Law Firm Accounting and Bookkeeping: Tips and Best Practices JurisPage Legal Marketing

The income statement helps law firms decide if they can generate profit by decreasing costs, increasing revenues, or both. It also grades the efficiency of the strategies employed by the firm at the beginning of a financial period. law firm bookkeeping Business owners and other executives can reference this statement or document to assess the success of their strategies. And depending on the outcome of their analysis, they can provide solutions to increase profit.

• IOLTA can be used to track billable hours, expenses, client payments, and trust accounting.
• Three-way reconciliation is generally conducted every 30 to 60 days, depending on the state.
• An income or operating statement is a financial statement that shows a company’s income and expenses.
• The accounting method you choose should be in place when your firm files its first tax return.
• Keep abreast of the specific rules of your local jurisdiction and leverage your tech options, and you’ll be well on your way to a more streamlined accounting process for your law firm.
• There are also financial reports that go beyond following best practices for accounting and identifying growth opportunities.
• Most firms will need three business bank accounts at a minimum—checking, savings, and a separate IOLTA or trust account.

A double entry system, therefore, has two equal and corresponding sides—or debits and credits—and creates a balance sheet consisting of assets, liabilities, and equity. Accounting for law firms lets you collect and analyze information, and make data-driven decisions based on what money comes in and leaves your firm, so it’s worth it to pay attention. QuickBooks Online is an industry leader when it comes to the best accounting software for attorneys. It’s relatively easy to use, offers plenty of features, and automates many accounting tasks. You’ll be able to import bank statements, run trust accounting reports, and print disbursements checks, all from one platform. In this section, we’ll take a quick look at how the top 10 legal accounting software solutions compare against each other in terms of pricing.

Final thoughts on accounting and bookkeeping best practices

Your checking account is self-explanatory — its primary purpose is managing business revenue. Following the above three best practices allows you to optimize your finances. It’s crucial to collect and organize your financial data regularly, not just at the end of the year. In our opinion, this is an oversight, as mismanaging these accounts can lead to serious consequences, even disbarment. Businesses are complex, and you may need to set a budget for different categories like marketing, technology, etc. With money flowing in so many different directions, it’s easy to lose track.

• 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.
• Clients (and employees) talk, and if your finances are in shambles due to negligence, that could spell disaster for your credibility.
• When an invoice is paid, you must first allocate the payment to the incurred cost.
• 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.
• 3 components involved in the reconciliation process consist of the trust ledger, the client ledger, and the trust reconciliation.

Any CPA should be willing to sit down with you for a free consultation. A legal bookkeeper can also help you manage your firm’s budget and make sure that you are staying on track financially. The bookkeeper should also be familiar with the firm’s billing cycle and invoicing procedures in order to ensure that all billable hours are accurately recorded and invoiced in a timely manner. Similarly, if you entertain clients frequently, you will want to keep track of those expenses as well. By tracking these costs throughout the year, you can ensure that you maximize your tax deductions come tax time.

Bookkeeping for Law Firms

The reality is that there is no scenario where it’s okay to use your IOLTA in this way. We don’t recommend building your business off the back of your credit card. The interest rates are high, limits are often lower than other forms of credit, and they’re easily mismanaged. These are funds you must keep separate from your firm’s operating funds. And without proper care, it’s easy to slip up and make a dangerous error.

While savings accounts are not known for having great interest rates to keep up with inflation, having extra cash on hand is an important safety net for any business. The distinction matters because equity partners can’t earn salaries like employees. They’re taxed based on their portion of the firm’s earnings and pay themselves through an owner’s draw. Some partners also earn guaranteed payments to ensure stable income even if the business operates at a loss. Some firms promote lawyers to a partner title without making them a part owner in the business.

What’s the difference between accounting and bookkeeping?

Your trust account should be clearly identified as “in trust” on your bank statement and cheques. Reconciling your trust account on a regular basis is a bit like doing your taxes. You want to make sure that all of the transactions have been recorded accurately and that the account balance is correct. Bookkeepers should reconcile trust accounts on a monthly basis, to identify any errors or discrepancies.

Check out Bench’s guide to recordkeeping to see record retention periods. There may be more (or fewer) documents to track depending on your firm. We’ve said it again and again, but never, ever mix your personal and your business finances. If they don’t, you need to go over every single transaction to see where the error lies. You should never, ever borrow money from your IOLTA before you’ve earned those fees.

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. For a CPA to work effectively, they will need you to provide accurate, up-to-date financial statements. Whether you’re good with numbers and spreadsheets or not, every lawyer needs to understand the basic role that bookkeeping plays in their business. Your business’s accounting method will affect cash flow, tax filing, and even how you do your bookkeeping.

• The most powerful solution to this problem is taking the time to frequently update your books (or outsourcing your bookkeeping to a team that will reconcile the numbers for you).
• This makes it much easier for your accountant to prepare financial statements and tax returns.
• Bookkeepers should reconcile trust accounts on a monthly basis, to identify any errors or discrepancies.
• Your firm’s jurisdiction can create variances on what the ethics are, but there are standard accounting basics that lawyers must follow.
• Not all income is revenue — this is a distinction that needs to be made or you could have to deal with inaccurate bookkeeping.
• No additional software is necessary to access the powerful accounting and bookkeeping tools that you would expect to find in high-quality programs.