The trust account ledger in OnePractice operates as a combined trust and debtors ledger. This is traditionally the most common way to operate a legal trust account system in New Zealand because it reduces a lot of accounting administrative overhead by not having to manually move funds between the client’s trust account and the firm’s account.
The reason this is used in New Zealand is due to the large amount of money that transits the trust account in the course of performing property conveyancing transactions, a large proportion of the work that is carried out by most New Zealand law firms. Common practice for conveyancing transactions is that the law firm recovers the fee for the work by automatic deduction at the time of the settlement. The combined ledger system automates this process.
The automated transaction that moves funds from the client trust account to the firm’s interest in trust (FIT) is termed a ‘gain.’ The automated transaction that moves funds from the FIT to the client trust account is termed an ‘advance.’
An advance is basically a loan from the FIT to the client to cover any overdraw of their trust account. Trust accounting regulations state that no client’s interest in the trust account can ever be overdrawn. An example of where an advance is used is where, at the outset of a conveyancing purchase transaction, there may be no funds in the client’s trust account but a LIM report is required and must be paid for immediately. The firm pays for the LIM out of the client’s trust account, effectively overdrawing the client’s trust. During the batch update process for that transaction, OnePractice will advance sufficient funds from the FIT to cover the client’s overdraft.
It should be noted that the system doesn’t put funds into the client’s overdrawn matter account, it just reserves sufficient funds in the FIT to cover the overdraw. The total amount of money that the firm has in the FIT (not to be confused with the available FIT balance) must exceed the total client debit balances in the trust. If it doesn’t, then some of the client’s trust accounts will be overdrawn.
Gains are used to recover previous advances, fees and firm costs (that are paid for from the office account i.e. LINZ, courier, office service fees etc) incurred on behalf of the client from the client’s trust account. An example of a gain would be where the client had a credit balance in the trust of $1,000.00 and the firm charges an invoice of $600.00 to the client’s matter. This will cause a gain of $600.00 to the FIT and reduce the client’s interest in the trust account to $400.00.
OnePractice offers both client level advancing and matter level advancing.
Client level advancing requires the least amount of money in the FIT i.e. it consumes the least amount of the firm’s own money to operate the trust account. Client level advancing basically means that a debit balance in one matter for a client can be offset by a credit balance in another matter for the same client. This emulates the manual ledger card system, used before the advent of computerised systems, where all trust monies for a client were recorded on a single ledger card independent of the matter.
Examples of how this works are as follows:
Debit matter 2 with a payment of $1,000.00.
| Client A | |
| Matter | Trust balance |
| 1-Sale of property | 1,000.00 |
| 2-Dispute with neighbour | -500.00 |
| Client B | |
| Matter | Trust balance |
| 1-Purchase of property | 1,500.00 |
| 2-Employment Advice | -2,500.00 |
When set to client level advancing:
- Client A has a net trust ledger balance of $500.00, so an advance of $500.00 is required from the FIT
Client B has a net trust ledger balance of -$1,000.00, so this will require an advance from the FIT of $1,000.00
When set to matter level advancing:
Client A has a matter balance in matter 2 of -$500.00, so an advance is required from the FIT of $1,000.00
- Client B has a matter balance in matter 2 of -$2,500.00, so an advance is required from the FIT of $1,000.00
The difference between client level advancing and matter level advancing for this example:
Using client level advancing in the above example, the FIT would need to have a minimum balance of $1,500.00 to prevent the trust from being overdrawn
Using matter level advancing the FIT would require a minimum balance of $2,000.00 (enough to cover the total matter debit balances)
Firms who migrate to OnePractice from systems that operate matter level advancing can expect a significant amount of the firm’s own cash to be freed up if they choose to change to client level advancing. This is particularly true when many of the firm’s clients have multiple matters open at any point in time.
In OnePractice, the gaining and advancing process is initiated by the batch update process. Transactions entered into OnePractice are initially saved in a state where they can be edited or deleted. This is very useful for fixing keying errors etc, before the transaction is ‘set in stone.’
This helps the client ledgers to be kept free of erroneous entries and reversing transactions required to fix the errors.
When the Trust Accountant is happy that the transactions entered since the last batch update are free of errors, they run a batch update. The batch update usually occurs once per day, but it can happen as often as the firm requires. The batch update locks the transactions in the system, so that they can no longer be edited (apart from the narration) or deleted, and then calculates any gains or advances caused by the transactions in the batch.
Trust Accountants need to pay particular attention to advances during the batching process. If the total advances less the total gains in a batch are greater than the available FIT balance, the trust account for some clients will be overdrawn.
We are aware that some systems calculate and report gains and advances on a per-transaction basis. We see little value in this because in the same batch, there could be a transaction that causes an advance to a client, and later a transaction that causes a gain on the same client. Looking at gains and advances on individual transactions seems a little pointless because you cannot see the whole picture. OnePractice nets up all transactions for each client and gains and advances are calculated on this basis.
In the OnePractice Batch Update screen, there are two views of the transaction being updated. One view lists all transactions by client then matter and shows a net gain or advance (or neither) for that client. The other view lists transactions by type (cheque, receipt, fee, journal, title search, etc) with totals per transaction type.