Accounting for Law Firms: A Guide Including Best Practices

Law firms are held to a high standard and suffer greatly when errors occur, even when the errors are unintentional and understandable. Law firm accounting helps you keep your firm’s name reputable and clean. Tackling bookkeeping every day prevents errors legal accounting services from piling up and ensures financial records remain accurate. Legal expenses quickly add up, from court filing fees to legal software subscriptions. Without proper tracking, your budget can spiral out of control and tax season can become a nightmare. IOLTA accounts are designed to keep client funds separate from your typical business or operating account—where you are allowed to accrue interest.

Do lawyers need accounting?

With this method, tax liability attaches before funds are even received. And although accrual accounting gives you a good idea of your future income and expenses, it does not provide as clear a picture of your cash HVAC Bookkeeping flow situation as cash basis accounting. This is a more appropriate accounting method for large firms with high client turnover. Clio Manage and other programs help firms organize their financial activities, from the expense and revenue tracking to managing billables.

Keep Track of Miscellaneous Expenses

• Double-entry accounting aids in the detection and prevention of accounting errors.
• Book your demo today to see how Clio Accounting can manage your bookkeeping and accounting from the same place you manage everything else for your firm.
• Let a competent, experienced professional or company handle things is always better.
• Trust account liability almost operates like strict liability, where simply committing an act is proof enough for guilt.
• 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.
• 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).
• It also establishes credibility with existing and potential clients, showing that the law firm is taking its financial affairs seriously.

Legal accountants also need to be intimately familiar with the relevant rules and regulations and be comfortable using different types of software. Accountants should also be able to provide a law firm with professional counsel to help the firm grow financially. With financial data, legal accountants present big-picture information and give comprehensive and specific reports of a firm’s financial health. These data are valuable for a law firm’s future sustainability and profitability. Three-way reconciliation is generally conducted every 30 to 60 days, depending on the state.

• Recording any money still in a trust account as income is a glaring error and is also against the rules.
• Double entry accounting is a helpful practice for lawyers to know about, as it provides an extra guard against errors.
• Failing to properly allocate these expenses can lead to inaccurate billing, complicate tax filings, and raise issues of compliance.
• An accountant who specializes in accounting for law firms is beneficial.
• Conversely, cash basis accounting recognizes revenue when you’re paid (i.e., when the cash is received) and expenses when they’re paid.
• Look into the pros and cons of both methods for your firm, then be consistent going forward to ensure your records are accurate and easy to track.

Messing Up With Trust Accounts

Examples of these expenses are fees for transportation, court filings, expert witnesses, transcripts, medical records, etc. If you’re a lawyer in Texas, check out our comprehensive guide, What You Need to Know About IOLTA Accounts in Texas.

The firm could face compliance issues, and their books will be inaccurate (skewing the value of any accounting data derived from them). And a lack of professionalism can lead to losing your clients, referrals, and growth opportunities. Accounting for law firms lets you collect and analyze online bookkeeping information, and make data-driven decisions based on what money comes in and leaves your firm, so it’s worth it to pay attention. We’ll also show you how legal accounting software can make the whole process easier (and more effective).

• This could mean taking on bookkeeping tasks in-house or hiring a professional bookkeeper with experience working with law firms.
• As you learn more about the process, you will likely find that you already understand law firm accounting and financial management.
• Ensure all tax filings are completed correctly and on time to avoid potential penalties or legal issues.
• By keeping your money separate at all times from your clients’ and strictly following trust administration rules and guidelines, you’ll sidestep a whole host of problems down the line.