Here are some practices you should follow to minimize the burden and set yourself up for success. However, there are a couple of unique aspects to law firm accounting, and managing them can be challenging. Most notably, lawyers often hold onto funds that don’t belong to them, and specific rules govern how you need to handle that cash. Make sure your bookkeeping staff knows law firm accounting procedures. Your bar license is at stake any time your firm improperly moves client funds, even if you didn’t do it. It’s recommended to find a merchant processor that works mainly with law firms to avoid breaking certain trust accounting rules.

Bookkeeping is a vital task for law firms, as it helps them to record and monitor financial transactions and keep accounts in balance. Accountants must ensure that bookkeeping for law firms is done properly in order to provide reliable financial data. These errors can lead to wasted time and complications for a law firm’s bookkeeping process. IOLTA (Integrated Online Taxation and Accounting) is a software platform that helps law firms manage their finances and keep records of their transactions. IOLTA can be used to track billable hours, expenses, client payments, and trust accounting.

The Difference Between Law Firm Bookkeeping and Accounting

In order to stay afloat financially, a well-thought-out budget is essential for a law firm. When creating a budget, it’s important to think about mandatory expenses, like employee salaries and office expenses, as well as potential surprises. For example, if the trust account statement balance does not match the trust ledger balance, Bookkeeper360 App Xero Integration Reviews & Features Xero App Store US it could mean that client funds have been misappropriated. For example, you can use the “Legal Billing” app to track your time, and then enter all of your billable hours into your accounting software. Double-entry accounting is a system of bookkeeping where every financial transaction is recorded in at least two different accounts.

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. Keeping client funds separate ensures the money isn’t inadvertently used for your business or personal expenses. You can add as many accounts to your chart of accounts as you need to prepare accurate and informative financial statements, but don’t let your chart of accounts get too unwieldy. How your business pays income tax is determined by your business’s legal structure.

Common legal accounting and bookkeeping mistakes

All transactions are then recorded in a ledger, which is a record of all financial transactions. Setting and sticking to a budget is essential to keeping track of your business finances. By knowing your expenses and revenues, you can make sure that you are not spending more than you are making.

• Double entry accounting is a helpful practice for lawyers to know about, as it provides an extra guard against errors.
• Your bookkeeeping shouldn’t be handled by the same accountant who services your plumber.
• It doesn’t belong to you, and if you claim it as such, you could face the consequences from regulators and have a more challenging tax season.
• And when you’re missing out on 12% of your billable hours, that’s 4.8 hours in a standard 40-hour workweek.
• For example, if a lawyer has $10,000 in their business account and $5,000 in their trust account, they would need to deposit the $5,000 into a separate trust account.
• In addition, you may need to use clients’ funds on their behalf, in which case you must provide detailed reports about your activities to remain in compliance.

With an all-contained https://kelleysbookkeeping.com/accounting-for-startups-everything-you-need-to/ and accounting system, users can enjoy having all their financial data in one place—reducing the risk of critical errors. In most cases, law practice management software doesn’t include an accounting element specialized for law firms. This leaves you with the purchase of additional non-legal accounting software.

How We Work with Law Firms

Lastly, transactions are not recorded until you receive the money, so it’s not taxed until it’s actually in the bank. If you commingle your personal and business funds, you’re “piercing the veil,” and courts will ignore the legal protection that comes with incorporating. When you have a trust account, you’re required (by the State Bar) to perform a three-way trust reconciliation every 30 to 90 days. To do so, you’d first need to transfer that money into your business account. Instead, employ good accounting and budgeting practices, so you don’t need to dip into these fees in the first place. They have their own rules and regulations that vary depending on your jurisdiction.

But taking the time to properly set up your finances won’t just make it easier to file your taxes each year. It’ll save you time, money, stress, and potentially legal headaches. You’ll have accurate financial statements on hand, which can show you how your practice is performing at any given moment. And it will be a lot easier to work with bookkeepers, accountants, new partners, and buyers, if you ever decide to sell the business. Lawyers are not accountants and they often make the same common mistakes when it comes to accounting for law firms.

What tools are available to help with efficient legal bookkeeping?

As a solo attorney, managing your books via accounting software may get you started. Yet, if you own a small firm with multiple attorneys, employees, or contractors, hiring a bookkeeper is more than worth it. When an invoice is paid, you must first allocate the payment to the incurred cost. Nevertheless, many attorneys fail to separate revenue that covers incurred costs from their actual income. Failure to allocate appropriately can lead to inaccurate books, and battle compliance issues.

The benefit of this approach is that you have a more realistic understanding of your law firm’s income and expenses. Practice Alchemy’s suite of law firm bookkeeping services will enhance your firm’s ability to track expenses, optimize cash flow, and produce informative financial statements on a regular basis. Unfortunately, far too many firms utilize outdated and ineffective tools to perform their accounting functions. This could be putting your firm at a significant disadvantage as inadequate law firm accounting software can lead to excessive billing process errors and inaccurate time tracking. An accountant who has experience with financial forecasting and strategy can help a law firm plan for its future expenses and income.