You spent years training to become a lawyer. During that time, you likely did not learn anything about legal accounting or bookkeeping. So the thought of legal bookkeeping and law firm accounting can sound intimidating to even the most experienced attorneys.

However, every law firm owner needs to know what bookkeeping and legal accounting are for their business. Without the essentials, your firm might struggle to stay compliant with ethical rules, and you may inadvertently leave money on the table.

We have created this guide to give you an overview of the fundamentals of bookkeeping and accounting for attorneys and help anyone who is a small law firm owner. 

We will introduce the basics of accounting and bookkeeping as it pertains to law firms. We will cover the best practices to follow and common mistakes you should avoid.

Attorney Specific Accounting and Bookkeeping

Many new business owners view accounting and bookkeeping identically. They both work with the financial figures of a company. Both are looking to help your firm grow and succeed financially.

However, bookkeeping and accounting are two separate terms. Each will work together but serve a different purpose at your firm.


Recording financial transactions and balancing financial accounts for a law firm is done by bookkeeping. Before any accounting, there needs to be legal bookkeeping performed as an administrative task for all law firms.

If proper attorney bookkeeping occurs, then the law firm can track what money is coming in and going out of your firm. It will be challenging to scale your growth without understanding the money coming in and out.

Bookkeeping is also vital for legal accounting. Well kept books for attorneys will aid accountants by giving them accurate financial data to work with.


Legal accountants use the data records provided by bookkeepers to create a foundation built to help firms make informed financial decisions. Accountants use financial data to analyze, interpret, and create a summary for you.

Law firms will hire legal accountants to prepare financial statements, provide financial forecasting, and capture expenses to give your business a clearer picture.

Table of Contents

Why Bookkeeping and Accounting Matters

Of course, bookkeeping and accounting matter to all businesses. However, it is not as evident as it should be to many companies. How much should a law firm care about bookkeeping and accounting, and how much?

The simple answer is that the law firm owner should care a lot about the books and accounting happening at their law firm.

Something critical to every law firm’s success is practical legal accounting. To make sure your firm’s financial statements are up-to-date, accurate, and complete, you must use a good bookkeeper. A transparent accounting system will bring your firm a clear financial picture, clients, and more.

Here is why:

1. Compliance

Staying compliant with the regulation of ethics is the responsibility of every lay firm. No law firm is exempt from following ethics regulations. Your firm’s jurisdiction can create variances on what the ethics are, but there are standard accounting basics that lawyers must follow.

Violating compliance regulations purposefully or through neglect can lead to significant repercussions. An example of a compliance regulation violation could be mishandling client funds.

Although it can vary depending on where your firm is located, many violations of legal accounting rules can result in:

2. Growing your business is important

It is easy to get caught up in your practice as it is a law firm. Every business gets busy, and it is easy to get distracted by the work you are doing for your clients. However, your law practice is still a business, so you will need to treat it as a business.

Legal accounting will let you analyze and collect information to make decisions with data in mind. These numbers are based on money that is coming into your firm and leaving your firm. So understanding this information is worth your time and energy.

Suppose you understand exactly what your firm is collecting and your firm’s expenses; you lower your chances of accidentally missing out on revenue. If billed hours are not recorded properly, or you miss out on tax deduction opportunities, you miss out on many opportunities.

Understanding this information will also help you identify areas of your practice that are the least successful and the most successful. If you know where you are most successful and least successful, you can allocate resources to provide stimulation for future growth.

3. Avoid harming your reputation

Being a professional and maintaining a good reputation is everything in the world of law. Making mistakes on compliance, making accounting mistakes, or losing your firm money, will make you look unprofessional. If you lack professionalism, you will lose clients, referrals, and opportunities to grow your firm.

Smart bookkeeping. Powered by professionals. Backed by technology.

Smart bookkeeping. Powered by professionals. Backed by technology.

Let us do it all for you!

  • Reconcile your accounts
  • Provide you with clean books every month
  • Ensure accurate records for seamless tax filing
  • Track your business financial health

Accounting terms to understand

Of course, no one will expect you to be a CPA, but any firm owner should understand how accounting can impact the law firm. Becoming familiar with these terms will help you know your accountant and bring you up to date with accounting terminology in general.

These are important terms to learn about:

1. Chart of Accounts

The Chart of Accounts is where you track transactions with your firm’s financial accounting information. Typically, the accounts’ chart will have five core categories of assets, liabilities, owners equity, revenue, and expenses—along with numerous subcategories.

A, IOLTA, or trust account and a trust liability account, should also be included in the chart of accounts for the owner of a law practice.

Having an activity statement that shows your starting balance, deposits in, payments out, and the ending balance is the Client Trust Ledger.

2. Double-Entry Accounting

The bookkeeping system that every entry to an account requires corresponding opposite access to a different accounting. This is a double-entry system, so there are two equal corresponding sides at all times. These can be called credits and debits. Double-entry accounting can create a balance sheet made of equity, liabilities, and assets.

Assets=liabilities + equity.

Essentially, double-entry accounting is an excellent safeguard against errors. When using double-entry accounting, all financial transactions will get sorted into specific categories (assets, liabilities, or equity), then once sorted; the two sides should match each other.

3. Interest on Lawyers Trust Accounts (IOLTA)

IOLTA, accounts are bank accounts where interest gets earned from the account and is collected and sent to the state bar. This money is used to fund social justice. Lawyers cannot profit from a client’s money that they paid and held in trust. However, specifics can vary depending on the state, so it is essential to check for details within your jurisdiction.

IOLTA, accounts are formed to store your clients’ funds apart from your primary business or operating account. It can be most comfortable for law firms to have two or more bank accounts and credit cards to ensure that they keep their IOLTA separate from client money.

4. Trust Accounting

A law firm’s operating funds must be kept separate from the client’s funds given in trust. This includes court fees, unearned retainer fees, advanced costs, funds for a settlement, or retainer fees

5. 3-Way Reconciliation

Using a 3-way reconciliation is a great way to check and verify your financial data periodically. It can be checked with accounting software or checked manually.

Best practices for Law Firm Accounting

When it comes to organization, getting off on the right foot should help you stay more organized now and into the future. To keep your firm on the right track, it is helpful to have a list of best practices to follow.

1. Budget Setting

If you do not set a budget for your business, you will be riding blind. To avoid running a blind business, you need to develop a law firm budget with the goal of:

Budgets come in multiple sizes and shapes. What matters the most is that you have a strategy in your budget that revolves around your business and where you want it to go.

Strategies to consider while creating a budget:

2. Trust accounting

The most common and dangerous legal accounting areas to make a mistake in are trust and IOLTA accounts. To avoid these mistakes, you will need to adhere to a process of best practices since it will become too easy for you to accidentally mix funds and put your business’s reputation on the line.

The best way to create a process for best practices is to:

3. Be consistent

Accounting is important because it gives the business financial data consistently. However, if the company is not using a bookkeeper or a professional to help, how will they be consistent?

Imagine if the team at a law firm recognized the importance of being prepared for tax time and the law firm accounting throughout the year to be prepper for the end of the year. Keeping track of all these records sounds like a lot of work, making it easy to procrastinate until the end of tax season.

Utilizing professional bookkeeping for attorneys to help keep accurate monthly documentation and consistent reviews of the business financial statements, you will see your firm’s accurate financial picture. With this picture, you can see opportunities for growth and see options before less organized competitors.

4. Financial reporting to find opportunities

There are also financial reports that go beyond following best practices for accounting and identifying growth opportunities.

Excellent law firm accounting is to give data that is valuable on the state of your company. Utilizing information on financial reporting will allow you to make data-driven decisions to impact your company positively. 

One way you can move your business is to reduce overhead. You can also make a difference in your firm by creating opportunities for financial growth.

Standard legal accounting and bookkeeping mistakes

When it comes to law firm accounting, there are a lot of things that can go wrong. If you put your firm’s bookkeeping and accounting on the back burner, you will have issues with cash flow, getting paid, and more. Below, we outline common legal accounting mistakes for you to avoid.

1. Trust account mismanagement

It is easy to make legal accounting mistakes when working in law with trust accounts. It is too easy to put the funds in the wrong bank account, mismanage an account, accidentally use funds that need to be saved, or fail to report it correctly. Making mistakes with trust accounting can lead to penalties, suspension, or the loss of the right to practice law.

When law firm bookkeeping, there is a simple way to avoid these errors. Remember it as trust accounts are not your money. That money is the property of your client. There is never an excuse to commingle funds. 

Accounting software for your firm can make this easier to avoid for your team. The software helps to build separate ledgers so that you can visualize them better as individual accounts.

2. Errors in data entry

If you are still inputting numbers manually, you are probably finding that it is leading to mistakes or duplicated data entry. These mistakes waste time, create mismatched records, create billing complications, and potentially compliance violations.

3. Differentiating income and revenue incorrectly

When invoices get paid, the costs will be incurred first. The expenses are not income, so they need to get logged separately.

However, when a firm fails to separate revenue that covers incurred costs from its actual revenue, its records will not be correct. If a firm does not separate its revenue from incurred costs from their actual revenue, the documents will be inaccurate. 

When this happens, the company could have compliance issues with their books getting found to be inaccurate.

4. Leaking money

Money leakage occurs when a firm struggles to send out invoices on time, track billable hours, and sending out late invoices. Leaking money happens when money that was supposed to be collected is not due to poor accounting practices. Sadly, this has become common practice for many lawyers.

In 2018, only 85% of what lawyers billed got collected (2018 Legal Trends Report). Keeping up on numbers daily, weekly, and monthly helps you remember what is happening to avoid these leakages from occurring on your watch.

Accounting software also helps keep your business on track for billing and invoicing like an expert. The software will help your business collect payments through online invoicing. Online invoices can simplify your workflow for billing. The more simple it is to the bill, and easier it is for your firm to get paid faster and have better cash flow.

5. Avoiding professional help

Another major issue we see is business owners avoiding help. People turn to you to be an expert on the law. It is time for many businesses to call to bring in a professional for bookkeeping services and accounting professionals.

Bringing in an expert will help you with accounting tasks, accounting processes, business decisions, bookkeeping tasks, and more. If you need to delegate, delegate. Do not be afraid to bring in an expert to allow you to focus on things you are better at, like solutions for your clients’ legal problems.

Choosing an accountant and bookkeeper for your firm

Understanding what goes into accounting is essential; you still are not an accountant or a bookkeeper. Bringing in an expert will give you peace of mind knowing that your business will get tax seasons done right. Having people come in and help provide their expertise in accounting and bookkeeping will help you see that it is being taken care of accurately and ethically.

Many business owners think that they will hire an accountant but not a bookkeeper. Your team members can do many bookkeeping tasks. However, for the sake of your firm’s finances and the accuracy of those finances, it is probably better to use someone with experience working in bookkeeping and accounting.

Your bookkeeper will help you track all information that is sent in and out of your business. Hiring an accountant is so much more than just to be used when it is tax time, and you are looking to file your tax return. They also exist to help you with financial statements, forecasting, and capturing expenses.

What do legal bookkeepers do?

Bookkeepers work directly to keep financial records in order at the law firm. 

Main tasks include: 

What legal accountants do

A professional legal accountant’s role will generally focus on interpreting, collecting, and utilizing financial data to help a firm stay compliant and grow.

Main tasks include:

Choose your method for accounting

Choosing an accounting method is another piece of the financial puzzle for a new company. Before the firm files its first tax return, it must select its method of accounting.

The business will need to look at the firm’s finances and see what makes the most sense for your business structure. Once you choose a type, you cannot change it in the coming years. You are choosing to impact how you carry out your bookkeeping, tax filings, and more.

Neither method is right for every firm. Some firms will even use accrual for their monthly reports but then submit their year-end tax return as the cash method.

Most importantly, you must find a plan that works well for you and stick with it. Consistently keeping up with your books will be the most important thing to keep your firm’s finances in check.

Smart bookkeeping. Powered by professionals. Backed by technology.

Smart bookkeeping. Powered by professionals. Backed by technology.

Let us do it all for you!

  • Reconcile your accounts
  • Provide you with clean books every month
  • Ensure accurate records for seamless tax filing
  • Track your business financial health


Although you may be just getting started in legal accounting, it does not have to be a foreign language. What is most important is that you understand the workings of your accounting and bookkeeping. Understand what it takes to remain compliant with your state and federal laws so that you can grow your firm into the best it can be.

Once you grasp these basic methods, we recommend bringing in an expert bookkeeper to help you keep the most accurate books. Hire a tax professional like a CPA to help you with your business taxes. Bring in a legal accountant to help you strategize how to help run your business through financial reports.

Lastly, acquire great accounting software to simplify your manual labor workload and let your company become more accurate, ensure its compliance, and stay more organized.