If you’re managing your books yourself, there are a few common mistakes that crop up from time-to-time and here’s how to avoid them. With the knowledge you’ve gained, you’re well on your way to better financial health. The hope is that, by knowing where your money is coming and going, you can spend more wisely and capitalize on valuable opportunities. When you don’t collect funds that you’re owed, you miss out on revenue and are essentially working for free. And when you’re missing out on 12% of your billable hours, that’s 4.8 hours in a standard 40-hour workweek. Not all accountants are familiar with the rules and regulations governing these accounts, nor do they know that the rules change with each jurisdiction.
For example, if you’re expensing a meal, you might record who you were with and what you discussed. After all, if the IRS audits you (shudder), you’ll want these records to prove your expenses were for business purposes. Many lawyers assume their bookkeeper can or should help them with their financial analysis and get frustrated when they don’t. If you understand the different roles and skillsets each position has, you’ll be able to assess what type of help they can provide to you. At Lawyerist, we firmly believe in the benefits of automation for accounting and bookkeeping. That’s why we’ve taken it upon ourselves to review a wide range of tools for you, so you don’t have to.
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You can add as many accounts to your chart of accounts as you need to prepare accurate and informative financial statements, but don’t let your chart of accounts get too unwieldy. Within each of those categories, you may have dozens of general ledger accounts. For example, you might have an operating account, lawyers trust accounts, accounts receivables, and fixed assets within the assets category. Accounting for law firms may be new or challenging to you, but it doesn’t have to be scary. What’s most important is that you get the details right so that you can stay compliant with ethics rules and help your firm grow to its full potential.
The key is to actively monitor things so you know when and what to adjust. If you’re missing your budgeted numbers, you can reduce expenses, delay one time purchases, increase sales through more aggressive marketing or advertising, or lower your profit expectations. When you know and monitor your numbers, you can quickly see when you’re off target and cut costs or make strategic investments to increase revenue. Track and code credit card transactions to the GL and ensure statements agree to GL. Practice Alchemyʼs team of legal bookkeeping experts know how to build and deploy successful bookkeeping programs to ensure your books are diligently and accurately kept. Instead of debiting cash and crediting income, you should debit the IOLTA account with a corresponding credit to Trust Account Liabilities.
Choose Your Firm’s Size
A simple mistake could send your firm into the red for the month. Or, you might lose track of critical transactions that affect your taxes. Have you ever tried to balance your checkbook, only to find you’re a quarter off somewhere? One number mistake on your law firm’s books can cause pandemonium. That’s why it’s important to take your time, double-checking your entries as you go.
Just be sure to verify your exact responsibilities with the State Bar Association and/or a professional accountant. They have their own rules and law firm bookkeeping regulations that vary depending on your jurisdiction. If you mismanage this account, you could face severe consequences, including disbarment.
Tools
While you don’t need to familiarize yourself with an accounting encyclopedia, it will pay off to learn some common terms. You’ll run into them often, and knowing the basics will help you stay in the know. Knowing the fundamentals will enable you to be aware of your overall financial health, but trained accountants can still provide peace of mind and offer invaluable help.
Law schools offer little to no training on how to manage these accounts. So, many lawyers go into the field without knowing the best practice surrounding trust accounts and how to manage them. They’ll be more familiar with the ins and outs of law firm accounting, including the rules and regulations that could get you into trouble. To do this, legal accountants capture expenses, provide financial forecasting, and prepare financial statements.