Law Firm Bookkeeping 101

Accounting software with a robust client relationship management system (CRM) saves time and streamlines your firm’s invoicing and billing workflows. Suppose  you choose accounting software that automatically syncs payroll functionality with time-tracking and expense apps. In that case, you can also generate pay runs with the click of a button, for better efficiency.

• One number mistake on your law firm’s books can cause pandemonium.
• This includes but is not limited to noting down payments made to vendors, documenting sales, and tracking various business-related expenses.
• However, it’s easy to make attorney bookkeeping and data entry mistakes when you have to maintain and complete your day-to-day transactions manually.
• When it comes to handling your law firm’s finances, your practice benefits from hiring experienced financial professionals.
• If you, or your bank, make one mistake, it could have serious consequences.

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. 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.

Managing Firm Finances: Bookkeeping, Accounting, and KPIs

But while there is overlap in their skill-set, they are two separate jobs. Make sure those costs are booked from an accounting standpoint and passed through as an expense card simultaneously. When it comes to protecting data, you’ll enjoy Clio’s industry-leading security. QuickBooks Online uses encryption to help protect client information. You can go with an accrual or cash accounting method in the US, and the difference is mostly about timing.

For example, law firms that handle real estate matters may require several pooled trust accounts at different financial institutions. On the other hand, a criminal practice may require only one pooled account. However, in some jurisdictions, you can’t even practice law without having an account—even if it’s for pro bono work. It’s common for law firms to operate one or more pooled trust accounts depending on the nature and needs of the practice. Even the most customizable general accounting software doesn’t support correct, automatic allocation of invoice payments, which becomes even more significant when invoices are not paid in full. Liabilities and costs must be paid first and prior to applying anything to income.

What Is Legal Bookkeeping and Why Is It a Service Worth Outsourcing?

Help you process and send invoices, process your accounts payable, and run your payroll. Your bookkeeper can also run routine financial reports for you, including the income statement and balance sheet described in Chapter 1. As a solo attorney, managing your books via accounting software may get you started.

Any interest earned on these funds is pooled together and used for legal aid, increasing access to justice for those who are unable to afford it. In short, a trust account is an account used by lawyers to hold money on behalf of clients. It’s also a good idea to reconcile trust accounts at least once a month and prepare monthly reports for each client, listing all of the activity in and out of the account and the ending balance. In cash basis accounting, you record income and expenses when money changes hands. In accrual accounting, you record revenue when earned and expenses when incurred, regardless of when cash changes hands. Manually inputting financial data and managing transactions takes time and puts you at risk of unnecessary error.

Legal Accounting Software Market Size Industry Report 2023

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. Entering numbers manually often leads to mistakes and duplicated data entry in the accounting process. This results in wasted time, mismatched records, billing complications, and even compliance violations.

After all, if the IRS audits you (shudder), you’ll want these records to prove your expenses were for business purposes. The key is to actively monitor things so you know when and what to adjust. If you’re missing your budgeted numbers, you can reduce expenses, delay one time purchases, increase sales through more aggressive marketing or advertising, or lower your profit expectations. 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.

Using online legal accounting software will ensure important financial data is processed and tracked correctly, so it’s easier to keep accurate financial records for your firm’s bookkeeping and accounting. Cloud-based law firm accounting software will help you stay compliant with applicable legal bookkeeping services ethics rules. Of course, the line between bookkeeping and accounting can get blurred. Some accountants record financial transactions, and some bookkeepers assist with business decisions and prepare financial statements. Healthy cash flow is key to any legal practice’s financial health.

It allows for more meaningful financial management that isn’t influenced by the ups and downs of cash flow. While the chart of accounts is customized to your law firm’s size, jurisdiction, and practice area, it typically includes five core categories in addition to numerous subcategories. Legal bookkeepers and legal accountants work with your firm’s financials, with the shared goal of helping your https://www.bookstime.com/online-bookkeeping firm financially grow and succeed. With this guide, you’ll understand key financial concepts, financial levers affecting your business, best practices for billing and collecting money, and how to manage and outsource financial work. 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.