Linda Artesani walks through the financial reports law firms need to run their practice and stay compliant. The 3-way bank reconciliation, which aligns adjusted bank balance, client trust liability, and sub-client totals, should be done monthly. Profit and loss, balance sheet, accounts receivable aging, and accounts payable reports help track collections and firm health.
Chapters
Hi there, Linda Artesani, Artesani Accounting. This week we're talking about the important reports that attorneys need to run their practice and also to stay in compliance. So let me start with the first, probably the most obvious one, which is the 3-way bank reconciliation report. It's a report that's not typical in any other industry. It's specific to working with attorneys and law firms. And basically the 3 components are your bank balance that's adjusted, so any outstanding checks or outstanding deposits will be adjusted or factored into that number that's on the bank statement, as well as your client trust liability header, and then also the sub-clients, so all the individual amounts that equal that total. So there's your 3 parts. They all have to align, and if they don't align, you have to figure out why they don't align. A lot of attorneys that we work with that come to us, they're usually on a spreadsheet, and we have to say to them, you know, we can get you off of the spreadsheet. We like to validate our data to the source. So that's the bank, that's the real balances that you will see there. So it's important to ensure that the client understands that if they're using outside legal software— LeanLaw is a great, great one for that— you have that little box right when you click on trust accounting that you can see the 3 Parts to it. The other reports that attorneys need are very similar, similar to what most industries need. They need a profit and loss, which is going to give them that picture of exactly what happened in that fiscal year, whether that fiscal year is the calendar year or a different year. Attorneys need to see the profit and loss, which will show their income, the money that they've made, and then the expenses, money that they, that they've spent. And then of course, at the bottom, their bottom line, which is whatever profit they've had or loss in their business. We also have a balance sheet. Now, what's beautiful about the balance sheet is the balance sheet's kind of like— I like to say it's the pulse of the company because it's really ongoing balances. So unlike profit and loss, which is that snippet, and at the end of the year, the It's reset. The balance sheet is going to show you your equity in the firm, how much money you've brought into the firm, how much money you've, you've taken in distributions, especially if you're in a partnership. That's going to show that running balance from the beginning of time. So know that when you see those reports, you'll be like, I didn't have $50,000 out. Well, $50,000 distributed may have come from a period of time. So it's not just that one year that you're looking at on the balance sheet report. Another report that I feel is— it's one of the reports that we are like right all over, especially when we onboard a new client. And that report is the AR aging. So a lot of firms, when they come to us, it's surprising to me, but they actually kind of let AR go by the wayside. So any accounts receivable that's not collected, they will just kind of disregard. They don't really want to do the job. Nobody really wants to do the job of phoning a client and saying, hey, pay me. You feel kind of like, you know, I've done the work, why aren't you paying me? And it is kind of an uncomfortable feeling. So a lot of times what we will do is we will step in as that outside outsourced company and take that job off of your plate. We'll call the clients, we will maybe make the statements, we will, we will do the back work. And QuickBooks Online Advanced actually has modules baked into the product that will do a little bit of that automation. You just have to set it up and it will remind the person. You can put in reminders, you can put in, hey, your account is past due. Those are features in QuickBooks Online that take the software and make it super smart and automate some of the work that's done manually. When you start to use these important pieces, which is why we love QuickBooks Online Advanced, it takes away the human error of maybe missing sending somebody something. So it takes a bit of setup, but once you get it in there, it just runs in the background for you. It's really helpful to a lot of the firms that have a lot of accounts receivable, like a family law practice. Sometimes immigration firms have a lot of that. We, we see that with immigration firms that we work with. So just know that you will maybe need that extra piece. It's partly, partly automated. Obviously the phone calls aren't automated, but we also partner with another firm that will do that part of the collecting so you don't have to, especially on the really old stuff. And for some reason, law firms tend to have a heavy, heavy amount of— heavy amount of balances in the over 90-day column. We really only want to see in the 30-day column. We want to keep it fresh. The older accounts receivable gets, the harder it is to collect. So in the article that's attached to this video, you'll see a rundown of these, these features that you want to have. That 3-way bank rec, you want to see your open AR. Accounts payable as well is important, so you want to see that part of it. Even if you're cash basis, you still have accounts receivable, accounts payable for the most part. You want to see the 3-way bank rec. It's really important. The Bar Association requires it, so it is either a monthly task or a quarterly. I recommend doing it monthly, even if your state says quarterly, just to stay on top of it. If you have any questions or comments, feel free to reach out. As I said, in the article you will see some pictures of some of these things and some links to a little bit of a table to get your adjusted bank balance to show in a spreadsheet. So there's a link to a spreadsheet in the article as well. I hope it's— this was helpful to helping you understand what works best. I didn't really touch upon compensation reporting. I'll put a link into that article. And then payroll reports obviously is a whole nother beast, but the compensation reporting is really specific to the firm, and you will see that. I have an article that really goes through all the different types of compensation that attorneys do, like eat what you kill. So that goes into a lot of detail on how to set that up. So on that note, if you're an attorney needing some help with your accounting, this is the work we do. Or you want to get off of some antiquated software, reach out. We do this work too. And if you are a bookkeeper or accountant and you'd like to learn more about the legal industry, join us in the Accountant's Law Lab. Links will be in the article, and please hit subscribe to stay in touch. Take care. Bye now.
