What Are the Three Bank Accounts Every Law Firm Should Have?

These best practices all come back to one idea — staying organized. You want to pay attention to the ABA’s rules, as not doing so could lead to some severe consequences. Being familiar with this concept gives you an understanding of how a balance sheet should look and can help safeguard against errors. Whenever there’s a change in one category, there should be a corresponding and equal change in another in order to keep the sheet balanced. If you have a debit in one account, it follows that there will be a credit in another account.

• But the way they go about it is different, doing different tasks for the good of your law firm.
• You can go with an accrual or cash accounting method in the US, and the difference is mostly about timing.
• Anyone wanting to run a legit business should never combine personal and business expenses.
• Some firms will even use accrual for their monthly reports but then submit their year-end tax return as the cash method.
• By following these tips and strategies, you can conquer the world of legal bookkeeping with Clio.
• However, if a firm fails to separate revenue that covers incurred costs from actual revenue, their records will be off.
• In 2018, only 85% of what lawyers billed got collected (2018 Legal Trends Report).

To effectively manage legal accounting for law firms, it’s wise to start with a foundation that works for all aspects of running your firm. An accountant who specializes in accounting for law firms is beneficial. Your best bet is likely to hire both a legal bookkeeper and a legal accountant. While it’s essential to understand the fundamentals of accounting for law firms, you still aren’t an accountant or bookkeeper. Hiring professionals is common for law firms, and it’s an easy route to peace of mind.

Bookkeeping solutions

You should also inquire into each candidate’s education and training related to legal accounting. Instead of debiting cash and crediting income, you should debit the IOLTA law firm bookkeeping account with a corresponding credit to Trust Account Liabilities. When you later earn your fee, you would debit Trust Account Liabilities and credit your revenue account.

• Once the account is open, it is important to manage it carefully by regularly reconciling accounts, tracking expenses, and paying bills on time.
• Although they share a common goal, they occur at different stages of managing your firm’s finances.
• If your law firm doesn’t already have business bank accounts, it’s time to open them.
• The purpose of bookkeeping is to provide an accurate record of financial transactions so that informed decisions can be made and business compliance with rules and regulations is maintained.
• Having cash in your savings account can improve your chances of being approved for loans and other lines of credit in the future.

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How to handle IOLTAs in your bookkeeping

People tend to use the terms bookkeeping and accounting interchangeably, but bookkeeping is actually just the first step in the accounting process. It involves recording and classifying financial transactions, preparing bank reconciliation, and tracking all income and expenses. Or maybe you’re just starting your firm and want to begin on the right foot.

Either way, law firms succeed or fail on client trust, and accurate, thorough bookkeeping is essential to building a reputable, compliant, and trustworthy firm. In addition to their business checking and savings accounts, most law firms are required to hold client funds in a separate trust account—often called an “IOLTA”. Law firms need to ensure that their financial and accounting practices are up to par in order to grow their businesses. Bookkeeping and accounting are important for all businesses, but they are especially important for law firms. A good bookkeeper can help you keep your finances accurate and up-to-date, which can help you attract clients and improve your image. Furthermore, a firm’s accounting system needs to be clear, accurate, and up-to-date in order to comply with regulations.

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For example, if you are a lawyer who frequently travels for work, you will want to keep track of all your travel expenses so that you can deduct them on your taxes. This includes things like airfare, hotel expenses, rental car expenses, and so on. In order to stay afloat financially, a well-thought-out budget is essential for a law firm. When creating a budget, it’s important to think about mandatory expenses, like employee salaries and office expenses, as well as potential surprises. Three-way reconciliations are an important part of practicing law and must be performed on a regular basis to ensure accuracy in your financial records.

If you are still inputting numbers manually, you are probably finding that it is leading to mistakes or duplicated data entry. These mistakes waste time, create mismatched records, create billing complications, and potentially compliance violations. Using a 3-way reconciliation is a great way to check and verify your financial data periodically. The bookkeeping system that every entry to an account requires corresponding opposite access to a different accounting. This is a double-entry system, so there are two equal corresponding sides at all times. Double-entry accounting can create a balance sheet made of equity, liabilities, and assets.