Managing an organized law firm chart of accounts is crucial for maintaining your business’s overall financial health and meeting strict legal ethics requirements. This begins by creating a comprehensive list of all your firm’s cash inflow and outflow items.
Although you may not have studied accounting/bookkeeping in college, it’s important to understand your firm’s financial big picture to maximize your business profit and ensure compliance. This overview covers the elements that comprise a standard accounting chart, along with practical tips for implementing the chart into your firm.
What is a Law Firm Chart of Accounts?
An accounting chart is an organized, itemized list of all accounts that capture every incoming and outgoing transaction. This represents everything from a recently opened law firm checking account to the cost of your office printers. A law firm chart of accounts also needs to meet your local state bar association jurisdiction standards by tracking all funds in trust accounts—and interest accumulated on those accounts. This is necessary to prevent license suspension or worse.
There are six standard categories that outline a typical legal accounting setup:
- Liabilities (and segregated liabilities such as a trust account)
Below is a breakdown of what each category means and how to implement each into your firm’s accounting chart.
What to Include in a Chart of Accounts
Law firm assets represent a tangible or intangible item of value that your business owns and receives some form of economic benefit. For example, if you are a personal injury lawyer, your firm’s operating account is something your firm owns (the account itself) and receives economic benefit from (cash). The benefit can be immediate (in the form of straight cash) or potentially built over time (like your firm’s operating account).
Current assets are assets you can convert into cash within one year. This can include:
- Upfront cash
- Accounts receivable (as you’re waiting to receive this cash from clients)
- Lines of credit (if they feature available funds)
- Your firm’s operating account
Non-current assets represent property and equipment your firm owns, that derive an economic benefit. This can include:
- Business property (owned)
- Furniture and fixtures
- Computer equipment
2. Liabilities (Liability Accounts)
Liabilities represent items and liability accounts that your firm owes. They are your firm’s financial responsibilities and are meant to help your business grow. These can include:
- Accounts payable
- Lines of credit (if you draw money from them)
- Business or capital loans
- Payroll taxes
- Wages and salaries (which should be further separated into their own ledger)
You’ll also need separate ledgers for tracking all funds in trust accounts and interest accumulated on those accounts, as per legal requirements. This is known as Interest on Lawyers Trust Accounts (IOLTA) and listed as a segregated liability.
Trust accounts hold the client’s money, usually in the form of client fees (typically a retainer), settlement money, or court fees. This prevents commingling with your firm’s funds (your operating account) so you don’t purposely or accidentally spend money that isn’t yours. You earn this money upon the completion of billable work, which can occur during the case as an invoiced bill or upon completion of the case as a final invoice.
All state bar associations require every law firm to list detailed and accurate records of all incoming and outgoing money from trust accounts. Any interest earned on those accounts (since they operate exactly like a banking checking account), does not belong to the client or law firm—instead it belongs to the state bar, and is typically used to fund pro bono cases. Make sure to check with your local state bar association for specific standards about trust accounts and IOLTA.
This represents the remaining value after all liabilities are deducted. Equity is broken down as what you own minus what you owe (assets minus liabilities). This can include:
- Retained earnings (net income after your firm has paid dividends to investors)
- Profit/income distributions
Revenue is the income received as a result of issuing your legal services. This can include:
- Earned fees
- Recovered disbursements
- Any other income
Expenses are a specific breakdown of the cost of operations for your firm. This can include:
- Office rent and parking
- Office equipment and operations such as telephones, supplies, and computer equipment and software
- Marketing promotions
- Professional costs such continuing education, conference fees, and organizational dues
Compensation is a more specific liability ledger. This represents your law firm’s payroll, which can include:
- Lawyers, paralegals, secretaries, and clerk salaries
- Employee benefits such as retirement and training/education
- Any other employee costs
Summary of Law Firm Chart of Accounts
Your firm needs an accounting chart to maximize its profitability and ensure local compliance standards. When assembling your chart, speak with an accounting expert who is experienced with law firms and can provide a law firm chart of accounts sample. A good law firm chart of accounts sample will include the main elements listed within this article—properly itemized and separated by your accounting expert or experienced lawyer.
Quickbooks is the easiest way for organizing all of your legal accounting. It also integrates with MyCase legal case management software which makes managing firm finances easier with legal invoicing, time tracking, financial reporting, legal payment collection, and automated workflows.
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This article is purely information and applies specifically to U.S. practices. It should not be used to represent or replace legal, business, or tax advice.
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