Accounting For Law Firms: The Complete Guide

A standard report can tell you the first piece of information but not the second one. Maintaining accurate ledgers and routinely reconciling accounts can also take up a lot of time. For example, you must maintain an accurate ledger for each client in case they ask for their account’s status. LawPay helps prevent commingling by keeping earned and unearned funds separate, preventing third parties from debiting your trust account, and only debiting your operating account for processing fees. You can also integrate LawPay with generic accounting tools to easily track clients, invoices, and more.

Here are essential tips that law firms can implement to ensure their accounting practices are not only compliant but also strategic and efficient. Some common hurdles law firms discover when managing finances are client trust accounting, timekeeping, and expense tracking. When setting up bank accounts for your law firm, it’s vital to ensure compliance with trust accounting regulations. Establish a separate client trust account to safeguard client funds from law firm operating funds. Additionally, staying updated with educational resources on the Clio Accounting Hub can provide insights into maximizing tax deductions specific to legal practices. Additionally, the accountant should be well-versed in irs statute of limitations from community tax resolution leveraging the preferred accounting method – whether accrual or cash – that best suits the needs of the law firm.

1. It is crucial for law firms to adhere to meticulous record-keeping practices and keep separate accounts as required by state bar association rules.
2. Molly McGrath is the dynamic Founder and CEO of Hiring and Empowering Solutions, a leading consultancy specializing in optimizing talent acquisition and development strategies.
3. You’ll have accurate financial statements on hand, which can show you how your practice is performing at any given moment.

Financial Statements 101

For example, when you send an invoice to a client, you’ll mark it as revenue, even though you might not get paid for 30 days. Your business’s accounting method will affect cash flow, tax filing, and even how you do your bookkeeping. 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. Data security is of utmost importance in law firm accounting, where sensitive financial information is handled daily.

Accrual accounting

Providing several flexible payment options can help your team get paid faster and improve payment collection. In our 2024 Legal Industry Report, MyCase and LawPay customers collected 33% more from their clients who paid using online payments. We’ll go over the cash and accrual accounting along with the pros and cons of both below. If you haven’t completed this first step, check out our guide on starting a law firm for more in-depth guidance. The Federal Unemployment Tax Act (FUTA) tax provides payments of unemployment compensation to workers who have lost their jobs.

Although that legislation did not pass, we recommend checking tax laws for the upcoming tax year and consulting with an accounting professional to ensure you choose a compliant accounting method. For example, businesses filing taxes for 2024 can only use the cash method if receipts from the past three years do not exceed $30 million. Law firm accounting is a complex system that’s responsible for countless non-billable hours for many legal professionals. In fact, our 2024 Legal Industry Report revealed more than 1 in 10 lawyers and legal professionals cite law firm accounting how to record the disposal of assets as the most challenging function their firm faces. Law firms can run into unnecessary expenditures if they have poor bookkeeping and accounting practices.

What makes legal accounting different from general accounting?

For example, monthly reporting can help your firm get a snapshot of your firm’s overall owners draw vs salary health to help guide financial decisions each month. At this point, you may use several financial platforms for accounting, financial reporting, payroll, and more. Solutions that help streamline services or work with each other can help eliminate platform fees, training time, and headaches to help optimize your financial processes.

Set Up Your Firm’s Bank Accounts

For a CPA to work effectively, they will need you to provide accurate, up-to-date financial statements. Whether you’re good with numbers and spreadsheets or not, every lawyer needs to understand the basic role that bookkeeping plays in their business. The first thing you should do if you think you’ve messed up is to contact a practice management advisor in your state.