Why Lawyers Struggle with Accounting Software

Let’s face it, most accounting software wasn’t made with advance fees, trust accounts, and eat what you kill compensation structures in mind. QuickBooks and Xero are good small-business accounting software, but they can feel clunky for a law practice.

If you aren’t using practice management software with a full-on accounting and billing component, here is what you might be missing.

Chart of Accounts

Law firms need some extra accounts on the chart of accounts, which might include:

It’s not just the accounts, of course. You have to use them properly in order to meet your reporting requirements and prevent mistakes.

Preventing Mistakes

You’ve got soft costs, hard costs, advances, trust funds … and mixing them up can cause problems.

Trust accounting, of course, is one of the easiest places to get into trouble, especially when you are doing it manually in general-purpose accounting software. It is easy to accidentally post an advance to Fee Income instead of your client’s trust funds liability account.

Properly structuring transactions like post-settlement accounting for a contingent-fee matter or overpaying an invoice with a mix of fee income, costs, and discounts, can induce headaches. And if you do it wrong, you may lose out on income or goof up your books and cause problems come tax time.

Trust Accounting

If you use advance-fee retainers and hold client funds in trust, you must comply with your reporting requirements. Which seems like a no-brainer except that trust accounting is one of the leading sources of ethical sanctions. Since your clients’ funds do not belong to you, a mistake when recording a transaction (like posting an advance to your Fee Income account) is conversion. Those reports help uncover bookkeeping errors that could land you in ethical hot water, which makes them worth doing properly.

Generating a trial balance in ordinary accounting software is clunky, but possible. Generating a three-way reconciliation report is all but impossible. In fact, the easiest way to do a three-way reconciliation if you use regular accounting software is probably on a separate spreadsheet.

Built-in trust accounting with support for lawyers’ reporting requirements is probably the biggest reason firms use accounting software specifically built for law firms instead of general-purpose accounting software.

Properly Allocating Revenue

When you record a partial invoice payment, the first things to get paid are liabilities and costs. Income should come last. Your accounting software should take care of this so you aren’t earning income when you still have costs you could be reimbursing. The only way to accomplish this in general-purpose accounting software is with manual journal entries whenever you get paid.

Tracking Practice-Area Profitability

While you can track all your revenue in a single Fee Income account, you should be able to tell at a glance whether your firm’s small-business practice is more profitable than your firm’s estate planning practice. Knowing where the money comes from can inform decisions about marketing, compensation, resource allocation, and guide your strategic planning.

To Deal or Not to Deal?

That is the question.

You can certainly make do with general-purpose accounting software like QuickBooks or Xero if you are scrupulous about errors, learn to do trust accounting and reporting properly, figure out enough double-entry bookkeeping to ensure you are handling payments properly, and build the reports you need to keep your firm healthy. Plus, it’s another monthly fee on top of your practice management software.

Really, it’s a personal preference, but CosmoLex is betting you don’t want to go to the trouble and expense, so it includes a full accounting solution; you don’t need separate software like QuickBooks or Xero.

Featured image: “Young Businesswoman Sleeping With Invoices On Desk In Office” from Shutterstock.