Five essential bookkeeping practices for law firms: master trust accounting and bar rules, use three-way bank reconciliation with practice-management software like Clio, track client costs carefully to avoid tax issues, understand attorney compensation structures, and add value through KPI reporting and advisory services.
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So today I'm gonna give you my top 5 tips as a legal bookkeeper. And this is really going to help anybody who just got that very first phone call and you're really excited. I remember how excited I was the first time a lawyer called me and I really didn't know what to do. I knew there was complexity to it, but I really didn't know how complex. So I'm gonna give you my 5 top tips that you need to know. And of course you can always take our legal, Fast Track Your Legal Bookkeeping bookkeeping course, Fast Track Legal Accounting, and that will help get you, you going. So if you have that client, you'll know what you need to know. So if you are just entering this world of legal bookkeeping, it can be really challenging. But it can be really rewarding. As a bookkeeper working with attorneys, there's a deep understanding. So you have to understand the nuances of trust accounting and client costs and attorney compensation. So it's not rocket science, but it's definitely complex. Which is why you want to ride down this road of the niche, because there's enough there that will keep you relevant in the future as technology starts to automate a lot of things. This is something that really can't be automated. At least I don't foresee it being automated for a very, very long time. So the first thing you need to know is you need to master trust accounting. Trust accounting is the cornerstone of legal bookkeeping, and it requires meticulous attention to detail. You have to be that person that if the trust account's off by a penny, You have to be that person that wants to figure out the penny and sit with it and not give up until you figure it out, which is really rewarding. It can be annoying too. Always phone a friend if you're that stuck and have, or take a rest and look at it with fresh eyes. That's my tip on that. But you also need to know when this attorney calls you, look to see exactly where it is that they practice law. So take a peek, take a look, see where they're practicing law. And then go into the bar association rules, especially if it's not local to you and you're a cloud bookkeeper, you work remotely all over the place. You want to know the bar association rules for that area. It's critical. You need to know that there's a distinction between a bank trust bank account and a trust liability account. That's the offset. The money goes into the bank account and it's recorded as a liability. So it's really a liability, just like a security deposit is, right? Your client gives you a security deposit as a landlord, and you actually owe that money back to the, to the person if there's no damages. It's the same thing here with law firm accounting, except the money is put into the trust retainer account and trust bank account, and it's put in a liability account for the client or the matter. And then that money sits there until there's a time of legal services rendered, and then we apply that to it. So it's kind of like a construction pre-deposit for work that hasn't happened yet. So work in process kind of thing. If you work with, with construction, you will find that that crossover from construction bookkeeping to legal bookkeeping is really easy and seamless. There's a lot of things that are similar there. The trust bank account is always a separate bank account where the funds are held and deposited. It's not their money until they use it. So this, these funds are never commingled and never mixing with the firm's operating account that they are moved over when the services are rendered. When the bill is produced. So know that there's a timing issue with learning about trust accounting. It can never be moved over because the attorney needs the money in the account to pay their payroll. It has to be moved over when the services are rendered. It's a big deal. And a lot of times you're gonna see the opposite. A lot of clients like to keep that money sitting in the bank account as a cushion. We don't do that either. That's just not allowed. You're allowed to keep a small cushion for like legal fees, wire fees, maybe a check order, but nothing more than that. Usually in some states you're not allowed at all. So you need to know those rules. And there must always be a balance between the process of the 3-way bank reconciliation. So you're gonna hear that term. You're gonna go, what the heck is that? What's the 3 ways? So it is the bank account balance at the bank. So the bank account balance at the bank, plus or minus any account, any transactions and transfers in transit. That can be checks that haven't cashed, which is a big item. That's gonna something you really wanna delve into as you start to look at this. It also can be deposits that just came, you know, they got deposited on a Friday, and it was over a long weekend, and it was at the end of the month, the very last day of the month. See? Yay! And then it gets moved into the bank on the Monday, which is now the next month. So those are the things in transit. So when you're comparing the 3 records of the trust bank account balance, the adjusted, adjusted for in-transit transactions, you're looking at the individual client trust ledgers, and that you're gonna look at in the the other software where that's kind of being tracked, maybe a Clio or a LeanLaw if they have that. If not, it's in QuickBooks. And then you're looking at the bank balance and the accounting data. So that's the 3 ways. And it's really to safeguard against any errors. And it's really demonstrating compliance and legal standards. So meticulous process is definitely a meticulous process, and it helps you maintain the client trust and protects your legal— it protects the attorney's legal practice from any potential financial discrepancies. So you want to accurately book in the client costs. What does that mean? Well, client costs are expenses on the matters. And if you look at the expenses on the matters, they're paid for out of the operating account. And that is— the IRS looks at that as a mini loan. So the law firm is loaning their operating capital to pay for the expenses. And then again, it gets all billed to the client every month, and then that gets pushed. You know, the retainer gets applied to it to pay for it. Know that that's a process, and the IRS actually give you the code in the article, so it sees it as a mini loan. So that's how it treats these transactions. So if the case is a personal injury case, know that if you're working with a PI attorney and the case is unsuccessful, they don't recoup those. So know those rules around that, and then that could be classified as a Advanced, advanced client cost, billable expenses unrecovered. So that's another account that you probably aren't aware of, but you want to have reimbursed expenses. The IRS says reimbursed expenses should never be reported as income, and you'll see that on some books. Sometimes they have billable expenses and billable expense income when they're recouped. That causes a problem at tax time because they may have more expenses at some point than they had as reflected as getting the money in, because you can think about it as a balance, right? Those two things balance each other out. If I have a $200 account book to billable expense on a client matter and then I get paid back for it, those two negate each other, but they really want to see that as a loan. So know that when you go through the records, that's what you want to see. There's a lot of complexities with payroll. So attorney payroll can be intricate and it depends on their compensation structures. So make sure you familiarize yourself with the attorney compensation plans. We do have an article, a few articles written about that. They might even be on my Artisani side. Look at how they have their base salary. Look at their bonuses. Look at the profit sharing if they have that, any, any of those kind of arrangements, and make sure you tailor the, the chart of accounts to accommodate those complexities, and also the entity type. That's another thing that I see that people forget to do, that it'll say opening— they'll say owner's contributions, owner's distributions, but their partnership is multiple partners, or they're actually an S corp, and it should say shareholder distribution, shareholder contribution. I take the time to really look at KPIs for your client. If you have sold that process, you really want to look at that and, and give them some insightful reports. This is how you can kind of blow the doors off of the whole relationship with the client and enhance your advisory services. As a bookkeeper, you can get that role to really kind of expand and get the clients to really love you. A lot of times they get these bookkeepers that are kind of cheaper, and they don't go the extra mile. And this is where you can shine, and that'll lead to referrals for you. So it's definitely worth the effort. Make sure you bundle that in and practice. Put that into your pricing, so get paid enough for it. I've got a few articles on that as well. You really wanna look at some of those articles and say, okay, this is kind of where I wanna go with this. I wanna charge more. Know that you're getting paid more because you have more of a deeper knowledge of the industry. If you're just starting off, you probably won't be able to do that. But as you get going, it's worth it because you can get paid a lot more for what you do. Same type of work, a little bit more detail-oriented, but well worth it. And future-proof your practice. That's the most important part. Until next week. Bye now.
