Law firm bookkeeping lies at the core of managing legal practice. It helps to align income, expenses, payroll, and taxes. A notable statistic of the American Bar Association emphasizes the importance of accurate reports: 50% of malpractice claims against attorneys are due to administrative errors. This highlights the indispensable role of record-keeping in risk mitigation and strengthening reputation.
Let’s take a closer look at law firm bookkeeping, along with some advice from experts who know the ins and outs.
Configuring the Chart of Accounts
An all-encompassing financial infrastructure is paramount in the gears of a successful legal enterprise. The chart of accounts is a strategic roadmap for the law firm’s financial operations covering each business aspect:
- Assets consist of cash reserves, accounts receivable, prepaid expenditures, advanced tax payments, inventory, buildings, office equipment, and client trust funds.
- Income sources include consultation fees, contingency compensation, legal service earnings, and court settlements.
- Equity holdings cover partner capital allocations, common and preferred stock, dividends, and retained profits.
- Liabilities comprise accounts payable, retainer obligations, payroll commitments, and bank loans.
- Expenses include rent, employee salaries and wages, office supplies, professional development costs, and marketing and advertising expenses.
Tailoring such a chart to the law firm’s specifics ensures meticulous tracking of financial transactions. Adaptable to different legal specialties, it becomes a key for proper financial management. Regular reviews and adjustments maintain alignment with the firm’s economic activities and goals.
Management of Client Trust Accounts
Trust accounts, also known as escrow or client funds accounts, are used to hold funds that belong to clients but have not yet been earned by the law firm. These funds are typically advanced payments for legal services, settlements, or other financial transactions. Proper management of this money is essential to maintain the clients’ trust, ensure compliance with ethical and legal standards, and facilitate accurate financial reporting. Here are some specifics to consider when managing client trust accounts in law firm bookkeeping:
- Segregation of funds: Client trust accounts must be completely separate from the law firm’s operating accounts. Mixing client and firm funds is strictly prohibited, as it can lead to ethical violations and legal consequences.
- Client ledgers: Maintain separate ledgers for each client with a trust account. These ledgers should clearly document all transactions, including deposits, withdrawals, and any earned fees. Regularly reconcile record books with bank statements to ensure accuracy and accounting equations.
- Initial deposits: When a client provides an advanced payment for legal services, deposit the funds into the client’s trust account. The bookkeeper should ensure that the source of the funds is properly identified and documented.
Accountants should generate trust account reports on a regular basis for internal and external purposes. These reports should detail each client’s trust balance, transaction history, and any interest earned.
Specifics of Tracking Time and Expenses in Law Firm Bookkeeping
Properly tracking time spent on legal matters and associated expenses not only ensures fair compensation for services rendered but also contributes to informed decision-making and improved profitability.
Attorneys and staff should diligently record the time spent on each client matter, task, or activity. This includes billable hours, non-billable work, and administrative tasks. Accurate time entries help determine the true cost of lawyer services. Each time entry should specify the client, matter, date, description of the work performed, and the time spent (usually in increments of tenths of an hour).
All expenses incurred on behalf of clients should be documented. This includes court fees, travel expenses, research costs, expert witness fees, and more. Expenses that will be reimbursed by the client should be tracked separately from firm overhead expenses.
Process of Invoicing and Billing
Invoices should provide a detailed breakdown of services rendered, time spent on each task, and associated expenses. Transparency in itemization enhances client understanding and reduces the likelihood of disputes.
Assign billing codes to specific tasks and expenses, making it easier for clients to comprehend the nature of the work performed.
Clearly indicate the billing rates for each attorney and staff member involved in the matter. This helps clients understand the value of each hour worked. Communicate openly about billing practices, charges, and any unexpected costs. Address client queries promptly and provide explanations when necessary.
Openly voice the consequences of late payments, such as interest charges or suspension of services. Establish a protocol for handling overdue accounts, including escalation steps and potential legal actions if necessary.
Details of Payroll Management
Ensure that employees, attorneys, and any independent contractors are accurately classified according to state guidelines. Misclassification can lead to legal and financial liabilities.
One of the tasks of a bookkeeper is to ensure overtime hours are calculated and compensated, following relevant labor laws. Implement a reliable time tracking system for support employees and attorneys to record hours worked, ensuring accurate pay calculations.
Utilize payroll software to automate calculations and generate accurate paychecks and tax forms. Maintain detailed records for each employee, including contact information, salary history, tax forms, and benefits enrollment. Safeguard employee information to ensure confidentiality and comply with data protection regulations.
Expert Advice on How to Improve the Law Firm Bookkeeping
Improving the accounting system is essential for maintaining financial health, ensuring compliance, and enhancing efficiency. Here are three expert tips to help you enhance your bookkeeping for attorneys:
- Internal controls: Implement internal controls to safeguard against errors and fraud. Designate roles and responsibilities for financial tasks, and ensure proper oversight and authorization processes.
- Specialized software: Invest in legal-specific software that can handle trust accounting, time tracking, client billing, and financial reporting. Specialized software streamlines bookkeeping processes and ensures compliance with legal and ethical guidelines.
- Budgeting and planning: Ask bookkeepers to develop annual budgets that outline projected revenues, expenses, and profitability goals. Regularly review performance against these budgets and adjust strategies as needed.
By adhering to these best accounting practices, law firms can maintain financial integrity, enhance client trust, and build a strong foundation for long-term success in the legal industry.
Boost Your Firm with Professional Bookkeeping Support
In this guide, we gathered tools that help you navigate today’s legal accounting features. However, there is a more advanced and faster option than doing it solely. That’s outsourcing.
BooksTime is a law firm bookkeeping expert that stands ready to offer tailored services for your business. Working with our accountants, you’ll get timely reports and tools to organize and track your financial data effectively. For instance, take into your consideration the case of Centre Realty Group. We reorganized their financial data system to control each number. Our bookkeepers manage CRG accounts receivable, ensuring timely payments and keeping reports and financial metrics for future growth predictions.
Cooperation with BooksTime means precision-driven accounting under the guidance of expert bookkeepers, accountants, and CPAs. What’s more, our referral program presents an opportunity to save your budget on bookkeeping services. If you refer a new client to us, both of you get a one-time $200 discount on your invoice. With five or more referrals, you’ll enjoy a permanent $100 discount. We work to make your business thrive and your life easier.