Legal Services Accounting: Law Firm COA Template & Account Hierarchy

Failing to incorporate matter-based accounting into your chart of accounts can lead to confusion and inaccuracies in billing and financial reporting. The accrual method records income when it’s made and costs when they’re incurred, regardless of when the money is paid. This method gives you a better picture of your company’s financial health and is not affected by changes in cash flow.

What is a Chart of Accounts for Law Firms?

You don’t necessarily need accounting software or a professional bookkeeper to handle your law firm bookkeeping. When you’re just starting out, you can keep costs low by recording all income and expenses in a spreadsheet, like our Excel Income Statement Template. People tend to use the terms bookkeeping and accounting interchangeably, but bookkeeping is actually just the first step in the accounting process. It involves recording and classifying financial transactions, preparing bank reconciliation, and tracking all income and expenses. Personal and business finances should be separate to ensure that bookkeeping is accurate and compliance is maintained.

Efficient Financial Decision-Making

• We offer a range of services, including lawyer SEO, PPC, and law firm web design, to ensure your firm stands out in the competitive legal landscape.
• With this in mind, lawyers need to have the right bank accounts set up.
• So, with double-entry accounting, every financial transaction gets sorted into a specific category (assets, liabilities, or equity).
• By leveraging the insights provided by financial reports through tools like Clio Manage’s Accounting Hub, law firms can identify strategic opportunities that contribute to their business growth.
• The total equity amount reflects the company’s net worth or book value, which is the value of the assets minus the liabilities.
• As mentioned, all accounts in the COA are typically arranged in a hierarchical order for easy navigation and reporting.

To see the balance of the trust account, you have to go over to the accounting tab and see that this client has $5000 available. The only option is to use the memo field to say, “Current retainer balance $5000. Balance after invoice payment, $3000.” We put into the memo field what we want to communicate to the client in terms of how law firm chart of accounts this should be paid. This becomes a notice that we’re going to be paying this through the trust account.

• Handling client funds is a significant responsibility, and you must remember a large number of rules to conduct your role ethically and responsibly.
• A critical part of the accounting process focuses on analyzing financial reports and KPIs for your law firm to uncover critical insights and make informed business decisions.
• Typically it is not necessary to have more than one General Retainer account and not likely a good idea.
• The legal profession is one of those; in fact, creating and maintaining the chart of accounts for law firms aren’t just suggestions; they are requirements.
• This listing also provides a structure for correctly managing funds between operating accounts and pooled trust accounts.
• In-house staff can undergo training to handle day-to-day bookkeeping tasks effectively, ensuring compliance with ethics regulations and trust accounting requirements.
• With the accrual method, you record revenue when it’s earned and expenses when they’re incurred—whether they’re paid right away or not.

The Difference Between Bookkeepers, Accountants and Trusted Advisors

A hierarchical structure based on account types is crucial when creating a chart of accounts for a law firm. By categorizing accounts into assets, liabilities, revenue, and expenses, firms can generate accurate financial statements and reports efficiently. This structure enables easy identification and aggregation of data, providing a comprehensive overview of the firm’s financial health. For instance, calculating total assets or expenses becomes effortless by summing up the corresponding accounts within their types. A hierarchical structure streamlines financial management, enhances reporting accuracy, and empowers law firms with valuable insights for sound financial decision-making. A law firm chart of accounts is an essential part of the accounting system, providing a rigorous structure for meeting compliance requirements cash flow in the legal sector.

• By embracing technology and seeking professional help, law firms can navigate the complexities of trust accounts and avoid common mistakes in legal accounting.
• Once withdrawn, the line of credit would no longer be counted as an asset—it would become a liability (as it is then money owed).
• If a law firm doesn’t do this right, they could get fined or even lose the right to work as lawyers.
• Establish separate accounts for different practice areas to track revenue and expenses.
• Lawyers must place special emphasis on managing client trust accounts to ensure both legal and financial compliance.
• Funds kept in trust must be held in a separate account from a law firm’s operating funds and must be held until they are earned from a specific client’s case.

Choose your method for accounting

Fortunately, with a combination of technology, best practices, and the right help, it’s possible to stay on top of your bookkeeping with little effort. A well-organized COA provides the data you need to make informed financial decisions, whether related to investing in technology, hiring staff, or expanding your practice. You can go Accounting for Technology Companies with an accrual or cash accounting method in the US, and the difference is mostly about timing. For instance, If a law firm possesses a building, it may be able to use it as collateral for a loan to finance the purchase of new equipment or to expand its operations.

The lawyer does not own the funds in this account, so it must be recorded on a per-client basis. Create separate bank accounts, to avoid any commingling of client funds and operational funds. Besides, the Chart of Accounts should include a Trust Liability account where all trust bank transactions will be posted. The funds are owed to the client until they are earned by the lawyer or disbursed in some other way.