When you assume that bookkeeping is merely the process of keeping track of cash flowing in and out, you are not entirely wrong, though the process is a little bit harder in a law firm. Attorney bookkeeping is like bookkeeping, only smarter, and chose to attend law school.
The Basic Difference
When it comes to keeping books regularly you can do it pretty easily: you list the money that you earn, the money you spend and ensure that the books balance. Consider a coffee shop -the coffee shop sells coffee, purchased beans and rent and that is it.
Attorney bookkeeping?
What is Special about Attorney Bookkeeping.
Trust Accounts (The Big Deal)
This is the primary distinction that makes lawyers different. Sometimes, attorneys have client money that is not theirs but is sitting in a special account, referred to as a trust account. Imagine you are holding a wallet of your friend: you cannot confuse their money with your own and you have to keep an eye on each single penny.
That is not necessary in regular businesses. A restaurant does not keep the money of the customers in storage- as soon as you incur your burger the money is gone.
Client Retainers
When customers make payments to lawyers in advance, the funds tend to rest in trust pending the completion of the task. It is the income that you have but which has not been earned yet which is called unearned income. What you need to track:
- The amount of trust that each client possesses.
- What work you’ve completed
- How to transfer money out of trust into your personal business account.
Three‑Way Reconciliation
Periodic auditing = reconcile your financial statement with books.
Attorney bookkeeping = correspond to three things:
- Your bank statement
- Your accounting records
- Balances of clients on an individual basis.
It is jugging, with spreadsheets and compliance that is required by the court at stake.
Strict Rules and Ethics
Not separating client money and yours is a giant no-no that can result in a lawyer being disbarred. The accounting regulations govern regular businesses but law firms also have ethics rules which the bar association continues to breathe down their neck.
Complex Billing
The lawyers usually charge per hour, per case or contingently (they earn only in case of a win). Meanwhile, they have to track:
- Varied hourly rates on various lawyers.
- Trial expenses and registration (usually a payment out of trust).
- Settlement which must be divided impartially.
Real‑World Example
Assuming Client Sarah pays her initial fee of 5,000:
Regular Business: Money is deposited directly in a business account. Done.
Law Firm:
$5,000 goes into trust account
Work done by lawyer = 10 hours and is paid at 300/hour = 3, 000.
Lawyer takes and transfers $3,000 out of trust and into business account.
Sarah still has two thousand dollars in trust.
That has to be traced individually on Sarah and all other clients.
Contemporary devices that are easing it are making it easier.
Bad news--legal bookkeeping software has become better. The three-way reconciliation might become a little less painful, and tools such as QuickBooks Online (with legal add-ons), Clio, orLeanLaw are now automated to do trust accounting.
Clouds allow lawyers to view their books at any time, and most can communicate with practice-management software (so time tracking and billing communicate with bookkeeping automatically).
Bottom Line
Attorney bookkeeping is not more difficult since attorneys are poor mathematicians but rather more challenging because they are handling money of other people with a high level of ethical regulations as well as a business operation. It requires additional attention, individual accounts, and full attention.
But when you are a lawyer and doing your own books it is no longer a matter of choice, but a matter of survival and retaining your license. and in case you are bringing on a bookkeeper? Ensure that they are also familiar with legal bookkeeping and not ordinary business accounting.
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