Basic Accounting Principles for Lawyers
Very few lawyers are also accountants and few accountants have a legal background. This means that many law firms are generating a decent income but fail to keep their books in order. This is especially true for those just starting out in the legal profession. Here are a few basic accounting principles for lawyers to follow and advice on how to manage your firm’s finances the right way.
Use the Right Tools
Good accounting is made easier when you use the right tools. Case management software is invaluable since it ensures that you track the hours that you as a lawyer, as well as anyone else in your company, work on a given case. Case management systems also track the status of the case, notify you of upcoming dates, and prevent cases falling between the cracks.
The ideal solution is working with case management software that integrates with your financial software, so you can invoice customers and track past-due bills easily. If your case management and business accounting systems don’t talk to each other, take care not to make errors entering data. Always use a single accounting system so that your books are accurate and easy to keep up to date.
Track all Your Expenses and Pay Them the Right Way
It is surprising how many people complete law school and focus only on the money they bring to the firm, not what they spend. They too often ignore overhead expenses like rent, insurance, utilities and support services until those bills come due. Some manage these expenses by delegating financial management of the firm to an accountant or office manager. However, lawyers running a firm or working for themselves need to be as mindful of the outgoings as they are of their income. What matters isn’t how much you earn but how much you keep.
Avoid paying bills like these out of petty cash since that makes it harder to prove that you paid these business expenses. Pay your liabilities and costs first, before you claim you have an income. And always pay your taxes on time and in full since your clients will have second thoughts if they find out you’re in legal trouble yourself with the IRS.
Law firms should consider adopting activity-based costing. By tracking income and expenses by legal specialty, department or lawyer, you can determine where your profit center is and which areas are consuming resources for relatively little profit. Track your time when you do pro bono work says William R Phipps from wbtblaw since you should know the total resources you’re pouring into the “free” legal advice you give.
Be Careful with Trust Accounts
Trust accounts are a way legal accounting differs from most other industries. Trust accounts must be properly managed and tracked for legal reasons. For example, your law firm may receive a client retainer that doesn’t belong to your firm until the work is done. Or, you may manage a trust account on behalf of a client that cannot manage it in-house and you’ll only receive a modest fee for doing so. Comingling these funds with the general funds creates the risk you’ll spend what you’re not entitled to use, and you risk a lawsuit if you cannot provide proper accounting for the funds you’ve spent. Set up separate trust accounts for each client, bill them appropriately, and maintain these accounts so you’re always ready for an audit. This process is made easier by adopting legal accounting software instead of generic accounting software.
Law firms are obligated to maintain trust accounts and accounting records for them; this is made simpler by adopting software with that functionality built in. Use legal and accounting software that minimizes your data entry and the effort spent on maintaining accounts. Track your expenses and pay them on time, in full, to avoid problems. If you can, track expenses and income by category so you can determine where your law firm’s profit center is.