Legal Bookkeeping Guide for Law Firms

Introduction

The systemic activity of keeping books and records of a business. The simplified dictionary definition of bookkeeping. Legal bookkeeping is exactly that, except it is done for businesses providing legal services. Law firm bookkeeping and accounting can be a daunting task for general lawyers. It requires exceptional attention to detail. Confusion can be a cause for human errors in the law firm accounting procedures. Our guide on law firm bookkeeping helps our readers to be more vigilant by staying informed with a few basics.

A breakdown of three benefits among many of proper law office accounting and bookkeeping:

• Helps track the law firm’s cash flow.
• Keeps the law firm compliant with SRA guidelines. 
• Increases profitability and makes the law firm successful.

Legal Accounting	Legal Bookkeeping
Invoicing expenses.	Recording and monitoring financial transactions.
Giving insights and building financial plans for the law firm.	Analysing the financial stability of the legal business.
Helping the business to stay in compliance with SRA rules.	Checking the accuracy of records.
Creating financial statements.	Managing payrolls.
Issuing payments and administration.	Managing the books.

Legal bookkeeping and legal accounting can be mutually exclusive. Both of them complement each other. Both are essential for a law firm to function. Most law firms seek to hire an experienced legal bookkeeper who would take care of both the bookkeeping and the accounting of the business. You cut down on the workload and your record-keeping stays consistent with your financial reports.

The main types of accounting you must have knowledge of when starting off as a legal bookkeeper are as follows.

• Trust Accounting

Trust Accounting involves maintaining trust accounts for law firm clients. The clients’ funds are held within these accounts in trust. The clients are the trustees of the funds. When a client’s money is held in trust accounts, legal trust accounting basics suggest that the law firm must not:

1. Use the fund for law firm expenses.
2. Deposit law firm funds into the client’s trust account. 
3. Interest on the client’s trust account.
4. Withdraw funds for any reason other than legal service related.

• IOLTA

IOLTA, or Interest on Lawyers Trust Account, are accounts that hold client funds from sources like settlements and retainers. Interest can be generated on IOLTA trust accounts. The earned interest does not belong to the law firm. Similar to basic trust accounting, they have certain rules. The law firm may only:

1. Use the interest in social services only, such as legal aid services.
2. Transfer the IOLTA trust funds from the trust account when earned.

• Double-Entry Accounting

Double-Entry Accounting helps to analyse and identify any errors in the legal accounting. It involves two entries for every transaction, a debit and a credit. These entries add up to form a balance sheet containing assets, liabilities and equity. The amount on either side must be equal at all times.

• Three-Way Trust Reconciliation

Three-Way Trust Reconciliation is done to ensure an error-free financial reporting at the end of a 30-days or 60-days period. It weeds out financial issues or impending ones within the law firm. It can be done by a bookkeeper with expert electronic bookkeeping, provided by excellent legal practice management softwares like Leap and QuickBooks Online. Three-Way Trust Reconciliation involves three components:

1. Trust Bank Statement
   Trust Bank Statement is issued by the law firm’s financial institution. It shows the amount in the client’s bank account. Since it is issued by a third-party, trust bank statements must be reconciled regularly. Any errors found in the statement should be acknowledged and reported with haste.
2. Trust Ledger
   Trust Ledger shows the amount shown within the financial statements for the IOLTA account. A corresponding amount should show up in an accompanying liability account. The amount in the Trust Ledger must equal the Trust Bank Statement. If it does not, it should point out an uncleared transaction from old invoices or bank deposits. It can be resolved by clearing the old invoices or adjusting the bank balance with the uncleared transactions. 
3. Client Ledgers
   Client Ledger shows the amount of funds remaining for each individual client. Similar to the Trust Ledger, this amount must always match with the amount in the Trust Bank Statement. Any errors should be identified and investigated promptly.

Legal Bookkeeping Best Practices

Legal firm accountancy and bookkeeping can be mostly stressful for most lawyers. Therefore, with the following short list of best practices, it will be easier for your law firm’s lawyers to turn it around for themselves, professionally speaking. 

• Allocating budgets appropriately – Revenue vs profitability charts are important for your law firm. It is necessary to be aware of your incomes and expenses and maintain a healthy cash flow within the law firm. Once you do, make plans and allocate the budget for your law firm appropriately.

• Maintaining bank accounts – Create and maintain bank accounts with responsibility. Whether it is an IOLTA account, savings account or check account, the regulation of each account is essential for a trouble-free relationship with your clients and banking institutions.

• Managing separate accounts – Keep anything related to your law firm’s expenses separate. Any mingling with the trust account funds will certainly lead to discrepancies in the accounts. The less you use a trust account for transactions, the safer.
• Keeping track of expenses – Analyse your records daily. Keep track of all your expenses, even the miscellaneous ones that would tend to be looked over otherwise.
• Following the trend – Keep up with the marketplace. Study what new trends in the legal business, analayse your legal firm’s financial statement and plan your next move.
• Implementing automation – Automate your bookkeeping and accounting records. Use some of the best legal practice management softwares available.
• Hiring professional help – Asking your law firm’s lawyers to do all the accounting and bookkeeping can take away from their time practising actual law. Hand over the burden of responsibility to an experienced and competent legal bookkeeper instead. Your records should be in safe hands!

Avoiding Legal Bookkeeping Mistakes

Go big or go home. Just like the best practices, there are a few mistakes that you should avoid with your law firm accounting. 

• Stay away from the trust accounts – We have mentioned it before. It is against the law to use your client’s funds in your law firm’s interest. And we also cannot stress this enough. Use clients’ trust accounts as little as possible. Regularly check the accounts, create suspense ledgers, use automation softwares to monitor every transaction for any errors in the record-keeping. 

• Entering the wrong data – The mistake can be as harmless as a single zero. And yet, most errors made in law firm accounting are almost always unforgivable. Steer clear of data entry mistakes with the help of legal practice management softwares.
• Know the difference between revenue and income – One mistake that should be too obvious. You should be aware of what revenue and income counts as. Revenue is the capital that your law firm receives from your partners. Income is what is left of it at the end after deducting all the expenses.

Conclusion

Law firm bookkeeping can be a challenge for small law firms. With the right guidance and the proper help, it can be overcome with ease. All you need to do is be wary on your path to growth and success.