Accounting For Law Firms


An effective accounting practice will help your law firm remain healthy. This involves optimizing numbers and making intelligent decisions regarding growth, budgets, and expenses. Find the cheap accounting services.

Revenue and income are two separate forms of proceeds, so it is vital to keep an eye on their distinction in order to identify problem areas early – like slow-paying clients who require follow-up.

Chart of Accounts

A law firm’s chart of accounts provides an organizational framework that organizes all of its financial transactions. It serves to categorize income, expenses, assets, and liabilities while giving a high-level overview of firm finances. When transactions take place, they are recorded within one of these accounts so records are correctly organized for easy access and assessment of information.

Each account in a law firm’s chart of accounts is assigned an account code that defines its purpose and nature, such as “Client Advances and Expenses,” which tracks client advances made to lawyers for legal work with interest accruing on them, or “Segregated Liabilities,” where all trust bank balances and transactions are posted.

Billable expense accounts are an integral component of a law firm’s chart of accounts, serving to track expenses that are reimbursed by clients or listed as invoiced expenses for payment. By keeping these expenses separated from other firm fees, these billable expense accounts allow firms to keep an eye on profitability and efficiency more closely.

Additionally, a law firm’s chart of accounts should account for revenue accounts that are specific to its industry. For example, referral income should be recorded as its revenue account in order to track the source of revenue and meet state reporting requirements accurately.

Employing a chart of accounts designed specifically for legal industry firms will maximize profitability while meeting local ethics regulations. While any general business accounting system such as QuickBooks Online could work, using one explicitly designed for legal firms that includes all relevant accounts out-of-the-box will reduce customization or modification costs, as will using software explicitly tailored to law firm accounting needs.

Financial Statements

Attorneys gain expertise in their chosen fields yet should be open to expanding their knowledge to include accounting basics for law firms. Acquiring an understanding of financial statements is crucial to profit from practices and enhance performance in business; financial statements comprise two reports – balance sheet and income statement – which provide insight into how well a law firm is doing financially as well as identify any problems that need addressing.

A balance sheet provides an accurate snapshot of a law firm’s assets, liabilities, and owners’ equity at any given moment in time. It demonstrates how much of your resources are funded through debt versus how much of the owner’s equity is available to invest back into expansion or pay off debt. Furthermore, keeping an eye on cash position provides invaluable insight into meeting short- and long-term financial obligations effectively.

An income statement provides a snapshot of your firm’s revenue and expenses over a specific timeframe and can help identify trends or outliers that deviate from budgeted amounts; additionally, it may reveal opportunities for expansion or change that could otherwise remain undetected.

P&L (profit and loss statements), also referred to in the industry, provide invaluable insights into your firm. They detail income sources and expenses. Also useful are expenses breakdowns by category as well as amounts spent. Using P&L allows firms to monitor how profitable their practice is financially, leading them to make future decisions like hiring additional attorneys, investing in new technologies, or restructuring how their business operates.

Cash flow statements are essential when evaluating the performance of any firm, providing insight into where your reserves stand, the unbilled work sitting on your books, and whether or not payments to vendors and clients have been on time. They’re handy for law firms, which typically have longer payment cycles compared to other businesses and a greater chance of not getting paid on time.


Accounting for law firms involves more than filing taxes – it also encompasses setting up payment arrangements, tracking client records and time spent per case, managing payroll, and overseeing compliance with IRS records-keeping requirements. Consistent accounting practices will help your firm protect itself in case of audit.

Once your practice has decided how it will accept payment from clients, the first step should be determining how it will receive funds from clients. Most state Bar Association rules allow lawyers to accept debit, credit, and electronic payments. After you’ve decided on which forms of payment it will take, research various payment processors and fee structures – one that works primarily with law firms can ensure compliance with trust accounting requirements.

Legal accountants can assist in creating a chart of accounts, which is an organized listing of all of your firm’s financial statements and is easily accessible by your bookkeeper. A diagram of funds is essential for effective legal bookkeeping and typically comprises five core categories, including assets, liabilities, and owner’s equity revenue expenses.

Income statements provide an analysis of a company’s performance over a given financial period. By studying these documents, business decisions about how to increase profits can be informed, as well as inefficiencies that could reduce costs.

Law firms must comply with various legal and tax regulations, so having an experienced accountant on board to guide you through the process is absolutely crucial. No matter whether your firm is solo practice or a multinational corporation, proper accounting and bookkeeping procedures will save you both time, money, and headaches in the long run.

If these tasks seem overwhelming, consider hiring an online bookkeeper to handle them for you. An outsourced bookkeeper provides access to an experienced team, cloud-based accounting software, and end-to-end solutions in order to monitor your firm’s finances.


Law firms face numerous tax-compliance issues at both state and local levels, whether it’s taxes on client funds or municipal levies – maintaining compliance is of critical importance for their legal practice. Furthermore, being aware of various taxes that impact them at different stages in their business cycle is also vitally important; an experienced accounting professional can help prevent costly mistakes while keeping books properly organized to stay tax compliant.

An effective accounting system begins with an organized chart of accounts. A legal chart of accounts typically contains five core categories – assets, liabilities, owner equity, revenue, and expenses. An organized chart can help lawyers understand the financial position of their firm as well as identify opportunities for improvement and expansion.

Many law firms need to correctly record prepayments into their operating account and use them to finance client projects, leading to misallocations and creating compliance issues with clients. Separating client trust account balances from operating funds ensures incurred costs can be allocated appropriately before revenue is recorded – thus helping firms avoid mismatching payment with income, an issue often found at law firms.

One common miscalculation among firms is subtracting only some expenses, including property and legal dues, from revenue. This can provide an inaccurate picture of their finances and make strategic planning for the future more challenging. A sound accounting system should include detailed tracking of expenses such as transportation fees, court filing costs, expert witness fees, and transcript fees.

An effective accounting system must include a strategy for allocating service revenue in accordance with state corporate income tax laws. A firm operating across multiple jurisdictions could use the billing addresses of its customers as an effective method for proportionally attributing revenue between each location where services were performed and state taxes due.

One of the more difficult compliance challenges for law firms involves issuing Forms 1099 to clients. Contrary to popular perception, most payments to lawyers that resolve client lawsuits don’t need Form 1099 reporting – for instance, when defendants in client lawsuits settle with plaintiffs and become the payor responsible for issuing forms to law firms representing both sides.

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