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8 Best Law Firm Bookkeeping & Accounting Practices
Attorneys spend several years practicing law after completing years of formal education and training. You might have also done the same and are now probably running your law firm. All these years, your professional life must have been around laws and the legal system but not accounting. However, if you are aware of bookkeeping and accounting basics, you wouldn’t know the core roles and responsibilities of professional bookkeepers and accountants.
Even if you have accountants on board to minimize your need to look into financials, it is still important for you to learn about the process and its importance. So let’s begin, starting with learning;
The Importance of Bookkeeping & Accounting for Law Firms
As a law business owner, know that efficient accounting for law firms is crucial to financial success. While there are many significant factors involved, here are some of the top reasons why you should focus a little more on your firm’s bookkeeping and accounting process.
1. Ensure Complete Compliance
It is mandatory for your law firm to comply with all accounting standards, norms, and regulations. Although some rules may vary according to geographic regions, some remain common. The American Bar Association’s Model Rules of Professional Conduct outlines rules concerning the professional and ethical responsibilities of legal professionals in the USA. For example, how attorneys should record bookkeeping entries, manage trust accounts, and keep clients informed about the receipt of funds.
In case an attorney or a law firm neglects or violates compliance regulations (regardless of intention), it can have repercussions including hefty fines, suspension of license, or disbarment.
2. Gain valuable financial insights
Accounting helps you gather and evaluate your law firm’s financial information, such as revenue and expenses. As a result, you can make data-driven decisions based on this valuable information. When you know how much your firm is earning and how much it is spending within a specific period, you can find out outstanding payments, tax deductions opportunities, and determine missing income due to not recording some billable hours, etc.
Besides that, this data also helps you identify your business areas that are not making enough impact, and need more of your attention for progress in the future.
3. Keep your law firm’s reputation Intact
With accounting mistakes, the world around you might see you as unprofessional. Imagine sending an invoice to one of your clients and the details don’t match with their records; they can think of this practice as a scam. Not only that, if your financial numbers are incorrect and you file taxes according to them, tax authorities can impose hefty fines, which can hamper your reputation among clients as well as in the market. Therefore, accurate accounting ensures your firm’s reputation remains intact.
Keeping your firm’s accounts maintained and organized is important; however, it is not as easy as it seems, especially when it comes to handling them on your own. Hence, here we will discuss some of the best ways to improve the financial accounting process of your law firm; read through this piece to get valuable insights on the same.
Best Practices to Improve Your Law Firm Bookkeeping & Accounting
1. Lay the foundation for effective financial accounting
As you want your firm to comply with legal accounting regulations, make sound financial decisions, and grow economically, you need to start from the basics of financial accounting – set up a sound bookkeeping system.
This includes deciding whether to manage bookkeeping tasks in-house or hire external legal bookkeeping services. The latter is widely considered a cost-effective option with multiple advantages such as access to law firm-specialist bookkeepers, round-the-clock support, faster TAT, etc.
Moreover, your outsourcing partner will be able to help you set up an optimization-focus bookkeeping system that not only ensures accurate bookkeeping but also streamlines finance functions and meets compliance.
2. Record and store all financial records
Financial records, including receipts and invoices, are important financial documents that you need to keep for at least two years. This means if you look into your books today, you must have receipts, invoices, and any other significant financial documents for the past two years. Here’s a list of documents that you need to store;
- Proofs of payments (receipts)
- Bills and invoices
- Checking account statements
- Credit card statements
- All canceled checks
- Detailed reports on previous tax returns (including forms)
- Work-time sheets/billing papers
Managing these records on paper is overwhelming, as you would know. Instead, you may use any reliable accounting software for this purpose, as there are several such software tools available on the market.
3. Make sure your bank account setup is right
If you don’t have a business checking account, you must have one because using one bank account for your business and personal financial needs arises inconsistency in records that require extra time and effort to rectify.
Any law firm must have at least two or three bank accounts;
1 checking account
1 savings account
1 trust account (IOLTA)
Without properly differentiating these accounts, your law firm is at risk of inaccurate bookkeeping, unorganized records, and failing to meet compliance requirements.
4. Select and use one accounting method
Learn about different accounting methods and find which one suits best for your law firm. You might need to consult a legal accounting expert before you make a decision. If you start implementing one, you need to stick to it for several years because it will have an impact on how you manage books, calculate and file taxes, etc.
You can either use accrual accounting or cash-based accounting. You may also use accounting software to manage books using accrual-based monthly accounting and generate cash-based statements for tax purposes. Determine the advantages and disadvantages of both and then consistently use one to ensure accurate tracking of your financial records.
5. Carefully prepare a budget and try to stick to it
A law firm will go through tough times to succeed if it doesn’t have a budget, which is crucial to set revenue benchmarks, project cash flow, and expenditure, set clear amounts for fixed costs, etc. While you might already have a system to prepare budgets, you need to have a strong strategy in place to prepare an effective one. Here’re a few tips to help you with the same.
- List down your firm’s necessary expenses
- Set goals for your personal as well as business finance management
- Project revenues
- Use software that makes budgeting easier
In case you or your clerical staff has a shortage of time for accounting and if you don’t have an in-house accounting team, outsourcing legal accounting services can be your best action. A reliable provider would be able to help you with bookkeeping, accounting, reconciliations, cash flow management, payroll, budgeting, financial reporting, and many other accounting functions.
6. Keep regular track of your trust accounts
- Follow the best trust accounting practices;
- Keep precise records
- Set up separate ledgers for operating and trust accounts
- Generate statements to look into funds removed from your trust account and funds remaining in the account
- Generating trust accounting reports
- Conduct three-way account reconciliations
Staying on top of your trust accounts is essential for law firms. By reconciling accounts regularly, tracking transactions, and maintaining accurate records, you can help avoid penalties and fines. Trust accounts are used to hold money that belongs to others, such as client funds or settlement proceeds. It is important to keep these accounts accurate and compliant with all applicable laws and regulations.
7. Review financial reports to identify weaknesses & opportunities
Organizing financial numbers, maintaining accurate records, and preparing a complete database out of that information is fine. But when it comes to utilizing that data, know that it needs to be monitored and analyzed regularly.
By doing that, you would be able to see a detailed picture of your law firm’s finances and financial performance. In other words, by analyzing your data, you can identify the times when your business was doing poorly and the reasons why. This will help you to understand your weaknesses and areas where you need to improve. You can also identify the times when your business was doing well and the reasons why. This will help you to understand your strengths and areas where you can invest for future growth.
Regular accounts monitoring helps you make data-driven decisions that can help you minimize losses and maximize profits. This can lead to the overall growth of your law firm.
8. Track all applicable tax deductions
Taxes are unavoidable, but you can minimize your tax liability by preparing in advance. Mny attorneys and law firms don’t use tax deductions efficiently because they don’t know the rules. The IRS has very specific rules about what deductions are allowed, and if an attorney claims a deduction that they’re not allowed to claim, they could be audited by the IRS.
When it comes to filing taxes, never wait till the peak tax season. Learn about tax laws applicable to law firms in your jurisdiction and what’s better – consult a tax expert. It will be of great help and you can significantly reduce your tax liability if possible.
Setting up an in-house accounting team can be expensive. In addition, you will have one more department to supervise. Instead, you can outsource accounting services and rest assured about the effective management of the finance and accounting processes of your law firm. Besides cost savings, you can get more time for core business operations and client servicing.
Therefore, it is highly recommended to consider outsourcing legal accounting services to a reliable service provider like Cogneesol. We are a global business process management firm offering attorneys, law firms, and legal departments a wide range of accounting services, from accounting setup to financial analysis, from management reporting to reconciliation and tax preparation.
In order to meet your special needs, we offer custom-made solutions that can include specific services you may need. Cogneesol has been providing high-quality services to hundreds of law business clients across the globe since 2008. We can help law firms set up effective accounting processes, clear backlogs, streamline functions, and optimize the entire process to add value to their bottom line. To learn more about us and our service offerings in detail, do not hesitate to contact us today; call us at+1 646 688 2821 Or send an email at [email protected].
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