Law Firm Accounting 101 Bench Accounting

Staying on top of receivables is essential to the financial health of your business. For example, if you purchase office supplies for your business, you should have an “Office Supplies Expense” account. But you don’t want to set up separate accounts for legal pads, pens, printer ink, etc. In 2018, only 85% of what lawyers billed got collected (2018 Legal Trends Report).

Financial KPIs Allow You to Monitor and Readjust

Most importantly, you must find a plan that works well for you and stick with it. Consistently keeping up with your law firm bookkeeping books will be the most important thing to keep your firm’s finances in check. Some firms will even use accrual for their monthly reports but then submit their year-end tax return as the cash method.

Accounting Basics for Lawyers

Automation can significantly enhance the efficiency of your bookkeeping processes. By implementing legal software for bookkeeping, you can automate repetitive tasks, reduce manual errors, and ensure normal balance that your financial data is always current. This not only saves time but also allows your staff to focus on more critical tasks.

Select cash or accrual accounting

Efficient bookkeeping allows law firms to streamline their finances, making it easier to manage expenses, track income, and ensure timely payments. By keeping your financials in order, you can focus more on delivering top-notch legal services to your clients rather than getting bogged down by financial paperwork. Law firm bookkeeping not only saves time but also reduces the risk of errors, ensuring that your financial records are accurate and up to date. One way to manage the finances is through cash accounting, which records transactions when cash is received or paid. This method is simple and helps track cash flow but may not provide a complete picture of the firm’s financial health. On the other hand, accrual accounting records transactions when they are earned or incurred, giving a more accurate representation of a firm’s finances.

Reliable forecasting can help law firms identify potential risks and opportunities, and plan their strategies accordingly. Some key aspects in forecasting include revenue growth, expense trends, and market conditions. Integrating both budgeting and forecasting into a law firm’s financial management will contribute to sustainable business growth. Adhering to IOLTA guidelines and trust accounting compliance best practices not only safeguards client assets but also protects the integrity of the legal profession. Stay diligent in managing trust accounts, and keep up-to-date with jurisdiction-specific rules to maintain a thriving, ethical law practice.

• This software can automate the process of sending reminders to clients, helping ensure timely payments and improving cash flow.
• Each month, a team of professional bookkeepers with experience in legal accounting gathers your data for you and turns it into accurate financial statements.
• Outsourcing this specialized service to NorthStar Bookkeeping can bring numerous benefits.
• Remember earlier when we discussed setting up a Chart of Accounts in Chapter 1?
• Utilizing your law firm’s data via financial reports gives you a holistic picture of your finances, performance, and outlook.
• First, let’s review typical accounting and bookkeeping functions that need to happen regularly so you can make sure you’ve got these covered.

In legal accounting, it’s crucial to correctly distinguish between income and revenue. Income refers to the money a law firm earns from providing legal services, while revenue encompasses all the funds generated by the firm, including interest and other sources. Instead, the interest accrued in IOLTA accounts is directed towards state-sponsored programs for law school scholarships and legal aid.

Smart bookkeeping. Powered by professionals. Backed by technology.

Providing several flexible payment options can help your team get paid faster and improve payment collection. In our 2024 Legal Industry Report, MyCase and LawPay customers collected 33% more from their clients who paid using online payments. We’ll go over the cash and https://www.bookstime.com/ accrual accounting along with the pros and cons of both below. If you haven’t completed this first step, check out our guide on starting a law firm for more in-depth guidance.