4 Special Accounting Considerations for Law Firms

Although legal accounting and bookkeeping are two separate tasks that could be performed by two different professionals, most legal accounting programs include functionality that handles both. This makes sense because the two work closely together but it can cause confusion for those newer to law firm accounting. Accrual accounting is a more sophisticated method that records revenue and expenses at the time they are earned or incurred, regardless of when you receive the money. The benefit of this approach is that you have a more realistic understanding of your law firm’s income and expenses. Cloud accounting software like Xero and QuickBooks offers a full suite of tools to help you with accounts payable and receivable, bank reconciliations, and financial reporting. Keep in mind that you’ll still be performing all your own bookkeeping tasks—you’ll just be using software to help streamline the process. When pressed for time, it’s tempting to let recordkeeping fall by the wayside.

With that said, knowing how to manage your money is also a reputation builder. Clients talk, and if your finances are in shambles due to negligence, that could spell disaster for your credibility. You’ll be able to visualize what you’re spending money on and what’s bringing in revenue, so you can pinpoint what’s working and what isn’t.

ZipBooks: top small law firms accounting software

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. An IOLTA account is a pool, interest-bearing business checking account for the deposit of client funds which interest earned belongs to the Lawyer Trust Fund. More specifically, the interest generated on IOLTA accounts is an important source of funding for the IOLTA program that is used for the purpose of civil legal aid and assistance to low-income residents.

If your law firm doesn’t already have business bank accounts, it’s time to open them. Most firms will need three business bank accounts at a minimum—checking, savings, and a separate IOLTA or trust account.

Use the ANCHOR website to Apply for up to $1500 in Tax Relief

Accurate legal accounting emboldens firms and lawyers to make knowledgeable financial decisions based on financial trends, forecasting, and key performance indicators. By following legal accounting best practices and using the right tools year-round, end-of-year accounting doesn’t have to be so scary. The Enterprise Plus plan also unlocks the LEDES budgeting feature. Additional features include an accounting of all operating and trust accounts with triple reconciliation. CosmoLex is a cloud-based law accounting software that’s part of the Tabs3 family. It comes with built-in trust accounting tools, so you don’t have to use any additional software.

• An industry-specific software option will help you manage your firm more effectively and efficiently.
• In the accrual method, you record a transaction when it actually occurs.
• Managing trust accounts is one of the unique aspects of legal accounting, and the consequences of mishandling them can be significant.
• The purpose of double-entry accounting is to act as a safeguard against errors and to provide an accurate record of all financial transactions.
• Some states prevent law firms from depositing their own funds into CTAs, so you’d pay them from your operating account.

It integrates with common law firm management tools like NetDocuments and Yocierge for increased functionality. These errors can lead to wasted time and complications for law firm bookkeeping a law firm’s bookkeeping process. In other industries, it is allowed to keep clients’ prepayments in your operating account and use the money to fund client projects.

Law Firm Bookkeeping and Accounting: A Completed Guide 2022

Some accounting software includes some bookkeeping functionality, but not everything that you need, and some offer complete bookkeeping and accounting features. Before you purchase software, it’s important to make sure that it will do what you expect.

Firms must secure paper and electronic payroll records and require written authorization for all changes from new hires, terminations, and changes such as salary, bonus, and related employee information. Direct deposit authorizations must be in writing and include only employees or recipients with a company email. To be SOC 2 compliant, the internal control practices and policies must be audited and meet certain service principles. These include security, availability, processing integrity, confidentiality, and privacy.

Keeping clients informed and upholding safekeeping requirements are critical practices for maintaining compliance with client funds. The business will need to look at the firm’s finances and see what makes the most sense for your business structure. You are choosing to impact how you carry out your bookkeeping, tax filings, and more. Bookkeepers work directly to keep financial records in order at the law firm. Staying compliant with the regulation of ethics is the responsibility of every lay firm.

• First, let’s review typical accounting and bookkeeping functions that need to happen regularly so you can make sure you’ve got these covered.
• To mediate any potential issues and allow attorneys to stay compliant with the rules that govern them, assets are stored in Trust and IOLTA accounts.
• If a law firm mingles client payments with revenue, then records will be off and they could face compliance issues.

They are not allowed to commingle these funds with their own money or use them for any purpose other than holding them in trust for their clients. A mileage tracker app can help you keep track of all your business miles, as well as plan for future expenses. A free time tracking software can be used until you get your legal accounting system set up. For example, if a law firm provides services to a client in December but doesn’t receive payment until January, the accrual method would require the firm to record the revenue in December. So, for example, if a law firm provides services to a client in December but doesn’t receive payment until January, the accrual method would require the firm to record the revenue in December. Setting and sticking to a budget is essential to keeping track of your business finances.

The income statement provides other information like the status of revenues, pinpointing irregular or inconsistent expenses, and overall company performance. With FreshBooks there are no contracts, and you’re not locked into an agreement.

• You’re not allowed to have your client and business funds in the same account.
• Maintaining your books on a regular basis ensures that all of your financial transactions are accurately recorded and organized.
• The feature that stands out the most with Zola Suite is its security.
• Opposite of cash accounting, accrual accounting records revenues the money they’re earned , not when the money hits your bank account.
• Using this information, you can make informed decisions about the future of your business.
• More specifically, the interest generated on IOLTA accounts is an important source of funding for the IOLTA program that is used for the purpose of civil legal aid and assistance to low-income residents.