Firm Finances: Bookkeeping, Accounting, and KPIs 2024

While mismanaging an IOLTA account carries stiff penalties, many law schools offer little to no training when it comes to managing trust accounts. As a result, attorneys often find themselves making several common mistakes again and again. The goal of bookkeeping is to have an accurate picture of your current financial standing.

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You can’t, for example, pay for your firm’s operating expenses directly out of an IOLTA account. Some firms will also intentionally use their IOLTA accounts to hide assets, or will leave funds in their IOLTA even after they’ve been earned, using it as a savings account. It’s also a good idea to reconcile trust accounts at least once a month and prepare monthly reports for each client, listing all of the activity in and out of the account and the ending balance. Follow these rules and keep track of client funds every day to ensure you don’t cross any lines that can cause your firm serious problems. Your financial strategy will help you plan, strategize, and shift as you need to, helping you grow a financially healthy law firm. Each month, take some time to reconcile your budget compared to your reality, making changes that benefit your bottom line.

Be prepared to perform a three-way trust reconciliation

Your bookkeeper goes into your accounting software regularly (at least weekly) and records all the money coming in and all the money going out so that it appears in the correct place. 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. Make sure whatever tool you use integrates properly or choose an all-in-one software for both. Through the balance sheet, law firm owners will have a solid understanding of the firm’s financial health, and can compare current assets and liabilities. When compared, the company’s liquidity can be ascertained, and the rate at which the company generates returns can be calculated.

You Always Know Where Your Money Is

1. Once you have a strategy and budget in place, the work of day-to-day management sets in.
2. In most cases, law practice management software doesn’t include an accounting element specialized for law firms.
3. And contrary to popular belief, the responsibility and penalties for proper/improper legal accounting fall squarely on law firms, not the accountant.
4. Fortunately, with a combination of technology, best practices, and the right help, it’s possible to stay on top of your bookkeeping with little effort.

But you don’t want to set up separate accounts for legal pads, pens, printer ink, etc. By now, you know you can’t simply create a financial strategy and budget and sit back and relax. Using key performance indicators will help you know sooner if you’re on track.

Furthermore, leveraging online tools such as Clio’s Accounting Hub for law firms can provide valuable insights and guidance on best practices in legal accounting. Mismanagement of trust accounts in law firms can result in severe consequences, including ethical violations and legal issues. It is crucial for law firms to adhere to meticulous record-keeping practices and keep separate accounts as required by state bar association rules. Moving from the requirements and regulations of Interest on Lawyers Trust Accounts (IOLTA), it’s essential for law firms to have a clear understanding of trust accounting.

Incorrect Differentiation of Income and Revenue

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. 3 components involved in the reconciliation process consist of the trust ledger, the client ledger, and the trust reconciliation. If you are self-employed, you will need to pay federal self-employment tax.

Now that we understand the significance of bookkeeping, let’s delve into the role of accounting for law firms. Understanding legal accounting terms such as chart of accounts and double-entry system is crucial. Regardless of the size of your law firm, it’s essential to understand the best practices of accounting and bookkeeping to ensure that your business is on the right track. A minor accounting error could result in significant reputational damage, hindering future growth opportunities and client referrals.

Typically, there are 5 core categories consisting of assets, liabilities, owner’s equity, revenue, and expenses. Though rules vary from state to state, most state Bar Association rules permit debit, credit and other electronic payment processing for law firms. For an in-depth discussion about the rise of electronic payments in the American legal profession, check out this guide to payment processing from the American Bar Association.

Before you commit, make sure you do the math to determine the impact a provider’s fees will have on your bottom line. Bookkeeping tasks are ongoing and can be performed daily, weekly, or monthly. Whether you do the task yourself or outsource it to a pro, the goal is to make sure your books are accurate, up-to-date, and useful to you and your CPA.

If a law firm doesn’t do this right, they could get fined or even lose the right to work as lawyers. It is sad but true that some of the most troubling errors law firms face are simple data entry mistakes. Unfortunately, their consequences are not always so simple and can affect significant portions of law firm business. Top-of-the-line law firm accounting practices generate regular reports of activities. By studying these reports, you will gain valuable insight into your firm’s operations and be able to make effective decisions for your firm.

Income refers to the money a law firm earns from providing legal services, while revenue encompasses all the funds generated by the firm, including interest and other sources. Ensuring that proper procedures are followed in managing trust accounts is essential for maintaining the integrity of a law firm. This includes establishing clear protocols for handling client funds, conducting regular reconciliations, and implementing robust internal controls. For a more in-depth look into trust accounting, read this article or download our law firm accounting guide on properly managing trust accounts. Law firm accounting is fairly subjective compared to law firm bookkeeping.

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. You don’t necessarily need accounting software or a professional bookkeeper to handle your law firm bookkeeping. When you’re just starting out, you can keep costs low by recording all income and expenses in a spreadsheet, like our Excel Income Statement Template. 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. It is crucial to maintain meticulous record-keeping and to keep separate accounts, especially for trust accounting as required by state bar association rules.

Law firms can avoid professional help by implementing robust accounting systems, utilizing specialized legal accounting software, and staying updated with the latest industry resources. Furthermore, selecting a suitable payment processor can streamline financial transactions, ultimately contributing to the success and growth of a law firm. Equally important is choosing the right accounting method and hiring a certified public accountant (CPA) to ensure compliance with state Bar Association rules and accurate financial reporting.