Every law firm has a responsibility to stay compliant with ethics regulations, and your firm is no exception. Ethics rules vary in each jurisdiction, but there are definitely some basics when it comes to accounting for law firms. Bookkeepers record the financial transactions and balance the financial accounts for your firm. Legal bookkeeping takes place before any accounting can occur and is an important administrative task for any law firm. Other tools include billing and creating professional invoices, including bulk invoices if you’re handling multiple clients.

• Tens of millions of people have relied on FreshBooks, making it a solid choice for your firm.
• The California IOLTA Program will monitor statutory compliance and will notify the attorney if a financial institution is not complying with IOLTA requirements.
• Double-entry accounting aids in the detection and prevention of accounting errors.
• It’s broken down into categories and contains a name and description for ease of use.
• It’s easy to tell yourself that you’ll pay those fees back in time, but don’t do it.

And even you have an overview of what is bookkeeping and accounting, you wouldn’t know what involve when it comes to bookkeeping and accounting for law firms. Law firm accounting is more complex than plain business accounting. Conversely, cash basis accounting recognizes revenue when you’re paid (i.e., when the cash is received) and expenses when they’re paid. The tax implications of this method also allow your firm to pay tax on income once it’s received and in the bank. With the accrual method, you record revenue when it’s earned and expenses when they’re incurred—whether they’re paid right away or not.

What Are the Three Bank Accounts Every Law Firm Should Have?

Irvine bookkeeping offers you comprehensive, cost-effective, and long-term law firm bookkeeping solutions. With our dedicated and experienced bookkeepers, you potentially transform the financial management of your law firm. Making the jump from an attorney to running a law firm can bring a ton of new intimidating challenges.

Your COA will look different depending on your jurisdiction, law firm’s size, and practice area, but will always have these categories. You’re responsible for recording the receipt and disbursement of these funds and posting the transactions to the ledger accounts of clients. 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 a client’s money. While not necessary, we recommend working with a bookkeeper who has experience working with law firms. In fact, some basic rules dictate how you must handle this money to ensure compliance.

Set a budget for your law firm

Setting up and recording the chart of accounts for law firms isn’t just suggestions, they are requirements. Use software such as Clio Manage to help track your billable time, expenses and revenue. Additionally, keep your financial records in check by syncing to a system for accounting for law firms like QuickBooks Online. If you’re the owner of a small law firm, you need to know the essentials of bookkeeping and accounting for law firms. This way, your firm can stay compliant with ethics rules—and you can ensure you aren’t leaving money on the table. Download the Handbook on Client Trust Accounting for California Attorneys.

If you’re curious about how outsourcing your law firm bookkeeping can benefit your business, start your free trial of Bench today. 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. Once your business bank accounts are up and running, you should avoid mixing your personal and business finances. You can’t, for example, pay for your firm’s operating expenses directly out of an IOLTA account.

Step 3: Maintain Compliance with Client Funds

This method does not recognize accounts receivable or accounts payable. Make sure you’re clear on all of the law firm accounting obligations related to managing and growing your business. There are many different accounting software programs available, so find one that works best for you and your firm. Overall, an experienced and qualified accountant can be a valuable asset to any law firm. By taking the time to find the right person for the job, a law firm can ensure that its finances are well-organized and accurate.

You should consult your bank, state bar association, and CPA to determine what kind of payments your firm will accept. Once that has been done, the next step is to decide which payment provider you’ll work with. Accrual accounting records revenues and expenses when they are earned or incurred, whether or not the money has been received or paid. For example, law firm bookkeeping all invoices sent to clients are recorded as revenue, regardless of the expected payment date. The advantage of this method is that it gives you a more realistic idea of (expected)  income and expenses over a period of time. This allows for the delay or acceleration of income and expenses by changing the timing of paying bills or invoicing clients.

When you know and monitor your numbers, you can quickly see when you’re off target and cut costs or make strategic investments to increase revenue. In today’s world, it is easy to find and use a virtual bookkeeping service. Also, many outsourced companies are now offering a team approach where you get the benefit of their bookkeeper, controller, and outsourced CFO for higher-level financial analysis.

For example, if the trust account statement balance does not match the trust ledger balance, it could mean that client funds have been misappropriated. Double-entry accounting is a system of bookkeeping where every financial transaction is recorded in at least two different accounts. Keeping clients informed and upholding safekeeping requirements are critical practices for maintaining compliance with client funds. We recommend you hire a legal bookkeeper and accountant to help keep you and your firm on track.

What are some tips for effective bookkeeping for a law firm?

With these tips, you can ensure that your law firm’s bookkeeping is effective and efficient. By keeping up with your records and hiring a professional, you can avoid any potential problems and keep your finances in order. Lawyers are required by law to maintain separate trust accounts for their client’s funds. 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. The double-entry accounting system is the most effective way to do bookkeeping for a law firm. This system sorts all transactions into two categories, assets and liabilities.