Law Firm Bookkeeping and Accounting: A Completed Guide 2022

law firm bookkeeping

When a lawyer holds onto a client’s money, they store it in a trust account. While not necessary, we recommend working with a bookkeeper who has experience working with law firms. Without a trusted bookkeeper for attorneys, a legal accountant won’t have any data work off of. Law firm accounting can be a lengthy process, widely despised by attorneys and other legal professionals who’d instead be practicing law than crunching numbers. As a solo practitioner or small law firm owner, you have more important things to do with your time then manage your books. My team and I take care of your books for you, so you can get back to doing what you really love, practicing law.

If you mismanage this account, you could face severe consequences, including disbarment. Law firms are expected to have a separate but essential trust account, typically called an IOLTA. Before the IOLTA, lawyers would store this money in a non-interest-bearing checking account, as they are not allowed to benefit financially from storing Smart Accounting Practices for Independent Contractors a client’s money. Accounting is a world of numbers, and, for law practices, it helps efficiently manage the money flowing in and out of business. If you’re going to hire employees, you will need to set up payroll. Gusto is an online service that automates a lot of the work involved in managing payroll and employee benefits.

Let Us Focus on the Numbers So You Can Focus on Your Firm

It’s especially beneficial when you employ other lawyers, as it can help you set a profitable hourly rate when billing your clients. As a result, it’s unwise for lawyers to attempt to handle their law firm’s accounting without assistance from an expert. It’s usually best to pay for a Certified Public Accountant’s (CPA) tax services. However, there are a couple of unique aspects to law firm accounting, and managing them can be challenging.

Do bookkeepers earn more money than accountants?

The salary range for bookkeepers and accountants differ per state and on other important factors. But typically, accountants earn more than bookkeepers, and their midpoint salary is higher. To gain an idea of how much these two professions earn in your area, you can refer to the 2020 Robert Half Salary Guide.

You should only ever charge your clients fees directly related to their account. You should also consider a savings account, despite interest rates often being low. Having cash in your savings account can improve your chances of being approved for loans and other lines of credit in the future. Following the above three best practices allows you to optimize your finances. Your budget is a vital tool for keeping you in control of expenditure and making sure you’re not overspending.

Top Tax Deductions for Lawyers and Law Firms

Effective accounting for law firms is critical to your firm’s success. To ensure your firm’s financial statements are accurate, complete, and up-to-date, you need to use sound bookkeeping for attorneys. It is my pleasure to recommend Becki Honeyman of Honeyman Accounting, LLC. Becki has managed my current 3-lawyer firm’s bookkeeping since 2013, and I worked with her at my former 7-attorney firm for several years before that. She’s knowledgeable about QuickBooks Online, PC Law, Clio, and other law firm billing systems, as well as LawPay.

Continuing with the theme of setting yourself up for success from day one, make sure that you take advantage of software’s ability to streamline your accounting processes as soon as possible. Much like practicing law, accounting requires extensive training and in-depth knowledge of https://simple-accounting.org/accounting-for-startups-the-ultimate-guide/ intricate rules. Making mistakes can lead to penalties and interest or audits from the Internal Revenue Service (IRS). In addition, you may need to use clients’ funds on their behalf, in which case you must provide detailed reports about your activities to remain in compliance.

Support From a Team of Accountants

If you’re looking to move outside of the Quickbooks universe, Xero is a fast-growing and popular online software option. Xero is substantially cheaper than Quickbooks, so it might make sense if you’re just getting started. As a lawyer, when you receive cash that belongs to a client, you are obligated to hold those funds in a client trust account separate from your own money. These are commonly known as IOLTA accounts (interest on lawyers trust accounts) and vary by state (and also check with your local bar association).

  • As owners of our own law firms, we’ve made our fair share of mistakes.
  • Cloud-based accounting software for law firms also automatically gets updated and backed up, offering unparalleled, real-time insights into your firm’s financial data.
  • These funds are stored in IOLTA or “interest on lawyers trust accounts” accounts.
  • Cash accounting also gives you an easier way to see how much cash your business has at a glance.

Trust accounts are one of the most common areas where legal accounting mistakes are made. Whether you mismanage the accounts, put funds in the wrong account, accidentally use funds, or fail to report correctly, trust accounting errors are a big deal in accounting for law firms. Trust accounting mistakes can lead to penalties, suspension, or even losing the right to practice law. By using sound bookkeeping practices to keep accurate records and consistently review the firm’s financial statements on a monthly or weekly basis, you’ll see your firm’s true financial picture. Committing to accounting for law firms will allow you to be better equipped to identify growth opportunities. The previous chapter discussed the six components of law firm finances and the various KPIs law firms should track to encourage continuous growth.

Do lawyers need accounting?

An accountant who prepares financial statements can provide valuable insights into the firm’s overall financial health. And an accountant who specializes in tax planning and compliance can ensure that the firm is compliant with all applicable laws and regulations. Professional accounting and bookkeeping services are expertise-driven and require specialized knowledge of compliance standards in order to ensure accurate record-keeping. While three-way reconciliations may seem like a lot of work, they are essential to maintaining accurate financial records for your law firm. As an accountant or bookkeeper, it is important to ensure accuracy in your law firm’s financial records. There are many benefits to double-entry accounting, but the main one is that it provides an accurate record of all financial transactions.

They can use your financial data to understand what it tells you about your business. Remember earlier when we discussed setting up a Chart of Accounts in Chapter 1? 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. Interestingly, tax deductions can ease the burden when used correctly—yet not all lawyers are up-to-date on their tax deductions. Many lawyers go to one or the other extreme—they either claim everything (and possibly more than they’re allowed to), or they’re so afraid to overstep they miss out on tax deductions. While there are a lot of factors to balance, here are the essentials for law firm accounting and bookkeeping success that you should get a handle on ASAP.

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