Top 5 Bookkeeping Mistakes that Law Firms Should Avoid
We are in a full-on rush to get the books updated for our tax professionals. Are you looking at your books and seeing something "off"? There is a lot that goes into running a law firm. The most important aspect is keeping financial records and ensuring that the books are in order. You must keep good records and comply with the IRS and the Bar Association.
Here are the top 5 mistakes I see in law firm books that should be considered to ensure you have proper financial records:
Trust accounting is vital for any law firm. If the books are not balanced, it could lead to big problems with the bar association. Your bookkeeper may have been reconciling the trust accounts in QuickBooks or Xero, but do you know to whom each penny of the trust account balance belongs? That's the key to keeping everything in order. The books may be balanced, but you may be out of compliance if we still need a three-way bank reconciliation.
Timing of Income
When documenting your income, validate when the income was earned and when the trust funds were transferred. It's just as important to ensure your income is not doubled. We see this happen with clients who use invoicing or billing, and then they receive the payment but also download the transactions from the bank feed as income. Using bank feeds booked to income and invoices and payments will result in double-counting your income.
Not Reconciling the Books at All
I often see this with clients with bank feeds set up for their accounting. They give me this look like they don't need to validate their transactions because the bank feed is matching–how could that possibly be wrong? Nothing could be further from the truth - bank feeds are not always accurate. It is paramount to reconcile your accounting to validate what happened at the bank level.
Advance Client Costs are Booked in as Income and Expenses
They should be booked as mini-client loans. They're never shown as income or expenses, even if one negates the other. This account must also be reconciled to determine whether the client has billed the fee. If not, it becomes a firm expense. This account should be monitored closely.
Per the IRS: "Client-Related Expenses (1) Attorneys, particularly those working on a contingency fee basis, may advance costs and other expenses for their clients. Such expenses can include but are not limited to, reproduction costs, court reporting, and stenographic costs, filing fees, travel expenses, and communication costs (i.e., long-distance telephone calls, etc.). These will normally appear in an asset account such as Unbilled Advanced Client Costs (until they are actually billed, of course). The examiner should determine if the reimbursements received from the client have been reflected in taxable income through either inclusion in gross receipts or as an offset to the actual expense."
My fifth and most important tip is not to try and do the bookkeeping yourself - hire a professional! Someone who understands accounting and has experience with the process. I see it all too often - a client will try to do the bookkeeping themselves because they think it's simple, but then they end up paying for it when they have to hire a tax professional to fix their records. That's not a good workflow. Why not have the work done correctly during the year so you can make significant financial decisions? My favorite term is "garbage in, garbage out." You can only track your records if your books are done properly.
Bookkeeping is crucial to running a profitable law firm. We aim to reduce errors and guide you to the areas that must be examined. Our tips will help you make the most of your financial records. For more information or to discuss your specific needs, please get in touch with us anytime at 239-848.0001 or use our Contact Form.