Although the word “bookkeeping” may give you flashbacks of those algebra classes in school (cue the sweat), it’s critical for your law firm. Proper law firm bookkeeping not only allows you to see how well your firm is performing but allows you to make informed business decisions that push you forward.
As a law firm owner, you may have already attempted to keep your books without oversight. If so, you may have been slapped in the face with the realization that you simply can’t. After all, law firm bookkeeping can snowball quickly, similar to doing dishes. If you do some washing every time you use a dish, you have a process that keeps your house clean. But if you wait a week…a month…or even *gasp* a year…you have a rotting mess on your hands.
Even though you’re juggling all the other responsibilities of owning a firm, you should never allow your books to fall behind. That’s where the right help and the right technology can come to your rescue.
Let’s start with the basics, shall we?
The Difference Between Law Firm Bookkeeping & Accounting
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. It involves:
- Recording every financial transaction that occurs within your firm such as posting debits and credits
- Creating and sending invoices
- Running payroll for your team
Bookkeeping requires you to be accurate, diligent, and display attention to detail. On the other hand, accounting is more subjective and involves:
- Using your books to uncover business insights such as key performance indicators, financial trends, the impact of financial decisions, tax planning, forecasting, etc.
- Capturing expenses that weren’t originally recorded and adjusting entries accordingly
- Preparing financial statements and other reporting tools
- Planning for tax liabilities
- Completing tax returns
Put simply, you can’t practice proper accounting without law firm bookkeeping as the foundation. Don’t believe us? Well, take it from Kelly. She found it out the hard way.
After Kelly filed her law firm’s taxes, she realized she had forgotten to add in several expenses that weren’t originally recorded on her books. Those expenses would have helped her lower her tax liability and keep more cash in her pocket for her business.
Keeping a Chart of Accounts
So, how do you avoid Kelly’s misfortune? You create a bookkeeping process that’s simple to follow. But, don’t panic if you’re not sure where to start. The first thing you should do is create a Chart of Accounts, the framework for organizing data such as:
- Client expenses
- Trust accounts
This financial statement is an index of your firm’s financial accounts, all in one place.
The Chart of Accounts typically includes five main categories: assets, liabilities, owner’s equity, revenue, and expenses, plus many subcategories depending on your business. Bookkeepers use the Chart of Accounts to ensure they plug financial information into the correct place for reconciling each account. It’ll help you do the same.
8 Common Bookkeeping Mistakes & How to Avoid Them
As owners of our own law firms, we’ve made our fair share of mistakes. Unfortunately, bookkeeping mistakes have consequences for your business, income taxes, and license. The good news is that these mistakes are easy to avoid. We’ll show you how.
1. Intermingling Personal & Business Expenses
Anyone wanting to run a legit business should never combine personal and business expenses. After all, it’s also frowned upon by the IRS. Intermingling the two makes it nearly impossible to claim your expenses, not to mention track the financial wellness of your firm.
To ensure you don’t intermingle, keep separate accounts for your business and your personal finances. For bookkeeping purposes, ensure you’re only tracking transactions that occur within your law firm’s accounts. If for any reason you make a mistake (such as depositing a personal check in your business account), make sure to track it in your books.
2. Losing Track of Business Expenses
Speaking of expenses, one of the most common mistakes attorneys make is losing track of business expenses. It’s best to capture and record your business expenses on the daily, so you don’t lose those receipts or invoices. Then, set aside a time each week to make sure they are coded properly in your books.
It’s also a great practice to record what each expense was for in detail. For example, if you’re expensing a meal, you might record who you were with and what you discussed. After all, if you should be subjected to an audit (shudder), you’ll want these records to prove your expenses were for business purposes.
3. Ignoring Professional Help
Bookkeeping requires dedication and attention just like everything else in your firm. We understand what it’s like to have everything fall on your shoulders. That’s also why we recommend eventually hiring a professional bookkeeper to ensure nothing falls through the cracks. (More on this later.)
Guess what? You can’t wait until right before tax time to start tracking your finances. In fact, you can’t even afford to wait a week until you make time to enter your transactions. We recommend scheduling a time to track your finances at least weekly.
Yes, put it on your calendar. It really is that important. A small amount of time each week will prevent you from spending hours on end trying to catch up.
5. Making Data Entry Mistakes
Have you ever tried to balance your checkbook, only to find you’re a quarter off somewhere? One number mistake on your law firm’s books can cause pandemonium. That’s why it’s important to take your time, double-checking your entries as you go.
The only way to make it happen goes back to our previous point: don’t procrastinate. Take time each day to enter your numbers, taking the extra few minutes to double-check your work.
6. Losing Track of Transactions
Glen looked at his books and noticed he had extra cash to spend on a computer upgrade for the firm. Unfortunately, after he purchased the new equipment, he realized he had forgotten to record a large payment on his books. Now, he’s in the red.
The goal of bookkeeping is to have an accurate picture of your current financial standing. Missing transactions cause inaccuracies that can cost you. For example, you might be like Glen and overspend, sending your firm into the red for the month. Or, you might lose track of critical transactions that affect your taxes.
To avoid this type of situation, use accounting software that allows you to automate some of the processes. For example, keeping track of invoices or monthly recurring expenses. Again, you should also be spending time daily recording your firm’s transactions.
7. Confusing Owner’s Pay & Draws
A draw is when you take funds out of your business for personal use. Owner’s pay refers to paying yourself a salary directly from your business. Using both can result in confusing transactions that are difficult to manage. We always recommend attorneys pay themselves a fair salary directly from their business. It’s simply better for you and your firm’s finances.
8. Fumbling Cash Reconciliation & Accrual Statements
In accounting, there are two types: the cash method and the accrual method. In the cash method, you record transactions as the cash is exchanged, regardless of when the transaction takes place. In the accrual method, you record a transaction when it actually occurs.
We recommend choosing one or the other to prevent confusion and for the most accurate overview of your firm’s finances.
IOLTA (Trust) Bookkeeping
As an attorney, you’re aware that when you receive money that belongs to a client, you must place those funds in a trust account separate from your own money. These funds are stored in IOLTA or “interest on lawyers trust accounts” accounts.
You don’t have to struggle with IOLTA accounts. In fact, there are some basic rules that dictate how you must handle this money to ensure compliance.
- First, does the balance in your IOLTA trust bank account match 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 reflect in each client’s IOLTA trust account balance on your firm’s books add up to the balance in your IOLTA bank account?
Follow these rules and keep track of client funds every day to ensure you don’t cross any lines that can cause your firm serious problems.
Bookkeeping & Accounting Software
Gone are the days of paper for recording transactions. Software now makes bookkeeping and accounting so much easier for us attorneys. Sure, you won’t get to use that favorite fountain pen, but trust us when we say that you won’t ever go back once you go digital.
There are many options available. Here are some of our favorites:
- Bench: Bench is a bookkeeping service that includes a team of bookkeepers who does all the hard work for you. It includes an app for your mobile device you can use to track your firm’s books.
- Less Accounting: With Less Accounting, you can track granular expenses, proposals, reports, your contacts, and more, all in one platform. Plus, the tool’s pricing is based on your firm’s spending.
- QuickBooks: What’s a list of accounting platforms without QuickBooks? It’s an all-in-one accounting solution that is great for growing firms due to its scalability. It includes billing, invoicing, online payments, tax preparation, reporting, and so much more.
At Lawyerist, we firmly believe in the benefits of automation for accounting and bookkeeping. That’s why we’ve taken it upon ourselves to review a wide range of tools for you, so you don’t have to. You’ll find more of our favorites here.
Bookkeeping Integration With Practice Management Software
Do you use practice management software? If you don’t, you should. In fact, some bookkeeping tools such as QuickBooks and Xero integrate with your practice management tool to easily track your clients, invoices, and more. Make sure whatever tool you use integrates properly or choose an all-in-one software for both.
“After spending way too much time doing it myself, and then procrastinating it way too much as I got too busy to do it myself, I hired a bookkeeper. Well, well worth it.” – Nathan
Consider hiring an actual bookkeeper, too. While you may be able to hoof it on your own with careful attention to detail, you also might benefit from an extra set of eyes. Take it from Nathan, nothing beats a human when it comes to attention to detail. Plus, delegating bookkeeping tasks ensures you don’t allow anything to fall through the cracks while you juggle everything else you need to do each day as the owner of a law firm.
“I waited six years to hire a bookkeeper—wish I’d only waited five minutes—so much benefit to outsourcing.” – Gary
If you do plan to hire professional help, there are a couple of things to keep in mind. Each firm is different, and your firm has unique circumstances that affect how you move forward. Here are some questions to answer:
- Should you hire an employee or pay a contractor for your bookkeeping?
- Will they use your technology and procedures, or will you use theirs?
- What tasks will your bookkeeper do and how frequently?
- How do you prevent fraud?
- Are you confident your bookkeeper will manage your IOLTA accounting?
How to Find the Right Bookkeeper for Your Firm
If you’re ready to find a bookkeeper, how can you make sure you choose the right one? How do you find one? Don’t worry, we’ve got you covered.
- Word of mouth: You trust your colleagues, friends, and family. Why not ask them for a referral? Don’t be afraid to ask your social media to cast a wider net.
- Lawyerist Insider groups: Here at Lawyerist, our Insider groups are chock-full of attorneys just like you who have hired their own bookkeepers. This means they’re full of knowledge and good sources for finding your own.
- Virtual bookkeeping services: You don’t only have the option of hiring a bookkeeper for inside your office. You can also hire a virtual bookkeeper through services such as Bench.
Make sure the bookkeeper you choose is certified in the software you want to use. For example, if you use QuickBooks, ensure the bookkeeper is certified in using the platform correctly.
We know that lazy bookkeeping practices will cost you real money and time, result in sweaty nightmares, and put your license and firm at risk. Thankfully, good bookkeeping can also result in accurate reports on demand, make billing easier and improving the way you view your finances.
Learn More About Creating Solid Bookkeeping Practices in Your Firm
You can create bookkeeping and accounting processes that best serve your law firm. All you need are some industry insights and a pat on the back from those who have done it all before. Become a Lawyerist Insider today to take your firm to the next level.