Bookkeeping for A Law Firm: Best Practices, FAQs Shoeboxed

However, every law firm owner needs to know what bookkeeping and legal accounting are for their business. Without the essentials, your firm might struggle to stay compliant with ethical rules, and you may inadvertently leave money on the table. To avoid this type of situation, use accounting software that allows you to automate these processes. For example, keeping track of invoices or monthly recurring expenses.

Once you understand the basics, consider hiring an accountant, either as a contractor or as an employee. They can help level up your firm and make the legal accounting process even smoother by adding legal accounting and law firm bookkeeping legal practice management software to your firm’s toolkit. Using legal technology can ease the workload of manual tasks while helping your firm meet its goals—avoiding errors, ensuring compliance, and staying organized.

Get clear on trust account rules / American Bar Association compliance

Most importantly, you must find a plan that works well for you and stick with it. Consistently keeping up with your books will be the most important thing to keep your firm’s finances in check. Some firms will even use accrual for their monthly reports but then submit their year-end tax return as the cash method. However, when a firm fails to separate revenue that covers incurred costs from its actual revenue, its records will not be correct. If a firm does not separate its revenue from incurred costs from their actual revenue, the documents will be inaccurate.

Keeping track of all these records sounds like a lot of work, making it easy to procrastinate until the end of tax season. We will introduce the basics of accounting and bookkeeping as it pertains to law firms. We will cover the best practices to follow and common mistakes you should avoid.

Why it’s important to organize your law firm’s accounting and bookkeeping

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. 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).

• When it comes to organization, getting off on the right foot should help you stay more organized now and into the future.
• One reason why people incorporate their businesses in the first place is that it provides a legal separation between them and their company.
• Before you purchase software, it’s important to make sure that it will do what you expect.
• The American Bar Association’s Model Rules of Professional Conduct outlines rules concerning the professional and ethical responsibilities of legal professionals in the USA.
• Most small and solo law firms are working with financial statements that don’t give them the information they need to make informed business decisions.
• Recording financial transactions and balancing financial accounts for a law firm is done by bookkeeping.

Manage them based on your state’s specific rules within your Chart of Accounts. Plus, no commitment or credit card is required, and you can cancel anytime. Below is a breakdown of what each category means and how to implement each into your firm’s accounting chart. Certain trust funds are subject to the Trust Administration Fee (TAF), payable quarterly to the Law Society of BC.

Standard legal accounting and bookkeeping mistakes

With that information, you can better understand your firm’s financial health and plan for the coming months. 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. How your business pays income tax is determined by your business’s legal structure. If you’re an attorney, you’ll probably set your firm up as a Limited Liability Partnership (LLP).

• Recording them as anything but that could land you in hot water with regulators and mess up your taxes.
• Taxes are unavoidable, but you can minimize your tax liability by preparing in advance.
• Before the firm files its first tax return, it must select its method of accounting.
• Any practicing lawyer in BC must file an Annual Trust Report, which provides information to the Law Society about their practice and trust accounting procedures.
• The amount of the deposit should be posted to the pooled trust bank account journal and the clients’ trust listing journal.
• If you sent your client an invoice, that is immediately counted as revenue if you don’t receive the money for weeks.

You can capture what was written down, and present the client with the adjusted amount. 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. Having an activity statement that shows your starting balance, deposits in, payments out, and the ending balance is the Client Trust Ledger.