4. Trust account records
(Sections 6, 111, 112 of the Act; Regulation 11)
Trust Account Guidelines contents4.1 Trust account records are the records that a practice must keep in relation to its trust account. The Act and the Regulations require you to keep trust account records that are up to date, clearly showing the amount of trust money held for each client, and that are secure against retrospective alteration or deletion.
4.2 All entries in the primary records must be dated and include references that identify their source and destination and enable them to be traced backward or forward, as the case may be (Regulation 11(3)).
4.3 The records described in this chapter are necessary to maintain a basic set of trust account records, suitable for a small trust account. This system, once established, can be extended or adapted to deal with larger volumes. Trust account records include :
- Trust account receipt book, or equivalent records (refer guidelines 5.5 to 5.7)
- Bank deposit supplement book (refer guideline 5.8)
- Trust account chequebook and electronic payment reports (refer guidelines 6.5 to 6.7)
- Trust account cash book summary or control account (refer guideline 4.4)
- Trust account journal (refer guidelines 4.5 to 4.10)
- Client trust ledger accounts (refer guidelines 4.11 to 4.16)
- Trust bank account statements
- Trust account bank reconciliations (refer guidelines 7.1 to 7.6)
- Receipt book register
- Records of valuable property received and held
- Nominee company and contributory mortgage records.
The above is not intended as an exhaustive list of trust account records.
Trust account cash book
4.4 The trust account cash book is the link in the system between prime entries (receipts, cheque butts and entries originating in bank statements), and the trust account ledger and month-end reconciliations. A sample format is as follows:
Inwards Cash Book
| Date |
Receipt No. |
Particulars |
Client a/c credited |
Receipt value |
Amount banked |
|---|---|---|---|---|---|
| July |
|||||
| 1 | 2301 | ASB Bank - mort. advance | J Smith | 127,500.00 | |
| 1 | 2302 | J Smith - cas contribt | J Smith | 24,300.00 | |
| 1 | 2303 | M Brown - cash in house | F Brown Est. | 47.50 | |
| 1 | 2304 | New Lynn Motors - proceeds 2 cars | F Brown Ets. | 37,440.59 | |
| 1 | 2305 | T Johnson - on a/c costs re assault charge | T Johnson | 755.00 | 62,543.09 |
| 2 | 2306 | R Jenkins - ba fees owing | R Jenkins | 75.00 | |
| 3 | 2307 | G Evans - balance fees | G Evans | 39.95 | |
| 3 |
2308 |
First National - dep $30,000 less commission $17,000 on 801 Long Rd | H Jones | 12,300.00 | 12,339.95 |
| Etc | |||||
| 31 | 2399 | Downtown Auctions - proceeds furniture | F Brown Est | 750.00 | |
| 31 | 2400 | S Read - rent 9 Short St 15 Jne - 20 July | Myers Trust | 1,090.00 | |
| 31 | 2401 | K Lyall - Int on loan 8% on $13,000 for qtr to 31/7 | H Kelly | 260.00 | 2,100.00 |
| 3244 | Cheque cancelled (see note) | M Smith est. | 3,756.43 | ||
| 208,314.47 |
Notes:
- A reciept banked separately or directly to the trust bank account will be shown in the bank column. Where two or more cheques are deposited to the bank, the individual amount will be shown in the "Receipt value" column and the total amount of the deposit extended to the “Amount banked” column.
- When a cheque is cancelled after recording, it should be reversed by recording it in the Inwards Cash book and in the client ledger account as a credit.
Outwards Cash Book
| Date | Payment No. | Particulars | Client a/c debited | Electronic payment value | Cheque value |
|---|---|---|---|---|---|
| July | |||||
| 1 | 3470 | Horne & Partners – settle purchase 5 Clover Avenue | J Smith | 150,420.75 | |
| 1 | 3471 | Village Carpenters Ltd – repairs to 9 Short St | Myers Trust | 458.00 | |
| 1 | 3472 | ACC – rates & water rates | J Smith | 534.78 | |
| 2 | 3463 | IRD – balance of income tax | H Kelly | 1,544.27 | |
| 3 | 030710 | AMEX – balance owing at date of death | F Brown Est. | 15,633.95 | |
| 4 | 3464 | A Robinson – balance of funds | A Robinson | 60.00 | |
| 4 | 040710 etc | J Smythe – balance of funds | J Smythe | 100.00 | |
| 4 | 2295 | Unpaid item reversed by bank (see note) | 3,842.75 | ||
| 15,733.95 | 156,860.55 |
Notes:
- The “Payment No.” column is used to record an electronic payment reference or cheque number.
- If a bank advises that a cheque deposited or automatic payment has not been paid by the bank on which it was drawn and that the item has been debited to the trust bank account, this unpaid receipt should be recorded in the Outwards Cash Book and debited to the client’s ledger account.
Cash Book Summary (or “Cash Control Account")
| Opening Balance at 01.07.2010 | 49,324.48 | |
| Receipts as per Inwards Cash Book | 208,314.47 | |
| 257,638.95 | ||
| Payments as per Outwards Cash Book Electronic Cheque |
15,733.95 156,860.55 |
172,594.50 |
| Closing balance at 31.07.2010 | 85,044.45 | |
| As per list of balances |
Trust account journal
4.5 The trust account journal is used to record transactions of the following type:
- Transfer of funds between two clients
- Transfer of funds between two accounts of one client
- Transfer of fees, disbursements or commissions from the client's account to the practice’s float account in the trust ledger.
4.6 The trust account journal can be kept in books that can be purchased from any stationer or on loose-leaf requisition forms. In either case, the following information must be recorded:
- Date
- Folio number. Each journal entry must be numbered consecutively for cross-referencing purposes.
- The name of each ledger account debited and credited.
- The ledger account numbers. These are recorded in the journal when the entry is transferred to the ledger.
- Amount
- Narration.
4.7 Journal entries must include, by way of narration immediately under the entry, a complete and comprehensible explanation of why the entry is necessary, including cross-references to other entries or other documents.
4.8 Journal entries are capable of removing from or adding to client entitlement to trust funds. For this reason, the system of internal control should ensure that only authorised journal entries are posted to the trust account ledger. As part of that system, the Trust Account Supervisor should scrutinise each page as it is completed and indicate approval by signing the bottom of the page.
4.9 Where loose-leaf journal entries are approved, they should be sequentially numbered, signed by the appropriate person to authorise them and filed for easy reference. In such cases, a journal transaction report should be produced from the computerised trust accounting system for scrutiny as in 4.8 above.
4.10 A sample format is as follows:
Trust Account Journal
| Date | Folio | Name of a/c | Ref | Dr | Cr |
|---|---|---|---|---|---|
| 2010 | |||||
| July 3 | 001 | Smith | 38 | 820.00 | |
| Firm's a/c Narration: BOC 78 03.07.2010 for purchase |
145 |
820.00 |
|||
| July 4 |
002 |
P & R Groves R Groves - share of matrimonial property Narration: Settlement as per deed dated 30.06.2010 |
23 29 |
127,500.00 |
127,500.00 |
Trust account ledger
4.11 The function of the trust account ledger is to record the entitlement of each client to the funds held in the trust bank account. The ledger contains one or more accounts for each client, recording every movement of money into or from the funds of that client and the resulting balance available. It is therefore critical to keep the trust account ledger accurately.
4.12 The trust account ledger in its simplest form is a set of ruled cards as shown below. The cards are kept together, in alphabetical order of client. Inactive cards are kept in a separate section, also alphabetically. Where a client or groups of clients comprise varying individual interests, the practice must ensure that the money relating to each individual interest is separately accounted for. This is commonly achieved by opening separate accounts or sub-accounts for each matter. Most trust account computer packages provide for this.
4.13 Entries to the ledger cards are "posted" by transcribing the details from the prime record (receipt book, chequebook or journal) and a reference entered in the posting mark column such as the cheque number, receipt number or journal page or requisition number. Payments from the trust bank account are debits and receipts into it are credits. As each entry is made, the resulting balance of the client's funds is entered in the right-hand money column.
4.14 All entries in the trust account ledger, and in other accounting records that are the source of such entries, must be dated. They must include cross-references that identify their source or destination to enable each entry to be traced backward or forward as the case may be.
4.15 The trust account ledger is self-balancing. When all entries are made and the balances correctly calculated, the total of the list of balances should be the same as the reconciled balance of the trust bank account (refer to guideline 7.6).
4.16 A sample format is as follows:
Trust Ledger
Howard & Co, Lawyers
Client: J Smith
Ledger card No. 38
| Date |
Details of transaction |
Ref |
Debit |
Credit |
Balance |
|---|---|---|---|---|---|
| 01.07.10 | ASB Bank – mortgage advance |
2301* |
127,500.00 | 127,500.00 | |
| 01.07.10 | J Smith – cash contribution |
2302* |
24,300.00 | 151,800.00 | |
| 01.07.10 | Horne & Partners – settle pchse 5 Clover Ave |
3470** |
150,420.75 | 1,379.25 | |
| 01.07.10 | ACC – rates and water rates |
3472** |
534.78 | 844.47 | |
| 01.07.10 | Howard & Co – fees and disbs BOC 78 |
J/27*** |
820.00 | 24.47 |
* = Receipt No. ** = Cheque No. *** = Journal No.
Obligation to keep records of clients’ valuable property
4.17 Valuable Property – ss111-112 of the Act. You must keep records of any valuable property held in trust on behalf of any person (s112(1)). The records must be in a form that can be inspected, and (i) describe the property received; (ii) show the date on which the property was received; and (iii) if the property has been disposed of, give details of the disposition of the property, including the date on which and the person to whom the property was disposed of.
4.18 Valuable items include:
- documents of title to assets
- bearer securities (that do not require a signature to transfer)
- saleable chattels such as jewellery.
4.19 A suggested form of record of valuable property is shown in Appendix C. Those practices with computer-based systems that provide for recording valuable property lodged with the practice should use those systems.
4.20 Shares held in your control under the FASTER system fall within the definition of valuable property. You should therefore be mindful of your obligations under ss111-112 of the Act to account to the person on whose behalf the property is held and to keep proper records in relation to the property.
4.21 On occasion, clients will ask practices to hold saleable chattels as per guideline 4.18 above. In a limited number of cases this may be appropriate but, unless there is no practical alternative and the practice has secure facilities, it is preferable to refer clients to their banks for this service.
Lawyers nominee company mortgages
4.22 For guidelines for the use of Landonline, refer to the quick link on the Property Law Section’s website.
Lawyers nominee company mortgages
4.23 All transactions, both principal and interest, relating to nominee company and contributory mortgages are to be recorded in the practice’s trust account records. Together with the related security and other records, they are subject in all matters to the Act, the Regulations, the LNCR and the RCCC.
4.24 The accounting records to be maintained include:
- Mortgage cards or computer equivalent records in the name of the mortgagor recording clearly:
-
- particulars of the mortgage, including date of maturity, rate of interest, dates interest payable, mortgage number and title reference
- principal advanced to the mortgagor and repaid
- interest due by the mortgagor and interest paid
- names of investors and amounts contributed by each
- changes in investors showing dates, names and amounts
- interest credited to investors.
- A register of clients’ investments in nominee company mortgages recording the investments of each client in such mortgages.This register may consist of a set of cards or computer equivalent records.
- A nominee company mortgages control account.
4.25 All trust monies invested on behalf of clients in nominee company mortgages and all repayments to clients of such monies should be recorded by way of journal entry in a separate trust account journal which should be divided in sections for:
- advances from clients
- repayments to clients and transfers of interest
- changes in investors.
Sectionalising eliminates the need for narrations and facilitates postings to the mortgages control account, the mortgage cards and the register of clients’ investments.
In addition to postings each day from the journal to clients’ trust ledger accounts, as at the end of each month the total advances for the month must be posted to the debit of the mortgages control account and the total repayments of principal for the month must be posted to the credit of this account.
The balance of the mortgages control account must be agreed at least monthly with:
- the total mortgage advances outstanding as per the mortgage cards
- the total amount of trust moneys invested in nominee company mortgages according to the register of clients’ investments.
A clear record of action in accordance with the foregoing should be checked and signed each month by the Trust Account Supervisor and be suitably filed so as to be readily available to be conveniently and properly audited or inspected.
4.26 Similar records to those in guideline 4.25 above should be maintained for contributory mortgages, in a manner that enables them to be conveniently and properly audited or inspected.
4.27 A file for each mortgage should be maintained containing the investment authorities, valuation reports and other information given to investors, and any correspondence to investors concerning defaults.
Other records
4.28 Files should be maintained for trust account bank statements, bills of cost debited to the trust account ledger and month-end balance working papers, in chronological order.
4.29 Any standing authorities relating to individual payments or debit journal entries should be numbered in accordance with the entries they support and filed in the same order.