We recommend you hire a legal bookkeeper and accountant to help keep you and your firm on track. There are many reasons for this, one of which is poor accounting practices. Inadequately tracking your billable hours and mismanaging your invoices can cause you to lose track of what money is owed, and what’s going out. Here are five common law firm accounting obstacles and mistakes you should be aware of so you can avoid them. Accountants rely on bookkeepers to keep accurate and timely financial statements.

A simple mistake could send your firm into the red for the month. Or, you might lose track of critical transactions that affect your taxes. Have you ever tried to balance your checkbook, only to find you’re a quarter off somewhere? One number mistake on your law firm’s books can cause pandemonium. That’s why it’s important to take your time, double-checking your entries as you go.

What are the key steps of bookkeeping for a law firm?

Speaking of expenses, one of the most common mistakes attorneys make is losing track of business expenses. It’s best to capture and record your business expenses on the daily, so you don’t lose those receipts or invoices. Then, set aside a time each week to make sure they are coded properly in your books. Remember earlier when we discussed setting up a Chart of Accounts in Chapter 1? Your bookkeeper goes into your accounting software regularly (at least weekly) and records all the money coming in and all the money going out so that it appears in the correct place.

If your data isn’t kept up to date, then your legal accountant won’t be able to do their job as effectively. It’s easier to start your legal accounting strong than to fix sloppy accounting done in the past. And with proper legal accounting and bookkeeping, it couldn’t be easier to get a big-picture overview at a glance. A chart of accounts (COA) is a list of all the financial accounts in the general ledger of your law firm. Every lawyer that manages trust accounts should know what three-way reconciliation means. While not necessary, we recommend working with a bookkeeper who has experience working with law firms.

Bookkeeping Services for Lawyers

This means that attorneys have to take extra care when selecting a merchant processor for their business. Most law firms opt to use cash basis accounting because it’s simple to maintain. Cash accounting makes it easy to determine when a transaction has occurred (the money is either in the bank or out of the bank) and there’s no need to track receivables or payables. In addition to their business checking and savings accounts, most law firms are required to hold client funds in a separate trust account—often called an “IOLTA”.

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. You’ll need to choose an accounting method before your firm files its first tax return, and then stick with it on all subsequent returns. It is recommended that bookkeeping for a law firm should be done on a regular basis, depending on the needs of the firm. In order to ensure compliance, financial success, and growth it is important that bookkeeping is done in an accurate and systematic way.

Legal billing and timekeeping

Legal bookkeepers and legal accountants work with your firm’s financials, with the shared goal of helping your firm financially grow and succeed. We’ll also show you how legal accounting software can make the whole process easier (and more effective). Focusing on the business of law, including critical issues of great importance to lawyers, whether within https://goodmenproject.com/business-ethics-2/navigating-law-firm-bookkeeping-exploring-industry-specific-insights/ law firms, corporate law departments, or solo practices. Organize your crucial contact information – from clients and prospects to witnesses and opposing counsel – in our single, easy-to-navigate dashboard. Our legal contact management software makes it easy to filter, search and access critical client data, view communication history and more.

And without proper care, it’s easy to slip up and make a dangerous error. Businesses are complex, and you may need to set a budget for different categories like marketing, technology, etc. With money flowing in so many different directions, it’s easy to lose track. 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. 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. The Federal Unemployment Tax Act (FUTA) tax provides payments of unemployment compensation to workers who have lost their jobs.

Emailed invoices have a Pay Now button so that clients can pay online with cards or bank transfers. A retainer agreement helps establish terms for your services and payment. Learn how to set up your own retainer agreements and improve stability for your practice. Send invoices from the app and get alerts the moment they’re paid. Have hard and soft costs sorted for you, from direct or third-party products or services you’re paying on behalf of the client, to assets and debts.

Thankfully, good bookkeeping can also result in accurate reports on demand, make billing easier and improve the way you view your finances. As a solo attorney, managing your books law firm bookkeeping via accounting software may get you started. Yet, if you own a small firm with multiple attorneys, employees, or contractors, hiring a bookkeeper is more than worth it.

For example, if a law firm has a goal of saving money, they may choose to cut back on non-essential expenses like office parties or new office furniture. Now you cross off law bookkeeping out of your to-do list and feel stress-free about the financial aspect. As a result, you take comfort in allowing yourself to offload financial tasks and turn your attention exclusively to business development and legal cases. The Trust ledger provides a summary of all the transactions involved in a trust account.