Top 5 Myths About Bookkeeping for Attorneys – And How to Bust Them!

Hey everyone, and welcome back to The Accountant's Law Lab. If you're a bookkeeper who's ever thought about working with law firms, or maybe you already do and you're losing sleep over trust accounts, this video is for you. Today we're busting the top 5 myths about bookkeeping for attorneys that I see all the time. These myths either scare great bookkeepers away from one of the most lucrative niches, or worse, they cause expensive career-ending mistakes for lawyers. So stick around to the end because I'm gonna give away a free tool that will instantly make you look like a trust accountant hero that every attorney needs. Let's dive in. The first myth is trust accounting is just another bank account. You treat it like everything else. I actually heard that from somebody. Look, I get it. To the untrained eye, an IOLTA account looks just like any other bank account. Money goes in, money goes out. Easy, right? This is the single most dangerous myth in legal bookkeeping. Client funds in trust or IOLTA accounts are governed by super strict state bar rules. It is Bar Rule 1.15. And commingling funds, even if it's accidentally done, can get a lawyer disciplined or disbarred. So how do we bust this myth? First, we are going to monthly perform 3-way bank trust reconciliation. So you're going to take that trust bank statement, the trust ledger, and it should equal the individual client ledgers, and that all has to match. So you have to have that equal in QuickBooks. Maybe they're using Clio. So all of those components have to match. Never pay operating expenses directly from trust, not even just this once. I've heard that a few times. Every transaction needs to have the client matter number or name and a clear description. Deposit is just not good enough. If you've ever sat through an audit, it won't fly. So if you use software like Clio or LeanLaw or Cosmolex, those are— Those will flag any commingling instantly. You're gonna see it right in front of your eyes that it doesn't line, doesn't match up. If it's not aligning, there's a problem. You need to fix it. So when you do this right, you become the bookkeeper that the attorneys brag about at their bar association happy hours. So myth number 2, law firms can just use cash basis accounting like any other small businesses. This is true. Most small law firms love cash basis because it's simple for taxes. But when it comes to retainers and flat fees being paid up front, Cash basis can get you into hot water. And I've had this argument with a lot of admins at accounting, at law firms. They're like, we're not accrual-based. Do you make, do you create invoices and use accounts receivable? Then you really are only cash basis at tax time. So the reality is that most the IRS and most state bars say that any unearned client fees are liabilities. Again, it's not, we're not talking cash basis. They're not income. Until the work is performed. So that timing is critical, even if the firm files their taxes on a cash basis. So if a client pays a law firm $10,000 flat fee on January 2nd, you don't need to record that. You do not record that as revenue on January 2nd if the work hasn't been performed. So how do we bust this myth? You need to record any advanced fees in the liability account, which is your account for your client retainers. And it's an unearned revenue account, really a trust liability subledger. That's how you track it. And then the client, your attorney-client, will invoice against the retainer. And then at that time, that's the only time that money moves out of that liability and is shown in the attorney's books as income. It's totally normal and accepted to use a hybrid method, accrual for trust and retainers and cash for tax filing. That's very normal and typical. But if you do this, you're going to save your attorney-clients from any nasty tax surprises and any ethical complaints. So myth number 3, one bank account's enough. You can just use classes in QuickBooks or categories to just track everything. I see this with new bookkeepers. They try to keep track of everything in one account, that header account that maybe Clio dumps into, and then try to track it with classes. It's a cute, innovative way. I've even seen them try to do it with tagging. Fortunately, that's gone away. But no, it doesn't work. Every single state bar requires physical separation of funds, and you need at minimum an operating account to show their earned money and expenses, and a separate IOLTA trust bank account that has your client funds and unearned fees in it. And many firms also will probably need a credit card account or a payroll bank account as well. So this is the kind of bank account you're going to see when you work with attorneys. So help your attorney open the correct accounts on day 1. Most jurisdictions will have specific banks that are allowed to be a trust account, so it's not just any old account. You can't throw it into an account that's going to get interest and you get to keep it. You want to make sure that it's an IOLTA-specific account. It's pretty easy. It's a little bit more nowadays to get the bank accounts opened. They probably have to go make an appointment, go to the bank to do this, but it's important. Then you want to reconcile that operating monthly— operating bank monthly— and then the trust monthly as well, especially if it has— sometimes we've had to do it like a soft soft reconciliation weekly if there's a high volume. And whatever you do, never sweep and use transfers in your accounting software. Never use that to move money from operating to trust and back and forth. It just makes a mess of the books. It's very hard to track. You really need to use the proper transactions for the proper scenarios that happen in law firm bookkeeping. That's important. Never overdraft an IOLTA account because that is the fast lane to a bar complaint. Okay. So, myth number 4, that contingency fees can be recorded whenever the firm feels like it. Actually, no. So, contingency cases can last for years, and some attorneys want the smooth revenue application, and they book the money in, and they divvy it out really quickly before the check is cleared. That's a big problem. You have to make sure the attorneys wait till the check clears the bank. Because you wanna make sure they physically have the money before they start like paying the client and paying all the bills that go with it. So under accrual accounting, and most growing firms will be using this, you wanna recognize the contingency fees only when the amount is fixed and determinable. You don't wanna make a clearing account or fake account to show the funds received. You wanna maintain the contingency fee WIP schedule, so the hours and rates and costs and advanced costs. Keep track of that. Record the fee only when the settlement agreement is executed, the money's in hand. Wait till it clears the bank. Wait till that money's physically in the bank, and then you can issue the invoices to show the work that's been performed by the law firm to be paid. And then also reimbursement of the client and any money that needs to go to any doctors or whatever has happened there that's in the case. Advanced client costs. You wanna recognize those as well. This keeps that trust accounting squeaky clean. So myth number 5, and it's one that I think is hard to bust because sometimes people think it's so easy. Any bookkeeper can do law firm bookkeeping. Legal experience really isn't that necessary. And this myth is why so many talented bookkeepers are undercharging or avoid the niche altogether. The reality is legal bookkeeping has a zero margin for error. Zero. Zero. One trust mistake can trigger a bar complaint. And attorneys will gladly pay 50 to 100% higher rates for someone who already understands that Bar Rule 1.15, knows how to do 3-way bank reconciliations and cost recovery. All those are places that can really cost a firm way more money than hiring the right person right at the get-go. So what do I recommend? To turn this myth into your superpower, Get certified. Get certified as a certified legal bookkeeper, or maybe take a course and learn this work. Learn how to do it right. Master at least one legal-specific platform. So don't try to learn them all and learn them all lightly. Maybe pick Clio and learn it hands down, or LeanLaw, learn it, study it, know the ins and outs of it, know how to do the workarounds, know the fixes. Offer trust compliance checkup as your foot-in-the-door service. A lot of times you can do a free trust account compliance checkup, or even charge a fee for it, and that will get the lawyer to start to have the conversation with you, because a lot of them have no clue if their current setup is even correctly balanced or safe. Then document everything in a client-specific procedure manual. And that's where really our value comes into play, because we can actually help with the workflow inside the law firm. So when you position yourself as the expert bookkeeper, attorneys stop looking at you as the bookkeeper and they start looking to you as that person that's protecting their license to practice law. So here's the best part. Once you know the rules cold, the legal clients will start paying you the highest fees in bookkeeping. So experienced bookkeepers generally can charge per month $1,500 to $5,000 a month for law firm bookkeeping. And many of us can serve firms that have maybe— you have 8 clients, maybe 15 clients, and do that very profitably. And you don't have to work so hard. This work becomes predictable. It's recurring revenue, and it's the work that you're doing that matters the most. So if you're tired of turning away law firm leads or undercharging the ones you have, let's fix it right now, beginning of the year. A fresh start. So I've put together this trust accounting reconciliation checklist for bookkeepers that walks you through the perfect 3-way bank reconciliation every time. Grab the link in the description. It's the same checklist that my students that are in the Law Lab have used to impress their attorneys on the very first month. And if you want to dig deeper and become that go-to legal bookkeeper in your area, check out our Fast Track Legal Bookkeeping course in the Accountants Law Lab. We teach you all about trust accounting retainers, All of that stuff. Go a little bit deeper. And then you can also join our Mastermind Group, which is also a great place where every Friday we combine forces and learn from one another. It's a really great space. So drop me a comment. Let me know which of these myths maybe surprised you. Maybe you have one that I missed. If you're already serving attorneys, what's the biggest headache that you see? What do you have to deal with? I do read every comment, so I'd love to hear from you. And if you found this helpful, smash that like button, subscribe so you never miss a post. Bye. And until next week, we'll see you then. Bye now.