Accounting for Law Firms: A Guide Including Best Practices

bookkeeping for law firms

Instead of debiting cash and crediting income, you should debit the IOLTA account with a corresponding credit to Trust Account Liabilities. When you later earn your fee, you would debit Trust Account Liabilities and credit your revenue account. Having too many accounts creates headaches later on, as it takes more time to review the books and increases your chances of making mistakes. Fortunately, with a combination of technology, best practices, and the right help, it’s possible to stay on top of your bookkeeping with little effort. Each of these records should be kept for a specific time—some for 10 years, some for as few as three.

  • This helps in managing client expectations and ensuring that retainer funds are appropriately utilized.
  • We also looked at real customer experiences to determine if their expectations were met based on what each company promised.
  • Comprehensive records not only support financial transparency and compliance but also enhance the firm’s ability to analyze financial data for strategic planning.
  • A CPA typically handles more complex financial tasks such as tax planning, financial auditing, and high-level financial analysis.
  • If you have multiple needs, such as help with payroll and taxes, in addition to your day-to-day accounting, this could be a good fit.
  • Technology tools like Clio Manage can aid in managing client funds within trust accounts and conducting three-way reconciliations, ensuring accuracy and transparency in handling clients’ monies.

Managing your books via accounting software may get you started as a solo attorney. But, if you want to spend your time focused on practicing law rather than deep in the weeds of your firm’s finances, you’ll likely want to consider hiring help. One (or more) of these professionals can greatly assist with your law firm accounting. 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.

Essential Tips for Effective Legal Accounting

Depending on your needs, opening a money market account for savings might be a smart move. It’s an interest-bearing account that offers a higher yield than traditional business savings accounts (interest rates for money market accounts sit at an average of 0.11% nationally). You’ll be required to maintain a higher minimum amount in the account, and have limited check-writing options. Once you’ve chosen a bank to work with, you’ll want to open a business checking account, a savings account, and an IOLTA (Interest on Lawyers Trust Account).

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. 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. An accountant who specializes in accounting for law firms is beneficial.

Mastering the Ledger: The Crucial Role of Effective Bookkeeping for Law Firms

At the very least, you should leverage accounting software to track your transactions. There’s no reason to manually enter transactions anymore with so many affordable options available. Consider asking the prospective accountant about their familiarity with employment tax regulations and whether they have worked with independent contractors common in the legal industry. The FUTA tax rate is 6%, which taxes wages up to the first $7,000 earned by the employee during the year. There are also state and sometimes municipal payroll taxes to be collected.

  • Bring in a legal accountant to help you strategize how to help run your business through financial reports.
  • Your bar license is at stake any time your firm improperly moves client funds, even if you didn’t do it.
  • As financial professionals experienced in the legal sector, we at NorthStar Bookkeeping have seen firsthand the impact of specialized bookkeeping on law practices.
  • AI-powered legal analytics, workflow tools and premium legal & business news.
  • As highlighted previously, technology plays a transformative role in legal accounting.
  • Amid these challenges and rapid change, there is a growing recognition of the need to brand and package service offerings in a way that resonates with clients.
  • Given the complexities of legal accounting, seeking advice from accounting professionals who specialize in the legal industry can be invaluable.

These funds are stored in IOLTA or “interest on lawyers trust accounts” accounts. First things first, bookkeeping and accounting aren’t the same things. Although they share a common goal, they occur at different stages of managing your firm’s finances. Bookkeeping happens first and relates to the administrative side of tracking your cash.

Standard legal accounting and bookkeeping mistakes

It involves recording and classifying financial transactions, preparing bank reconciliation, and tracking all income and expenses. To keep things even more streamlined, consider using online payment software together with legal accounting software. 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. You’ll also want to decide how your firm will track incoming and outgoing funds. Your business’s accounting method will affect cash flow, tax filing, and even how you do your bookkeeping.

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 law firm bookkeeping regularly so you can make sure you’ve got these covered. By now, you know you can’t simply create a financial strategy and budget and sit back and relax. Using key performance indicators will help you know sooner if you’re on track.