This means that attorneys have to take extra care when selecting a merchant processor for their business. To offset this risk, it’s important to carefully monitor cash flow with accounts receivable (AR) and accounts payable (AP), which appear on your balance sheets. With the accrual method, you record revenue when it’s earned and expenses when they’re incurred—whether they’re paid right away or not. This creates a better matching of costs to the revenues earned in a given month or year. It allows for more meaningful financial management that isn’t influenced by the ups and downs of cash flow. So, with double-entry accounting, every financial transaction gets sorted into a specific category (assets, liabilities, or equity).

What is a Law Firm Chart of Accounts?

Whether billing clients, disbursing funds from trust accounts, or allocating expenses to specific matters, meticulous attention to detail is essential. By establishing clear policies and procedures for transaction recording and leveraging automation tools where possible, law firms can minimize errors and ensure adherence to regulatory requirements. This gives you the best of both worlds while making your law firm’s comprehensive accounting situation easier to manage. Accounting for law firms is the process of recording and managing a firm’s financial activities. For example, this includes tracking income, expenses, overseeing trust accounts, and monitoring client billing. It also encompasses creating and managing budgets, producing financial reports, and managing payroll.

Accounting Basics for Lawyers

A general ledger is a complete record of a law firm’s financial transactions, separated into transaction types, including assets, liabilities, revenues, expenses, and owner’s equity. This data is required to create accurate, defendable financial statements. The general ledger will also be the basis for your double-entry bookkeeping https://www.bookstime.com/ system. The double-entry accounting method tracks where a lawyer’s money is coming from and where it’s going. Two entries are made for each financial transaction — a “debit” and a “credit.” These entries are recorded in the general ledger to demonstrate whether the funds are being transferred to or from an account.

LeanLaw: Best overall law firm accounting software

• By including general retainers in a law firm’s chart of accounts, you can more easily monitor these accounts.
• This prevents commingling with your firm’s funds (your operating account) so you don’t purposely or accidentally spend money that isn’t yours.
• There are many pre-packaged software options that make maintaining a general ledger almost effortless, or you can build your own using simple spreadsheets and a basic understanding of double-entry accounting.
• It’s also important to keep accurate records and track funds in general retainers.
• Most software uses double-entry accounting, meaning it factors in assets, liabilities and equity, in addition to revenue and expenses.

Beyond just staying organized and compliant, following best practices for accounting for law firms will help you identify growth opportunities. While the chart of accounts is customized to your law firm’s size, jurisdiction, and practice area, it typically includes five core categories in addition to numerous subcategories. Attorneys use the application to record billable and nonbillable time and expenses.

Consider a business credit card

It’s also a good place to store money you’re setting aside for taxes and emergencies. Trust accounts hold the client’s money, usually in the form of client fees (typically a retainer), settlement money, or court fees. This prevents commingling with your firm’s funds (your operating account) so you don’t purposely or accidentally law firm chart of accounts spend money that isn’t yours. You earn this money upon the completion of billable work, which can occur during the case as an invoiced bill or upon completion of the case as a final invoice. Law firm assets represent a tangible or intangible item of value that your business owns and receives some form of economic benefit.

• Many attorneys prefer to get paid by credit card (online or in-person), which incur their own special fees.
• Can manually enter time in Essentials plan and higher; automatic time tracking costs extra.
• These are known as errors of principle, since they result from failing to correctly apply accounting principles.
• Without the proper business bank accounts, you risk inaccurate bookkeeping, messy records, and potential compliance violations regarding trust funds.
• Managing all of your business transactions in a separate account makes it easier for you, your bookkeeper, and your CPA to manage your accounting.
• A standard report can tell you the first piece of information but not the second one.
• Beyond traditional financial reporting, law firms can harness the power of data analytics to optimize their operations and enhance client service delivery.

Benefits of using Clio Manage with QuickBooks Online

A general ledger can yield information that is not readily evident by reviewing financial statements. Comparing transaction data from one time period to the next causes any unusual, erroneous, or fraudulent transactions to stand out. Analyzing changes and trends within the trial balance can yield important information.