Lawyers are not accountants, but when it comes to running a law firm – it turns out that accounting becomes one of the top priorities. In a world where compliance is king, that includes meeting the needs of a myriad of unique legal accounting requirements facing every law firm.
Most accountants will give advice that is primarily based on the best general accounting practices. The problem is that legal accounting is an entirely different animal, and if your firm isn’t compliant with legal-specific accounting regulations, the penalties can be devastating — even leading to disbarment.
That’s why it’s best for lawyers themselves become knowledgeable when it comes to the specialized legal accounting needs of their firm. And when seeking advice, it’s extremely important to make sure that the accountant you chose is well-versed in legal accounting — and not just in general business accounting.
Here are 5 key “legal accounting danger zones” that all lawyers should proactively address. Knowing and understanding these areas could make the difference in your firm’s long-term survival.
Proper Accounting for Client Funds
Law firms often use retainers to secure funds from clients. These funds do not belong to the firm until it has been earned. With multiple clients and multiple accounts, it is absolutely essential that one client’s funds do not mingle with another’s. When it comes to client trust fund accounting, your records need to be100% accurate, clean, and current. Unintended inaccuracies with your IOLTA legal trust accounting can lead to ethics violations and disbarment.
Proper Accounting for Case Costs
The routine practice of law involves costs incurred from the outset of every case — costs that are subsequently billed to the client at a later date. The principle is simple, all costs must be recorded and accounted for, but in legal accounting not all incurred case costs are created equal. Advanced client expenses need to show up as an asset on the firm’s Balance Sheet, while reimbursable client costs need to be recorded on the Profit & Loss Statement. In addition, law firms need to make sure each cost gets allocated to the appropriate matter contemporaneously or it will not get billed — resulting in net loss to the firm.
Proper Allocation of Income
Legal accounting requires that all income be allocated appropriately. When an invoice is paid, the portion of the revenue allocated for incurred costs needs to be recorded separately — and not recognized as income. You must understand what portion of the payment covers incurred expenses and what is real revenue. This will help your firm understand where your cash flow is coming from and make better informed decisions about the firm’s future.
Ensure Legal Billing and Accounting Systems are in Sync
It is extremely important that the same data be entered into both your legal accounting and legal billing systems. Moreover, on an ongoing basis, these two systems must utilize matching data sets. Otherwise your firm could run into cash flow and compliance issues, resulting billing complications or ethics violations. Cosmolex brings all of your systems together in one place — running off a single set of data — removing any concerns of data conflicts between your legal billing and accounting systems.
External Help for Professional Setup and Review
Legal billing and accounting has precise requirements beyond those needed for general accounting. For that reason, it is in your firm’s best interest to seek experienced, expert help when it comes setting up your legal accounting and billing systems. Just like you wouldn’t see a podiatrist about chest pains, you wouldn’t have a general accountant set up your legal accounting system — they simply lack the specialized expertise needed to do the job correctly.
Cosmolex is the one solution that solo attorneys & small law firms can use to manage their practice, billing AND accounting in one single login. CosmoLex does it all — including time tracking, billing, business accounting, trust (IOLTA) accounting, calendaring, task & document management — eliminating the need to juggle several programs. One dashboard shows case status, performance & financial data at a glance — so you can prioritize your day on what really matters. It’s a simple proposition: CosmoLex takes care of your entire practice, so you can take care of your clients.