds from general to make up for the shortfall.
If your current trust comparison report shows a client with a negative balance, the first step is to review the client’s ledger, and confirm the entries are correct. If the client does indeed owe you money, you need to immediately deposit funds into your trust account to make up for the shortfall. In PCLaw, you need to make the appropriate entries to transfer the funds owing from the trust bank ledger to accounts receivable, and then proceed to recover the funds from your client. Then confirm that negative trust protection is set in System Settings, to ensure that this will not happen again in the future.
As always, I invite your comments and suggestions for future posts. Next week – error #4 - Client trust ledger accounts with no activity in over one year.
Clyde
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