Running a legal practice is demanding: you have a lot of things on your plate. In addition to following up with clients and preparing for court proceedings, you also have to ensure that your accounts are in order. But keeping up with your finances can be incredibly complex, no matter what the size of your firm might be.
Here are 8 bookkeeping tips for your law firm to help you avoid the common pitfalls of legal bookkeeping.
Accounting vs. bookkeeping for legal practices
Oftentimes, the phrases “accounting” and “bookkeeping” are used interchangeably. However, this is not quite accurate. Bookkeepers are tasked with accurately recording financial transactions. Accountants interpret, analyse, and summarise this data.
Your legal practice will likely need both accounting and bookkeeping services. When used together, these services can help you to account for every dollar spent and earned throughout the course of a financial year.
Read More: Do I Need a Bookkeeper, an Accountant, or Both?
Tips for law firm bookkeeping
When handling the bookkeeping responsibilities for your legal practice, it is essential that all transactions are accurately recorded. By following the tips below, you can improve your law firm bookkeeping practices.
1. Don’t mix personal and business expenses
While it may seem like it saves time to mix your personal and business expenses, this is a huge mistake. Even if you are operating a small legal practice, different types of expenses must be tracked separately. Over the course of a year, it can be easy to confound personal and business expenditures, which will make it more difficult for you to report your taxes properly.
You should have a separate account for your business expenses and never use your personal account or credit card for business-related activities. By maintaining separate accounts, you will find it much easier to track your expenses throughout the year.
2. Outsource your bookkeeping: let Visory run your finance function
If you really want to optimise your legal practice bookkeeping, then you should consider outsourcing through a company like Visory. A dedicated Visory team runs your bookkeeping, payroll, accounts payable and receivable, and scales with your firm.
Our AI, Delphi, helps deliver the work, overseen by your team. Through Visory Insights, a Business Performance Partner walks you through the numbers, monthly or quarterly, and what they mean for your decisions. See our pricing for fixed monthly fees.
3. Track your practice’s finances constantly: don’t wait until tax time
One of the best things you can do to improve your bookkeeping practices is to track your finances regularly. You should compile weekly and monthly finance reports that detail every transaction. Keep this information well organised so that you can easily access it at the close of your financial year.
If you wait until tax time, you could find yourself scrambling to gather transaction data, and you could miss deductions you are entitled to claim.
4. Maintain a chart of accounts
A chart of accounts is a list of your legal firm’s General Ledger Accounts, from the first asset account through the last expense account in your legal practice’s accounting books. Maintaining a chart of accounts is a great way to support quality reporting.
Creating these charts is only half the battle. You must also update them regularly to ensure that all information is accurate. While it may seem tedious, maintaining account charts is a great way for lawyers to stay organised. If you don’t have the bandwidth to do this yourself, a good bookkeeper can manage a chart of accounts for you.
Read More: Learn more about Visory’s bookkeeping services
5. Stay up to date on trust accounting
Client money held in trust is governed by the legal profession law of your state or territory, and the rules are strict. In New South Wales, Victoria and Western Australia, the Legal Profession Uniform Law and the Legal Profession Uniform General Rules 2015 apply; the other states and territories have their own legal profession Acts and rules. Keep your trust account and trust records completely separate from your firm’s operating accounts.
Under the Uniform General Rules, for example, a law practice must reconcile its general trust account records as at the end of each month, within 15 working days after the month ends, and its trust records are examined each year by an external examiner. Most firms use specialist trust accounting software for this. Responsibility for trust compliance stays with the law practice and its principals, so check the requirements with your regulator (such as your law society or legal practice board) and get qualified advice on your obligations.
6. Use bookkeeping to identify opportunities
Did you know that accurate bookkeeping can actually help you increase cash flow and grow your business? Used well, bookkeeping can provide valuable insight into your firm’s finances and long-term outlook. You can identify trends, improve income tracking capabilities, and better manage your funds.
You can use this information to refine your business practices, reduce waste and improve profitability. In turn, you will have additional funds available to scale your business.
7. Avoid data entry errors or leaking money
While our next tip may sound like a given, data entry errors are actually extremely common. Even a seemingly small mistake can throw off your entire bookkeeping process. To make matters worse, it can cause your firm to start leaking money.
There are four common sources of revenue leaks in the average law firm. The first can be attributed to recording errors. If you are not accurately documenting all billable hours, then you are essentially giving away free legal services.
The second common cause of lost revenue is billing at rates that are too low. The third source of revenue leaks is the over-use of write-offs. While most law firms use write-offs, inaccurate record-keeping could lead to accidentally subtracting too many hours.
The final cause of lost revenue for your firm is not collecting on all billed services. Accurate data entry practices help you to keep track of all billed services and ensure that clients pay what they owe.
8. Track your tax deductions
While you must constantly track your firm’s finances, you should also keep up with your tax deductions throughout the year. Every time that you make a purchase that is eligible for a tax deduction, document it. Save necessary receipts and transaction records so that you can claim these deductions at tax time.
Law firm bookkeeping from Visory
Law firm bookkeeping is involved. Visory’s bookkeeping services take the day-to-day work off your plate, with a dedicated team and clear monthly reporting.
Interested in learning more about Visory’s bookkeeping services? Get your free financial health check to see if Visory fits your law firm’s goals and needs.
About this article
Written by The Visory Team. Published . General information for Australian businesses, not advice for your situation.
