Do’s and Don’ts of Law Firm Bookkeeping
- September 2, 2023
- Posted by: Merry Stewart
- Categories: Insights, QuickTips
Understanding the importance of good bookkeeping is essential for any small business. For law firms this is even more imperative.
Law firms are subject to a variety of accounting standards and regulations, both federal and state. Proper bookkeeping is essential for ensuring that the firm’s records are accurate and compliant.
All businesses need accurate financial information to make informed decisions about their business, such as pricing services, hiring new staff, and investing in new equipment. Bookkeeping provides the foundation for this information by tracking all financial transactions.
Proper bookkeeping can help law firms identify potential problems with their finances early on, such as cash flow problems or increasing expenses. This can give the firm time to take corrective action before the problems become serious.
We’ve put together some simple dos and don’ts for good law firm bookkeeping to help you stay compliant, find errors before they cost you more money, and make better business decisions.
- Do know your local compliance requirements
Every state has different requirements to stay in compliance. Knowing your state’s bar and local requirements for retainers, unclaimed funds, and use of operating vs. trusts accounts can ensure your firm complies with those rules and regulations.
Always check with your state bar association for accounting regulations.
- Don’t Commingle Business and Personal expenses on your books
It may go without saying but many business owners make this mistake. Perhaps it starts with an error by using the wrong card while making a purchase, but before you know it, you’ve created a big commingle mess in your books.
Accidents happen, and that is okay. Be sure to keep records and documents and fix those errors as soon as you are aware of them. Properly recording it on the books will show you fixed the mistake.
Keep personal and business accounts separate. It’s not worth the hassle, trouble or additional costs you will run into to separate after you have mixed them
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Do reconciliations of accounts each month
This simple task is often overlooked. Many put it off rather than doing it routinely, but it is a key tool for bookkeepers. The reconciliation process can assist in finding data entry errors, duplications, missing transactions, and ensure the data on reports are accurate each month.
Three-way reconciliation can ensure your IOLTA and client ledger accounts are properly maintained and keep you compliant.
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Don’t assume all merchants are the same
It is best to work with a merchant that is familiar with law firm needs, especially operating and trust accounts. Make sure the merchant can handle both and can separate based on different client needs.
You’ll also want to make sure they handle process fees in a manner that keeps you compliant. Fees of this nature should always come from your operating account, not the trust account.
It is beneficial to also work with a merchant that can integrate with your accounting software to streamline the accounting process for each transaction as well as batched deposits.
- Do track client ledgers separately
Be sure to have each client tracked on separate ledgers. The ledger should maintain each transaction that pertains to that specific client and matter. The balance of that ledger should be easily accessible and available for the client to know what their current retainer balance is.
Not maintaining and ensuring that every cent is accounted for can result in regulation and ethics violations. Don’t put your firm at risk, keep each ledger separate and reconcile regularly.
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Don’t use IOLTA accounts for operating expenses
While this may seem obvious, it’s easy to mix accounts when paying expenses that relate to cases. Be sure to have a full understanding of the differences between what can be paid from the IOLTA account and what cannot.
Never use IOLTA account to pay:
- Payroll expenses
- Personal expenses
- Office expenses
- Paying referral fees
- Purchase of assets
- Payments on business liabilities
Expenses you can pay from trust accounts:
- Settlement expenses paid directly from settlement funds
- Attorney Fees (paying yourself and co-attorneys)
As a rule of thumb, the only funds in the IOLTA account should be:
- Settlement funds
- Unearned Income (aka Retainers)
- Funds for which you are the Fiduciary Trustee
- Third-party funds
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Do invest in a professional
Just like you are an investment to your clients, hiring a professional bookkeeper is an investment in your law firm. Having accurate accounting records, tracking client ledgers and reviewing financial reports are all key components of growing your firm and staying in compliance.
Overall, bookkeeping is an essential part of running a successful law firm. By ensuring compliance with accounting standards and regulations, providing accurate financial information for decision-making, identifying potential problems early on, and saving time and money, bookkeeping can help law firms to achieve their financial goals.