Lawyers and law firms have specific financial needs that are unique to their industry. When a lawyer decides to make the jump from being an attorney to managing their own practice, they are required to consider their legal accounting. Lawyers with accounting expertise and accountants, and law firm bookkeeping who understand all the intricacies and regulations associated with legal accounting are hard to find. Therefore, creating and maintaining the law firm's Chart of Accounts is very important.
There are certain things to be included in your client’s Chart of Accounts in order to easily comply with most recordkeeping requirements. They are:
Trust Liability
The most unique feature of the law firm's chart of accounts and law firm bookkeeping is the IOLTA or trust account. 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. Remember to create separate general ledger expense accounts to differentiate between expenses incurred for your firm and expenses to be billed and reimbursed by your clients.
Law firms must also show the trust balance on a per-client basis. To comply with this rule, you can use your client’s name to set up sub-accounts under Trust Liability. Any client-related deposit and payments going out would be marked as Trust Liability: Client ABC. This method helps your law firm bookkeeping to easily keep track of the trust balance for each of your clients. Just a look at the balance sheet and you know exactly how much each client has in the trust account. Or bookkeeping services can help your firm do it. It ensures the balance per client matches the balance in the IOLTA bank account as well.
Trust Interest Payable
Another special feature of the Chart of accounts and an IOLTA bank account is the way the interest is handled. Since the funds do not belong to the attorney, the interest on the IOLTA bank account should not be entered as interest income in law firm bookkeeping when the funds are received or interest expense when the money is paid to the state. This makes sure your client’s records will reflect correctly what these funds are for in the IOLTA account.
At times, banks deposit the interest in one month but withdraw the money in the next month. If you run the balance sheet for the first month, it should show your client owes the interest to the state. When the money is paid to the state, the interest payable account should be zero.
Reimbursable Client Expenses
Most law firms have expenses that are reimbursed by their clients. If you do not keep track of these and the chart of accounts, expenses can be left out and never get collected. The simplest way to keep track of these is to create one or many billable expense accounts in your law firm's Chart of Accounts. You need to check if your client wants to separately keep track of filing fees, medical records, travel & other expenses.
You need to set up an income account in the chart of accounts. Then you create an expense that is billable and feeds into the relevant income account. Below is an example of how to set up a billable expense using QuickBooks Online:
After the billable expense is set up, expenses can be assigned to clients and listed on invoices to get reimbursed. The difference between the billable expenses and the income will show how much your client’s law practice has in outstanding reimbursable expenses.
Referral Income
In case your client refers clients to other professionals, they may receive referral income. This income should be recorded on the Chart of Accounts for the law firms as ‘Other income’ because it does not actually come from practicing the law. On the profit and loss statement, it should not be listed at the top with all the other income earned from the main business. Instead, it will appear at the bottom.
Once all the above-mentioned accounts have been added to the Chart of accounts, it is easy for law firms to enter transactions accordingly into QuickBooks Online. The data needed for state reporting including the three-way reconciliation reports will be easily found in the balance sheet and profit and loss statement.
It’s actually really simple, just employ a legal-specific accounting solution that not only provides access to a wide range of legal accounts out of the box but also enforces the correct use of these accounts. Do not try to customize general business accounting to meet your needs. It is not only costly but also ineffective. The following legal-specific accounts are suggested for the common use of small law firms:
Account Type
Operating Bank
Trust Account Bank
Accounts Receivable Accounts Receivable
Advanced Client Costs Other Current Asset
Advanced Client Costs: Court Costs Other Current Asset
Advanced Client Costs: Filing Fees Other Current Asset
Undeposited Funds Other Current Asset
Accumulated Depreciation Fixed Asset
Furniture and Equipment Fixed Asset
Client Trust Liability Other Current Liability
Client Trust Liability: Firm Funds Other Current Liability
Client Trust Liability: IOLTA Interest Other Current Liability
Payroll Liabilities Other Current Liability
Capital Stock Equity
Opening Balance Equity Equity
Retained Earnings Equity
Shareholder Distributions Equity
Legal Fee Income Income
Reimbursed Client Expenses Income Income
Accounting Fees Expense
Advertising and Promotion Expense
Automobile Expense Expense
Bank Service Charges Expense
Client Cost Expense
Computer and Internet Expenses Expense
Continuing Legal Education Expense
Depreciation Expense Expense
Dues and Subscriptions Expense
Insurance Expense Expense
Insurance Expense: Disability Expense
Insurance Expense: Professional Liability Expense
Interest Expense Expense
Legal Library Expense
Meals and Entertainment Expense
Office Supplies Expense
Payroll Expenses Expense
Postage and Delivery Expense
Professional Fees Expense
Rent Expense Expense
Repairs and Maintenance Expense
Research Services Expense
Telephone Expense Expense
Travel Expense Expense
Utilities Expense
Ask My Account Other Expense
Hopefully, the above Chart of Accounts for law firms in QuickBooks helps set up the most basics for a law firm’s needs. Come back for more from our series of law firm accounting guides.
Read More: Top 6 Reasons Why Lawyers Lose Money
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As a business owner, if you see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
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