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You can also strengthen and protect your firm’s finances from preventable problems. Most law firms opt to use cash basis accounting because it’s simple to maintain. Cash accounting makes it easy to determine when a transaction has occurred (the money is either in the bank or out of the bank) and there’s no need to track receivables or payables. From sending payment requests and tracking them to integrating with your go-to legal software products, LawPay will fit your needs. LawPay also ensures your law firm accepts payments that comply with your state bar’s regulations surrounding trust (IOLTA) accounts and the American Bar Association (ABA) guidelines.
Ask a CPA to help you determine which accounting method is best for your business, and stick with it. If you’ve ever balanced your checkbook, or simply compared the balances in your bank account and your company books to make sure they match, you’ve already performed a two-way reconciliation. Recording them as anything but that could land you in hot water with regulators and mess up your taxes. IOLTA accounts are tricky, because they have very specific rules around what you can and can’t do with them, and the penalties for breaking these rules can be severe, including disbarment. Depending on your needs, opening a money market account for savings might be a smart move.
Essential Records
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. If you want your firm to stay compliant, be financially successful, and grow, you need to have an accurate and clear bookkeeping system for your law firm to follow. This could mean taking on bookkeeping tasks in-house or hiring a professional bookkeeper with experience working with law firms. Beyond just staying organized and compliant, following best practices for accounting for law firms will help you identify growth opportunities. While the chart of accounts is customized to your law firm’s size, jurisdiction, and practice area, it typically includes five core categories in addition to numerous subcategories.
This means your law firm’s accounting is always up to date and accurate. No more wondering if your reports were produced before or after a data sync. You can think of PCLaw as a strong accounting foundation, with lightweight law practice management features built on top. And if your law firm needs more comprehensive case and document management, PCLaw integrates with Time Matters. Consider whether your firm would be best suited for combined practice management / accounting software (or separate software for each), and consider the specific features your law firm needs.
Invoicing and Payment Tracking
Usually, the two primary groups of people that use the income statement are internal and external users. The internal users include company management and the board of directors, while the external users are tax and accounting professionals, creditors, and consultants. In many cases, your tax consultant will not also be your accountant. Tax consultants might only be hired yearly to do your taxes, make entries, and clean your books.
With that said, knowing how to manage your money is also a reputation builder. Clients (and employees) talk, and if your finances are in shambles due to negligence, that could spell law firm bookkeeping disaster for your credibility. You’ll be able to visualize what you’re spending money on and what’s bringing in revenue, so you can pinpoint what’s working and what isn’t.
Law Firm Automation: Your Way Toward Efficiency
Next, we recommend that your firm makes an inventory of the specific capabilities and features that you require in your law firm accounting software. For this, you should confer with both your legal team and your accountant. A common point of confusion are the different types of law firm accounting software. Regardless of the growth of electronic and online payments, attorneys have to be careful when deciding on a merchant processor for their firm. It’s worth noting that an average payment processor charges a percentage per transaction as a payment fee, which increases the risk of breaking some trust accounting laws. So pick a payment processor that is law firm-friendly, and most certainly, rules-compliant.
There are other types of deductions you need to keep track of that incur while doing business. If they don’t, you need to go over every single transaction to see where the error lies. We’ll dive more into the specifics of why you need a CPA later on in this piece, but trust us when we say hiring one will make your life much easier. With that said, here are the steps we recommend you follow, whether you’re a small or large firm. In our opinion, this is an oversight, as mismanaging these accounts can lead to serious consequences, even disbarment.
What’s the difference between accounting and bookkeeping?
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. Committing to accounting for law firms will allow you to be better equipped to identify growth opportunities. Stay organized with law practice management software that allows you to keep track of everything from billable hours to time tracking. FreshBooks’ robust accounting platform helps you stay on top of client work and keep all your client documents in one place. These are the basic books and records that most attorneys, regardless of specialty will have on file for their firms. Many lawyers use accounting software and legal practice management software to maintain their books and records in electronic formats.
- The interest rates are high, limits are often lower than other forms of credit, and they’re easily mismanaged.
- This is a list of all your firm’s financial accounts, giving you a framework for where to record every transaction.
- Forbes Advisor rated and reviewed some of the most popular legal billing software options available to help you decide which is right for your practice.
- Bookkeepers work directly to keep financial records in order at the law firm.
- These data are valuable for a law firm’s future sustainability and profitability.
- If your law firm needs a central, secure cloud platform for all of your legal software, documents and data, Practice Foundation is for you.
The Trust Reconciliation – the trust bank statement provides a third-party verification to the transactions posted to the trust account. Accounting for law firms may be new or challenging to you, but it doesn’t have to be scary. What’s most important is that you get the details right so that you can stay compliant with ethics rules and help your firm grow to its full potential. You can go with an accrual or cash accounting method in the US, and the difference is mostly about timing. While this primarily applies to new law firms, ensuring that the basics are determined and set up correctly is critical. IOLTA accounts are designed to keep client funds separate from your typical business or operating account—where you are allowed to accrue interest.
This, in turn, will make you more profitable and free your time to do the work you love to do, rather than spend hours overseeing and managing your firm’s administrative functions. It’s incredibly robust and flexible, making it a top choice for law firms of 10 time-keepers or more. Juris provides full-fledged accounting as well as nuanced, detailed billing for a variety of billing models. To successfully manage and grow your practice, you need to invest considerable resources in your firm’s finances. Many business owners think that they will hire an accountant but not a bookkeeper. However, for the sake of your firm’s finances and the accuracy of those finances, it is probably better to use someone with experience working in bookkeeping and accounting.
