If you want your firm to be financially healthy and thrive well into the future, you need to pay attention to your finances. At a glance, the COA should communicate all the financial transactions that your firm engaged in during a specific period. It’s broken down into categories and contains a name and description for ease of use. First, let’s differentiate between accounting and bookkeeping — two terms that are often used interchangeably but really shouldn’t be. Each of these records should be kept for a specific time—some for 10 years, some for as few as three. The IRS doesn’t require you to keep records of certain expenses under $75, but we still recommend that to be safe, you keep copies of all records.
Beyond knowing how to assign billable hours and ensuring that invoices are sent and paid on time, take advantage of budgeting and financial analysis services. Supporting Strategies can evaluate your day-to-day operations and suggest improvements that have the potential to transform the financial management of your law firm. Recording any money still in a trust https://www.bookstime.com/ account as income is a glaring error and is also against the rules. You may count funds in trust accounts as income until you have earned fees for services rendered. QuickBooks is an industry leader and one of the oldest accounting software options. Countless law firms have used the features QuickBooks offers to handle their financial and legal concerns.
Accounting for Law Firms Best Practices
When tax season comes around, you could forget to claim it and miss out on those deductions. 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. We’ve seen firms using these accounts to hide assets or as a savings account. 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 sum of all the client ledgers must equal the balance in the trust ledger. There should be no reconciling or outstanding items because entries in the trust ledger and client ledger should happen simultaneously. We recommend you hire a legal bookkeeper and accountant to help keep you and your firm on track. You now have all of the information and tools needed to get your law firm’s accounting where it ought to be.
Losing Track of Transactions
Regardless of the size of your law firm — even if you’re a solopreneur — it’s important to know accounting and bookkeeping basics. By learning the fundamentals of accounting, you can make sure your firm is compliant with ethics rules while finding ways to optimize your cash flow. From sending payment requests and tracking them to integrating with your go-to legal software products, LawPay will fit your needs. 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.
Although they share a common goal, they occur at different stages of managing your firm’s finances. Bookkeeping happens first and relates to the administrative side of tracking your cash. In fact, some bookkeeping tools such as QuickBooks and Xero integrate with your practice management tool, allowing you to easily track your clients, invoices, and more.
Managing Firm Finances: Bookkeeping, Accounting, and KPIs
Law firms are expected to have a separate but essential trust account, typically called an IOLTA. Plus, if you want to outsource to accountants or legal bookkeepers, having a solid foundation will make it 10x easier. Before the IOLTA, lawyers would store this https://www.bookstime.com/law-firm-bookkeeping money in a non-interest-bearing checking account, as they are not allowed to benefit financially from storing a client’s money. Before meeting with a bank representative, call ahead and ask what paperwork you need to bring to your initial appointment.
But, if you want to spend your time focused on practicing law rather than deep in the weeds of your firm’s finances, you’ll likely want to consider hiring help. One (or more) of these professionals can greatly assist with your law firm accounting. To avoid this type of situation, use accounting software that allows you to automate these processes. For example, keeping track of invoices or monthly recurring expenses.
Yet, if you own a small firm with multiple attorneys, employees, or contractors, hiring a bookkeeper is more than worth it. Once you have a strategy and budget in place, the work of day-to-day management sets in. Reviewing your finances is not an annual event completed at tax time!
- Our clients are small law firms who understand the importance of active financial management and entrepreneurs who want to know their numbers and want to make their law firms work for them.
- With cash accounting, you don’t have to pay taxes on earned money until it has been deposited into your account.
- The finances of service providers tend to have far fewer moving parts than those of businesses with an inventory on the books.
- A budget helps you set expectations regarding cash flow and expenses for the year, reducing the likelihood of missing a payment or bouncing a check.
- There are also state and sometimes municipal payroll taxes to be collected.
When looking at the importance of solid accounting, you’re really talking about looking at financial data on a regular basis. And you can’t do that if you’re not gathering and sorting it on a regular basis. Know that your firm’s day-to-day transactions are being accurately recorded to ensure smooth operation of your firm as a business. Let our team of legal bookkeeping experts start doing the work for you. Practice Alchemy gives you a complete “plug and play” bookkeeping solution to manage your accounts and give you the necessary insights you need into your firm’s financials. As my law practice has grown, Anna and Kate have continuously dived in, assessed, and fixed my accounting processes.
Accounting for law firms: best practices
And with one error comes many more, so it’s crucial to keep things organized. Not all accountants are familiar with the rules and regulations governing these accounts, nor do they know that the rules change with each jurisdiction. But every payment provider has a different fee structure (for example, credit card payments often come with a fee) so look into that beforehand.