Law Firm Bookkeeping 101: Choosing The Best Accountant for Your Firm

Without the proper business bank accounts, you risk inaccurate bookkeeping, messy records, and potential compliance violations regarding trust funds. Most law firms should start by using the cash basis accounting method. The IRS won’t require you to use the specific rules necessary to implement the accrual method until you’re making $10 million a year. The cash basis accounting method is easier and more straightforward, which will free up your time to work on building your practice. Typical accounting tasks are (1) preparing monthly income and balance sheet statements; (2) preparing and completing tax returns; and (3) forecasting future cash flow.

• As an attorney, you may be aware of state bar requirements for trust accounts, but that doesn’t prevent you make mistakes.
• If you’re going to hire employees, you will need to set up payroll.
• Legal-centric online payment services, like the ones we explore below, will cater to the unique needs of law firms, including dealing with trust accounts and ABA billing codes.
• 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.
• Clio aims to be the Operating System for your law firm, and can integrate with many other cloud-based apps your firm may use.
• This model has led to discovering numerous dumpster fires in law firm accounting.

Each month, take some time to reconcile your budget compared to your reality, making changes that benefit your bottom line. We know that lazy bookkeeping practices will cost you real money and time, result in sweaty nightmares, and put your license and firm at risk. Thankfully, good bookkeeping can also result in accurate reports on demand, make billing easier and improve the way you view your finances.

Xero: For easier online accounting

Intermingling expenses isn’t a fatal mistake but it causes problems for your business when it comes to claiming expenses and tracking the financial health of your business. Now that you understand that bookkeeping happens first, I suggest you figure out the best way to handle bookkeeping before we move on to legal accounting. Here are our top recommendations for accounting software options, plus tips on how to decide.

For bookkeeping purposes, ensure you’re only tracking transactions that occur within your law firm’s accounts. If for any reason you make a mistake (such as depositing a personal check in your business account), make sure to track it in your books. Law firm bookkeeping records the financial transactions and balances the financial accounts for your firm. Legal bookkeeping takes place before any accounting can occur and is an essential administrative task for any law firm. Reliable bookkeeping for attorneys also provides accurate financial data for legal accountants to work with. While you spent most of your life becoming a seasoned lawyer, accounting is a different area and not your expertise.

A step-by-step guide to mastering accounting for lawyers

However, your law practice is still a business, so you will need to treat it as a business. Speaking of expenses, one of the most common mistakes attorneys make is losing track of business expenses. It’s best to capture and record your business expenses on the daily, so you don’t lose those receipts or invoices. Then, set aside a time each week to make sure they are coded properly in your books. Your financial strategy will help you plan, strategize, and shift as you need to, helping you grow a financially healthy law firm.

• And when you commingle your personal and business finances, the following problems can arise.
• It includes lightweight practice management (clients, cases and calendars), coupled with robust time tracking, billing and accounting (including robust financial reporting).
• Because of this, you run the risk of breaking certain trust accounting laws (those transaction fees need to be immediately paid back into the trust account).
• This is a double-entry system, so there are two equal corresponding sides at all times.
• Additionally, maintaining accurate books helps ensure that all financial information is correct and up-to-date.

You can’t, for example, pay for your firm’s operating expenses directly out of an IOLTA account. Some firms will also intentionally use their IOLTA accounts to hide assets, or will leave funds in their IOLTA even after they’ve been earned, using it as a savings account. While mismanaging an IOLTA account carries stiff penalties, many law schools offer little to no training when it comes to managing trust accounts. As a result, attorneys often find themselves making several common mistakes again and again.

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As with the law, too much can go wrong if you don’t have the right professional in charge. Let a competent, experienced professional or law firm bookkeeping company handle things is always better. You have tremendous duties and responsibilities as a lawyer and are scrutinized on many levels.

She is also experienced in setting up corporations with the State Corporation Commission and the IRS. Law firms must follow certain standards when it comes to recordkeeping, holding funds in trust, and notifying clients of the receipt of property or funds. Violating legal accounting and compliance regulations can lead to financial penalties, the suspension of license, and even disbarment. LeanLaw was designed with the midsize law firm in mind and is specially equipped to handle the time tracking and monitoring, billing, and trust needs of law firms. When you add QuickBooks through instant integration, you can easily access a full suite of tools to help you manage your small or midsize law firm. Successful law firms know everything about their money, from where it came from to where it will go.

Everything a big operation could want and need from an accounting software solution is available through PCLaw. Xero is growing fast as an accounting management option for small and growing law firms. One of its most attractive features is no limit on the number of users allowed access. Another feature that makes it one of the top choices for law firms is its ease of use and intuitive interface.

And depending on the outcome of their analysis, they can provide solutions to increase profit. Your bookkeeper will help you track all information that is sent in and out of your business. Hiring an accountant is so much more than just to be used when it is tax time, and you are looking to file your tax return. They also exist to help you with financial statements, forecasting, and capturing expenses.