If proper attorney bookkeeping occurs, then the law firm can track what money is coming in and going out of your firm. It will be challenging to scale your growth without understanding the money coming in and out. Many new business owners view accounting and bookkeeping identically. That includes things like affordability, ease of use, and suite of features (client management, financial management, project management, etc.).

There is no room for error when blending client funds with law firm funds. It pays to have an effective system that will prevent this from occurring. By keeping your money separate at all times from your clients’ and strictly following trust administration rules and guidelines, you’ll sidestep a whole host of problems down the line. To open a business bank account, you will need the necessary legal paperwork, such as the Articles of Incorporation and Employer Identification Number (EIN).

It overcomplicates your accounting

It’s easy to tell yourself that you’ll pay those fees back in time, but don’t do it. Law schools offer little to no training on how to manage these accounts. So, many lawyers go into the field without knowing the best practice surrounding trust accounts and how to manage them. It would be best if you chose your legal accountant for their experience working with law firms, specifically those in your practice area and jurisdiction. You should budget for an accountant and bookkeeper to assist you with managing your firm’s finances and ensuring you’re compliant with ethics regulations. A legal accountant and bookkeeper will work towards the same goal — they both want to keep your law firm financially healthy and built for the future.

And law schools don’t really go into how to manage these accounts properly, so we see a lot of lawyers going in blind. Lastly, transactions are not recorded until you receive the money, so it’s not taxed until it’s actually in the bank. When you have a trust account, you’re required (by the State Bar) to perform a three-way trust reconciliation every 30 to 90 days. To do so, you’d first need to transfer that money into your business account.

Step 2: Find the Best Legal Accounting Software for Lawyers

Fortunately, you can easily avoid many of them if you know which types of errors are the most common. PCLaw has made its name a one-stop shop that works well in any situation, especially with large law firms. Everything a big operation could want and need from an accounting software solution is available through PCLaw.

• Accountants sometimes call this the “corporate veil,” and it’s what protects owners and their assets from any legal action taken against the company.
• Accurate timekeeping is crucial to ensure that clients are billed correctly and to track billable hours for each lawyer.
• Violating compliance regulations purposefully or through neglect can lead to significant repercussions.
• By studying these reports, you will gain valuable insight into your firm’s operations and be able to make effective decisions for your firm.
• Are you confident that your trust account is being managed properly?

And when you commingle your personal and business finances, the following problems can arise. Making the jump from an attorney to running a law firm can bring a ton of new intimidating challenges. Legal accounting and attorney bookkeeping are surely one of the largest you face.

What is the Difference Between Legal Accounting and Bookkeeping?

Additionally, the total debits recorded must equal the total credits recorded. Total assets are also required to equal total liabilities plus equity (net worth or capital) of a 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.

Other tools include billing and creating professional invoices, including bulk invoices if you’re handling multiple clients. With the matter management features, you’ll be able to manage items and events related to matters, including expense cards, trust transactions, and time cards. FreshBooks is a cloud-based accounting software that we voted as the best legal accounting software overall.

Step 3: Maintain Compliance with Client Funds

If you need to go back at the end of the year and sort your financial data into all three categories, it’ll be a nightmare. As a result, you should open a separate checking https://www.bookstime.com/ account and credit card for your legal practice before you start taking on clients. Fortunately, most accounting concepts for law firms are relatively straightforward.

Bookkeeping for lawyers will always involve using and managing a general ledger. A general ledger is a complete record of a law firm’s financial transactions, separated into transaction types, including assets, liabilities, revenues, expenses, and owner’s equity. This data is required to create accurate, defendable financial statements. The law firm bookkeeping general ledger will also be the basis for your double-entry bookkeeping system. The double-entry accounting method tracks where a lawyer’s money is coming from and where it’s going. Legal accounting software is designed to help law firms with bookkeeping, allowing them to keep track of their finances in an efficient and compliant manner.

Avoid the Accrual Method of Accounting

We’ve seen firms using these accounts to hide assets or as a savings account. The reality is that there is no scenario where it’s okay to use your IOLTA in this way. We don’t recommend building your business off the back of your credit card. The interest rates are high, limits are often lower than other forms of credit, and they’re easily mismanaged.

• But setting up your finances properly won’t just make it easier to file your taxes each year—it’ll save you time, money, stress, and potentially legal trouble (yes, really!).
• But rules do vary by state, so consult your State Bar Association and a professional accountant before finalizing your accounting setup.
• If any of these three balances do not match, it could indicate errors in your financial record keeping and should be investigated immediately.
• 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.