Information about bookkeeping for law firm

Before the firm files its first tax return, it must select its method of accounting. Suppose you understand exactly what your firm is collecting and your firm’s expenses; you lower your chances of accidentally missing out on revenue. If billed hours are not recorded properly, or you miss out on tax deduction opportunities, you miss out on many opportunities. Legal accounting will let you analyze and collect information to make decisions with data in mind. These numbers are based on money that is coming into your firm and leaving your firm.

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. On the other hand, income refers to what is left over after the firm’s costs and expenses have been deducted from the revenue.

Take Advantage of Accounting Software & Tools

If you make purchases for your business on your personal account, you can easily lose track and forget all about them. When tax season comes around, you could forget to claim it and miss out on those deductions. Do your due diligence and make sure every dollar going into the trust account is supposed to be there. You should only ever charge your clients fees directly related to their account. 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.

• You get all the benefits of full time staff member without the expense or hassle of hiring, training, and worrying about staff turnover.
• Keeping up with client billing and following up on unpaid invoices can be a considerable challenge while you’re juggling the workflow involved with multiple legal cases.
• Cloud based accounting and practice management software is essential in today’s world.
• Leaking money happens when money that was supposed to be collected is not due to poor accounting practices.
• IOLTA, accounts are bank accounts where interest gets earned from the account and is collected and sent to the state bar.
• From creating a budget, choosing the right bank, hiring the correct advisors, and deciding on which type of accounting your firm will do—it all can feel overwhelming.

At its core, you must always know who’s entitled to the funds in your trust account and give it to that person. Knowing the fundamentals will enable you to be aware of your overall financial health, but trained accountants can still provide peace of mind and offer invaluable help. First, let’s differentiate between accounting law firm bookkeeping and bookkeeping — two terms that are often used interchangeably but really shouldn’t be. The key is to actively monitor things so you know when and what to adjust. 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.

What is Law Firm Accounting?

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. Entering numbers manually often leads to mistakes and duplicated data entry in the accounting process. This results in wasted time, mismatched records, billing complications, and even compliance violations. Beyond just staying organized and compliant, following best practices for accounting for law firms will help you identify growth opportunities.

That’s also why we recommend eventually hiring a professional bookkeeper to ensure nothing falls through the cracks. It’s also a great practice to record the details of each expense. For example, if you’re expensing a meal, you might record who you were with and what you discussed. After all, if the IRS audits you (shudder), you’ll want these records to prove your expenses were for business purposes. In this chapter, we’ll start with choosing accounting software. With those items in place, we can tackle what to monitor and when.

How Law Firm Accounting Software Can Help

Legal accountants use the data records provided by bookkeepers to create a foundation built to help firms make informed financial decisions. Accountants use financial data to analyze, interpret, and create a summary for you. I helped switch us from Quicken (the PERSONAL accounting software) to QuickBooks Online. I have worked with several CPAs to get the taxes filed for the different companies and learned how they like to receive information and what can make filing taxes easier. I also learned what the owner needs to see in regards to financial reports to run his companies so he can figure out what to change and how to make them grow. It is sad but true that some of the most troubling errors law firms face are simple data entry mistakes.

• Recent technological advancements have made accounting easier for firms.
• This feature allows users to quickly and easily sync their contacts, invoices, financial information, and transactions so that data entry is reduced or eliminated.
• You need to know specific things about your potential hire to honestly know if they are up to handling your bookkeeping needs.
• Accounting for law firms is often intimidating—even for seasoned lawyers.
• With QuickBooks for Lawyers, you can also manage amounts in both operating and trust accounts as well as payments and credit notes applied to bills in Clio.
• So understanding this information is worth your time and energy.

Plus, if you want to outsource to accountants or legal bookkeepers, having a solid foundation will make it 10x easier. Before the IOLTA, lawyers would store this money in a non-interest-bearing checking account, as they are not allowed to benefit financially from storing a client’s money. You can’t wait until right before tax time to start tracking your finances. In fact, you can’t even afford to wait a week until you make time to enter your transactions. We recommend scheduling a time to track your finances at least weekly. By now, you know you can’t simply create a financial strategy and budget and sit back and relax.