It is important to accurately record all transactions on a daily basis in order to avoid mistakes and maintain accuracy. The more methods of payment you have, the higher the odds are of a client working with you. The accounting method you choose should be in place when your firm files its first tax return. It affects everything, including cash flow, bookkeeping, and tax filing. Every business requires a business bank account, law firms included.
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. When it comes to accounting for law firms, whether you handle it yourself or hire someone, your bookkeeping system must maintain a consistent schedule for carrying out bookkeeping tasks. While there are a lot of factors to balance, here are the essentials for law firm accounting and bookkeeping success that you should get a handle on ASAP. Small and medium law firms have a lot to benefit from this software, as well as solo accountants working for multiple clients. Accountants can use it to manage clients and track time across different client accounts.
Do treat the trust account as other people’s money
You can manage your contacts, documents, and other aspects of your law firm’s operation with Zola Suite. 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.
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. First, let’s review typical accounting and bookkeeping functions that need to happen regularly so you can make sure you’ve got these covered. While you could hire permanent accounting help as your firm grows, most firms find working with an independent contractor who provides these services is a great way to get started.
Open a business bank account
Bookkeepers maintain and record all financial transactions in the original books of entry and balance the financial accounts for your firms. They summarize and organize all the company’s financial transactions chronologically in a systematic manner. In law firms, legal bookkeeping takes place first and relates to the administrative side of tracking cash.
You can use the same IOLTA for multiple clients, but you must have a reliable method to track each client’s running balance. Organizing financial numbers, maintaining accurate records, and preparing a complete database out of that information is fine. But when it comes to utilizing that data, know that it needs to be monitored and analyzed regularly.
Standard legal accounting and bookkeeping mistakes
Refundable retainers — where the client may have a refund for hours prepaid but not worked during the month — are what accountants call unearned or deferred revenue. The retainer fee goes into a CTA, and you can draw from it as the client approves invoices for services rendered. Any funds that go into a CTA are a liability on your balance sheet because it’s money you’re holding but didn’t earn. Law firms juggle their clients’ money more than in most industries.
- Trust accounting is the bookkeeping of clients’ income and expenses that are held in trust.
- Lawyers are not accountants and they often make the same common mistakes when it comes to accounting for law firms.
- When choosing an accountant for a law firm, it is important to look for someone with experience working with law firms, good references, and familiarity with the firm’s accounting software.
- And with one error comes many more, so it’s crucial to keep things organized.
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. Hiring a CPA can help you make more A Deep Dive into Law Firm Bookkeeping long-term budgeting and business decisions about your firm’s future. They can also set up a system of internal controls to help protect your firm’s assets from misappropriation or embezzlement.
But every payment provider has a different fee structure (for example, credit card payments often come with a fee) so look into that beforehand. Lastly, transactions are not recorded until you receive the money, so it’s not taxed until it’s actually in the bank. It’s similar to two-way reconciliation, https://goodmenproject.com/business-ethics-2/navigating-law-firm-bookkeeping-exploring-industry-specific-insights/ where you compare your bank account balance to your company’s books to make sure it matches. 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.