how to do law firm bookkeeping what are its rules

When it comes to organization, getting off on the right foot should help you stay more organized now and into the future. To keep your firm on the right track, it is helpful to have a list of best practices to follow. Violating compliance regulations purposefully or through neglect can lead to significant repercussions. An example of a compliance regulation violation could be mishandling client funds.

how to do law firm bookkeeping what are its rules

In case you or your clerical staff has a shortage of time for accounting and if you don’t have an in-house accounting team, outsourcing legal accounting services can be your best action. A reliable provider would be able to help you with bookkeeping, accounting, reconciliations, cash flow management, payroll, budgeting, financial reporting, and many other accounting functions. Without a professional accountant, you risk mixing up revenue and income, two different types of proceeds. Revenue refers to the money, payments, and proceeds your firm receives.

You need to grow your business

By doing that, you would be able to see a detailed picture of your law firm’s finances and financial performance. In other words, by analyzing your data, you can identify the times when your business was doing poorly and the reasons why. This will help you to understand your weaknesses and areas where you need to improve. You can also identify the times when your business was doing well and the reasons why. This will help you to understand your strengths and areas where you can invest for future growth.

Choosing an accounting method is another piece of the financial puzzle for a new company. Before the firm files its first tax return, it must select its method of accounting. Using a 3-way reconciliation is a great way to check and verify your financial data periodically.

Accounting for Lawyers: Four Basics You Need To Know

Law firms are held to a high standard and suffer greatly when errors occur, even when the errors are unintentional and understandable. Law firm accounting helps you keep your firm’s name reputable and clean. You should also inquire into each candidate’s education and training related to legal accounting.

If you have evergreen client trust accounts, you can keep your accounts receivable next to zero. With a legal accounting expert who knows how to set up the the trust ledger according to state bar association rules, client funds in trust just get transferred to the operating bank account. Another major concern around online payments is staying in compliance with the rules surrounding trust accounting and IOLTA accounts for law firms.

Continue Providing Exemplary Service To Your Clients When You Leverage Our Services On Bookkeeping For Law Firm

It includes standard features and is incredibly easy to navigate. On top of that, ZipBooks is more than reasonably affordable; it’s highly affordable compared to many options. Accounting software for law firms is vital for busy and growing offices. As you would imagine, there are numerous market options, each with particular and sometimes peculiar characteristics and features.

The firm could face compliance issues, and their books will be inaccurate (skewing the value of any accounting data derived from them). When looking at the importance of solid accounting, you’re really talking about looking at financial data on a regular basis. And you can’t do that if you’re not gathering and sorting it on a regular basis. IOLTA accounts are designed to keep client funds separate from your typical business or operating account—where you are allowed to accrue interest.

Incorrectly differentiating income and revenue

This could mean taking on bookkeeping tasks in-house or hiring a professional bookkeeper with experience working with law firms. 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. 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.

  • For example, if you were using LawPay to collect payments and invoice clients, you could easily sync all your transactions into QuickBooks for easy reporting and reconciliation.
  • It’ll keep you organized, ensuring you meet all of your financial obligations to your clients, your firm, your employees, and more.
  • Your business may also be required to pay state taxes in both your home state (where your business is registered) and in any states where your business has nexus.
  • This will help you to understand your weaknesses and areas where you need to improve.
  • To fix it, you have to go over each transaction to make sure it was entered into your accounting system properly.

They also exist to help you with financial statements, forecasting, and capturing expenses. Imagine if the team at a law firm recognized the importance of being prepared for tax time and the law firm accounting throughout the year to be prepper for the end of the year. Keeping track of all these records sounds like a lot of work, making it easy to procrastinate until the end of tax season. IOLTA, accounts are bank accounts where interest gets earned from the account and is collected and sent to the state bar. Lawyers cannot profit from a client’s money that they paid and held in trust. However, specifics can vary depending on the state, so it is essential to check for details within your jurisdiction.


As every business is different, your choice of the “right bank” depends on the nature of your practice, as well as how you prefer to handle your banking transactions. Your firm needs to keep track of your invoices so you know what money is owed (and who you owe money to) to avoid this problem. If you sent your client an invoice, that is law firm bookkeeping immediately counted as revenue if you don’t receive the money for weeks. If they have to dig through your personal account to find the odd business transaction, you’re giving them extra unnecessary work and will be charged for it. Do your due diligence and make sure every dollar going into the trust account is supposed to be there.

  • It’s called the “corporate veil,” and it protects business owners and their personal assets from legal action taken against the company.
  • That’s why we’ve put together everything you need to know about law firm accounting and bookkeeping.
  • Whether it means using legal accounting software to simplify and automate your accounting, hiring a professional legal accountant, or both—don’t be afraid to delegate when you need to.
  • As every business is different, your choice of the “right bank” depends on the nature of your practice, as well as how you prefer to handle your banking transactions.
  • And because legal business can be performed from the courtroom, the car, or the couch, it’s easier to get things done when it works for you.
  • Without the proper business bank accounts, you risk inaccurate bookkeeping, messy records, and potential compliance violations regarding trust funds.
  • Plus, if you want to outsource to accountants or legal bookkeepers, having a solid foundation will make it 10x easier.

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