Accounting for Law Firms: A Guide Including Best Practices

Zola Suite might be the best choice for you if you need a platform that includes CRM capabilities. The software is user-friendly, offers plenty of useful feature modules, and is highly affordable. The free version is free forever and has plenty of invoicing and accounting functions.

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. Keeping client funds separate ensures the money isn’t inadvertently used for your business or personal expenses.

Monitoring the IOLTA account

Using legal technology can ease the workload of manual tasks while helping your firm meet its goals—avoiding errors, ensuring compliance, and staying organized. It has to come with superior accounting features, handle client trust accounts, and maintain detailed records to properly bill clients. This best legal accounting software roundup covers everything from the best small law firm accounting software to premium law office accounting software for larger companies. All transactions related to the trust account need to be accurately recorded and documented, including the date, amount, payee, and purpose of the transaction.

Law firms need to spend extra time setting up their accounting software before opening for business. To ensure you set up to track CTAs and retainer payments correctly, engage a law accountant. Make sure your bookkeeping staff knows law firm accounting procedures.

Open a business bank account

The software makes lawyers more productive with features like time and expense tracking, online payments, billing, accounting, integrations, and calendaring. LeanLaw is one of the more popular names in the legal accounting industry. There are many things that make LeanLaw the best law firm billing software, including features like time tracking by matter, expense tracking, bulk invoices, and trust accounting. Efficient accounting, finance, and billing are the keys for any law firm to be profiting, but the management of these tasks can be a complex process.

The asset and liability amounts should always match, making no impact on your financial statements. 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.

Avoiding professional help

To fix it, you have to go over each transaction to make sure it was entered into your accounting system properly. 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. For example, an accountant might examine your firm’s profitability and make recommendations to improve your bottom line. If any of these three balances do not match, it could indicate errors in your financial record keeping and should be investigated immediately.

When choosing an accountant or bookkeeper for a law firm, it is important to select someone who has experience working with businesses in the legal industry. This will ensure that the accountant or bookkeeper understands the unique financial needs of a law firm. Setting and sticking to a budget is essential to keeping track of your business finances. By knowing your expenses and revenues, you can make sure that you are not spending more than you are making. In addition, using software like Clio Manage to keep your financial records up-to-date can be a huge time saver. Automated accounting software can help streamline the process, freeing up time for other tasks.

There’s no surprise that Xero made it on our list of best legal accounting software. This popular solution has been around since the mid-2000s and boasts over 2 million users. Trustbooks has completely changed my view on trust accounting for my firm. It takes into account all of the trust accounting requirements of the State Bar and helps make sure you comply with them. Trustbooks has simplified the trust accounting for my firm and I no longer dread doing reconciliations or an audit from the State Bar. These are special trust accounts you set up to authorize Teranet to withdraw the registration fees and land transfer tax for electronic registrations in Ontario’s land registry system.

• By tracking these costs throughout the year, you can ensure that you maximize your tax deductions come tax time.
• Everyone from your bookkeeper to your CPA and the IRS needs you to keep documents proving the income, credits, and deductions you put on your tax return.
• Just as your clients rely on your expertise with the law, there comes a point when you need to call in accounting professionals.
• By having a CPA on board, law firms can get assistance with filing taxes and making sure they are compliant with all regulations.
• It’s important for law firms to maintain a consistent schedule when it comes to bookkeeping activities in order to ensure accuracy in their accounting records.
• Lawyers spend years honing their legal skills, but they often have little knowledge of accounting practices.
• Legal-specific credit card merchants are prepared to deposit fees into one account (the trust account) and withdraw them from another (the operating account).

In 2018, only 85% of what lawyers billed got collected (2018 Legal Trends Report). Keeping up on numbers daily, weekly, and monthly helps you remember what is happening to avoid these leakages from occurring on your watch. When this happens, the company could have compliance issues with their books getting found to be inaccurate. You can also make a difference in law firm bookkeeping your firm by creating opportunities for financial growth. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

Mistakes to Avoid in Law Firm Accounting and Financial Management

Fortunately, with a combination of technology, best practices, and the right help, it’s possible to stay on top of your bookkeeping with little effort. The IRS doesn’t require you to keep records of certain expenses under $75, but we still recommend that to be safe, you keep digital copies of all records. The IRS accepts digital copies of receipts, and apps and online services make it relatively easy to scan and save them. Each of these records should be kept for a specific length of time—some for 10 years, some for as few as three.