Accounting for Law Firms: A Guide Including Best Practices

If you are running a law firm, don’t make that severe mistake. Your client trust accounts are required to keep separate from your business accounts. While there are a lot of factors to balance, here are the essentials for law firm accounting and bookkeeping success that you should get a handle on ASAP. While it’s essential to understand the fundamentals of accounting for law firms, you still aren’t an accountant or bookkeeper. Hiring professionals is common for law firms, and it’s an easy route to peace of mind.

Following these best practices will help law firms ensure that their bookkeeping activities are conducted ethically and in compliance with relevant regulations. A chart of accounts is a list of all your firm’s financial accounts, usually used by an accountant and available for bookkeepers. Account numbers of the chart of accounts are structured to suit the needs of your law firm, the jurisdiction, and the practice area. Typically, there are 5 core categories consisting of assets, liabilities, owner’s equity, revenue, and expenses.

Get back time to grow your law firm

The bookkeeper should also be familiar with the firm’s billing cycle and invoicing procedures in order to ensure that all billable hours are accurately recorded and invoiced in a timely manner. Similarly, if you entertain clients frequently, you will want to keep track of those expenses as well.

Additionally, it is prudent to select someone who has decision-making skills that are tailored to legal bookkeeping. There are many benefits to double-entry accounting, but the main one is that it provides an accurate record of all financial transactions. This system can be used by any size business, but it is particularly beneficial for law firms because it helps them to keep track of their expenses and income.

Thinking About Exploring Your Options For Bookkeeping?

Tolaw firm bookkeeping every bookkeeper holds financial accounts and transactions. Each page of the same ledger represents an account from the chart of accounts. A proper system should be employed to track the working hours of the law firm’s clients, billing them and tracking their payments on receipt.

• By knowing your expenses and revenues, you can make sure that you are not spending more than you are making.
• Using a product-centric and customer-first approach, ProfitSolv collaborates with firms to offer better client services.
• With all the data collected in one place on the income and expenditure of law firms, analysis needs to be done to find out what profit/loss the law firm is making.
• Meanwhile, you can spend time doing only the things that you can do for your business by outsourcing low-value tasks like data entry and keeping track of your general ledger.
• These actions will mitigate your risks of incurring a penalty.
• “Bookkeeper” and “accountant” are terms that are often used interchangeably.

Total assets are also required to equal total liabilities plus equity of a law firm). If you want your firm to stay compliant, be financially successful, and grow, you need to have an accurate and clear bookkeeping system for your law firm to follow. This could mean taking on bookkeeping tasks in-house or hiring a professional bookkeeper with experience working with law firms. Whenever a client pays an invoice, you must allocate the payment to the incurred costs of a matter first.

Mismanaging trust accounts

If there are any differences between the three, your https://www.bookstime.com/ reconciliation report should show the reason for the discrepancy. For example, say you deposited a check for $10,000 to the trust account on December 30 but the deposit didn’t clear the bank until January 2. The December 31 bank statement shows a balance that is $10,000 less than your books or the client’s trust ledger due to a timing difference. You would note this in your reconciliation report and ensure your January 31 bank statement includes the deposit.

Whether intentional or through neglect, violations of compliance regulations—like mishandling client funds—can lead to serious repercussions. Get Clio Grow and law practice management with Clio Complete. We are experienced in dealing with the majority of good legal accounts software packages. When it comes to Trust/IOLTA accounting, we adhere to a careful process that eliminates errors and establishes strict procedures for handling client retainers and subsequent disbursements. John W. Olmstead, MBA, Ph.D, CMC,() is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Provide all required financial reports to the firm owner on a monthly basis.