Law Firm Accounting Guide for Optimizing Your Finances

By Hannah Bruno

You’re a lawyer, not an accountant. We know you’d like to spend your limited time in other ways. But setting up your finances properly won’t just make it easier to file your taxes each year—it’ll save you time, money, stress, and potentially legal trouble. Using a legal accounting solution can make an especially big difference.

When implementing a law firm accounting strategy, there is plenty to consider.

Set a Budget for Your Law Firm

The basis of good legal accounting always starts with a well-thought-out budget. A budget helps you set expectations regarding cash flow and expenses for the year—reducing the likelihood of missing a payment or bouncing a check.

Below are steps to take to set a budget:

1. Brainstorm your firm’s expenses: Ask yourself these questions for each line item: Will this save me time to put towards more billable work? Will this help me find more business?
2. Identify current resources: You’ll also want to outline what assets you have on hand, such as starting capital and existing equipment. Refer to your law firm’s chart of accounts and make updates as needed.
3. Make a savings plan: Set aside some money, either as a recurring expense or a percentage of your revenue, for any potential surprises you encounter.
4. Project your revenue: Once you’ve itemized all the expenses, resources, and savings to set aside, the next step is to project your expected revenues.
5. Set rates: Be sure to set your rates carefully, factoring in the objectives above and the average rates for your location and practice area.
6. Document and track your budget: This will help you determine whether you need to adjust your projections or document any expenses you didn’t account for.

Set Up Your Firm’s Bank Accounts

Every business is different, so your choice of the “right bank” depends on the nature of your practice and how you prefer to handle your banking transactions.

To open any business bank account, your practice needs to be registered with the state in which you are operating, have a registered business name, and have an Employer Identification Number (EIN). Before meeting with a bank representative, call ahead and ask what paperwork you need to bring to your initial appointment.

What Types of Bank Accounts Does Your Firm Need?

There are four types of accounts you’ll want to open:

• Business checking account: You will manage most of your business expenses and revenue from your checking account.
• Business savings account: Set aside money you’ll need later in a savings account. Even though interest rates on business accounts are traditionally low, having a cash surplus in a business savings account can improve your likelihood of being approved for a loan.
• IOLTA account: In addition to business checking and savings accounts, most law firms are required to hold client funds in a separate trust account—often called an “IOLTA.”
• Business credit card: Although not required, opening a business credit card can help your law firm separate business expenses from personal expenses.

What to Know About IOLTA Accounts

IOLTA accounts are tricky because they have very specific rules around what you can and can’t do with them, and the penalties for breaking these rules can be severe—including disbarment.

Every state has an IOLTA program, and the bank where you opened your regular business checking account also offers IOLTA accounts. But rules vary by state, so consult your State Bar Association and a professional accountant before finalizing your accounting setup.

For peace of mind, we recommend seeking a payment and billing provider that adheres to IOLTA account rules, such as LawPay.

Choose an Accounting Method

You’ll also want to decide how your firm will track incoming and outgoing funds before your firm files its first tax return and then stick with it on all subsequent returns.

Elect to use one of two methods:

Cash accounting

Cash accounting recognizes revenues when cash is received, as well as expenses when paid. However, this method does not recognize accounts receivable or accounts payable.

Accrual accounting

Accrual accounting records revenues and expenses when earned and incurred, regardless of when the money is received or paid.

Keep Comprehensive Records

Your bookkeeper, CPA, and the IRS all require you to keep documents proving your income, credits, and deductions.

Therefore, you should hold onto the following:

• Receipts
• Bank and credit card statements
• Bills
• Canceled checks
• Invoices
• Proof of payments
• Financial statements from Bench or your bookkeeper
• Previous tax returns
• W2 and 1099 forms
• Accounts receivable journal showing billed receivables
• Case time records per client
• Time summary reports sorted by attorney and by client
• Register of cases in progress (often organized by client’s name)
• Other documents of income, deductions, or credits shown on your tax return Keep these records for a specific time—some require 10 years, and some as few as three. The IRS doesn’t require you to keep records of certain expenses under $75, but we still recommend that to be safe, you keep copies of all records.

Regularly Reconcile Accounts

Law firms must ensure bank statements, trust account ledgers, and client ledgers match and are accurate. This is done by completing three-way trust reconciliation between all of these statements.

To do this, you’ll first compare the bank statement with the trust account ledger to ensure all entries match. If they don’t match, you’ll need to make corrections until they do. Then, compare the bank statement with each client ledger to ensure they also match. You must regularly reconcile accounts to comply with IOLTA requirements and maintain an accurate picture of your law firm’s finances.

Optimize Your Law Firm’s Accounting System With LawPay

From sending payment requests and tracking them to integrating with your go-to legal software products, LawPay’s legal billing software will fit your needs. LawPay also ensures your law firm accepts payments that comply with your state bar’s regulations surrounding trust (IOLTA) accounts and the American Bar Association (ABA) guidelines. Schedule a demo.