For example, when you send an invoice to a client, you’ll mark it as revenue, even though you might not get paid for 30 days. There are many reasons for this, one of which is poor accounting practices. Inadequately tracking your billable hours and mismanaging your invoices can cause you to lose track of what money is owed, and what’s going out. Everyone makes mistakes, including lawyers (and bookkeepers, and accountants). Thankfully, there are a lot of tools available to help you manage your trust accounts, so you don’t have to go at it alone. Here are five common law firm accounting obstacles and mistakes you should be aware of so you can avoid them.

• CosmoLex empowers law firms to accept credit card payments, debit card payments, and automated clearing house payments (ACH payments).
• Hire a tax professional like a CPA to help you with your business taxes.
• Instead, you can outsource accounting services and rest assured about the effective management of the finance and accounting processes of your law firm.
• Keeping up on numbers daily, weekly, and monthly helps you remember what is happening to avoid these leakages from occurring on your watch.

The FUTA tax rate is 6%, which taxes wages up to the first $7,000 earned by the employee during the year. There are also state and sometimes municipal payroll taxes to be collected. Speak to your accountant to make sure you are correctly withholding each payroll tax. Also, ask if you are eligible law firm bookkeeping to receive a tax credit for paying timely state unemployment taxes. Employment taxes are reported using a Form W-2 for each employee, and Form 940 and Form 941 if you withhold any taxes from an employee’s paycheck. It’s best to work with a CPA who has experience working with law firms.

Why is bookkeeping and law firm accounting important?

The fee structure for every payment provider differs, and before you decide, ensure you know your numbers and the effect of the provider’s fee on your bottom line. The recording of daily transactions in a consistent way is known as bookkeeping. To put off bookkeeping means you’ll have to catch up with it at the end of the month, or worse – at the end of the year, and that will be more stressful and time-consuming. The key is to actively monitor things so you know when and what to adjust. If you’re missing your budgeted numbers, you can reduce expenses, delay one time purchases, increase sales through more aggressive marketing or advertising, or lower your profit expectations.

Unlike a specific retainer, general monetary retainer cannot be allocated to any legal services that are rendered or will be rendered. Lastly, acquire great accounting software to simplify your manual labor workload and let your company become more accurate, ensure its compliance, and stay more organized. Bookkeepers work directly to keep financial records in order at the law firm. Bringing in an expert will help you with accounting tasks, accounting processes, business decisions, bookkeeping tasks, and more. Do not be afraid to bring in an expert to allow you to focus on things you are better at, like solutions for your clients’ legal problems.

Start by Hiring a Bookkeeper

Additionally, an accountant who can use data to make informed decisions about the firm’s financial health is highly desirable. Maintaining your books on a regular basis ensures that all of your financial transactions are accurately recorded and organized. This makes it much easier for your accountant to prepare financial statements and tax returns. The double-entry accounting system is the most effective way to do bookkeeping for a law firm.

Most firms will need three business bank accounts at a minimum—checking, savings, and a separate IOLTA or trust account. Without the proper business bank accounts, you risk inaccurate bookkeeping, messy records, and potential compliance violations regarding trust funds. During representation, clients access a secure client portal where they can message their attorney, send and view important documents, and access their billing reports. CosmoLex also enables clients with the option to pay invoices via credit card or online, improving law firm accessibility and boosting client convenience. Law firms can create professional-looking invoices and email them to clients in one click, helping clients get their bills paid by their due date. They can even use the accounting software to send automatic late payment reminders to past-due clients to help clients stay on track with payments throughout their matter.

Law Firm Accounting and Bookkeeping: Tips and Best Practices

There are at least three main bank accounts that you should open for your law firm. Before you can open a business bank account, your business will need to be registered with the state, have a business name that is registered and have an employer identification number (EIN). Once you master the basics of accounting for lawyers, you can better navigate the everyday challenges unique to the legal industry. Here are the top three issues to look for in your practice, along with proven solutions to consider. If you have never seen your general ledger or don’t look at it very often, it is time to change that.

• Typically, businesses pay a variety of taxes across federal, state, and local levels of government.
• If you’re trending behind, it is better to know sooner rather than later so you can react accordingly.
• Poor bookkeeping can lead to cash flow problems and even money leakage.
• Recent technological advancements have made accounting easier for firms.
• Understanding these terms and how they relate will help law firms properly manage their finances.
• Lawyers looking to launch their practices, or maintain a successful one, need to pay attention to firm finances.

Second, it can help to prevent personal funds from being used to pay for business expenses. Setting and sticking to a budget is essential to keeping track of your business finances. By knowing your expenses and revenues, you can make sure that you are not spending more than you are making.

As a fully customizable legal accounting software platform, QuickBooks lets you manage retainers based on your state’s specific IOTLA programs rules. Easily track all money held in trust retainers and general retainers. Quickbooks is the easiest way for organizing all of your legal accounting. It also integrates with MyCase legal case management software which makes managing firm finances easier with legal invoicing, time tracking, financial reporting, legal payment collection, and automated workflows. Most law firms need a least a mixed trust account – a bank account to hold money for more than one clients.