Make sure whatever tool you use integrates properly or choose an all-in-one software for both. When it comes to tax season and planning for the future, lawyers need to move beyond boxes of receipts and a spreadsheet for managing firm finances. Learn the basics of accounting and how to better manage your firm’s funds in this guide. Within each of those categories, you may have dozens of general ledger accounts. For example, you might have an operating account, lawyers trust accounts, accounts receivables, and fixed assets within the assets category.
Or, you might lose track of critical transactions that affect your taxes. Remember earlier when we discussed setting up a Chart of Accounts in Chapter 1? Your bookkeeper goes into your accounting software regularly (at least weekly) and records all the money coming in and all the money going out so that it appears in the correct place. It’s easy to record all deposits to bank accounts as income, but deposits made to IOLTA accounts aren’t income for your law firm—they belong to your client. In cash basis accounting, you record income and expenses when money changes hands.
Why is Law Firm Accounting Important?
We have created this guide to give you an overview of the fundamentals of bookkeeping and accounting for attorneys and help anyone who is a small law firm owner. Law firms are under a particular duty to maintain compliance at many levels, most notably with regard to client funds and other financial matters. They also face tax-compliance issues at the state and federal levels and municipal taxes.
This is especially important when it comes to paying mandatory disability or worker’s compensation insurance. You can research this on your state government’s website, and consult with your CPA. Before you commit, make sure you do the math to determine the impact a provider’s fees will have on your bottom line. Every business is different, and the “right bank” for you will depend on the nature of your practice and the way you prefer to get your banking done.
Strategies for Tax Planning
By keeping your money separate at all times from your clients’ and strictly following trust administration rules and guidelines, you’ll sidestep a whole host of problems down the line. The right budget management software is essential for law firms. Clio Manage and other programs help firms organize their financial activities, from the expense and revenue tracking to managing billables. Most bar associations require law firms to comply with regular three-way reconciliation.
The key is to actively monitor things so you know when and what to adjust. When you know and monitor your numbers, you can quickly see when you’re off target and cut costs or make strategic investments to increase revenue. In today’s world, law firm bookkeeping it is easy to find and use a virtual bookkeeping service. Also, many outsourced companies are now offering a team approach where you get the benefit of their bookkeeper, controller, and outsourced CFO for higher-level financial analysis.