Whether you mismanage the accounts, put funds in the wrong account, accidentally use funds, or fail to report correctly, trust accounting errors are a big deal in accounting for law firms. Trust accounting mistakes can lead to penalties, suspension, or even losing the right to practice law. Your law firm chart of accounts is the backbone of your accounting system. This listing also provides a structure for correctly managing funds between operating accounts and pooled trust accounts. To do this, you’ll first compare the https://www.bookstime.com/ bank statement with the trust account ledger to ensure all entries match. Then, compare the bank statement with each client ledger to ensure they also match.

IOLTA Account Overview and Best Practices for Law Firms

List of AccountsThe list of accounts is a hierarchical outline of the firm’s financial accounts, grouped at the top level by assets, liabilities, equity accounts, revenue, and expenses. Your firm’s chart of accounts will have several sub-accounts under each of the top-level groups, often with their own sub-accounts. The bank then forwards the interest earned on IOLTA accounts to the state bar.

How to Set Up a Law Firm Chart of Accounts

• Lawyers must make sure that every credit card payment, bank deposit, and financial report is right.
• But if your law firm bookkeeping isn’t up to date, it’s tough to stay on top of cash flow and ensure client funds are handled properly.
• The balance sheet documents how the firm is funding business operations between debt and equity.
• Law firm bookkeeping records the financial transactions and balances of your firm’s financial accounts.
• For example, your asset account might contain sub-accounts for your operating bank account, accounts receivable, and advanced client costs.

Automated bill reminders enable you to automatically send outstanding balances to your clients and bill recipients based on a schedule you can customize. Use software such as Clio Manage to help track your billable time, expenses and revenue. Additionally, keep online bookkeeping your financial records in check by syncing to a system for accounting for law firms like QuickBooks Online. The chart of accounts for law firms should include the IOLTA or trust account, as well as a trust liability account (to offset and show that the funds in the IOLTA account are not the law firm’s).

Step 3: Organize Accounts by Category

In turn, you can make better decisions about optimizing your firm’s operations and profitability. See how we can help by talking to our team of Certified Payment Specialists today. Attorneys use the application to record billable and nonbillable time and expenses.

If lawyers have a pooled trust account with multiple clients’ funds, they must also keep track of transactions made with each client’s funds. Interest on Lawyer Trust Accounts, also known as IOLTA accounts, are bank accounts used to hold client retainers, settlement funds, and other money that belongs to clients. A well-structured chart of accounts is the backbone of efficient financial management and reporting within a law firm.

A baseline understanding can make it easier to review reports and comprehend recommendations from your accounting team. If you’re trying to handle bookkeeping on your own in addition to putting in all those billable hours, it’s easy to overlook workflow steps or make mistakes. You can add as many accounts to your chart of law firm chart of accounts accounts as you need to prepare accurate and informative financial statements, but don’t let your chart of accounts get too unwieldy. The information you use to make business decisions — such as financial statements and a legal KPIs dashboard — will be more accurate.