Legal accounting can be challenging for many small law firms and individual practitioners alike.
The five key Legal Accounting Challenge (s) for Lawyer
Key Legal Accounting Challenge for Lawyer #1 Client Trust Fund Accounting
Like many other businesses, it is normal for Legal firms to take deposits before commencing any work. In law firms, these are referred to as retainers. Retainer management is more important and complicated than deposits. Retainer funds remain the assets of the client until earned.
For instance – In a typical business transaction, a customer can give the contractor a deposit to order carport doors, carpet, etc., that money no longer belongs to the buyer, it is normally non-refundable and is booked as earnings within the contractor business. In a law firm, the retainer remains as an advance of the client and is a liability of the law firm until it has been earned for work performed by the attorney. These funds must be held in a Trust Account.
Complications can arise as Law firms need to track client ledgers separately from each other, while still keeping all trust funds collectively in a singular bank trust account. Law firms need to ensure that one client’s monies are not used on behalf of another client or used with the reserves of the firm. This is where sound practice management and accounting systems are quintessential.
Key Legal Accounting Challenge for Lawyer #2 – Proper Accounting of Project/Matter Costs:
Matter costs can be incurred from the beginning of legal cases. These costs are either charged to the client or secured at settlement (if there is a settlement), depending upon the nature of the matter. It is expected that all costs are accounted for properly, which seems straightforward. But, in Legal accounting, not all expenses can be treated the same.
Key Legal Accounting Challenge for Lawyer #3 – Distinguishing Income from Revenue:
The incurred costs of a matter must be allocated first when an invoice is paid. As this is not income, this portion must be logged separately. Inaccurate books will occur within the accounting records of firms who struggle with separating revenue that covers incurred costs from their actual revenue. This will result in compliance issues and a firm’s inability to recognize which cases are most valuable.
Key Legal Accounting Challenge for Lawyer #4 – Double Data Entry & Resulting Errors:
It is common for law firms to use two separate systems for their accounting and billing. As such it is crucial that a firm’s accounting and billing systems use identical sets of data. This is where compatible systems working together is essential. This allows financial data across both systems to be linked. Failure to carefully keep accounting and billing systems in sync may result in bookkeeping issues, which will lead to billing complications, missed revenue, and possible ethics breaches.
Key Legal Accounting Challenge for Lawyer #5 – Proper Identification of sources of Money:
Managing a caseload is just the beginning of the things a lawyer must contend with when also managing a firm. There must be an absolute understanding of how to separate matter-related revenue and expenses. Knowing how to track and separate accounting transactions is essential.
There are varied law firm accounting software programs designed specifically for solo legal practitioners and small- to mid-sized law firms and can help your legal practice better manage time, billing, accounting, and cases. And engaging an accounting and bookkeeping firm experienced in legal accounting processes and systems is oftentimes the principal step to the long-term business success of any legal firm. Do you need help to take your firm to the next desired height in business?No Fields Found.