Law Firm Chart of Accounts Explained: Tips & Samples

A balance sheet contains details of a firm’s assets and liabilities at any given period. It is one of the core financial statements used for assessing the health and performance of a law firm. To reduce the risk of misinterpreting available funds, it is important to monitor the balances in accounts receivable (AR) and accounts payable (AP), as they appear on your balance sheet.

Statement of Cash Flows

Second, as a business owner, you should receive a reasonable return on your investment. Healthy businesses should aim to generate 10-15% of their income in profits. This concept holds true for anyone in your family that you employ as well. We know lots of spouses running firm operations, marketing, client intake, accounting, and being the chief bottle washer. This statement is especially important for stakeholders within your firm, as it showcases how much equity they hold in your business. Plus, it shows how much available owners’ equity you have to reinvest back into your https://www.bookstime.com/ firm as expansion, new equipment, or debt payoff.

Understanding Your Law Firm’s Financial Levers

However, cash accounting may not accurately reflect your finances since it does not account for accounts receivable or payable. For example, you may appear to have more cash than you have if outstanding payments are unearned revenue owed to vendors. This is a contributing factor of why the general accounting principles (GAAP) does not find cash accounting acceptable. It can also be complicated to switch from cash accounting to accrual accounting. The ABA supports law firms that use the cash accounting system and opposes legislators who previously tried to impose required accrual accounting for several personal service businesses. Law firm accounting is a complex system that’s responsible for countless non-billable hours for many legal professionals.

• LawPay generates transaction details and daily deposits of client funds.
• Although that legislation did not pass, we recommend checking tax laws for the upcoming tax year and consulting with an accounting professional to ensure you choose a compliant accounting method.
• The advantage of this method is that it gives you a more realistic idea of (expected)  income and expenses over a period of time.
• If a firm is in a state of growth, this information proves invaluable for evaluating staffing needs and assessing benefit requirements.
• Escrow account ledgers, which track funds held in trust on behalf of clients, do not fit directly into the financial statements discussed above.
• Law firms deal with various financial transactions, such as receiving payments from clients, paying expenses, and managing trust accounts.

Client Trust Accounting in California: A Lawyer’s Guide

Chart of Accounts SampleA sample chart of accounts generally shouldn’t be copied directly into your law firm accounting software without some customization. Records for Each AccountAs noted, a proper chart of accounts facilitates the appropriate recording of the transactions within those accounts. Following law firm accounting best practices, each transaction requires a debit from one account and a credit to another.

• This includes, among other activities, tracking profitability and expenses to predict and plan for revenue growth.
• While both are important in law firm financial management, it can be more difficult to carve out the time for long-term planning.
• A positive net income indicates that the firm’s revenues exceeded its expenses during the period, while a negative net income signifies a loss.
• The next step is to nail down your law firm’s budget and related goals to help keep your team financially afloat.
• Retained earnings are profits that have been reinvested in the business rather than distributed to the owner(s).
• For example, your asset account might contain sub-accounts for your operating bank account, accounts receivable, and advanced client costs.

Navigating Tax Regulations

• After all, if you can’t support yourself, you won’t be able to support your clients.
• If you’re seeking a unified solution for case management and legal accounting, Clio could be the perfect fit.
• This checklist will help you tidy up by the end of the year and give you a clear picture of your firm’s financial performance.
• After covering client expenses, the leftover amount is considered income.
• Accounting for law firms may be new or challenging to you, but it doesn’t have to be scary.

It involves a ton of inefficient, manual work—involving a lot of spreadsheets, paper invoices, inputting data entry, and struggles with collections. Just as your clients rely on your expertise with the law, there comes a point when you need to call in accounting professionals. Whether it means using legal accounting software to simplify and automate your accounting, hiring a professional legal accountant, or both—don’t be afraid to delegate when you need to. Accounting for law law firm chart of accounts 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. Reliable bookkeeping for attorneys also provides accurate financial data for legal accountants to work with.