Bookkeeping in Law Firms
Law Firm Accounting and Financial Management
Written by Knowledge Team, posted on February 22, 2019
Bookkeeping practices must be defined and tracked, so it does not distract Lawyers billable time. What are the pain points faced by law firms and why outsourcing firm’s bookkeeping is helpful
What is Bookkeeping
Bookkeeping is the term used to record all business transactions in a law firm including financial transactions, sources of business revenue, profits, purchases, receipts, payments, reimbursements and expenditures.
Bookkeeper and Booking – In-house, outsourced or technology
It is expected out of every law firm to accurately manage the flow of money in and out and to maintain a complete and precise record of all transactions. Having accurate monthly financial records helps law firm owners to be aware, if the business is making or losing money and to answer the most important questions of accounting. In addition to this, it is imperative for the growth of any law office’s business to outsource bookkeeping and to concentrate the energy and time on law firm’s core business.
Every law firm needs a bookkeeper who does the accounting and bookkeeping by managing more advanced financial tasks. Employing an in-house bookkeeper would need a substantial investment but that is a far better solution considering the importance of bookkeeping in maintaining a complaint law firm accounting system.
Why Law Firm needs a Book keeper
- Law firms and lawyers can focus their time on billable activities like managing cases and clients, and business development tasks like networking, administration, accounting, etc. As law firm’s business expands, it can become difficult for law firms to manage more advanced financial tasks, as bookkeeping is something that is entirely different from legal processes
- Billable activities must be tracked, and Invoices generated on time for the firm to get paid. Bookkeepers can confirm that activities are accounted for all the fee earners
- Calculating taxes and GST for activities and disbursements cannot be managed by Lawyers
- Understanding of office account and client account to avoid any compliance issues
- Tracking money flow is important, but it is time-consuming and involves accounting skills and intensive labor
- Cash flow complications may usually arise if business finances and personal finances are spent from the same bank account leading to a difficult bookkeeping process
- Irregular Financial Reports or generating financial statements delayed could result in the negative credibility of law firm’s business
- Payroll management is an important task in bookkeeping and the one who does that cannot afford to make mistakes
- Keeping track of receipts and maintaining them methodically is yet another significant challenge faced by law firms
- Bank accounts must be reconciled every month and financial metrics to be made available
- Reading the reports thoroughly, understanding the financial data and interpreting the data based on comparison of financial reports with the income statements / balance sheets can be tedious and confusing
The basic four principles of law firm BookKeeping
Tracking Every Activity
Tracking client billable activities with least effort is imperative. Law firms can employ a proper system for tracking the hours devoted to clients, billing them for those hours, and keeping track of their payments when being received. The main point is to be accurate in tracking and simply not to let anything slip through. Approvals can be in place for Invoices before presented to the client for payment
Tracking Every Expense
Disbursements must be recorded by secretary, and receipts must be attached to the vouchers. Law firms can implement expense workflow process based on their SOP and requirements. Hard and soft expenses must be tracked and reported correctly
Recording in Ledgers
Bookkeeping ledgers hold financial accounts and transactions. Each page of this ledger represents one account from the Chart of Accounts. The ledger must provide the transaction history and current balance in each account, throughout the accounting period. Thereby, ledger provides a summary of income and expenses, on a regular basis and serve as the authoritative source of data for a firm’s financial accounting reports.
Assessing the Profit/Loss Reports
Once the transactions are entered in the ledger and financial reports prepared, the law firm can assess the financial status and health of law firm’s business. The primary rule is that every debit must have an equal credit and all the accounts must get balanced. With all the gathered data on income and expenses of law firms, analysis should be carried out that actually shows what profit/loss the law firm has gained.
Tasks of Book Keepers
- Reconciling bank statements on a monthly basis.
- Adjusting entries if needed to tally the account balances. Adjusting entries may be due to unrecorded costs and revenues.
- Taking trial balances occasionally to ensure that the journal entries have been posted accurately to every account.
- To match the debit and credit balances and to identify the errors in case of mismatch.
- Periodically close accounts to determine the profit or loss associated with all revenue and expense transactions.
- Providing information for the company’s income statement.
- Creating Income Summary Account to show the net income or loss for a particular accounting period.
- Cleaning up firm’s financials to know exactly how much money is being made and how the firm is performing.
- Giving suggestions to law firms for improvement, growth and profit based on day-to-day bookkeeping assessments.
Bookkeeping for Law Firm’s Success
Good bookkeeping is a crucial part of a growing law firm. By outsourcing law firm bookkeeping, attorney’s legal time saved and enhances the organization’s internal system and augment transparency. It also provides detailed, accurate and timely records that can prove invaluable in terms of decision-making or in audit scenarios.
A great Practice Management Software like PageLightPrime support the tasks of Bookkeepers by providing easy access to Journals, Transactions, Activity and Expense tracking. PageLightPrime Legal Time and Expense tracking will allow fee earners to track their billable hours and not miss out any Matter disbursements. Trust Accounting, GST support is available and be configured to local needs. Build in reports can help bookkeepers to make informed decision fast.