Legal Accounting Fundamentals That All Lawyers Should Be Familiar With

You might have spent great years learning the skills to become a competent lawyer, but you might not be fully adept at legal accounting. Legal accountants are professionals trained for managing law firm’s business accounts. They have their own set of skills, knowledge and practices to handle the legal accounts. Their educational and professional training is different from lawyers. That is why not all lawyers can handle their business accounts professionally.

Although, many small law firms tend to manage everything itself. But seeking professional accounting assistance is the need for this time. Legal accountants will follow the work ethics and your law firm will stay compliant with the accounting system. Therefore, hiring law firm accounting services is essential and beneficial for the firm’s growth.

Most lawyers are not aware of the difference between accounting and bookkeeping. Although these two terms are quite familiar and used commonly among accountants, not everyone is aware of their difference.

Difference between Bookkeeping and Accounting:

You may classify bookkeeping as an initial step in legal accounting. Bookkeeping involves recording daily transactions on general ledgers and business accounts. The accounts are later balanced to complete the bookkeeping process. This financial information is then used further in the accounting process.

Accounting involves using financial data to analyze, interpret and summarize the firm’s financial information. This information is then used to prepare financial statements, financial forecasts and business growth plans.

Most law firms hire bookkeepers to record daily cash flows. This helps them to analyze the total amounts coming in and going out of the firm. It is also useful in evaluating the cash status of the firm. However, it is not an ideal way to interpret the firm’s growth by its cash intake. For that reason, accounting is relevant.

Why Does a Law Firm Require Bookkeeping and Accounting Services?

No business organization can survive without accounting. Accounting is considered the backbone of any organization. It helps the firm to analyze its financial status and plan its next move. It is the best indicator of the firm’s success. It is very useful in getting more clients, more funds and business expansion. Without a proper accounting system, there are chances of fraud, miscalculations and official audits. Thus, to avoid all such complications hiring the best accounting services for lawyers is vital.

Big firms hire individual professionals to manage their bookkeeping, payrolls, taxes and business accounts. Hiring full-time accounting professionals is a costly and time taking process. Not all law firms need to do so. Small and medium law firms can hire accounting firms to handle every task themselves.

Nowadays there are a lot of accredited accounting firms that offer online bookkeeping, virtual accounting, advisory and tax services. Consulting one of these firms and selecting their best packages will help small law practices to avail most of their free time productively. They will not have to worry about the auditing, tax filing and client accounts anymore. Such firms have a dedicated team of experts who are adept at managing law firm trust accounts, bank reconciliations and official audits.

Other Essentials That All Lawyers Should Know:

Furthermore, lawyers should familiarize themselves with some of the most common accounting terms to better understand the accounting process.

  • Client Trust Ledger
  • Interest on Lawyers Trust Account
  • 3 Way Reconciliation
  • Professional Accounting Software

Client Trust Ledger:

Just like a company’s ledger where all cash transactions are recorded, a law firm has its client trust ledger for all clients. Here all cash transactions involving each client take place. Lawyers should be aware of this term as it is specific to legal accounting and, they should always be updated with the list of all company accounts.

Interest on Lawyers Trust Account:

It is a checking account where lawyers or law firms have limited access. The main purpose of this account is to raise money for social programs.

3 Way Reconciliation:

Usually, companies reconcile their financial statements at each of each month. This reconciliation takes place between the firm and the bank’s accounts. But, in the case of a law firm, 3-way reconciliation takes place, including the client trust account as well.

Professional Accounting Software:

It is also essential for a law firm to hire an accounting service provider that uses industry-specific accounting programs. Law firm’s accounting is different from any other accounting so it requires the usage of legal accounting software like PC Law or Clio.

Hence, it can be concluded that lawyers should be aware of the basic legal accounting terms and specifics before hiring an accounting service provider.