It’s either to manage as the money is either in the bank or not in the bank. If they have to dig through your personal account to find the odd business transaction, you’re giving them extra unnecessary work and will be charged for it. When you incorporate your business, you essentially separate yourself from the business entity.
That’s challenging in any industry, but it can be especially difficult for a small law firm. Not only do you have to keep track of which transactions are personal and which are business, but you also need to know which costs you incur on behalf of your clients. As a result, lawyers can automate a significant portion of their bookkeeping using accounting software. Subsequently, they can often handle the aspects that require a human touch personally without much training. Here’s what you need to know to establish and maintain an effective accounting system for your law firm. We’ll cover the unique accounting challenges lawyers face, some general best practices to follow, and the most common pitfalls you need to avoid.
Never record a trust deposit as income
In addition, using software like Clio Manage to keep your financial records up-to-date can be a huge time saver. As owners of our own law firms, we’ve made our fair share of mistakes. Unfortunately, bookkeeping mistakes have consequences for your business, income taxes, and license. In fact, some bookkeeping tools such as QuickBooks and Xero integrate with your practice management tool, allowing you to easily track your clients, invoices, and more.
For an in-depth discussion about the rise of electronic payments in the American legal profession, check out this guide to payment processing from the American Bar Association. Once you’ve determined what kinds of payments your firm will accept, you’ll then need to choose a payment provider to work with. Managing all of your business transactions in a separate account makes it easier for you, your bookkeeper, and your CPA to manage your accounting. If everything is jumbled into one account, come tax time, you or your CPA will have to go through your bank records to figure out which expenses are related to your business. The first thing you should do if you think you’ve messed up is to contact a practice management advisor in your state.
Why it’s important to organize your law firm’s accounting and bookkeeping
For example, if a law firm provides services to a client in December but doesn’t receive payment until January, the accrual method would require the firm to record the revenue in December. Automated accounting software can help streamline the process, freeing law firm bookkeeping up time for other tasks. It is important to accurately record all transactions on a daily basis in order to avoid mistakes and maintain accuracy. Speaking of expenses, one of the most common mistakes attorneys make is losing track of business expenses.
Whenever a client pays an invoice, you must allocate the payment to the incurred costs of a matter first. However, if a firm fails to separate revenue that covers incurred costs from actual revenue, their records will be off. Outsourced bookkeeping services remain up to date with the latest bookkeeping software, practices, trends, and more.
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Typically, there are 5 core categories consisting of assets, liabilities, owner’s equity, revenue, and expenses. An accountant who specializes in accounting for law firms is beneficial. Your best bet is likely to hire both a legal bookkeeper and a legal accountant.
- This practical, step-by-step guide will set you and your firm up for a year-end win and success in 2021.
- Accounting software solutions for law firms can help to reduce costs, increase efficiency, and keep track of all the transactions that occur.
- Outsourced bookkeeping services remain up to date with the latest bookkeeping software, practices, trends, and more.
- As a result, you take comfort in allowing yourself to offload financial tasks and turn your attention exclusively to business development and legal cases.
- Many lawyers have no idea how much money they are making or how the firm is doing.
- Many lawyers assume their bookkeeper can or should help them with their financial analysis and get frustrated when they don’t.