Law Firm Accounting Guide: How to Master the Language of Legal Business

You have tremendous duties and responsibilities as a lawyer and are scrutinized on many levels. That's why legal accounting and bookkeeping are so essential. As you know, the only way to avoid running afoul of laws and regulations is to have strong legal accounting and bookkeeping practices.

By learning the principles and best practices of legal accounting and bookkeeping and mastering their languages, you can effectively separate personal and business expenses. You can also strengthen and protect your firm's finances from preventable problems.

In this law firm accounting guide, we take you through law firm accounting and financial management basics to cement your knowledge and present valuable new information. We cover all the key aspects involved in both practices and explain strategies to help you apply this knowledge to your firm's benefit.

This law firm accounting guide will help you understand the following: 

• The key difference between law firm accounting and bookkeeping
• The best practices for law firm accounting
• How proper accounting for a law firm can benefit your business
• The best accounting software for law firms
• The mistakes to avoid in law firm accounting and financial management
• Other law firm accounting best practices

Law Firm Accounting: The Main Definitions

Law firm accounting is an integral part of any successful legal practice. It involves the systematic recording, reporting, and analysis of financial transactions related to legal services. It is an essential part of any law firm's operations and provides an accurate record of income and expenses. The main definitions associated with law firm accounting include Trust Accounting, IOLTA, Double-entry Account, and Three-way Reconciliation.

Understanding these terms and how they relate will help law firms properly manage their finances. Additionally, maintaining accurate books helps ensure that all financial information is correct and up-to-date.

Trust Accounting

Trust accounting is the bookkeeping of clients' income and expenses that are held in trust. This type of accounting may include assets from settlements or retainers fees. These funds held in a trust are not the law firm's property but are individuals or institutions known as trustees. 

While each account is managed in accordance with the law of the state, they have common rules guiding them. 

1. These funds should not be used for law firm operating expenses. 
2. Client funds must be deposited into a client trust account. 
3. You cannot deposit law firm money in a client's trust account.  
4. Your firm may not earn interest on the account. 
5. You cannot keep earned fees in a client's trust account. 
6. You cannot withdraw disputed money for payment of firm fees. 
7. You must fully account for trust monies and assets when a client requests. 
8. Firms must reconcile trust accounts regularly.

IOLTA

IOLTA stands for Interest on Lawyers Trust Accounts. These accounts include pooled client funds from settlements, retainers, and other client funding sources. Interest is transferred from the account and used for social justice programs, such as legal aid services. Like the trust accounts, the rules vary to keep in mind. They require meticulous accounting to keep clients' funds separate. 

1. Law firms cannot borrow or use these funds.
2. Law firms may remove funds from the IOLTA trust bank account when they have earned them. 
3. Interest can be made on these accounts. Earned interest does not belong to the law firm.

Double-Entry Accounting

Double-entry accounting aids in the detection and prevention of accounting errors. In double-entry accounting, each transaction results in two transaction entries. These transactions are recorded on equal sides, known as debits and credits. Debits and credits combine to form a balance sheet comprising assets, liabilities, and equity. They must always equal out on all accounts. 

Three-Way Reconciliation

Most bar associations require law firms to comply with regular three-way reconciliation. Reconciliation protects against financial issues and uncertainty for both clients and law firms. Three-way reconciliation requires bank account balances and book balances to match. It also requires the bank account and book balances to match client ownership details. 

Three-way reconciliation is generally conducted every 30 to 60 days, depending on the state. You can do it manually or by using powerful accounting software to assist law firms in meeting this requirement. Law firms are responsible for balances that do not match up, regardless of fault.

The Key Difference Between Law Firm Accounting and Bookkeeping

Both accounting and bookkeeping for law firm are essential for success, and they share some similarities. Although they are different processes, they complement one another. Generally speaking, law firm bookkeeping is only concerned with organizing recording financial transactions and data. Accounting, on the other hand, deals with interpreting and presenting this financial information to relevant parties.

Bookkeeping is the horse and always comes before accounting. Each transaction is taken into account and detailed by the legal bookkeeper. You must carry out an administrative task for any new financial transactions.

Accounting is the cart and always comes after bookkeeping tasks have been completed. Without the finished work of a legal bookkeeper, a legal accountant won't have any figures or data to interpret or work with.

With financial data, legal accountants present big-picture information and give comprehensive and specific reports of a firm's financial health. These data are valuable for a law firm's future sustainability and profitability.

Bookkeepers should be up to speed on the rules and regulations of the jurisdictions they work in and have accounting software experience. Legal accountants also need to be intimately familiar with the relevant rules and regulations and be comfortable using different types of software. Accountants should also be able to provide a law firm with professional counsel to help the firm grow financially.

Law Firm Accounting Best Practices

Even with your busy schedule of cases and clients, you can master law firm accounting and financial management. Although daunting for some, the principles behind law firm accounting and financial management are based on simple financial management concepts that are not as difficult to master as you might think.

As you learn more about the process, you will likely find that you already understand law firm accounting and financial management. But no matter how much knowledge you hold, this guide will help you attain a high level of fluency in both practices.

Sort Out Your Budget

Your budget will act as one of the primary guiding forces of your law firm. Hence, working out a comprehensive budget that captures every aspect of your business is important. Mastery of accounting and financial management practices will help immensely. With a well-thought-out budget, you will be prepared to:

• Make and execute realistic goals
• Monitor cash flow and expenditures
• Account for discrepancies

The right budget management software is essential for law firms. Clio Manage and other programs help firms organize their financial activities, from the expense and revenue tracking to managing billables.

Figure Out What Types of Bank Accounts You Need 

All law firms must have bank accounts to handle the flow of revenue, payments, and other funds. Generally speaking, most lawyers use three types of accounts:

• IOLTA accounts
• Checking accounts
• Savings accounts

Many law firms have all three accounts or more, depending on their needs. Proper law firm accounting and financial management can help you decide which ones are right for you and which banking institution is suitable for your firm.

When deciding which accounts you should open for your law firm, you'll want to get answers to a few key questions. You should pose these questions to the institution handling your business bank accounts:

• What are the fees involved, and how can they be avoided?
• Are business savings accounts available?
• Are business credit cards and lines of credit available?
• Are IOLTA and other types of trust accounts available?
• Can I designate separate users to handle certain banking matters?
• What type of security and fraud protection do you offer?

Comparing different banks' answers to these questions will help you decide which institution and account are right for you. Shop around and ask lots of questions.

Open a Business Bank Account

A bank account allows tracking all incoming and outgoing funds, which is necessary for accurate record-keeping. It helps to keep personal and business finances separate. Having a separate business account allows for greater control over the accounting of clients’ funds. It provides a more secure way to manage finances. It also establishes credibility with existing and potential clients, showing that the law firm is taking its financial affairs seriously. 

To open a business bank account, you will need the necessary legal paperwork, such as the Articles of Incorporation and Employer Identification Number (EIN). You may also need to provide proof of address and identification documents. Once the account is open, it is important to manage it carefully by regularly reconciling accounts, tracking expenses, and paying bills on time.

Keep Your Accounts Separate

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.

Specify Your Accounting Methods

Specifying your accounting methods and needs is another important step to mastery of legal accounting and financial management. Law firms use either accrual or cash accounting. The appropriateness of one method over the other highly depends on the characteristics of your firm.

Cash Accounting

Cash accounting is the simpler of the two. It provides for recording cash as revenue when your firm receives it. This means once a payment hits your bank account, it is taxable. The same holds for expenses. They aren't counted as such until money leaves your account. This method does not recognize various payment accounts, such as accounts receivable and payable.

One of the principal benefits of using the cash accounting method is its simplicity. This type of accountancy gives you a clear look at your current financial situation. But it does not take into account cash coming in later. However, this could work to your benefit. With cash accounting, you don't have to pay taxes on earned money until it has been deposited into your account. This can help you defer tax liability until you are in an optimal position to address it.

Accrual Accounting

With the accrual method, on the other hand, you enter an expense or revenue the moment it is incurred or earned. For example, when you invoice a client for services, the money they owe you is entered into the books as revenue. The same is true for expenses and liabilities. Once your firm receives a bill, the expense goes on the books.

With this method, tax liability attaches before funds are even received. And although accrual accounting gives you a good idea of your future income and expenses, it does not provide as clear a picture of your cash flow situation as cash accounting. This is a more appropriate accounting method for large firms with high client turnover.

Hire a CPA

Lawyers are incredibly competent professionals. However, taking on tasks above and beyond your duties is never a good idea, especially accounting and financial management tasks. As with the law, too much can go wrong if you don't have the right professional in charge. Let a competent, experienced professional or company handle things is always better.

How to Hire Staff for Law Firm Accounting Jobs

You want a professional with ample experience handling law firms' accounting ins and outs—one who knows jurisdictional rules and can provide valuable guidance to your firm. To ensure you make the right choices, developing a thorough job description that outlines the skills and experience required for each position is important. Then you do the following: 

1. Make sure that the people you hire possess the necessary qualifications, including experience in financial analysis and accounting software and knowledge of legal terminology and procedures. 
2. Create a transparent selection process that allows you to compare applicants and their qualifications. 
3. Ask open-ended questions about their experience and skills during the interview to verify their credentials, which will help you gain insight into the candidate’s strengths and weaknesses. 
4. Review any references they provide and check with the state licensing board to ensure they have the appropriate certifications. 

After selecting a candidate, provide adequate training to ensure they are prepared to handle the job. Offer competitive wages and benefits packages to qualified candidates once you have finalized your selection.

Questions to Ask When Interviewing a Bookkeeper

Finding the right staff member requires asking the right interview questions. You need to know specific things about your potential hire to honestly know if they are up to handling your bookkeeping needs.

Questions to ask potential bookkeeper hires include:

• Do you know the relevant jurisdictional rules and regulations?
• What experience do you have with accounting software?
• What is your experience with preparing financial reports?

You will also want to inquire about their relevant education and training in bookkeeping and financial account management.

Questions to Ask When Interviewing a Legal Accountant

Some key questions to ask potential legal accountants include the following:

• Are you up to speed on the rules of our firm's jurisdiction?
• Do you have experience with similar law firms?
• What benefits can you provide to a firm like mine?
• Are there any special services or experiences you can bring to the table?
• Will you be able to provide recommendations and guidance?
• What accounting software do you have experience with?

You should also inquire into each candidate's education and training related to legal accounting.

Study Law Firm Accounting Reports Regularly

Top-of-the-line law firm accounting practices generate regular reports of activities. By studying these reports, you will gain valuable insight into your firm's operations and be able to make effective decisions for your firm. It's easier to spot opportunities and potential problems and take effective, appropriate action if you regularly read your law firm accounting reports.

How Accounting for Law Firm Can Benefit Your Business?

Although the basic principles behind accountancy and bookkeeping are easy to grasp, the execution of both requires time. That's why law firms employ dedicated professionals and software to handle financial matters for their businesses. Doing so provides them with the following benefits:

It Keeps Your Law Firm Compliant

Law firms are under a particular duty to maintain compliance at many levels, most notably with regard to client funds and other financial matters. They also face tax-compliance issues at the state and federal levels and municipal taxes.

Legislative bodies, the American Bar Association, and state bar associations have created protective rules stipulating how lawyers carry out their duties to their clients.

It Helps You Grow

A strong accounting practice will also allow you to plan strategically for the future. Clearly presented financial data will help you identify areas in your business that may need tweaking for optimal functionality. This data will also aid in determining the financial feasibility of planned projects or actions, such as taking on a particular client, hiring more staff, or acquiring real estate and other assets.

To learn more about financial management and law firm growth, watch our podcast, where Sasha Berson and Ryan Kimler discuss increasing a law firm's revenue by optimizing numbers.

You Always Know Where Your Money Is

Successful law firms know everything about their money, from where it came from to where it will go. If you don't have a strong accounting practice handling your affairs, you might be surprised at all the expenses you incur and pay each month. You may also be surprised by how much revenue comes in.

It Protects Your Reputation

It takes years to build a strong attorney reputation and one second to destroy it. Law firms are held to a high standard and suffer greatly when errors occur, even when the errors are unintentional and understandable. Law firm accounting helps you keep your firm's name reputable and clean.

Best Accounting Software for Law Firms

Accounting software for law firms is vital for busy and growing offices. As you would imagine, there are numerous market options, each with particular and sometimes peculiar characteristics and features. Below, you'll find a short breakdown of some of the more popular options for accounting software for law firms.

FreshBooks

Tens of millions of people have relied on FreshBooks, making it a solid choice for your firm. This comprehensive accounting tool can help you manage every aspect of your firm's business, including expenses and revenues, client information, and communications.

Some of the tasks that FreshBooks will help you with include the following:

• Tracking and monitoring time and resources spent on each client
• Managing invoices and receipts
• Accepting all main forms of payment in multiple currencies
• Creating financial reports, such as expense and profit-loss reports

FreshBooks offers four levels of monthly pricing:

• Lite ($4.50): Services for up to 5 billable clients, invoice services, and business tracking
• Plus ($7.50): Services for up to 50 billable clients and double-entry accounting
• Premium ($15.00): Unlimited billable clients and other included services
• Select: Support for specific needs with custom pricing models

Pros:

• High-level features
• High-performing workflow automation
• Formidable security and encryption features
• User-friendly and intuitive interface

Cons:

• Templates used for invoices should allow more customization
• It may be difficult to incorporate retainers

Zoho Books

Zoho Books is one of the more affordable law firm accounting software options. But don't let that fool you into thinking it is incomplete or lacks essential features. Zoho Books gives users access to all of the key features offered by more expensive programs, including:

• Quote and invoice generation
• Expense and receipt management
• Time tracking
• Payment monitoring
• Automated recurring financial transactions

Pricing for Zoho Books is offered in five different monthly plans:

• Standard ($15): Supports 3 users and 5,000 invoices
• Professional ($40): Supports 5 users, plus invoices and other services
• Premium ($60): Supports 10 users and includes various services
• Elite ($120): Supports 10 users and includes premium features
• Ultimate ($240): Supports 15 users and includes advanced analytics for your firm

Pros:

• Great integration with specific apps
• Great for invoices and billing
• Cost-effective and easy to manage

Cons:

• Mobile app does not allow payment
• Better options are available for larger businesses

Sage Accounting

Sage Accounting is most suitable for smaller law firms and sole proprietors. Still, it is not lacking in functionality and features. Instead, it is a straightforward program that can give law firms peace of mind that their operations are being managed and monitored reliably.

Some of the great features that come with Sage Accounting include:

• Invoice and bill management
• Automated updates for transactions
• Comprehensive financial reporting
• Monitoring of time and money spent on each client
• Access to cash flow predictions
• Automatic bank reconciliation
• Inter-office networking capabilities
• Payment services in multiple languages and currencies

Sage Accounting has two pricing levels: First, a $10 per month plan grants access to one user and includes essential services. For $250 a month, you can have unlimited user access to the program and a wider array of features and services.

Xero

Xero is growing fast as an accounting management option for small and growing law firms. One of its most attractive features is no limit on the number of users allowed access. Another feature that makes it one of the top choices for law firms is its ease of use and intuitive interface.

Some of the great services that come with Xero include:

• Views for both cash flow and accounts payable information
• Pay Now buttons for invoices
• Invoices customized for clients
• Tracking of project costs and time requirements
• Storage for bills, invoices, and receipts
• Over 1,000 integrations and support for 160 currencies
• Expense management and tracking

Three monthly plans are available with Xero:

• Early ($12): Offers support for 20 invoices and basic features
• Growing ($34): Provides bulk transactions for reconciliations
• Established ($65): Provides in-depth expense and project tracking and reporting

Xero offers a 30-day trial period for firms that want to test the water without making a long-term commitment.

Pros:

• Unlimited users for every plan
• Reliable and secure
• User-friendly interface
• Customizable reporting

Cons:

• The starter plan has limited invoicing capacity
• Cancellation requires one month's notice
• The mobile app lacks full features

FreeAgent

FreeAgent is not the most well-known accounting program, but those who use it love it. It's touted for its simplicity, efficiency, and many tools. Small and upcoming law firms will find FreeAgent a great match as they work to thrive in the industry.

Some of the great features that come with a subscription to FreeAgent are:

• Accurate expense tracking
• An array of project management features and tools
• Mobile and desktop time and resource tracking
• Automated and recurring invoices
• Bank account linking
• Support for multiple currencies and languages
• Sales tax tools

FreeAgent has just one plan, giving law firms unlimited access to every feature the program offers without long-term contracts. At $10 per month for the first six months and $20 after, the price is just right for law firms on the move.

Pros:

• Very easy to use
• Great customer support
• Many options for automation
• Unlimited access to all features

Cons:

• Less flexibility with only one plan
• Mobile print is too small to see without zooming
• Not particularly conducive to growing a business

TaxSlayer

As the name implies, TaxSlayer is a powerful software for all things tax-related. It allows firms to execute a variety of tax actions, as well as create and send important financial and tax documents. Millions rely on TaxSlayer to ensure they comply with all of the necessary tax regulations and adequately fulfill their tax duties.

Special features that are available with TaxSlayer include:

• 100% guarantee on tax calculations
• 1040 filing
• 1099 income tax services
• Quarterly tax payment reminders
• Access to all major IRS tax forms and documents

Pricing for TaxSlayer includes one free plan and three paid plans:

• Free: Includes 1040, state tax filing, educational expenses, and phone support
• Classic ($29.95): Also includes earned income tax credit computing and child tax credits
• Premium ($49.95): Includes phone and email support along with tax pro and IRS audit assistance
• Self-employed ($59.95): Provides 1099 assistance with professional and personalized guidance

Pros:

• Easy to switch from another provider
• Support for major IRS forms and documents
• Simplifies tax returns
• Fast and user-friendly, as well as affordable

Cons:

• No carryover provided for foreign taxes
• Help resources are a bit lacking

Zola Suite

Zola Suite is an option with some of the most powerful and plentiful tools for law firm accounting and bookkeeping. It offers most—if not all—of the tools, other software options, and some of its unique features, most notably various management capabilities. You can manage your contacts, documents, and other aspects of your law firm's operation with Zola Suite.

Key features of this software that is used often for larger law firms include:

• Case management and tracking
• Scheduling and task assigning
• Premium calendar services
• Customized intake forms and entry fields
• User access
• Role management
• Report creation
• Trust account management
• Retainer management and tracking

Pricing is available at three levels with Zola Suite:

• Core ($59): Includes basic accounting and document services
• Enterprise ($79): Offers unlimited document storage, CRM software, and tracking
• Enterprise Plus ($89): Includes department-based accounting and other premium features

Pros:

• Automated calendar functions
• Great for highly active firms
• High-level support and a user-friendly interface

Cons:

• The client portal presents some complexities
• Voids and refunds are a bit more complex than necessary

PCLaw

PCLaw has made its name a one-stop shop that works well in any situation, especially with large law firms. Everything a big operation could want and need from an accounting software solution is available through PCLaw.

Features of this software solution include:

• Management of calendars, matters, and documents
• Billable and non-billable time tracking
• Tools that streamline your financials and reconciliations
• Comprehensive data at your fingertips
• Fast document generation and template creation
• Bill payment collection and expense tracking
• You can fill out a form on the PCLaw website to receive a quote for specific services.

Pros:

• Packed with tools and features
• Simple tracking of time, deadlines, and filings
• Highly customizable
• High-end reporting functionality

Cons:

• Basic functionality from the mobile app
• It does not come with a payroll system
• Lacks upfront pricing
• Not affordable for many smaller businesses

LeanLaw

LeanLaw was designed with the midsize law firm in mind and is specially equipped to handle the time tracking and monitoring, billing, and trust needs of law firms. When you add QuickBooks through instant integration, you can easily access a full suite of tools to help you manage your small or midsize law firm.

Special features that come with LeanLaw include:

• Individual client trust account tracking
• Client trust ledger creation and management
• Monitoring of time and expenses
• Three-way bank reconciliation in real-time
• Automated financial trust reports
• Customized, automated workflows
• Bill generation and automation of payments
• Attachments to important documents

Two annual plans are available with LeanLaw. The monthly price of each includes the following:

• Core ($40): Expense and time tracking and capped bulk invoicing
• Pro ($55): LEDES billing, uncapped bulk invoicing, multiple trusts, and more

If you prefer a month-to-month subscription, the price goes up to $50 and $65 for the Core and Pro plans.

Pros:

• Great for law firms and lawyers who also use QuickBooks
• Efficient mobile time-recording capabilities
• User-friendly

Cons:

• Not a comprehensive solution without QuickBooks
• Lacks some features and tools
• Billing customization is lacking

TimeSolv

TimeSolv excels at project tracking, but project tracking isn't all this software option does. It allows you to efficiently and easily manage your firm's billing aspects and the other important financial transactions you engage in, from expense tracking to automatic payment processing. TimeSolv can also take care of your firm's tax calculation and filing needs.

Some TimeSolv features include:

• Simultaneous tracking of multiple projects
• Customization of invoice templates for efficient billing
• Payment collection and management
• Multiple report-viewing formats
• Multiple trust account management
• Auto-pay setup for invoices
• Easy integration with various popular programs like QuickBooks and Xero

Pricing for TimeSolv is based on how many people will use the software. Paying by the month is more expensive and costs $39.95 per user. Purchasing an annual subscription saves you $4 per user per month.

If you are on the fence about TimeSolv, you can take advantage of their 30-day free trial to give them a shot. TimeSolv also offers a six-month money-back guarantee for those who purchase the service but are not happy with it.

Pros:

• Free trial and great money-back guarantee
• User-friendly platform
• Efficient time and accounting management and tracking capabilities
• Easy billing setup

Cons:

• Trust account management is not as simple as other functions
• The calendar lacks a reminder feature
• The reports feature needs more customization

CosmoLex

CosmoLex is another great all-in-one option for law firms. No additional software is necessary to access the powerful accounting and bookkeeping tools that you would expect to find in high-quality programs. Whatever it is you need to do, you are likely able to do it with CosmoLex.

Some of the many services that CosmoLex offers include:

• Generating trust accounting reports
• Printing checks for disbursements
• Creating professional and customizable invoices
• Generating bulk invoices

These listed services are in addition to most accounting software's standard features, including expense tracking, calendar management, and report generation.

Pricing for this all-in-one cloud-based software solution comes at a whopping $85 per user per month and is billed annually. This is more expensive than most basic software programs but cheaper than some premium plans for other options.

Pros:

• All-in-one accounting and bookkeeping solution
• Attentive customer support
• Lots of tools and features
• Client portal for the uploading of documents by clients
• Simple pricing structure

Cons:

• It has a learning curve
• May experience glitches from time to time

ZipBooks

ZipBooks is considered by many to be the best accounting software for smaller law firms. It includes standard features and is incredibly easy to navigate. On top of that, ZipBooks is more than reasonably affordable; it's highly affordable compared to many options.

With ZipBooks, you have access to the following tools and features:

• Client management tools
• Effective time tracking
• Automated billing and invoice management
• Online payment options with PayPal and Stripe

ZipBooks offers a free option with basic features. It also offers three monthly plans:

• Smarter ($15): Supports five users and includes time-tracking capabilities
• Sophisticated ($35): Supports unlimited users and secure document sharing
• Accountant: Custom-priced option with client support and more

Pros:

• Free plan
• Easy to learn and manage
• Offers time tracking by client and project
• Supports invoice management
• Generates statements and reports

Cons:

• There is currently no ZipBooks app
• ZipBooks is designed to be used in North America

QuickBooks Online

QuickBooks is an industry leader and one of the oldest accounting software options. Countless law firms have used the features QuickBooks offers to handle their financial and legal concerns. Although it can benefit law firms of any size, QuickBooks tends to work well with smaller and midsize firms.

Some of the fantastic features you'll get when going with QuickBooks include:

• Convert estimates into invoices
• Track bills, expenses, and revenue
• Create and review various reports of your firm's finances and overall health
• Extensive communication and networking between your firm's devices
• Multiple forms of payment processing
• Sales tax capabilities

QuickBooks offers four levels of pricing by the month:

• Simple Start ($15): Includes all standard features and access for one user
• Essential ($27.50): Includes access for three users with invoice management
• Plus ($42.50): Offers access for five users with inventory and profitability projections
• Advanced ($100): Allows access for more than five users and many additional features
• Self-Employed ($7.50): Offers quarterly tax help and standard accounting tools

Each plan's prices increase after three months to $30, $55, $85, $200, and $15, respectively.

Pros:

• Ability to make cash flow projection
• Time and expense tracking tools and features
• Integration capabilities with over 600 apps
• Invoice management

Cons:

• No free plans are available
• The Simple Start plan only allows access for one user
• The learning curve is a little steep
• Budget-tight law firms might have trouble affording the plans

Mistakes to Avoid in Law Firm Accounting and Financial Management

Accounting and financial management mistakes can threaten the well-being of any law firm. Fortunately, you can easily avoid many of them if you know which types of errors are the most common.

Not Distinguishing Between Revenue and Income

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. Taxes, property expenses, legal dues, and payroll are typical expenses law firms must deduct from revenue to get income. Mixing up the two can give you a false picture of your firm's financial health.

Borrowing From IOLTA

Borrowing from IOLTA is not only a mistake but also against the rules. Client safety is one of the main concerns of bar associations. The bar will do everything possible to make sure client funds are safe. Borrowing from a trust account puts these funds at risk. Borrowing is also a red flag for potential insolvency or other financial problems a law firm may be going through. In other words, if your law firm even considers borrowing from its IOLTA account, you may not be in the best position to handle clients. You should take action to remedy your finances.

Recording Trust Accounts as Income

Trust accounts are not income for your firm. Recording any money still in a trust account as income is a glaring error and is also against the rules. You may count funds in trust accounts as income until you have earned fees for services rendered.

Messing Up With Trust Accounts

Mistakes with trust accounts are common but not always forgivable. Disbarment and other sanctions are on the table when a firm messes up with a trust account. Various ways these errors manifest themselves include:

• Erroneous deposits
• Accidental misuse of client funds
• Commingling of funds
• Failure to accurately report accounts

Law firms must know that there is essentially no wiggle room for errors. Trust account liability almost operates like strict liability, where simply committing an act is proof enough for guilt. No reasoning behind the action can absolve the actor.

Fortunately, software is available to help monitor for errors and prevent them from happening in the first place.

Data Entry Mistakes

It is sad but true that some of the most troubling errors law firms face are simple data entry mistakes. Unfortunately, their consequences are not always so simple and can affect significant portions of law firm business.

Other Law Firm Accounting Best Practices

To ensure that finances stay in order, here are some other best practices for accounting you should consider implementing: 

• Ensure all tax filings are completed correctly and on time to avoid potential penalties or legal issues.
• Create a budgeting system and setting up automated reminders to help keep spending in check. 
• Review financial statements and study trends in the industry to help identify areas of improvement or opportunities for growth regularly. 
• Don’t forget miscellaneous expenses. Examples of these expenses are fees for transportation, court filings, expert witnesses, transcripts, medical records, etc. 

Contact a Professional for Help

Law firm accounting and financial management are pillars all law firms should rest on. There are far too many regulations and opportunities for error for an active firm not to have quality methods of handling its legal and financial accounting needs.

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.

‍