Accounting for Law Firms: A Guide Including Best Practices
Many attorneys prefer to get paid by credit card (online or in-person), which incur their own special fees. Sometimes these fees can become hard to track, causing you to charge the wrong client’s account. To prevent misappropriating funds from other clients, remember to only charge your clients for fees directly relating to their trust account.
That’s why accrual accounting necessitates you track accounts receivable and accounts payable on your balance sheet. Accrual accounting gives you an idea of what income and expenses you have during a period of time, but doesn’t give a good picture of your actual cash flow. It’s not as dire as comingling your business and trust accounts, but it’s a slippery slope toward unorganized accounting.
Contact a Professional for Help
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. Most law firms opt to use cash basis accounting because it’s simple to maintain. Cash accounting makes it easy to determine when a transaction has occurred (the money is either in the bank or out of the bank) and there’s no need to track receivables or payables. Managing all of your business transactions in a separate account makes it easier for you, your bookkeeper, and your CPA to manage your accounting. If everything is jumbled into one account, come tax time, you or your CPA will have to go through your bank records to figure out which expenses are related to your business.
With that information, you can better understand your firm’s financial health and plan for the coming months. 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. To keep things even more streamlined, consider using online payment software together with legal accounting software. For example, if you were using LawPay to collect payments and invoice clients, you could easily sync all your transactions into QuickBooks for easy reporting and reconciliation. Managing your books via accounting software may get you started as a solo attorney.
Differentiating income from revenue
Some have income in the thousands per year and some have income over $5 million per year. It takes years to build a strong attorney reputation and one second to destroy it. 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. While each account is managed in accordance with the law of the state, they have common rules guiding them.
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 flow situation as cash accounting. This is a more appropriate accounting method for large firms with high client turnover. Each month, a team of professional bookkeepers with experience in legal accounting gathers your data for you and turns it into accurate financial statements. You also get smart software to help you monitor your finances and stay in control of cash flow.
Step 9: Project Future Cash flow
Let a competent, experienced professional or company handle things is always better. Insights on running a successful law firm with case management, client intake, billing and payments, tech innovation, and more. Nearly every industry requires a seasoned accountant who can handle all of the financial aspects of running law firm bookkeeping a business—and law firms are no exception. However, leaving the task to an office manager or assistant can result in inconsistent, error-ridden financial records. And legal professionals who take on the lawyer accounting duties themselves often end up dedicating hours to non-billable administrative work.
For example, if a law firm has multiple partners, each with their own areas of focus and billable hours, the bookkeeper will need to be able to track this information correctly. A well-organized budget should include both personal and business goals and be tracked with reliable software such as Deskera. Having a clear budget will help you track expenses, revenue, and goals so that you can make sure that you have the necessary resources available for major expenses. Now you cross off law bookkeeping out of your to-do list and feel stress-free about the financial aspect.
If you’re unsure of whether or not an expense is deductible, it’s better to pay for it with your personal account and reconcile later. Seek the advice of an accountant like JADDE Financial Solutions. Separate your transactions at point of purchase, even if it’s more of an inconvenience. It is easy to make legal accounting mistakes when working in law with trust accounts.