bookkeeping for law firm

You recognize revenue when cash is received and expenses when money is paid. This method doesn’t use more complicated concepts like accounts receivable or accounts payable because you only count the cash as it moves into and out of your financial accounts. The more methods of payment you have, the higher the odds are of a client working with you. A bookkeeper creates financial statements for your law firm bookkeeping accountant to use to file your taxes, provides suggestions on improving your firm’s financial health, and more. Opposite of cash accounting, accrual accounting records revenues the money they’re earned (likewise with expenses), not when the money hits your bank account. Your legal bookkeeper will be able to keep accurate records and review and update your books on a weekly or monthly basis.

A good law firm accounting software should include features such as billing and invoicing, bookkeeping, reporting and analytics, and payroll. The software should also include a mileage tracker, the ability to offer online payments, timekeeping tools, and the ability for multiple users to access the tools. If your law firm doesn’t already have business bank accounts, it’s time to open them. Most firms will need three business bank accounts at a minimum—checking, savings, and a separate IOLTA or trust account.

How to Choose an Accounting Software for Your Firm

Mismanagement of trust accounts can have serious consequences, including fines and legal repercussions. Commingling trust funds with other company funds is prohibited and can lead to problems. Lawyers who temporarily hold money from multiple clients must deposit these funds into separate trust accounts. Additionally, lawyers are not allowed to keep any interest earned from their trust account; instead, they must surrender it to the client.

  • Although the roles of bookkeeping and accounting are different, there is a thin line to distinguish between them.
  • Meetings get automatically invoiced to the correct matter and workflows are easily customized for each case.
  • Your business’s accounting method will affect cash flow, tax filing, and even how you do your bookkeeping.
  • Lawyers are not accountants and they often make the same common mistakes when it comes to accounting for law firms.
  • Make sure to consult with a CPA before settling on the method you’ll use.

An IOLTA account is a pool, interest-bearing business checking account for the deposit of client funds which interest earned belongs to the Lawyer Trust Fund. Follow these rules and keep track of client funds every day to ensure you don’t cross any lines that can cause your firm serious problems. Anyone wanting to run a legit business should never combine personal and business expenses. Intermingling the two makes it nearly impossible to claim your expenses, not to mention track the financial wellness of your firm.

Why bookkeeping and accounting matter for law firms

As fees earned by the lawyer, the money should transfer from the client’s fund to the firm’s operating account. The trust account essentially offers a way to separate the client’s and firm’s money. Bookkeeping is completely diverse from the legal process and so, with the expansion of business, it becomes difficult to manage advanced financial tasks. When the law firms outsource their requirements to us, they can focus on business development tasks such as administration, networking, etc. The lawyers can get confused over the calculation of taxes and GST for disbursements and activities, thus, it is important to opt for a reliable bookkeeping service provider like us.

This means that attorneys have to take extra care when selecting a merchant processor for their business. To offset this risk, it’s important to carefully monitor cash flow with accounts receivable (AR) and accounts payable (AP), which appear on your balance sheets. Most law firms opt to use cash basis accounting because it’s simple to maintain. Cash accounting makes it easy to determine when a transaction has occurred (the money is either in the bank or out of the bank) and there’s no need to track receivables or payables. In addition to their business checking and savings accounts, most law firms are required to hold client funds in a separate trust account—often called an “IOLTA”.

What are some common mistakes made in bookkeeping for a law firm?

Not all accountants are familiar with the rules and regulations governing these accounts, nor do they know that the rules change with each jurisdiction. Here are five common law firm accounting obstacles and mistakes you should be aware of so you can avoid them. The next step is to determine how your law firm is going to receive money from clients. Instead, employ good accounting and budgeting practices, so you don’t need to dip into these fees in the first place.

This will make it easier to find what you’re looking for and will help you avoid any mistakes. Having a legal bookkeeper on your team can save you a lot of time and money in the long run. There are a few key reasons why it’s important to have an easy expense reimbursement system in place for a law firm. Three-way reconciliations are an important part of practicing law and must be performed on a regular basis to ensure accuracy in your financial records. For example, if a law firm has a goal of saving money, they may choose to cut back on non-essential expenses like office parties or new office furniture.

Legal Accounting as a Service

If you’re serious about growing your business, you need to team up with a Certified Public Accountant (CPA) early on. Choosing various software that works together seamlessly makes running your firm much more straightforward. This can save a lot of time and hassle for both the bookkeeper and the employees. All transactions get sorted into specific categories (assets, liabilities, or equity), then once sorted; the two sides should match each other. It will be much easier to pick a few numbers and keep those top of mind. With those distinctions in mind, it becomes easier to see which type of professional help you might need.

bookkeeping for law firm

You want to pay attention to the ABA’s rules, as not doing so could lead to some severe consequences. Whenever there’s a change in one category, there should be a corresponding and equal change in another in order to keep the sheet balanced. If you have a debit in one account, it follows that there will be a credit in another account. In this system, all transactions are categorized as one or the other. In 1981, this money started being stored in an IOLTA, which is an interest-bearing account. Ask around to see if other attorneys have a recommendation, or ask your State Bar for referrals.