A trust ledger must never sit in deficit. If a file’s trust account is showing as overdrawn, it needs to be corrected straight away by moving real funds from the general account into trust — not with a journal or an adjustment alone.
How to correct the overdraw
Do this on the file that is overdrawn. Two entries bring the trust ledger back to zero or positive:
- Process a disbursement payment from the general account on the file, for the amount of the overdraw. This takes the funds out of the general (office) account.
- Process a trust receipt on the same file, for the same amount. This brings the trust balance back to zero or positive.
Once both entries are done, the file’s trust ledger is back in order and the overdraw is corrected.
What happens to the disbursement next
The disbursement now sits on the file as a cost the firm has funded. What happens to it next depends on why the trust account was overdrawn in the first place.
Recoverable disbursement
If it’s a genuine recoverable cost, leave it as a recoverable disbursement — to be recovered from the client in the normal way, from trust funds once available or on the next bill.
Correct the underlying error
If the overdraw was caused by an error — for example, trust money was transferred to the office account against a bill before it was actually available or cleared — correct the underlying error. The disbursement may need to be reversed or adjusted rather than recovered.
Key points
- Correct an overdraw immediately — a trust ledger should never be left in deficit.
- Money must actually move from the general account to the trust account: a disbursement payment out of general, and a receipt into trust.
- Always process the correction on the file that is overdrawn.
- The reason for the overdraw determines what happens to the disbursement afterwards — but the correction itself is always the same two steps.
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