Law Firm Accounting: A Complete Guide for Attorneys and Legal Practices

Most of the accounting trouble law firms run into has to do with law firm bookkeeping their trust or IOLTA accounts. Regulations do vary by state, but keep in mind the following dos and don’ts no matter where you practice. The third bank account law firms should have is a trust or IOLTA account.

• It is shaped by ethical obligations such as the ABA Rule 1.15, which mandates the separation of client funds from a law firm’s operating funds.
• The types of expenses you can deduct on your tax return will depend on the expenses you incur in the course of doing business.
• The most vital preparatory step is reconciling existing Client Account balances and resolving all ledger discrepancies before the merger date.
• Solutions that streamline services or work with each other can eliminate platform fees, training time, and headaches and help you optimize your financial processes.
• When you manage client funds properly, you protect their interests while building the reputation that drives long-term success.

Citrin Cooperman’s Client-Centric Approach

Everyone from your bookkeeper to your CPA and the IRS needs you to keep documents proving the income, credits, and deductions you put on your tax return. Bookkeeping tasks are ongoing and can be performed daily, weekly, or monthly. Whether you do the task yourself or outsource it to a pro, the goal is to make sure your books are accurate, up-to-date, and useful to you and your CPA. Ask a CPA to help you determine which accounting method is best for your business, and stick with it. Every business is different, and the “right bank” for you will depend on the nature of your practice and the way you prefer to get your banking done. If you’re serious about growing your business, you need to team up with a Certified Public Accountant (CPA) early on.

• We have a small firm, but since using MyCase we are more organized and file reviews are a breeze.
• Ask a CPA to help you determine which accounting method is best for your business, and stick with it.
• Three-way reconciliation is a legal accounting practice that compares bank statements, client ledgers, and trust account balances.
• Premature transfer to operating accounts violates trust accounting rules and can trigger disciplinary action.
• 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.
• Accept secure payments, set flexible rates, and manage your business without cobbling together extra tools.

Law firms

Firms in an expansion phase often outgrow the simplicity of cash accounting. These practices may consider switching to an accrual accounting model to get a clearer picture of revenue earned versus cash received. Implementing law firm financial management tools that track performance over time—such as accounts receivable aging reports or revenue forecasts—can help guide strategic decisions.

Hire an accounting professional

Keep abreast of the specific rules of your local jurisdiction and leverage your tech options, and you’ll be well on your way to a more streamlined accounting process for your law firm. While savings accounts are not known for having great interest rates to keep up with inflation, having extra cash on hand is an important safety net for any business. Lawyers go to law school—and graduate to find themselves running businesses. Yet whether you’re starting a solo practice or growing an existing firm, the same accounting rules apply. The complexity and dual regulatory risk (SRA and HMRC) inherent in law firm M\&A necessitate the involvement of specialists who understand the legal sector’s unique financial mandates. AZL’s process promotes inclusive financial reporting by standardising financial procedures for all staff.

How Do You Perform Accurate Three-Way Reconciliation?

For solo practitioners and small firms, focus on establishing strong habits around expense tracking, trust fund management, and monthly reconciliations. Automating recurring tasks—like invoicing, payment reminders, and financial reporting—can save time, reduce manual errors, and simplify bookkeeping for small law firms. A law firm accountant typically handles higher-level financial tasks, such as preparing tax filings, reviewing budgets, and offering strategic advice. Working with an accountant familiar with legal accounting rules ensures compliance and provides a broader perspective on the firm’s financial health. Effective financial management begins with consistent, well-defined accounting procedures. By establishing clear processes for tracking revenue, expenses, and client funds, firms reduce the risk of errors and strengthen compliance with bar rules.

• Entrust your financial records to a dedicated team of certified bookkeepers through QuickBooks Live Experts, ensuring accuracy and compliance.
• The credit card service fees can’t come out of the trust account because they’re the law firm’s fees to pay, not the client’s.
• For legal accounting, this means more accurate financial statements and faster month-end closes.
• Disorganized bookkeeping can lead to data discrepancies, payment issues, and other challenges.
• Learn more about Bench, our mission, and the dedicated team behind your financial success.