Law Firm Accounting 101 Bench Accounting

To ensure easy expense reimbursements, it’s a good idea to require that all employees and partners use a company credit card. Doing this makes it easier to track expenses for each client and partner and creates a more direct paper trail. As a smaller firm, you’re in a good position insomuch as the choices you make now can be made with an eye towards sustainable growth. Investing in the right accounting software will both handle your immediate needs and also make future expansions as painless as possible as your client base and administrative requirements grow. Cash accounting tracks only finances that have already entered or exited your account.

This is exactly the sort of murky trust account question that keeps lawyers up at night. The second rule above means that lawyers also need to keep a watchful eye on how much each client has in trust, as they cannot use one client’s money to cover expenses for another client. If your firm plans on hiring employees, then you have to set up payroll. Before including anyone in your payroll, ensure your workers are grouped as either employees or independent contractors.

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This way, you can eliminate the chances of involving the client’s money even by mistake. The IOLTA account is a type of bank account the interest on which is directed to funds for social justice by the state. With that said, you must confirm with the jurisdiction of your state as the specifications for the IOLTA accounts are variable. The lawyers are prohibited from collecting interest on trust funds held for their clients. The structure of the Chart of Accounts shows you where each transaction in your firm’s finances should be recorded. In addition to five core categories, the chart of accounts typically includes several subcategories depending on your law firm’s size, jurisdiction, and practice area.

It is in the best interests of your firm that these mistakes be avoided before they prove costly and result in loss of clients, referrals, growth prospects, apart from good reputation. If you are a law firm owner and wondering if you could lay your hands on a basic Accounting Guide to help you with the basics, then this post is for you. Our services for private companies range from audit and tax to consulting with a team that works to deeply understand your business and vision. We’ll deploy the innovative tech powered solutions that accurately and efficiently handle the ins and outs of your global, national and local assurance, tax and operational needs. If you have employees, you’ll have to pay Federal Insurance Contributions Act (FICA).

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Each month, a team of professional bookkeepers with experience in legal accounting gathers your data for you and turns it into accurate financial statements. You also get smart software to help you monitor your finances and stay in control of cash flow. Essentially, you are loaning this money to your clients, which means these expenditures are not tax deductible. Loans to and from your firm do not show up on the income statement; they show up on your balance sheet.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein. If you are self-employed, you will need to pay federal self-employment tax. This is essentially FICA and Medicare, only your payment covers both a withholding from your wage and the matching contribution from your company. You will also need to understand your obligations in regards to employment law and employment tax.

In particular, most of these applications will help you manage your time tracking. IOLTA reconciliations will still need to be managed, and this is something your accountant or bookkeeper can help you do. Those who are looking for an all-in-one solution — including a general ledger package — for their law firm need look no further than PCLaw by LexisNexus. The one feature PCLaw lacks is payroll processing, though they do partner with ADP for payroll processing.

Law Firm Bookkeeping Vs. Accounting

This is fine but look closely at the outstanding items to ensure they aren’t an incorrect ledger entry. It’s important to adhere to best practices, or you may accidentally commingle funds and put your firm at risk. As rules vary by state, consult your state bar association and a professional accountant to ensure that you’re following the proper protocol.

PCLaw’s pricing starts at $39 per user per month, but the fine print states this is based on a five-user firm over a three-year period. To get accurate pricing for your firm, you will need to complete PCLaw’s web form and schedule a demo and consultation. Here are our top recommendations for accounting software options, plus tips on how to decide. Make sure you weigh the pros and cons of both methods for your firm, and then, moving forward, make sure your records are clear and easy to read.

Year-End Law Firm Accounting: Everything You Need to Know

Our partners cannot pay us to guarantee favorable reviews of their products or services. This article discussed in detail the differences between bookkeeping and accounting. With the well-thought and well-designed templates, you can now anticipate your work to become simpler. These templates can be used for transactions like invoices, quotations, orders, bills, and payment receipts.

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. Learn more about the legal chart of accounts and view examples of formatting. LeanLaw’s pricing is $28 per user per month 8 3 research and development costs when paid annually, or $35 per user per month when paid monthly, making it one of the most cost-effective options on our list. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research.

It should be user-friendly, designed for the unique needs of the legal industry, and easy-to-access when you need it. In most cases, this means cloud-based legal accounting software that integrates with your existing tech stack. By using sound bookkeeping practices to keep accurate records and consistently review the firm’s financial statements on a monthly or weekly basis, you’ll see your firm’s true financial picture. Committing to accounting for law firms will allow you to be better equipped to identify growth opportunities.

Best Law Firm Accounting Software in 2023

Some firms will also intentionally use their IOLTA accounts to hide assets, or will leave funds in their IOLTA even after they’ve been earned, using it as a savings account. Every state has an IOLTA program, and it’s likely that the bank where you opened your regular business checking account also offers IOLTA accounts. But rules do vary by state, so consult your State Bar Association and a professional accountant before finalizing your accounting setup. Make sure you’re clear on all of the law firm accounting obligations related to managing and growing your business. Employing a mileage tracker app can ensure that you and your employees are reimbursed for all of your business mileage.

• Danielle Bauter is a writer for the Accounting division of Fit Small Business.
• Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience.
• Owners, called partners, enjoy the benefits of pass-through taxation under a shield that protects their personal assets from business liabilities.
• Consider what functionality would be most useful, and make them deal-breakers when selecting an option.
• Only a small mistake or duplicated data entry may result in wasted time, mismatched records, billing complications, and even compliance violations.

Your business may also be required to pay state taxes in both your home state (where your business is registered) and in any states where your business has nexus. Why fall into the same trap that other firms have fallen into during their client accounting services journey? If you know what those traps are, you will save significant money and time in establishing your CAS practice. During those long days in law school, you may have kept yourself going by imagining yourself in action as a lawyer—negotiating deals, examining witnesses, perhaps even nabbing that corner office. It’s unlikely that at any point in the process you imagined the glamour of going over the accounting statements at your solo, small or midsize firm. And yet, sound financial administration is one of the most critical components of a successful law practice.

Commingle operating and Client Trust Account funds

When setting up a new trust account, ask your financial institution to provide trust account statements at the end of the reporting period. This will ensure that the financial institution reports all activities and balances in your trust account at month-end and year-end dates. Having these documents on hand will be useful for trust reconciliations and annual Trust Report requirements. Through the balance sheet, law firm owners will have a solid understanding of the firm’s financial health, and can compare current assets and liabilities. When compared, the company’s liquidity can be ascertained, and the rate at which the company generates returns can be calculated.

With the accrual method, you record revenue when it’s earned and expenses when they’re incurred—whether they’re paid right away or not. This creates a better matching of costs to the revenues earned in a given month or year. It allows for more meaningful financial management that isn’t influenced by the ups and downs of cash flow. While it’s essential to understand the fundamentals of accounting for law firms, you still aren’t an accountant or bookkeeper.