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. Bookkeeping happens first and relates to the administrative side of tracking your cash. Accounting for law firms becomes so much easier when you work with an accounting professional from the beginning. Double-entry accounting is a system of bookkeeping where every entry to an account (i.e., every financial transaction) requires a corresponding and opposite entry to a different account. A double entry system, therefore, has two equal and corresponding sides—or debits and credits—and creates a balance sheet consisting of assets, liabilities, and equity.
Most law firms accept electronic payments, like debit and credit. The more methods of payment you have, the higher the odds are of a client working with you. Many lawyers do this to solve problems like inadequate law firm bookkeeping cash flow to deal with unexpected expenses. It’s easy to tell yourself that you’ll pay those fees back in time, but don’t do it. Law schools offer little to no training on how to manage these accounts.
QuickBooks Online: For streamlined legal accounting
You want to pay attention to the ABA’s rules, as not doing so could lead to some severe consequences. With that said, there are some basic regulations that you’ll want to abide by regardless of where you’re practicing. These rules and regulations change with every jurisdiction, so it’s a good idea to become familiar with what’s expected of you before jumping in. Being familiar with this concept gives you an understanding of how a balance sheet should look and can help safeguard against errors. The balance sheet will contain assets, liabilities, and equity.
Is bookkeeping a stressful job?
Bookkeeping is a task that requires dedication and hard work and comes with its own set of stresses. As with many jobs, the amount of stress that comes with bookkeeping depends on the size of the business, the bookkeeper's qualifications, and the amount of experience they have.
The following guide explains the fundamentals of law firm accounting and bookkeeping. We’ll also show you how you can make the whole process easier. But setting up your finances properly won’t just make it easier to file your taxes each year—it’ll save you time, money, stress, and potentially legal trouble (yes, really!). While mismanaging an IOLTA account carries stiff penalties, many law schools offer little to no training when it comes to managing trust accounts. As a result, attorneys often find themselves making several common mistakes again and again.
It overcomplicates your accounting
Accounting for law firms lets you collect and analyze information, and make data-driven decisions based on what money comes in and leaves your firm, so it’s worth it to pay attention. When an invoice is paid, you must first allocate the payment to the incurred cost. This portion is not income, so you must record it separately. Nevertheless, many attorneys fail to separate revenue that covers incurred costs from their actual income.
What are the three types of bookkeeping?
A business must use three separate types of accounting to track its income and expenses most efficiently. These include cost, managerial, and financial accounting, each of which we explore below.
With that said, knowing how to manage your money is also a reputation builder. Clients (and employees) talk, and if your finances are in shambles due to negligence, that could spell disaster for your credibility. You’ll be able to visualize what you’re spending money on and what’s bringing in revenue, so you can pinpoint what’s working and what isn’t. You’re required to do this every 30 to 60 days depending on your state — be sure to check your state’s rules. In this system, all transactions are categorized as one or the other.
Ensure you have the right bank accounts set up
If you’re confident that you can manage a business credit card properly (that is, pay off the total in each month), it’s an excellent tool to grow your business. The difference is, the interest earned in a lawyers’ trust account is directed to the state IOLTA board to be used toward advancing legal services and non-profits. When a lawyer holds onto a client’s money, they store it in a trust account.
If they have to dig through your personal account to find the odd business transaction, you’re giving them extra unnecessary work and will be charged for it. When you incorporate your business, you essentially separate yourself from the business entity. It’s called the “corporate veil,” and it protects business owners and their personal assets from legal action taken against the company.
Accounting terms you need to know
You can research this on your state government’s website, and consult with your CPA. Bookkeeping tasks are ongoing and can be performed daily, weekly, or monthly. Whether you do the task yourself or outsource it to a pro, the goal is to make sure your books are accurate, up-to-date, and useful to you and your CPA. Every business is different, and the “right bank” for you will depend on the nature of your practice and the way you prefer to get your banking done. As your budget year crawls on, you can adjust numbers to more accurately reflect reality and plan the rest of the year accordingly.
You undoubtedly have more pressing matters than organizing your financial statements or monitoring your books. When you partner with Lescault & Walderman, enjoy the luxury of accruing more billable hours and scaling your law firm and less time worrying about your financial data. To keep things even more streamlined, consider using online payment software together with legal accounting software.
These are trained professionals who can keep you on track, ensure you’re always compliant and find ways to optimize your finances for future success. A bookkeeper creates financial statements for your accountant to use to file your taxes, provides suggestions on improving your firm’s financial health, and more. Opposite of cash accounting, accrual accounting records revenues the money they’re earned (likewise with expenses), not when the money hits your bank account. Basically, cash accounting does not recognize accounts receivable or accounts payable. Instead, revenue is recorded when cash is received, and expenses when they’re paid. Your legal bookkeeper will be able to keep accurate records and review and update your books on a weekly or monthly basis.
- 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.
- Your COA will look different depending on your jurisdiction, law firm’s size, and practice area, but will always have these categories.
- My name is Brandy Derrick and I am the owner of Legal Ease Bookkeeping, LLC.
- Remember that your trust account is your client’s money, not yours.