Accounting for Law Firms: A Guide Including Best Practices

While three-way reconciliations may seem like a lot of work, they are essential to maintaining accurate financial records for your law firm. As an accountant or bookkeeper, it is important to ensure accuracy in your law firm’s financial records. Bookkeeping is a process of recording, classifying, and summarizing financial transactions to provide accurate and up-to-date financial data. This is important for law firms because it helps them stay compliant with regulations and track their finances. Most small businesses, including small law firms, choose the cash basis of accounting, as this method allows the firm to delay paying taxes on income until the payment comes in the door. Or maybe you’re just starting your firm and want to begin on the right foot.

During that time, you likely did not learn anything about legal accounting or bookkeeping. So the thought of legal bookkeeping and law firm accounting can sound intimidating to even the most experienced attorneys. Revenue billed per month is the total anticipated revenue amount your clients have been billed for over a month. This KPI helps law firms understand how much revenue they can anticipate upon client payments and comprehend general month-to-month performance.

Develop a bookkeeping system

Putting it off means having to catch up at the end of the year—the more stressful and time consuming approach. Ask a CPA to help you determine which accounting method is best for your business, and stick with it. One reason why people incorporate their businesses in the first place is that it provides a legal separation between them and their company. Accountants sometimes call this the “corporate veil,” and it’s what protects owners and their assets from any legal action taken against the company. If you’ve ever balanced your checkbook, or simply compared the balances in your bank account and your company books to make sure they match, you’ve already performed a two-way reconciliation. Recording them as anything but that could land you in hot water with regulators and mess up your taxes.

As a solo practitioner or small law firm owner, you have more important things to do with your time then manage your books. My team and I take care of your books for you, so you can get back to doing what you really love, practicing law. As a solo practitioner or small law firm owner, you have more important things to do with your time than manage your books. When it comes to our record-keeping, the handling of our Trust account was and continues to be most important. Now that we work with Lescault and Walderman, they are responsive to our needs.

So, which method is right for you?

The tax implications of this method also allow your firm to pay tax on income once it’s received and in the bank. 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. Just as your clients rely on your expertise with the law, there comes a point when you need to call in accounting professionals.

• The free version is free forever and has plenty of invoicing and accounting functions.
• It’s also a strong fit for nonprofit organizations, which can use the software for free.
• We help you do right by your clients and get you home for dinner on time.
• Ethics rules vary in each jurisdiction, but there are definitely some basics when it comes to accounting for law firms.
• The previous chapter discussed the six components of law firm finances and the various KPIs law firms should track to encourage continuous growth.

Clients (and employees) talk, and if your finances are in shambles due to negligence, that could spell disaster for your credibility. You’ll be able to visualize what you’re spending money on and what’s bringing in revenue, so you can pinpoint what’s working and what https://goodmenproject.com/business-ethics-2/navigating-law-firm-bookkeeping-exploring-industry-specific-insights/ isn’t. 3 components involved in the reconciliation process consist of the trust ledger, the client ledger, and the trust reconciliation. Accountants also help you with strategic tax planning, analyzing your business financial position, forecasting, and tax filling.

Best accounting software for law firms comparison chart (top 10 highest rated)

And when you’re missing out on 12% of your billable hours, that’s 4.8 hours in a standard 40-hour workweek. Data entry errors lead to wasted time, as you comb through records to figure out what the error is, as well as billing complications and compliance violations in the worst cases. And law schools don’t really go into how to manage these accounts properly, so we see a lot of lawyers going in blind. Trust accounting (including IOLTAs) isn’t a part of standard business accounting.

A bank account allows tracking all incoming and outgoing funds, which is necessary for accurate record-keeping. Having a separate business account allows for greater control over the accounting of clients’ funds. It also establishes credibility with existing and potential clients, showing that the law firm is taking its financial affairs seriously.

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. You don’t necessarily need accounting software or a professional bookkeeper to handle your law firm bookkeeping. When you’re just starting out, you can keep costs low by recording all income and expenses in a spreadsheet, like our Excel Income Statement Template. Each month, a team of professional bookkeepers with experience in legal accounting gathers your data for you and turns it into accurate financial statements.

Importantly, you can determine your practice’s progress at any time when you have accurate financial statements. Also, you will find it much easier to work with bookkeepers, partners, colleagues, and accountants. Legal accounting software is designed to help law firms with bookkeeping, allowing them to keep track of their finances in an efficient and compliant manner. This type of software provides a range of features and benefits, such as auto-generated reports, secure data storage, and access from any device. Automation can also reduce the time spent on manual data entry tasks, making it easier for accountants and bookkeepers to remain up-to-date with ethical rules and client information. Additionally, cloud-based legal accounting software offers real-time insights into financials while eliminating the need for costly on-premise installations.

Best Legal Accounting Software for Small & Large Law Firms

Clearly presented financial data will help you identify areas in your business that may need tweaking for optimal functionality. This data will also aid in determining the financial feasibility of planned projects or actions, law firm bookkeeping such as taking on a particular client, hiring more staff, or acquiring real estate and other assets. With the accrual method, on the other hand, you enter an expense or revenue the moment it is incurred or earned.

• Each month, take some time to reconcile your budget compared to your reality, making changes that benefit your bottom line.
• Every law firm has a responsibility to stay compliant with ethics regulations, and your firm is no exception.
• But, if you want to spend your time focused on practicing law rather than deep in the weeds of your firm’s finances, you’ll likely want to consider hiring help.
• Even though bookkeeping and accounting for law firms is more complex, it is a very doable process with a little knowledge and experience.
• Then, you’re ready to evaluate the top accounting platforms for law firms.
• As an attorney, you’re aware that when you receive money that belongs to a client, you must place those funds in a trust account separate from your own money.