Accounting for Law Firms: A Guide Including Best Practices

Handling client trust accounts demands strict adherence to ethical guidelines and best practices. It is crucial to never commingle trust funds with the law firm’s operating funds and to promptly disburse funds as required. Of course, the line between bookkeeping and accounting can get blurred. Some accountants record financial transactions, and some bookkeepers assist with business decisions and prepare financial statements. One way to manage the finances is through cash accounting, which records transactions when cash is received or paid. This method is simple and helps track cash flow but may not provide a complete picture of the firm’s financial health.

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Botkeeper is best for accounting firms that want to scale by automating bookkeeping tasks. QuickBooks Live is best for business owners who want to get their bookkeeping in order but don’t have the time or resources to do it. We believe everyone should be able to make financial decisions with confidence. Handling bookkeeping by yourself can be both expensive and potentially damaging for your firm. Your bookkeeeping shouldn’t be handled by the same accountant who services your plumber. First, let’s review typical accounting and bookkeeping functions that need to happen regularly so you can make sure you’ve got these covered.

Ensure you have the right bank accounts set up

Online bookkeeping services can save business owners both time and money. However, with hundreds of options, it can be daunting to sort through them all law firm bookkeeping and find the best service for your business. We’ve analyzed the best bookkeeping services to help you find the right solution quickly and easily.

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• By implementing strategic tax planning measures, law firms can reduce their tax liabilities, optimize financial performance, and ensure compliance with legal obligations.
• Even though interest rates on business accounts are traditionally low, having a cash surplus in a business savings account can improve your likelihood of being approved for a loan.
• You can learn more about record retention periods in our guide to business recordkeeping.
• And contrary to popular belief, the responsibility and penalties for proper/improper legal accounting fall squarely on law firms, not the accountant.
• Each of these records should be kept for a specific length of time—some for 10 years, some for as few as three.

Efficient payroll processing involves accurate data entry and tracking of employee working hours, leaves, and overtime. Law firms must adhere to federal, state, and municipal payroll taxes, and employee benefits as appropriate. Adhering to IOLTA guidelines and trust accounting compliance best practices not only safeguards client assets but also protects the integrity of the legal profession. Stay diligent in managing trust accounts, and keep up-to-date with jurisdiction-specific rules to maintain a thriving, ethical law practice. To navigate these complexities, it is beneficial for law firms to work with accountants and bookkeepers who specialize in legal accounting.

Key Principles of Legal Accounting

There will come a point when you need to call in professionals for legal accounting, so don’t be afraid to delegate when you need help. Lawyers are not accountants and they often make the same common mistakes when it comes to accounting for law firms. Legal accounting and attorney bookkeeping mistakes have catastrophic consequences for your business, income taxes, and license. Below we’ll show you the most commonly fall short in accounting practice.

• But if your law firm bookkeeping isn’t up to date, it’s tough to stay on top of cash flow and ensure client funds are handled properly.
• Once you’ve determined what kinds of payments your firm will accept, you’ll then need to choose a payment provider to work with.
• Ethics rules vary in each jurisdiction, but there are definitely some basics when it comes to accounting for law firms.
• We know that lazy bookkeeping practices will cost you real money and time, result in sweaty nightmares, and put your license and firm at risk.
• You’ll also want to decide how your firm will track incoming and outgoing funds.

You can find services for as little as $20 per month while others run thousands per month. If you want your business to save time and money, then you should consider hiring a bookkeeping service. A bookkeeping service can help you stay organized and on top of your finances.

Keep comprehensive law firm records

For example, say you deposited a check for $10,000 to the trust account on December 30 but the deposit didn’t clear the bank until January 2. The December 31 bank statement shows a balance that is $10,000 less than your books or the client’s trust ledger due to a timing difference. You would note this in your reconciliation report and ensure your January 31 bank statement includes the deposit. In fact, some bookkeeping tools integrate with your practice management tools, allowing you to easily track your clients, invoices, and more. Make sure whatever tool you use integrates, or choose an all-in-one software for both.

AI-powered legal analytics, workflow tools and premium legal & business news. This website is using a security service to protect itself from online attacks. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. For pricing, we considered whether a service offers a free trial or a free version of its software as well as the affordability of its lowest and highest price tiers. Ignite Spot Accounting is best for businesses that want bookkeepers who are certified in popular bookkeeping programs.

How to Choose an Accounting Software for Your Firm

It is crucial to accurately record these transactions to maintain a clear financial picture of the firm. Legal bookkeeping is an essential administrative task that occurs before accounting takes place. Bookkeepers are responsible for documenting financial transactions and balancing the firm’s accounts.