Yet, if you own a small firm with multiple attorneys, employees, or contractors, hiring a bookkeeper is more than worth it. You can’t use Excel spreadsheets to maintain all of your financial books and records for an entire year. When used for that much data, Excel becomes clunky and lacks features you could use to improve your reporting. There are plenty of tools available that can help get you started.
For example, if a lawyer has $10,000 in their business account and $5,000 in their trust account, they would need to deposit the $5,000 into a separate trust account. The lawyer would then need to surrender any interest earned on the $5,000 to the client. Similarly, if you entertain clients frequently, you will want to keep track of those expenses as well. By tracking these costs throughout the year, you can ensure that you maximize your tax deductions come tax time. In order to stay afloat financially, a well-thought-out budget is essential for a law firm. When creating a budget, it’s important to think about mandatory expenses, like employee salaries and office expenses, as well as potential surprises.
Study Law Firm Accounting Reports Regularly
Accounting for law firms is advanced and specialized, requiring reporting expertise and robust software to streamline it. And contrary to popular belief, the responsibility and penalties for proper/improper legal accounting fall squarely on law firms, not the accountant. We recommend you reach out to a professional, like a legal accountant or bookkeeper, to assist with your business’ accounting. These are trained professionals who can keep you on track, ensure you’re always compliant and find ways to optimize your finances for future success.
We recommend QuickBooks Plus and Advanced in order to get the most from your legal billing software. Both plans allow you to get a more granular view of your practice and track billable hours by client, case, and employee. Monitor and manage Trust/IOLTA accounts and client trust liabilities to meet strict state bar regulations. Offload your firm’s day-to-day legal bookkeeping needs so you can focus on what really matters.
How to choose an accountant for your firm
As lawyers, we didn’t want to focus on the day-to-day of our firm’s accounting. They check-in with us weekly or more, and they maintain and upgrade our financial systems as our firm continues to grow. They always give us good folks to work with; we enjoy working with them. Make one mistake when recording your debits and credits, and your entire balance won’t add up.
- Legal accountants use the data records provided by bookkeepers to create a foundation built to help firms make informed financial decisions.
- In fact, some basic rules dictate how you must handle this money to ensure compliance.
- For example, when a law firm pays its rent, the transaction would be recorded as a debit to the asset account for cash and a credit to the liability account for rent.
- Clearly presented financial data will help you identify areas in your business that may need tweaking for optimal functionality.
- The IRS accepts digital copies of receipts, and apps and online services make it relatively easy to scan and save them.
To do this, legal accountants capture expenses, provide financial forecasting, and prepare financial statements. And while you learned the ins and outs of the legal system in law school, they didn’t teach you about accounting and bookkeeping. Follow these rules and keep track of client funds every day to ensure you don’t cross any lines that can cause your firm serious problems.
Stay on top of your accounting
Using key performance indicators will help you know sooner if you’re on track. 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. law firm bookkeeping Bookkeeping is the process of recording daily transactions in a consistent way and is a key component of building long-term financial success. Putting it off means having to catch up at the end of the year—the more stressful and time consuming approach.
Both are looking to help your firm grow and succeed financially. Grow Law Firm is a professional law firm digital marketing agency with the sole mission of helping law firms take their operations to the next level. Call today for a free consultation and learn what Grow Law Firm can do for you. Sage Accounting is most suitable for smaller law firms and sole proprietors.
Should Your Law Firm Hire a Bookkeeper and an Accountant?
If you understand the different roles and skillsets each position has, you’ll be able to assess what type of help they can provide to you. At Lawyerist, we firmly believe in the benefits of automation for accounting and bookkeeping. That’s why we’ve taken it upon ourselves to review a wide range of tools for you, so you don’t have to. You’ll find more at our Accounting, Billing & Finance review portal. Once you have a strategy and budget in place, the work of day-to-day management sets in.
- A double entry system, therefore, has two equal and corresponding sides—or debits and credits—and creates a balance sheet consisting of assets, liabilities, and equity.
- Although you now understand the common mistakes in accounting for law firms, you’re still an accountant or bookkeeper.
- In many law firms, one employee handles all the bookkeeping and other back-office functions, leaving the company vulnerable during instances of illness, sick leave, or vacation.
- As your budget year crawls on, you can adjust numbers to more accurately reflect reality and plan the rest of the year accordingly.
- It is also beneficial to ask around and check references to ensure the accountant has expertise in this field.
- Generate financial statements like cash flow, profit and loss, or balance sheets.
- Understand what it takes to remain compliant with your state and federal laws so that you can grow your firm into the best it can be.
The lawyers can get confused over the calculation of taxes and GST for disbursements and activities, thus, it is important to opt for a reliable bookkeeping service provider like us. Most law firms should start by using the cash basis accounting method. The IRS won’t require you to use the specific rules necessary to implement the accrual method until you’re making $10 million a year. The cash basis accounting method is easier and more straightforward, which will free up your time to work on building your practice. Accrual accounting is a more sophisticated method that records revenue and expenses at the time they are earned or incurred, regardless of when you receive the money. The benefit of this approach is that you have a more realistic understanding of your law firm’s income and expenses.
IOLTA accounts are tricky, because they have very specific rules around what you can and can’t do with them, and the penalties for breaking these rules can be severe, including disbarment. Every business is different, and the “right bank” for you will depend on the nature of your practice and the way you prefer to get your banking done. 3 components involved in the reconciliation process consist of the trust ledger, the client ledger, and the trust reconciliation. Accountants also help you with strategic tax planning, analyzing your business financial position, forecasting, and tax filling. All the comprehensive adjusted owner’s information would help you make informed business decisions.