GUIDE TO LAW OFFICE BOOKKEEPING

GUIDE TO LAW OFFICE BOOKKEEPING 2005 The Law Society of Saskatachewan

GUIDE TO LAW OFFICE BOOKKEEPING Edited by: John E. Allen, C.A. Auditor/Inspector The Law Society of Saskatchewan 1100-2500 Victoria Avenue Regina, SK S4P 3X2 (Patterned after The Law Society of Alberta Guide to Manual Law Office Bookkeeping by Paul McLaughlin)

TABLE OF CONTENTS OVERVIEW Page 1 INTRODUCTION Page 3 1.1 Potential Users of Manual Bookkeeping Page 3 1.2 Downsides of Manual Bookkeeping Systems Page 3 1.3 What This System Does and Does Not Provide Page 4 1.4 General Comments about Law Office Accounting in Saskatchewan Page 5 1.5 Financial Classifications and Debits/Credits Page 6 ACCOUNTS/SUPPLIES Page 8 THE TRUST ACCOUNTING SYSTEM Page 10 3.1 Trust Records Page 10 3.2 Deposits to Pooled Trust Page 11 3.3 Pooled Trust Cheques Page 14 3.4 Separate Interest-Bearing Trust Accounts Page 16 3.5 Trust Transfer Journal Page 21 3.6 Trust Reconciliations Page 22 3.7 Appendix A Page 22 THE GENERAL LEDGER ( GL ) ACCOUNTING SYSTEM Page 23 4.1 GL Accounting Records Page 23 4.2 The GL Synoptic (Daily General Journal) Page 22 4.3 General Cheques Page 24 Routine Office Expenses (Page 25) Office Expenses Payment posted to Multiple Accounts (Page 25) Bank Charges and Overdraft Interest (Page 26) Business Loan (Page 26) Draws (Page 27) Client Disbursements (Page 27) Payroll (Page 27) GST (Page 29) 4.4 Rendering Accounts to Clients Page 29 4.5 General Account Deposits Page 31 Payment of Fees and Disbursements (Page 31) Capital Contribution (Page 32) Bank Loan Increase (Page 32) Recoveries (Page 33) 4.6 Office Credit Card Page 33 4.7 Disbursements Page 34 4.8 Monthly GL Reconciliation and Report Page 36 APPENDIX A - Trust Accounting Examples APPENDIX B - General Ledger Accounting Examples

1 OVERVIEW This guide is intended to assist lawyers using either manual or computerized bookkeeping systems although reference is made mainly to manual systems. The INTRODUCTION (Page 3), outlines who should consider using a manual system, what it provides and what it doesn t provide, and offers some general comments about law office accounting in Saskatchewan. Part 2, SUPPLIES (Page 6), lists what you will have to buy to implement a manual system. Part 3, THE TRUST ACCOUNTING SYSTEM (Page 8), details the records needed for trust accounting. It will guide you through the steps needed to record basic trust transactions, including: Deposits to the trust account. Payments from the trust account. Payments to and transfers from separate interest-bearing trust accounts. Monthly trust reconciliation. Part 4, THE GENERAL ACCOUNTING SYSTEM (Page 22), details the records needed for general ledger ( GL ) accounting. It will guide you through the steps needed to record basic general account transactions, including: Payments from the general account for expenses, service charges, interest, loan payments, credit card payments, drawings, client disbursements, payroll, GST and PST. Rendering accounts to clients. Receiving payments from clients for fees, disbursements and interest. Receiving capital contributions and loan advances. Charges to credit cards. Disbursements incurred on behalf of a client. A monthly GL reconciliation and report.

2 APPENDIX A Trust Journal - Example Trust Journal - Column Descriptions Trust Journal - Entry Descriptions Trust Reconciliation Checklist Trust Reconciliation (including outstanding cheque list and SIBA list) and Client Trust Listing - Example - Blank Forms APPENDIX B General Ledger Synoptic (General Daily Journal) General Ledger Synoptic - Column Description General Ledger Synoptic- Entry Descriptions General Ledger Reconciliation and Checklist General Account Reconciliation (including outstanding deposits and cheques) - Example - Blank Form Aged Accounts Receivable Listing - Example - Blank Form Revenue and Expense Analysis - Example - Blank Form Sample Account

3 Part 1 INTRODUCTION 1.1 Potential Users of Manual Bookkeeping Although computerized accounting and management information systems are used widely in today s law offices, there is still a place for manual bookkeeping systems, particularly for: Lawyers just starting out. Lawyers with a minimal amount of bookkeeping (low volume). Lawyers who do not want to computerize. A manual bookkeeping system is inexpensive to set up and operate and gives the practitioner invaluable exposure to the basic requirements of law office accounting. It is necessary to understand basic accounting requirements/principles to evaluate accuracy and adequacy of computer system output. Whether a system is manual or computerized, the difference is in the process, not in the records themselves. Both require: Receipts. Deposit Slips. Cheques. Client Trust Ledger, etc. 1.2 Downsides of Manual Bookkeeping Systems When deciding whether to use manual bookkeeping, the practitioner should keep several things in mind: Keeping a manual system current requires a significant commitment of time, energy and attention to detail. Manual bookkeeping requires posting and other procedures that will often appear time-consuming and repetitious. Manual bookkeeping has few built-in audit controls to prevent errors. Manual bookkeeping systems do not easily produce management information.

4 1.3 What a Manual System Does and Does Not Provide A manual system provides: A complete trust accounting system, including the monthly trust reconciliation. A system for identifying and tracking disbursements. A system for identifying and tracking accounts receivable. A partial expenses accounting system. Rules for balancing the GL monthly. A limited amount of management information in the form of a few basic monthly reports. However, the manual system described is not a full law office accounting and management information system and it does not provide: Time keeping. A Profit and Loss Statement or a Balance Sheet (although it does produce most of the information needed for those records). Management information beyond some very basic reports. Cash flow analysis or projection. TIP This system is not the only way to do manual bookkeeping; any system that complies with the Law Society Rules may be used. For tax and business purposes, your system should comply with generally accepted accounting principles. TIP It is up to you to familiarize yourself with the Rules of the Law Society respecting accounting and to exercise sound professional judgement when implementing your accounting system.

5 1.4 General Comments about Law Office Accounting in Saskatchewan The Law Society Rules apply to all aspects of trust accounting; they also apply to many aspects of General Ledger ( GL ) accounting. Specific Rules and processes apply to the receipt of cash and particularly large amounts of cash. These Rules currently prohibit a member from receiving more than $7,500.00 in cash relating to one transaction. Consideration is also being given to requiring members to follow certain procedures when receiving cash from and/or refunding cash to clients. Members are advised to check current Rules or contact the Law Society if this issue is encountered. Independent practitioners that share a trust account must maintain a common set of trust accounting books and records. When you open a new practice, you must file a Form TA-1 (Commencement Report). Each year thereafter, you will file a Form TA-3 (Practice Declaration), being your annual certification to the Law Society with respect to trust account activity, due 90 days after your fiscal year end. You will also have to engage an accountant to conduct a review of your records and complete and file a Form TA-5 or TA-5S (Accountant s Report) also within 90 days of your fiscal year end. All accounting records and certain supporting information must be retained for at least 6 years (Rule 980(1)) with records referred to in Rule 962(a) and (b) and 963(c) required to be kept for at least 10 years. Canada Revenue Agency and other regulatory bodies may require different retention periods and the member/firm must ensure all requirements are met before records are destroyed. If you discover an inadvertent discrepancy in your trust account (e.g. the bank deducted cheque printing charges), you must make payment to trust to cover the deficiency immediately and advise the Law Society of any discrepancies greater than $100.00 along with a description of the circumstances and corrective action taken. Help is available. The Law Society s Auditor is available to answer questions on the Law Society Rules relating to accounting and accounting procedures.

6 1.5 Financial Classifications and Debits/Credits A basic knowledge of financial classifications and of double entry bookkeeping is required whether a manual or computerized system is used. The following is a very basic outline and definition of financial classifications: Revenues - Increase in Economic Resources Expenses - Decrease in Economic Resources Net Income (Loss) - Excess (Deficiency) of Revenues over Expenses Revenues - Expenses = Net Income (Loss) Assets - Economic Resources Liabilities - Debts/Obligations Equity - Excess of Assets over Liabilities Assets - Liabilities = Equity Double entry bookkeeping is a system whereby each financial transaction is recorded twice - once as a debit and once as a credit. Debit entries must equal credit entries for each transaction and therefore at the end of a period of time (i.e. month), the books must balance - the total of all debit entries during the month must equal the total of all credit entries over the same period of time. DEFINITION - Debit - Left - Credit - Right Increase Decrease Assets Debit Credit Liabilities Credit Debit Revenue Credit Debit Expense Debit Credit Retained Earnings Net Income/Equity Credit Debit TIP The described system outlines a number of procedures that are sound business practices but are not required by the Rules. Some procedures may amount to overkill in a practice with few trust transactions.

It should be noted when recording entries in the General Ledger Synoptic (Daily General Journal - Appendix B) that each column is labeled as either a debit column or a credit column. If a credit amount is to be entered in a debit column or vice versa, that amount is shown in brackets. See Appendix B, Line 10, for an example. 7

8 Part 2 ACCOUNTS/SUPPLIES To implement the accounting system, you will need: A pooled trust account, that is, an interest-bearing account in a Saskatchewan branch of an approved depository (defined as a chartered bank, trust corporation or credit union ), designated as a trust account in your name. This account will hereinafter be referred to as your trust bank or trust bank account. TIP You are required by Rule 911(2) to instruct your trust bank to remit the interest on your pooled trust account to the Law Foundation at least quarterly. TIP You must make sure your bank agrees not to recover service charges or amounts from your trust account. Arrangements can be made with your bank to have these amounts charged directly to your general account. Alternatively, a nominal amount of up to $100.00 may be deposited into trust under your name, against which service charges and like bank fees may be charged. A general bank account maintained in connection with the firm s law practice. Deposit books for each of your trust and general bank accounts (supplied by your bank). Prenumbered and preprinted trust cheques and general cheques preferably with stubs (supplied by your bank). Trust cheques must be printed with the words trust or trust account clearly printed on the face of the cheque. This is usually above the signature area on the cheque. TIP To avoid the embarrassment of issuing cheques on the wrong account, order your trust and general cheques in distinctly different colours.

9 Two bound three-part receipt books, preferably prenumbered, one for trust and one for general (manual system). Three ledger books consisting of a ring-type book, ledger cards and index cards, to use as your client trust ledgers and your client accounts receivable ledgers (manual system). TIP The Rules allow you to open more than one trust account and more than one general account. Keeping track of more than one trust and/or general account will increase the volume and complexity of your bookkeeping and significantly increase the chances for error. You should therefore limit yourself to one trust and one general account unless you have a sound business reason for having more. An accounting journal book (daily journal) with approximately 8 columns for the date, particulars, receipt/cheque #, deposits, cheques and balance to use as your Trust Receipts and Disbursements Journal (manual system). An accounting journal book (general journal) with columns for the date and particulars, and 24 to 28 columns for numbers across two pages (this is referred to as a General Journal) (manual system). Several three-ring binders (manual system). TIP A journal is an accounting record, usually multi-columned, designed to record a variety of different transactions chronologically. TIP A ledger is an account record, also usually multi-columned, designed to record chronologically all the transactions that relate to a specific account and to show the balance of that account. Ledgers are usually in loose-leaf form.

10 Part 3 THE TRUST ACCOUNTING SYSTEM 3.1 Trust Records Your trust records will consist of: Trust Receipts Book. Trust Deposit Book. Pooled Trust Account Cheque Book. Trust Receipts and Disbursements Journal (also known as the daily journal), in which you will keep a running record of all trust transactions and a running balance of your overall trust balance. Client Trust Ledger, where you will keep track of your trust transactions on a client-by-client basis. TIP When you receive trust money from one client for more than one matter at the same time, it will be easier to keep track of the flow of funds if you open separate client trust ledger accounts for each matter. Bank statements, including pooled trust account statements, passbooks for daily interest savings accounts and statements regarding term deposits. Monthly reconciliation forms, including the monthly trust listing. Any material in your files that substantiates your trust posting, such as mortgage advance transmittal letters, releases, directions to pay, statements of adjustment, statements of account, trust statements, etc.

11 TIP You must keep your records at your place of practice except during such period as your accountant may need them to complete Form TA-5 or TA-5S. TIP All posting must be done in ink. TIP Try to avoid abbreviations, the meaning of which is not obvious. TIP The Rules require you to keep your books current at all times. TIP The order in which procedures are described in this Guide is meant to help keep your records up to date. You should therefore carry out the procedures in order. TIP One of the functions of bookkeeping is to establish an audit trail that ties together all the records that relate to a transaction. Therefore, the same information may be recorded several times in various journals and ledgers. 3.2 Trust Receipts/Deposits to Pooled Trust The following steps are required to process a receipt of trust monies and deposit those monies to your pooled trust account. TIP Rule 910(1) requires you to deposit trust money forthwith -- the same or the next banking day.

12 3.2.1 Issue a receipt. The receipt, preferably prenumbered, should contain full information about the transaction, including: Date of receipt. From whom the funds were received. Why the funds were paid to you (e.g. retainer, balance to close, mortgage advance). File number and/or client name. Amount. 3.2.2 Consider photocopying the deposit instrument. Record the date, the file number and the purpose for the deposit on the photocopy (optional procedure). TIP If you intend to disburse trust money to a third party immediately after receiving it from your client, you should require certified funds unless the source of the funds is another lawyer or a financial institution. It is less important to get certified funds where the money will remain in your trust account for some time before being disbursed, but it may be prudent if you do not know the client well. 3.2.3 Record the deposit in the cheque book. Record the deposit on your cheque book stubs and update the running balance (optional). Funds, as defined in the Rules, includes credit card slips. If you deposit a credit card slip into trust, associated service charges, fees and discounts are your responsibility and must be paid from your general bank account. The client must receive credit for the full amount paid. You must deposit the credit card slip expeditiously, so you cannot hold a blank, signed credit card slip as security for your fees and disbursements. You should understand your bank s clearing rules for credit card slips to ensure that you do not disburse funds that have not cleared. Also, caution is advised if trust amounts must be received via telephone (unsigned) as the credit card company may reverse this amount for up to a year after processing.

13 3.2.4 Record the deposit in the Trust Receipts and Disbursements Journal. Record full information about the deposit in your Trust Receipts and Disbursements Journal (Daily Journal). Calculate the new running balance. Trust Receipts and Disbursements Journal Date Description Doc # Deposits Cheques Balance Balance Forward 135,600.00 Jan 10/05 Rec d. from John Jones - cash to close and legals - File #123 R1245 19,400.00 155,000.00 3.2.5 Post the deposit to the Client s Trust Ledger Card. Record full information about the deposit in your trust Ledger Card for that client. Calculate the new running balance. Client Trust Ledger Card Name John Jones File No. 123 Address 1234 56 th St., Anywhere, SK Re: Purchase Date Description Doc # Cheques Deposits Balance Jan 10/05 Rec d. from John Jones - cash to close and legals R1245 19,400.00 19,400.00 3.2.6 Record the deposit in the Trust Deposit Book. Show file number, amount and total amount deposited on that day. 3.2.7 You may wish to initial receipts as an indication that they have been recorded in the Trust Receipts and Disbursements Journal and/or the Client Trust Ledger. TIP The bank keeps the deposit slip so avoid revealing confidential information such as the identity of your client on the deposit slip. TIP Undisbursable trust money may be turned over to the Law Society only if all requirements of Rule 1301 are met.

14 3.3 Pooled Trust Cheques The following steps are required to process a cheque drawn on your pooled trust account. 3.3.1 Satisfy yourself as to your authority to draw the cheque. TIP The best authority for drawing a trust cheque is the written direction of the beneficial owner of the trust money. In any situation where you don t have written authority, you should identify the source and nature of your authority as clearly as possible. If the source of your authority is not obvious, document your authority in a memo to the file. 3.3.2 Record the cheque in the Cheque Book. Record full information about the cheque (date, payee, client, amount) on the cheque stub. Update the running balance (if maintained). 3.3.3 Prepare the cheque. (Optional - You may consider photocopying cheque and retaining copy on file.) Do not sign the cheque at this time. 3.3.4 Record the cheque in the Trust Receipts and Disbursements Journal. Record full information about the cheque in your Trust Receipts and Disbursements Journal, including the cheque number, and update the running balance. Trust Receipts and Disbursements Journal Date Particulars Doc # Deposits Cheques Balance Balance Forward 135,600.00 Jan. 10/05 John Jones - cash to close and legals - File #123 R1245 19,400.00 155,000.00 Jan 11/05 Thomas Thompson - balance to close on File #123 C0102 18,500.00 136,500.00 3.3.5 Post the cheque to the particular Client s Trust Ledger Card. The information on the ledger card should include: The date of the cheque.

15 The payee. What the cheque is for. The amount. This step is done at this stage to ensure that your attention is drawn to the amount in the client s account before you write the cheque. Client Trust Ledger Card Name John Jones File No. 123 Address 1234 56 th St., Anywhere, SK Re: Purchase Date Description Doc # Cheques Deposits Balance Jan 10/05 John Jones - cash to close and legals 1245 19,400.00 19,400.00 Jan 11/05 Thomas Thompson - balance to close - Cheque #102 18,500.00 900.00 3.3.6 Optional - When the cheque has been recorded in the Trust Receipts and Disbursements Journal and the Client Trust Ledger Card, consider initialing the cheque stub as a record that this has been done. 3.3.7 After completing all of the above steps, sign the cheque and distribute as required. TIP One of the most common audit deficiencies is the cheque that creates a client trust ledger overdraft, i.e. a cheque for more than the balance shown on the client s trust ledger. A ledger overdraft does not necessarily create a bank overdraft because other trust money in the pooled trust account may cover the deficiency. To prevent trust ledger overdrafts, follow the above steps in order. If you delegate some of the steps, examine the client trust ledger personally before signing the cheque. TIP Do not transfer a retainer from your trust bank account to your general bank account to pay your fees or to reimburse you for disbursements until you have rendered a written account to your client.

16 TIP Withdrawals from trust must be by cheque. Wire transfers require a cheque and a written request signed by a lawyer. TIP Money which belongs to you must be withdrawn promptly from your trust account (within 1 week from date of invoice). TIP The Rules prohibit trust cheques made payable to Cash or Bearer and post-dated cheques. The cheque must clearly indicate that it is a cheque drawn on a trust account be dated and completed as to the payee and the amount and be signed by the member from whose trust account the withdrawal is made or another authorized member. Record the file number on the face of the cheque. Tip The basic rule is that any withdrawal or transfer of trust money requires the signature of a lawyer authorized by the firm to sign. From time to time, solo practitioners need to have trust cheques issued when they are not available to sign themselves. The simplest way to deal with this problem is to make arrangements for another member of the Law Society to have temporary signing authority on the trust account so the cheque can be signed in the lawyer s absence. Trust cheques must never be signed only by a non-member. 3.4 Separate Interest-Bearing Trust Accounts The Rules permit you to deposit trust money for a specific client from the pooled trust account into a separate interest-bearing trust account where the interest will accrue to the benefit of that specific client. Trust money must not be deposited directly in a separate interest-bearing trust account. All trust money you receive must first be deposited to the pooled trust account, then paid, with client authority, from the pooled trust account to the separate interest-bearing trust account. Trust money belonging to a specific client may be deposited (paid from the pooled trust account) in a separate interest-bearing account with an approved

17 depository insured by the Canadian Deposit Insurance Corporation ( CDIC ), the Credit Union Insurance Fund or other investment if approved in writing by the client. A copy of this written approval must be retained by the member. A separate interest-bearing account may contain only trust money belonging to one client. Trust money may be transferred between the pooled trust and a separate interest-bearing account in the same branch by a letter or other document showing the amount and date of the transfer, the accounts involved and sufficient information to identify the client (e.g. a file number or description that does not disclose confidential client information). The letter or document must be signed the same as a cheque (i.e. by a member). A copy of this signed letter must be retained by the member. Interest earned on separate interest-bearing accounts is the property of the beneficial owner of the money and must be accounted for. It must be posted when you are informed it has been paid. If the account is closed in the middle of the month. the accrued interest will be posted at that time. On daily interest savings accounts and some term deposits, the interest is normally posted by the financial institution on a monthly basis; part of your monthly reconciliation procedure will be to determine the amount of the interest from the financial institution and post it to the client s separate interest bearing trust account. On other term deposits, the interest is paid at the completion of the term and the interest should be posted when the investment comes due. Interest on a term deposit that is rolled into a new term deposit should be posted when it is rolled over, not when the deposit is eventually cashed in. TIP Placing a client s money in a separate interest-bearing trust account may generate a considerable amount of bookkeeping, so make sure that the interest to be generated justifies the time and hassle involved. A new client trust ledger card should be created for money transferred to a separate interest-bearing trust account. Removing the interest-bearing funds from the main pooled trust ledger card will prevent you from accidentally creating a negative balance for the client in the pooled trust account or writing an NSF cheque in the mistaken belief that there are sufficient funds in your pooled trust account to cover it. The new ledger card should be readily distinguishable as a ledger card for a separate interest-bearing account. The particulars of the separate interest-bearing account should be shown on the card.

18 3.4.1 Establish a Separate Interest-Bearing Trust Account. The following steps are required to establish a separate interest-bearing trust account. Satisfy yourself that you have your client s authority to transfer the trust money into a separate interest-bearing trust account. Prepare a letter and write a cheque to the bank. The letter should ask the bank to set up the separate interest-bearing account. It should specify the kind of account or investment requested by this client. The account should be opened in your name in trust for client X. Since the interest is taxable in the hands of the client, you will have to provide the bank with the client s SIN number. The letter should be signed the same as a cheque. Put a copy of the letter in the client s file and keep a copy in a binder or folder of separate interest-bearing trust account transfer letters. TIP If you provide your bank with your client s name, address and SIN #, the T5 income tax slip for the interest earned will be sent directly to the client. Record the transfer in the Cheque Book. Record full information about the transfer of money out of your pooled trust account on the cheque stubs and update the running balance (optional). Record the transfer in the Trust Receipts and Disbursements Journal (Daily Journal). A transfer of funds to a separate interest-bearing trust account will generate two Trust Journal entries, one for the withdrawal from the pooled trust account and one for the deposit to the separate interest-bearing trust account. The running balance in your Trust Receipts and Disbursements Journal will be unaffected by this posting because the two entries off-set each other. Trust Receipts and Disbursements Journal Date Particulars Doc # Deposits Cheques SIBA Balance Balance Forward 155,000.00 Jan 11/05 Bank of Montreal C-103 100,000.00 100,000.00 155,000.00 Post the transfer to the Client Trust Ledger Card for the pooled trust account. Record full information about the transfer of funds out of your pooled trust account and update the running balance.

19 Client Trust Ledger Card Name Cam Carlson File No. 110 Address 1234 56 th St., Anywhere, SK Re: Purchase 1234 56 th St. Date Description Doc # Cheques Deposits Balance Dec 30/04 Bank of Nova Scotia R240 100,000.00 100,000.00 Jan 11/05 Bank of Nova Scotia - SIBA C103 100,000.00 0.00 Create a new Client Trust Ledger Card for the separate interest-bearing trust account. Post the transfer to the separate interest-bearing trust account to the new Client Trust Ledger Card. Record full information about the transfer and the investment and update the running balance. Separate Interest-Bearing Trust Account Client Trust Ledger Card Name Cam Carlson - INTEREST-BEARING ACCOUNT File No. 110 Address 1234 56 th St., Anywhere, SK Re: Purchase 1234 56 th St. Date Description Doc # Cheques Deposits Balance Jan 11/05 Smith & Jones Pooled Trust C0103 100,000.00 100,000.00 3.4.2 Interest on a Separate Interest-Bearing Trust Account. The following steps are required to record the interest on a separate interest-bearing trust account. Determine the amount of the interest from the bank. Post the interest to the Separate Interest-Bearing Trust Account Client Ledger. Update the running balance. Separate Interest-Bearing Trust Account Client Trust Ledger Card Name Cam Carlson - INTEREST-BEARING ACCOUNT File No. 110 Address 1234 56 th St., Anywhere, SK Re: Purchase 1234 56 th St. Date Description Doc # Cheques Deposits Balance Jan 11/05 Smith & Jones Pooled Trust Account C0103 100,000.00 100,000.00 Jan 31/05 Interest 500.00 100,500.00

20 3.4.3 Closing a Separate Interest-Bearing Trust Account. Send a letter to the bank. The letter should contain full details of the account and direct the bank to close the daily interest account or cash in the term deposit and deposit the funds to your pooled bank trust account. The letter should be signed the same as a cheque (i.e. by the member). Record the transfer in the Cheque Book. Record full information about the transfer back to your pooled trust account on the cheque stubs and update the running balance (optional). Post the transfer to the Client Trust Ledger Card for the Pooled Trust Account. Record full information about the transfer of funds back into your pooled trust and update the running balance. Client Trust Ledger Card Name Cam Carlson File No. 110 Address 1234 56 th St., Anywhere, SK Re: Purchase 1234 56 th St. Date Description Doc # Cheques Deposits Balance Dec 30/04 Bank of Nova Scotia 1240 100,000.00 100,000.00 Jan 11/05 Bank of Montreal - SIBA 100,000.00 0.00 Jan 31/05 Transferred from SIBA 100,500.00 100,500.00 Record the transfer in the Trust Receipts and Disbursements Journal. Trust Receipts and Disbursements Journal Date Particulars Doc # Deposits Cheques Balance Jan 31/05 Balance Forward 55,000.00 Transferred to Pooled Trust SIBA #14322223 (File #110) 100,500.00 155,500.00 Post the transfer to the Separate Interest-Bearing Account Client Trust Ledger Card. Record full information about the transfer and update the running balance. Treat the transfer as a cheque drawn on the separate interest-bearing trust account.

21 Separate Interest-Bearing Trust Account Client Trust Ledger Card Name Cam Carlson - INTEREST-BEARING ACCOUNT File No. 110 Address 1234 56 th St., Anywhere, SK Re: Purchase 1234 56 th St. Date Particulars Doc # Cheques Deposits Balance Jan 11/05 Transferred from Operating Trust Account 100,000.00 100,000.00 Jan 31/05 Interest 500.00 100,500.00 Jan 31/05 Transferred to Operating Trust Account 100,500.00 0.00 3.5 Trust Transfer Journal. The Rules require you to keep a Trust Transfer Journal. The Trust Transfer Journal is a record that tracks all transfers between trust ledgers. Such a transfer may occur, for example, if you are acting on both sides of a real estate deal. You receive the funds from the purchaser; and at some time they become the funds of the vendor. You need two Client Trust Ledger Cards (one for each client), and in addition to posting the change of ownership of the funds on the respective clients ledger cards and in the Trust Receipts and Disbursements Journal, the transfer must be recorded in the Trust Transfer Journal. TRUST TRANSFER JOURNAL Date Particulars Amount Jan 20/05 Transferred from Clark purchase (File #14) to Barton sale on (File #12) 50,000.00 TIP Each transfer must be authorized in writing by a member. This is most easily done by a memo to file signed by the member outlining the specifics of the transfer. A copy is filed in the client s file. TIP A simple form of Trust Transfer Journal is a ledger card filed at the front of your Client Trust Ledger where you record the date of each trust transfer, from which client and file the transfer is made, to whom and to what file it is made, and the amount.

22 3.6 Trust Reconciliations Your trust accounts must be reconciled monthly. The trust reconciliation is a simple arithmetical operation that involves showing that three sources of information are consistent as at a certain date (each month end): Bank Statement(s) - The total of the balances on the bank statement for your pooled trust bank account and on the up-dated statements for any separate interest-bearing accounts, adjusted to take into account any unprocessed cheques and/or deposits. Trust Receipts and Disbursements Journal Balance - The running balance shown in your Trust Receipts and Disbursements Journal. Client Trust Listing Total - The total of the client trust ledger balances shown on your Trust listing, which is a listing of the balances shown on all your client trust ledger cards, including separate interest-bearing trust account client ledger cards. The Rules require you to reconcile your trust account within 20 days of the end of each month. The reconciliation should be dated and signed by the member. A Trust Reconciliation Checklist and Form may be found in Schedule A. TIP You have to do a trust reconciliation even if you have no transactions in the month and even if you have no funds in trust. 3.7 Appendix A provides a hypothetical example of a: Trust journal with column and transaction description. Trust reconciliation checklist. Trust bank reconciliation and supporting listings. Client trust listing. Blank forms have also been included for your use if you wish.

23 Part 4 THE GENERAL LEDGER ( GL ) ACCOUNTING SYSTEM 4.1 GL Accounting Records Your general ledger accounting records will consist of: GL Synoptic. General Receipts Book. General Deposit Book. General Cheque Book. Time-Keeping Records to substantiate the fees charged (not part of the described system). Billings or Chronological Invoice File, a chronological file or binder containing a copy of all fee and disbursements accounts rendered. General Ledger ( GL ), in which you keep a running record of all non-trust transactions by transaction type. General Bank Statements. Monthly Bank Reconciliation Forms. If you have employees, a Payroll Record or Book. 4.2 The GL Synoptic (Daily General Journal) The GL Synoptic is a journal that is used to keep track of all general bank account transactions in chronological order. The GL Synoptic is a journal with at least 20 columns. The GL account titles are listed across the top of the facing pages. You will want to discuss with your accountant the most appropriate headings to put across the top of your Synoptic columns. Typically, the column headings will include most of the following: Date Description Payor/Payee Receipt/ Cheque # General Bank Revenue Client Disbursements Deposits Cheques Fees Other Description Amount

24 GST IT Withheld (Paid) CPP Withheld (Paid) EI Withheld (Paid) Business Credit Card Payments (Charges) Payable ITC Auto Advertising and Promotion Expenses Insurance Interest/ Bank Charges Expenses Sundry Library Office Phone Salaries/ Benefits Travel Description Amount Note: The sundry column can be used to record low volume items such as the purchase of assets (i.e. desks, computers, etc.), bank loans (receipt and payments), rent (usually only 1 payment per month). etc. In these cases, for example, the sundry account could appear as follows: Date Description Payor/Payee Description Sundry Amount Jan 15/05 Office Depot H.P. Computer 2.000.00 Jan 16/05 Bank of Montreal Bank Loan 25,000.00 Jan 19/05 Boardwalk Professional Rent 1,000.00 4.3 General Cheques The following steps are required to process a cheque drawn on your general account: 4.3.1 Record the Cheque in the Cheque Book. Record full information about the cheque on the cheque stub and update the running balance. The information should include: The date of the cheque. The payee. What the cheque is for. The amount.

25 4.3.2 Check the running balance to ensure you have sufficient funds to cover the cheque. 4.3.3. Prepare the cheque and sign it. 4.3.4 Record the cheque in the synoptic. To record in the Synoptic, enter the amount of the cheque in the General Bank--cheque column and make off-setting entries in one or more other columns. Some examples of typical postings are shown below and in Appendix B. TIP The Rules require you to keep a book of original entry showing all disbursements of money other than trust money and showing each cheque number, the date of each disbursement and the name of the payee. TIP Start a new page in the Synoptic at the beginning of each month. Routine Office Expenses. Routine office expenses will normally be paid by cheque. The posting will break the payment down between an expense charge and GST, which will be recovered as an Input Tax Credit ( ITC ). Synoptic Date Description Payor/Payee Receipt/ Cheque # General Bank GST [Expenses] Deposit Cheques Payable ITC Office Jan 10/05 Grand & Toy 145 52.31 2.66 49.65 Other expenses are posted in a similar fashion. Expense payment posted to multiple accounts. Many lawyers in spacesharing arrangements receive a single bill for their monthly expenses under the space-sharing arrangement. The cheque to pay the bill may have to be posted to several expense accounts:

26 Synoptic Date Jan 31/05 Description Payor/Payee Lawoffice Mgt. Inc. General Bank GST [Expenses] Receipt Cheque # Deposits Cheques Payable ITC Disbursements Office Phone 146 582.75 87.19 152.35 217.71 125.50 Bank Charges and Overdraft Interest. The bank will automatically withdraw these charges (if applicable) from your general account each month. These withdrawals are posted the same as cheques: Synoptic Date Description Payor/Payee Receipt/ Cheque # General Bank Deposits Cheques [Expenses] Interest/Bank Charges Jan 31/05 Service Charge 55.42 55.42 TIP Mark the stub of last cheque of the month visibly as you will need to refer to the month-end balance when reconciling the general bank account. The month-end cheque stub running balance amount will have to be updated as part of the reconciliation process for items such as bank service charges included on the monthly bank statement when received. The current cheque stub may also have to be updated for reconciling items needed to bring the cheque stub running balance in line with the bank reconciliation amount. Business Loan. If you have a business loan which you pay through your office account, the bank may deduct the payments monthly. The monthly payment will be treated as a cheque. You will have to determine the breakdown of each payment between principal and interest and post it accordingly. Synoptic Date Description Payor/Payee Receipt/ Cheque # General Bank [Expenses] Sundry Interest/Bank Deposit Cheques Charges Description Amount Jan 31/05 Loan Payment 643.23 143.23 Bank Loan 500.00

27 Date Drawings Synoptic Description Payor/Payee Receipt/ Cheque # General Bank Capital (Contributions) Deposits Cheques Draws Jan 31/05 Drawings 148 1,200.00 1,200.00 Client Disbursements. Client disbursements are treated as expenses until recovered by being billed to the client. The posting of the payment to a third party for a typical client disbursement expense would be: Synoptic Date Description Payor/Payee Receipt/ Cheque # General Bank GST Client Disbursements Jan 31/05 Deposits Cheques Payable ITC Description Amount Land Surveyors 149 347.75 File #123 347.75 Payroll Posting. Payroll is a little more complex. Three postings are required, one for payment of the mid-month advance (if applicable), the payment of the month-end balance (gross salary less mid-month advance and deductions) and the monthly payment to Canada Revenue Agency ( CRA ) of employee withholdings and employer contributions for Income Tax, UIC and CPP. Assume the employee receives a salary of $1,900.00 per month, with a mid-month advance of $850.00. The mid-month advance is recorded as: Synoptic Date Description Payor/Payee Receipt/ Cheque # General Bank Expenses Deposits Cheques Salaries Jan 15/05 Sam Smith 150 850.00 850.00 The month-end posting will have to reflect the deduction of Income Tax, CPP and EI, as well as the mid-month advance. Since a mid-month advance of $850.00 was made, there is $1,050.00 left to be paid, and that is the amount entered as the Salaries expense. The actual amount paid to the employee, however, is $851.43, because $198.57 was required to be withheld (Income Tax - 140.00, CPP - 30.00, EI - 28.57). The posting is as follows:

28 Synoptic Date Description Payor/Payee Receipt/ Cheque # General Bank [Expenses] IT Withheld (Paid) CPP Withheld (Paid) EI Withheld (Paid) Deposits Cheques Salaries Jan 31/05 Sam Smith 151 851.43 1,050.00 140.00 30.00 28.57 The monthly remittance to CRA is composed of two parts, the amount withheld by the employer from the employee s salary and the contributions the employer is required to make to EI and CPP on behalf of the employee. The employee withholdings part of the payment equals the IT/CPP/EI withholding amounts from the previous month, with the excess being the employer s contribution required for the previous month. Synoptic Date Description Payor/Payee Receipt/ Cheque # General Bank [Expenses] IT Withheld (Paid) CPP Withheld (Paid) EI Withheld (Paid) Deposits Cheques Salaries Jan 31/05 Sam Smith 151 851.43 1,050.00 140.00 30.00 28.57 Feb 15/05 CRA 152 314.27 140.00 60.00 114.27 TIP If you have any employees, you will have to get an employer number from CRA. You will be provided with books that set out the amounts of the Income Tax, Unemployment Insurance and Canada Pension Plan deductions. As of this writing, employers must match their employees CPP contributions and pay $1.40 for each $1.00 of employee EI premium. Payments may be made directly to CRA or paid at your bank, and must be remitted by the 15 th of the next month along with the official remittance forms that CRA supplies. You are required to provide your employees with a pay stub showing period worked, gross pay, deductions and net pay. You should obtain a payroll book from a stationery store to accumulate your payroll information through the year, as you will have to issue T4 income tax slips to each employee no later than February 28 of the following calendar year.

29 GST. Posting the GST payment is also somewhat complex. The amount of the GST payment should equal the difference between the GST Payable account (derived from the accounts sent to clients) and the GST/ITC account. If the GST Payable account has accumulated $3,200.00 since the last payment to CRA, and the GST/ITC account has accumulated $745.00 in the same period, the payment due should be $2,455.00, and the posting will be as follows (the two postings in the GST accounts are negatives because they clear the accounts): Synoptic Date Description Payor/Payee Receipt/ Cheque # General Bank GST Deposits Cheques Payable ITC Feb 28/05 Paid CCRA 153 2,445.00 (3,200.00) (745.00) TIP A petty cash fund of say $100.00 may be used. When you pay cash for items, retain the cash register tape or voucher for that purchase. You may also reimburse yourself or others for amounts paid and retain those cash register tapes or vouchers in the cash box as well. When the amount of actual cash on hand in the cash box starts getting low (i.e. $20.00 remains), total the receipts or vouchers on hand and write a cheque to petty cash for that amount to bring the amount of petty cash back up to the original $100.00 amount. This cheque written to petty cash will be posted in the Synoptic based on your analysis of the type of expense paid according to the cash register slips and vouchers being reimbursed, i.e. $20.00 for office expenses, $30.00 for travel, $30.00 for business promotion (advertising). 4.4 Rendering Accounts to Clients Before you deposit any money received from your clients for fees or disbursements into your general account, you must render an account or billing to the client. Some general comments about accounts: Accounts must be in writing, on the firm s letterhead and be delivered to the client. Payments for fees, whether directly from the client or out of trust, cannot be deposited in the general account until the account has been delivered to the client. An account is considered to be delivered when it is mailed or otherwise delivered.

30 One category of charges is fees for professional services. The services for which the fees are charged should be particularized to the degree necessary to inform the client fully about the services provided. A second category of charges is disbursements, that is, payments to third parties made by the member on the client s behalf. Disbursements typically include such payments as Land Title charges, long distance charges, courier charges, registration fees and so on. Many lawyers charge only fees and disbursements, and absorb the cost of nonlegal internal services such as photocopying, file opening, receiving and sending faxes and word processing as part of the overhead costs of the firm included in the professional fees. However, it is proper to add an Other Charges category to the fees portion of the account for such non-legal services, provided they are reasonable, are shown as such on the account, and were brought to the client s attention in advance. GST and PST will also be shown on the account as applicable. The Rules require you to keep a chronological file of all accounts to clients showing the fees and other charges billed to the client, the date of the bill and the client to whom the account is rendered. The Rules also require you to keep a ledger or some other suitable system that shows your accounts receivable position with respect to each client. The system described below meets both of these requirements through the filing of unpaid and paid invoices. The procedure for rendering an account is a follows: 4.4.1 Check for unbilled disbursements in the disbursements column of the Synoptic and in the unbilled disbursements voucher file. 4.4.2 Prepare the account. Prepare the original for the client and make a file copy and a copy for the Chronological Billing File. TIP You need to be able to determine your client accounts receivable position quickly. A simple, practical solution to this problem is to file the chronological copy of each account that is not paid immediately in alphabetical order in an Unpaid Accounts folder or binder. Partial payments are noted on the copy. When the account is paid in full, the copy is then filed in chronological order in the chronological billing file.

31 4.4.3 Forward the account to the client. 4.4.4 Maintenance of Your Accounts Receivable Record. Accounts receivable can be handled in various ways. Systems can range from simply filing unpaid invoices to preparation of a separate accounts receivable ledger. The system described is a combination of filing outstanding invoices and recording invoices and payments in the Synoptic. If the account is not paid immediately, file the copy of the invoice in alphabetical order in an Accounts Receivable File. When payment is received, note the date payment is received on this invoice copy and move it from the Accounts Receivable file to the Chronological Billing File. 4.4.5 Record Payment of Account in Synoptic. The invoice is recorded in the Synoptic when prepared. The amount of the fees is posted to Revenue--Fees. The disbursements are posted as negative amounts (recoveries) in the relevant expense columns. For example, photocopying is an office recovery; long distance is a telephone recovery; courier is an office recovery; Land Title charges are a client disbursements recovery. The amount of the GST is posted as GST payable. An example of the posting is as follows: Synoptic Date Description Payor/Payee Receipt/ Cheque # Cash General Bank Accounts Receivable Revenue GST [Expenses] Client Deposits Cheques Fees Payable Disbursements Jan 20/05 Sam Smith IN 0101 1,386.71 1,000.00 90.72 152.35 Jan 20/05 Jan 20/05 Payment of Account Deposit of Funds 123 1,386.71 (1,386.71) (1386.71) 1,386.71 [Expenses] Office Phone Travel (25.43) (43.21) (75.00) 4.5 General Account Deposits The following steps are required to process a deposit to your general account: 4.5.1 Issue a prenumbered receipt (if applicable). The receipt should be completed showing: The date received.

32 From whom the funds were received. Why the funds were paid to you (e.g. fees, paid on account, capital contribution, expense recovery). Invoice number or date (if applicable). If amount has been paid from trust, the receipt and the invoice should be marked paid from trust. 4.5.2 Post the deposit to the General Cheque Book. Record deposit on the current cheque stub in your General Cheque Book and update the running balance. 4.5.3 Write the deposit up in the General Deposit Book. 4.5.4 If the deposit is in payment of a client account receivable, locate the particular invoice being paid, record the date monies are received on the invoice, and mark invoice as paid. Record the invoice in the Synoptic as shown in Item 4.4.5. TIP To pay an account out of trust money, write a trust cheque to yourself (i.e. Smith Law Office) and deposit it into your general account. The account must be prepared and sent to the client before or at the time funds are removed from trust. 4.5.5 Recording Deposits other than Fees and Disbursements Capital Contribution. When you make a capital contribution (i.e. you pay some of your own money into the business account) you post it as follows: Synoptic Date Description Payor/Payee Receipt/ Cheque # Deposits General Bank Cheques Capital (Contribution) Draws Jan 20/05 John Smith 147 1,000.00 (1,000.00) Bank Loan Increase. An increase in your bank loan is treated as a deposit: