Accounting for Law Firms: A Guide Including Best Practices

Your business may also be required to pay state taxes in both your home state (where your business is registered) and in any states where your business has nexus. Once your business bank accounts are up and running, you should avoid mixing your personal and business finances. While mismanaging an IOLTA account carries stiff penalties, many law schools offer little to no training when it comes to managing trust accounts.

Bench is an online bookkeeping service that caters to small business owners who’d rather spend their time growing their business than managing the books every month. 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. Which method you choose will affect cash flow, tax filing, and even how you do your bookkeeping. Make sure to consult with a CPA before settling on the method you’ll use.

What is the difference between bookkeeping and law firm accounting?

Debits and credits combine to form a balance sheet comprising assets, liabilities, and equity. Your bookkeeper, accountant, and the IRS will thank you for holding onto documents proving your income, credits, https://investrecords.com/the-importance-of-accurate-bookkeeping-for-law-firms-a-comprehensive-guide/ and deductions. Cash accounting also gives you an easier way to see how much cash your business has at a glance. Simply look at your bank balance and you’ll know exactly what the situation is.

For example, you might think you have plenty of money in the bank and buy a new computer before realizing you forgot to record that check to the court reporter. A simple mistake could send your firm into the red for the month. Or, you might lose track of critical transactions that affect your taxes. When choosing an accountant or bookkeeper for a law firm, it is important to select someone who has experience working with businesses in the legal industry.

Monthly Financial Statements

Achieve a clear insight around your firm’s working capital, financial projections, and requirements for future expansion. We were in the middle of making a lot of plans, but the lack of data was holding us back. Eventually we realized it made sense to hire someone and not try to do this in house.

• In this law firm accounting guide, we take you through law firm accounting and financial management basics to cement your knowledge and present valuable new information.
• Your law firm will also be able to set revenue benchmarks, which will help you determine if you are meeting your goals or need to adjust your business plan.
• Recent technological advancements have made accounting easier for firms.
• It involves recording and classifying financial transactions, preparing bank reconciliation, and tracking all income and expenses.
• People tend to use the terms bookkeeping and accounting interchangeably, but bookkeeping is actually just the first step in the accounting process.
• She is also experienced in setting up corporations with the State Corporation Commission and the IRS.

It will be challenging to scale your growth without understanding the money coming in and out. We have created this guide to give you an overview of the fundamentals of bookkeeping and accounting for attorneys and help anyone who is a small law firm owner. Generate financial statements like cash flow, profit and loss, or balance sheets. As lawyers, we didn’t want to focus on the day-to-day of our firm’s accounting. They check-in with us weekly or more, and they maintain and upgrade our financial systems as our firm continues to grow. They always give us good folks to work with; we enjoy working with them.

Common legal accounting and bookkeeping mistakes

Lawyers are required by law to maintain separate trust accounts for their client’s funds. They are not allowed to commingle these funds with their own money or use them The Importance of Accurate Bookkeeping for Law Firms: A Comprehensive Guide for any purpose other than holding them in trust for their clients. The double-entry accounting system is the most effective way to do bookkeeping for a law firm.

• When it comes to accounting for law firms, there’s no one “right” method (though you may be required to take on the accrual method).
• Conversely, cash basis accounting recognizes revenue when you’re paid (i.e., when the cash is received) and expenses when they’re paid.
• Xero is growing fast as an accounting management option for small and growing law firms.
• 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.
• LawPay also ensures your law firm accepts payments that comply with your state bar’s regulations surrounding trust (IOLTA) accounts and the American Bar Association (ABA) guidelines.
• It’s called the “corporate veil,” and it protects business owners and their personal assets from legal action taken against the company.

Without the essentials, your firm might struggle to stay compliant with ethical rules, and you may inadvertently leave money on the table. 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. Better Bookkeepers is a true, full-service bookkeeping business near you that provides any relevant services you need. If you’re looking to audit-proof your business and review your finances, we’re the right choice.