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Law Firm Bookkeeping

Lawyers hate bookkeeping. But maybe they don't need to. Keep accurate books and records with useful software, a habit, and some attention to detail.

Bookkeeping, while a bit uncomfortable for some lawyers, is really quite manageable.

The whole point is simple: to accurately and systematically record all of your law firm’s financial transactions.

Tracking your firm’s finances is so simple, in fact, that it can sneak up on you. At first, when you’re just starting a law firm, bookkeeping is astonishingly easy. You don’t need fancy software to track a couple of financial transactions every month. The entire process takes minutes and doesn’t require much thought, preparation, time, or follow up.

But it can snowball quickly. This snowball effect is particularly pronounced if you have bad habits and, unfortunately, as it relates to IOLTA accounts. That’s why you should begin as you mean to go on. Don’t wait.

They say keeping books is like doing dishes. If you do some washing every time you use a fork, you have an (annoying but otherwise perfectly simple, significant, and sustainable) custom that keeps your house clean. If you wait a week, a month, a quarter, or a year, though, you’ve allowed a festering, smelly mess to assault your abode.

Likewise, minding your books only once per month (or, perish the thought, once per quarter or year) is smelly and gross.

The Difference Between Bookkeeping & Accounting

Bookkeeping and accounting aren’t the same things. They share a common goal (keeping your financial house in order), but they arise at different stages.

Bookkeeping is first, and it is almost exclusively transactional and administrative. It mainly involves:

  • Recording financial transactions, like posting debits and credits and maintaining and balancing specific accounts.
  • Creating invoices.
  • Running payroll.

Keeping accurate books and records doesn’t require special skills or any analysis or interpretation. It requires accuracy, diligence, and attention to detail.

Accounting tends to be more subjective. It involves:

  1. Uncovering business insights hidden in bookkeeping information (like the cost of operations, key performance indicators that tie different data points together, internal and external—and micro and macro—trends, the impact of specific financial decisions, strategic tax planning, and financial forecasting, for example).
  2. Capturing expenses that weren’t recorded in the bookkeeping process and creating adjusting entries.
  3. Preparing financial statements and other financial reporting tools.
  4. Completing tax returns.

Accountants tend to have four-year degrees in accounting or finance and often choose to seek the higher professional certification of Certified Public Accountant (or “CPA”).

Chart of Accounts

Starting a Law Firm Budget TemplateThere is a framework for organizing revenues, expenses, client expenses, trust accounts, and other data and preparing that data for plugging into financial statements. It is called your “Chart of Accounts,” and it is an index of your firm’s financial accounts. It commonly has five main categories (assets, liabilities, owner’s equity, revenue, and expenses), and many subcategories. Your bookkeeper uses this chart to record all of your firm’s financial transactions in the right place. Your accountant uses it to generate insights, tax returns, and financial statements.

Download our Chart of Accounts Template.

Your chart of accounts is unique to your law firm. Still, there are some categories that cut across jurisdiction, practice area, and firm size. We’ve put together a chart of accounts template that you can use to build your own. You and your accountant should customize it to your needs, keeping in mind that if you intend to grow, you may want to be over-inclusive with your categories at first. You can always add more categories in the future, of course. And, as always, let us know how you use it so we can update it to make it better for everyone else.

Get the Chart of Accounts Template

Common Bookkeeping Mistakes

Lawyers make a common set of bookkeeping mistakes. Despite being easy to avoid, each has ramifications for your business, your income taxes, and your license. For example, lawyers often:

  1. Mismanage IOLTA accounts, the funds in them, or the reports required for them.
  2. Intermingle personal and business expenses.
  3. Lose track of business expenses.
  4. Skip professional help.
  5. Procrastinate.
  6. Make data entry mistakes.
  7. Lose track of transactions.
  8. Confuse owners’ pay and draws.
  9. Fumble cash reconciliation and accrual statements.

IOLTA (Trust) Bookkeeping

We think you know this already, but we’ll repeat it here to emphasize its importance: lawyers who receive money that belongs to a client must place those funds in a trust account separate from the lawyer’s own money. You store this client-owned money in IOLTA (“Interest on Lawyers Trust Accounts”) accounts. Rules dictate how lawyers handle this money, and systems ensure lawyers’ compliance with those rules. Whether you’re following those rules is relatively straightforward to discern with a few bookkeeping fundamentals:

  • First, does the balance in your IOLTA trust bank account match with the amount reflected on your books in the IOLTA trust liability account balance?
  • Next, does each client’s trust balance have a detailed ledger showing specific transactions for every single inflow and outflow?
  • Finally, when taken together, do the total amounts reflected in each client’s IOLTA trust account balance on your firm’s books add up to the balance in your IOLTA trust bank account?

Like other kinds of bookkeeping, attorneys have been known to struggle with IOLTA accounts. Don’t do that. It doesn’t have to be hard. Just follow our advice about trust accounting basics, get some quality software, and develop a habit.

Bookkeeping & Accounting Software

We’re long past the age when lawyers enter each financial transaction on a paper ledger bound in the finest exotic leather. Sophisticated software products—some specific to lawyers, some more generic—make trust accounting, basic bookkeeping, and full accounting much easier (and, we suppose, less…leathery). You can use a stand-alone product for all of your bookkeeping needs. You can also rely on your law practice management software’s integrated bookkeeping and accounting functions. Some firms use both. You can start your research using our feature comparison chart and reviews to find the best law firm accounting software.

Bookkeeping Services

With all of this bookkeeping and accounting work comes a common set of pain points. As a law firm owner, you may struggle with the management of your firm’s obligations. Some firm owners handle it themselves. Some hire an employee (usually part-time). Some use their accounting firm’s bookkeeping services. Some engage a bookkeeping-specific independent contractor to work on-site or remotely.

The right solution for you depends on your unique circumstances, your risk tolerance, and your budget. Regardless of how you decide to handle bookkeeping duties, you’ll need to weigh some common considerations. For example:

  • Should you hire an employee or pay a contractor?
  • How do you find people with experience?
  • How do you find people with the right experience?
  • How do you handle training? Will they use your technology and procedures, or will you use theirs? If you’re using theirs, are they optimized for law firms?
  • What tasks will your bookkeeper do and how frequently?
  • How do you prevent fraud?
  • Are you supremely confident your bookkeeper will manage your IOLTA (trust) accounting as your professional obligations demand?
  • Do you have systems and procedures in place to ensure they’re helping you meet those obligations?
  • Do they know how to track, invoice, and reconcile expenses you advance for your clients?
  • Do they know how to use your technology (or do they recommend and have experience with lawyer-specific bookkeeping and accounting software)?
  • Are they familiar with and experienced in how lawyers in general and you in particular track and bill for services?
  • How should you track and bill for miscellaneous costs (fax, phone, copies, travel, mileage) if at all?

Sometimes you will need to sort how to have different systems communicate with one another. For example, what happens when your law practice management software, accounting software, and bank accounts are hosted on different systems and show different account balances? Which one do you trust at any given moment? And how do you get them to sync? You don’t want to enter the same transaction in three different systems manually.

11 Key Takeaways

  1. Get paid as quickly as you can.
  2. Pick a chart of accounts reasonably calculated to reflect your particular law practice’s revenues and expenditures now and into the not-too-distant future.
  3. Pick a tool or tools to help with your process. Law firm accounting software is a good place to start, but you should look at your law practice management software, too.
  4. If your law firm is already up and running, determine your firm’s profitability.
  5. Examine and implement system-wide trust accounting best practices.
  6. Set your time entry, billing, bookkeeping, and accounting processes (including the ones you’ll do daily, weekly, monthly, quarterly, and yearly).
  7. Look to simplify your systems, and forever jettison the multiple spreadsheets, shoeboxes full of receipts, various mobile-phone apps, and notebooks that litter your law firm’s bookkeeping landscape.
  8. Automate everything as much as possible.
  9. Be clear about how you allocate regular overhead expenses and costs you incur and advance on your clients’ behalf.
  10. Reconcile the transactions you’ve recorded in your books with your actual bank account statements regularly. Don’t forget credit cards and online payment accounts like PayPal.
  11. Get help. Hire a part-time employee or an independent contractor to do this work for you. Ask your accountant for recommendations if you don’t know where to start.

Lazy bookkeeping practices cost you (real) money and time, give you anxiety, and put your license and your firm at risk.

On the other hand, a healthy bookkeeping habit can give you accurate reports when you need them, helps you know what you’re making and how you’re doing, gives you important tools to decide what strategic investments you can afford, and enables you to recognize opportunities to improve your business. It will make billing easier for your clients and help you become more efficient and get paid more quickly.

Conclusion

How can you grow your firm if you don’t know the numbers? How can you implement a marketing budget? How can you decide if your marketing is working? How can you measure your return on any marketing (or other) investments you make? Bookkeeping is the single most powerful tool for giving you objective, actionable data about the financial health and well-being of your enterprise. Capturing useful and meaningful data doesn’t have to be terrifying. Indeed, it may very well be the most empowering habit you have ever developed for your business.