Law Firms often struggle to properly setup, manage and maintain an effective Accounting process. You are an Attorney, not an Accountant, and Law Firm Accounting can be very challenging. In this article, we explore Accounting Best Practices and Pitfalls for a small Law Firm.

Accounting and Bookkeeping:

Bookkeeping and Accounting is often used interchangeably however, they are two very distinct aspects of your Law Firm. Bookkeeping captures financial transactions that flow through your firm’s financial accounts. Reconciling financial transactions, creating invoices and running payroll are all activities related to bookkeeping. Accounting on the other hand involves generating  Financial Reports, creating KPIs and recording end of year adjustment entries.


Chart of Accounts:

The Chart of Accounts is the foundation to maintain good accounting records and identifies revenue, expenses, assets and liabilities accounts. Click here to see a sample chart of accounts for a small Law Firm. Accounts used in the Chart of Accounts are unique to your individual firm. They should be broad enough not to be overly analytical, but have enough categories that can be used for analysis.


Operating and IOLTA (Trust) Accounts:

It is a common error for a small law firm to establish one single organization in the accounting software that contains both Operating and Trust Accounts. You want to avoid the potential for your Trust Financials to end up commingling with your organization records. We highly suggest you use a tailored software like TrustBooks to manage your Trust Accounts. TrustBooks is easy to use yet powerful enough to easily reconcile your Trust Accounts.


Cash vs Accrual Accounting Method:

What is the difference between the Cash Accounting vs. Accrual Accounting? Most Law Firms we work with utilize the Cash Method of Accounting because it is easier to implement. In the Cash Method of Accounting, expenses are recorded when incurred or when the payment is made. Revenue instead, is recognized when income from a client is received.

The Accrual Method of Accounting recognizes Revenue when an Invoice is Created in the Accounting system. It recognizes expenses when they are incurred and is easier to analyze. However, the Accrual Method of Accounting is more complex than the Cash Method.


Case Costing Accounting:

Law Firms often incurs expenses for clients that will be billed later as part of the Accounts Receivables process. It is important to allocate these costs to a Reimbursable Client Cost account rather than individual expense categories in the Income Statement. By doing so, you avoid the potential of commingling your law firm’s expenses with client costs that need to be reimbursed later. For example, let’s say you incurred an initial cost of $ 100 for postage on behalf of a client, if you record this transaction as a postage expense, it will over inflate this category. Instead, if you segregate the $ 100 as Reimbursable Client Costs you will be able to see accurate postage costs your firm incurred during the month.


Accounting Software:

Just like most Small Businesses, your Law Firm should maintain computerized accounting records for reliability purposes. In the United States the two major Accounting Software providers are Xero and QuickBooks. While we work with both products, Xero provides a more elegant and easier to understand platform for our clients vs. QuickBooks. We strongly suggest a cloud version so that accounting records are not stored on your local computer hard drive. Cloud Accounting allows you to access your firm’s financial records anytime, anywhere and virtually on any internet connected device. Both Xero and QuickBooks have server redundancies in place that make it extremely unlikely that your data could be lost.

From a security standpoint both Xero and QuickBooks offer state of the art data encryption technology. Both companies take their customer’s data security very seriously and have spent significant capital on data security.


Practice Management Software:

Most firms we work with today use a Practice Management Software in conjunction with an Accounting Software like QuickBooks and Xero. Why? Because a Practice Management Software allows you to manage the progress of your cases, keep billable hours information and, manage your firm’s resources in a cohesive system that was design for this purpose. Accounting Software gives you critical financial information like; your Profit and Loss, Accounts Receivables and Payable and Cash Flow information. Accounting Software is not truly designed to provide granular case level information. Therefore, there is allot of value in subscribing to a Practice Management Software that can keep you organized.

Most of the small law firms we work with, use Clio as their preferred Practice Management application. Clio fully integrates with both Xero and QuickBooks. Therefore, invoices created in Clio automatically post in your Accounting Software, removing the need for redundant data entry.


Accounting and Financial Analysis:

By implementing good accounting processes and systems you now have the tools you need to run an effective and efficient law firm. Reports from your Accounting Software can provide a wealth of information regarding your profitability, cash flow needs and critical KPI indicators.

Understanding your financial records is essential in order to run a data driven law firm. However, uncovering the story behind your finances requires training and expertise which often attorneys might not have. Consider working with an Accounting Firm that assist in helping you understand the meaning behind your financial data.


Law Firm Accounting and Tax Planning:

Clients often look at their accounting as a necessary evil, or a cost that must be incurred. However, you might save money if you implement a proactive accounting model where records are updated on a continuous basis. In our firm we update our clients accounting records daily, this allow us to take a proactive approach to their finances and identify tax saving opportunities throughout the year. Daily Accounting records make us better Tax Planners. With this information we can provide our attorney clients with real-time tax projections. This allows you to know how much tax liability you will see before we reach tax season. By doing this, our clients can easily plan for Quarterly Federal and State Estimated Tax Payments, reducing the chance of having unexpected surprises at tax time.

Law Firm Accounting can be complex and overwhelming, but if structured correctly can help you manage a lean and effective law firm. Reach out to us if our firm can be of any assistance with your Accounting and Tax needs.