The Importance of Legal Bookkeeping for Law Firms

Proper bookkeeping is indispensable in growing a business. It is also crucial for a law firm.  Correct bookkeeping allows law firms to see their financial performance. It also aids them in making business decisions based on the financial performance of the firm.

Bookkeeping is the recording of all business transactions, business revenues, profits, receipts, purchases, payments, expenditures, and reimbursements. Improper accounting can negatively impact law firms.

Bookkeeping can take up a lot of time. This is why many law firms, if they have to do the accounting themselves, do not keep the record of their revenues and expenses up to date.

Bookkeeping, however, is an essential part of running a law firm, and should be given top priority.

Developing a Bookkeeping System

Bookkeeping entails the process of consistently recording daily transactions. Bookkeeping is something any staff of the law firm can master as long as they have the time and are trained to update financial records.

Bookkeeping is a task that needs to be done daily. Some law firms only do their bookkeeping weekly, and others do it monthly.  Not doing your books daily, can cause the risk of them making mistakes.

Bookkeeping tasks include:

• Recording debits and credits

• Payroll preparation

• Reconciling records with bank statements

• Keeping track of financial transactions

A law firm has three options on how to manage their financial records:

• Do-it-yourself. This is feasible when your law firm is on the start-up stage, and your transactions are not numerous and complicated. You can do manual bookkeeping by using spreadsheets or accounting software to record financial transactions.

• Outsource bookkeeping tasks. If you are a growing law firm with minimal daily financial transactions, you can choose to work with a bookkeeping service. Some larger law firms select this option by creating systems and procedures that in-house staff can do and leave the actual recording to the bookkeeping service.

• In-house bookkeeping. This is the best option for larger law firms.

Your law firm is a business. The rise and fall of any business are often due to mismanagement of financial records. It can be frustrating for a law firm to acquire new clients and provide the best legal services. It is important to maximize revenues.  Law firms cannot afford losing money due to poor bookkeeping practices.

The Importance of Legal Bookkeeping

There are several reasons why your law firm needs to have legal bookkeeping. The most crucial reasons being:

• Compliance

You need to comply with the law and the Bar Association’s rules in their bookkeeping or be subjected to strict penalties and possible disbarment.

• Prosperity

The continued success of your law firm depends on proper bookkeeping. When your law firm maintains accurate financial records, it develops business intelligence that allows your firm to increase its long-term success.

• Income

Your law firm can suffer from loss of income because of inaccurate bookkeeping. Loss of income can come in the form of undercharging clients because the firm cannot efficiently track billable expenses and billable hours.

The Importance of Maintaining a Legal Bookkeeper

The main job of a legal bookkeeper is to maintain the books of account of your law firm, including maintaining accurate records of business transactions and client accounts.

A legal bookkeeper should be an accomplished and experienced person with strong knowledge in invoicing, bookkeeping, and accounting processes in a law firm setting. More importantly, he should be knowledgeable in maintaining the different accounts of a law firm.

With a legal bookkeeper on board, the law firm can focus on providing legal services to increase billable activities, networking to increase business development, and another administrative task to streamline operations leaving the legal bookkeeper to comply with all accounting procedures of the law firm:

• Maintains separate office and client accounts to avoid issues on compliance.

• Maintains separate bank accounts for the business and personal finances to avoid complicated bookkeeping processes.

• Tracks billable activities, including generating invoices at the proper time, so the law firm gets paid.

• Tracks billable activities to make sure they are credited to the right fee earners.

• Keeps track and maintains receipts.

• Maintains accurate records of money received and disbursed on behalf of clients.

• Cash flow management.

• Payroll management.

• Reconciles bank accounts of the law firm and makes financial metrics available.

• Prepares the firm’s Financial Statements on time to increase the credibility of the law firm.

• Reads, understands, and interprets financial data and compares financial reports with balance sheets and income statements.

• Records the law firm’s investment in interest-bearing accounts and Trust accounts.

• Computes taxes and GST for disbursements and activities.

Other than the books of accounts of the law firm, a legal bookkeeper also handles two important accounts, this time belonging to clients.

Accurate Legal Bookkeeping

Proper legal bookkeeping entails four basic principles:

• Maintaining Ledgers

Bookkeeping ledgers hold financial transactions and accounts. Every account in the Chart of Accounts of a law firm has a specific page in the Ledger of Accounts.

The ledger is a record of the current balance and transaction history of each account in an accounting period. Therefore, a Ledger of Account is a summary of the income and expenses of a law firm.

The Ledger of Accounts needs to be regularly updated because it is an accurate source of the data in the preparation of the firm’s Financial Accounting Reports.

• Tracking of All Expense

Disbursements should be accompanied by vouchers and liquidated by a receipt. The law firm can work with an expense workflow based on its requirements and Standard Operating Procedures (SOP). All expenses (hard and soft) should be tracked and reported on time.

• Tracking of All Activities

Client billable hours are the primary source of income of a law firm. The law firm needs to create and implement an accurate tracking system for hours’ lawyers devote to clients. This is to ensure correct billing and tracking of received payments.

An accurate tracking system further ensures that no billable hour slips through.

• Assessing Financial Reports

Transaction entries in the Ledger of Accounts are used to prepare Financial Reports.

Every debit entry must have a corresponding credit entry to balance all accounts.

The law firm’s income and expense data are analyzed to show the profit and loss gained by the law firm.

A Financial Report, a record of the profit and loss statements, provides the law firm with a clear view of their financial status.

Legal bookkeeping is sometimes not a top priority of some law firms. It should, however, be realized that proper accounting shows the health or illness of a law firm at any given time. It allows top management to streamline operations, improve marketing strategies, and work on acquiring new clients to grow the law firm continuously.

Common Bookkeeping Mistakes that can hurt your Law Firm

Bookkeeping is not spared from some mistakes. These mistakes often happen when there is no legal bookkeeper or proper oversight to handle these tasks.

Here are some common bookkeeping mistakes and how they can be avoided:

• Combining Business and Personal Expenses

Separating business and personal expenses is the top rule when running a law firm or any legitimate business. The IRS frowns at this practice because combining both costs makes it difficult to track the firm’s real financial status, not to mention, making it close to impossible to claim expenses.

The best thing a legal bookkeeper can do is create separate accounts for the firm and personal finances. A legal bookkeeper should only track transactions of the firm’s account.

• Not Recording all Transactions

It can be disastrous to a law firm when some transactions are not recorded, more so when these are expense transactions. Missing expense transactions may cause the firm to think that they have more funds than what is right.

A proper filing system and keeping an updated and accurate record of financial transactions will help your law firm save time and money on your income tax and thousands of dollars in taxes.

Bookkeeping aims to have an accurate record of the firm’s current financial standing. Missing expense transactions may cause the firm to overspend and send them into the red. Missing out on critical transactions may also have some tax implications.

To ensure all transactions are properly recorded, accounting software can automate some of the accounting processes. The legal bookkeeper still needs to register the firm’s daily transactions.

• Improper Petty Cash Management

It is natural for your law firm to have a petty cash fund for sudden and immediate expenses. The petty cash fund needs to be liquidated with receipt and voucher attachments. Often, petty cash funds are not correctly tracked and liquidated and can sometimes cause a cash dent to your firm.

• Data Entry Mistakes

This usually happens when the bookkeeper does not enter transactions every day. A mistake in one entry or missing to record an entry in the law firm’s books can cause a lot of trouble. The bookkeeper needs to be meticulous in recording daily transactions and double-checking the entries.

To ensure all transactions are properly recorded, numbers should be entered and double-checked every day.

• Fumbling with Accrual Statements and Cash Reconciliation

There are two types of cash transactions in accounting. First, the accrual method is the recording of a transaction when it actually happens.  Second, the cash method is the recording of the transaction as the cash is disbursed regardless of when it is actually taking place.

This can cause some problems in reconciliation when both and recorded interchangeably. To avoid this mistake, each cash transaction should be liquidated with receipts.

• Recording Owner’s Pay as Owner’s Draw or Vice-Versa

An owner’s pay refers to the salary a law firm owner’s salary from the firm. An owner’s draw is when he withdraws funds from the business for his personal use. Confusing one transaction from the other can result in mismanaging the firm’s financial statements.

To avoid committing most of these mistakes, the legal bookkeeping should make it a point to track the firm’s income and expenses at least once a week.

• Lack of Data Backups

There is always a possibility that data will be lost or accidentally deleted. Financial records are essential to a law firm. Data backups are imperative to avoid the need to redo everything. Financial transactions and records can be saved on cloud-based software instead of computer hardware.

• Poor Communication

Proper communication between the legal bookkeeper and the law firm is vital, so the bookkeeper knows what is happening in the firm at all times. Excellent communication can help the bookkeeper create financial statements that show the actual operational costs of the firm.

How a Bookkeeper Can Help a Law Firm Increase Profit Margin

If you are a start-up law firm or into solo practice, you can be your own bookkeeper. When your firm can already afford to hire one, it is wise to leave the bookkeeping to a specialized professional.

Lawyers are always busy juggling between all activities involved in the practice of law. They do not have the time to spare calculating and analyzing numbers.  A legal bookkeeper is in charge of calculating and analyzing numbers to keep track of a law firm’s health.

A legal bookkeeper can help grow your law firm and increase profit margins in many ways:

• Allows you to Focus on Activities to Grow the Law Firm

Lawyers are always busy juggling between all activities involved in the practice of law. They do not have the time to spare, calculating, and analyzing numbers.  It is still better to have a legal bookkeeper who is in charge of calculating and analyzing numbers to keep track of a law firm’s health.

• Reduce Accounting Expenses

Accountants charge more than bookkeepers. Your law firm only needs a bookkeeper to track daily expenses, run monthly payrolls, and prepare most financial reports. A legal bookkeeper can, therefore, help your firm save a lot of money.

• Have Someone Focus on Watching over your Cash Flow

Someone in your law firm needs to keep a close watch on cash flow to avoid running short of money. It will work in the law firm’s best interest if someone holds a close watch on billable hours, invoicing, revenues, and expenses. These are essential tasks of a legal bookkeeper.

• Access to Vital Figures

Your accountant manages reports and monthly financial account reconciliations. Bookkeepers record daily income and expense transactions so you can access these records anytime without having to wait for your accountant’s report.

A Legal Bookkeeper Can Help your Firm Save on Taxes.

The main task of a legal bookkeeper is to maintain accurate financial records. This can help your law firm improve tax returns.

A legal bookkeeper also keeps an organized record of your law firm’s financial transactions for easy filing of taxes. Having organized financial records can help your firm avoid costly audit expenses.

A Bookkeeper helps your Law Firm Run Smoothly.

Proper bookkeeping creates accurate financial records. This will give a clear picture of the present state of your financial situation so you can make sound business decisions.

Protects your Law Firm from Audits

A legal bookkeeper is an invaluable help when your law firm gets audited by the IRS. Since they prepare all the financial reports, they know where the data used in tax documentation are coming from.

Accounting vs. Bookkeeping

Accounting and bookkeeping are useful to your law firm in different ways. Both have different processes and are done at different stages.

• Bookkeeping tracks the inflow and outflow of cash from the law firm.  It entails the recording of financial transactions, running payroll, preparing billable hours, sending out billing statements, and invoicing.

• Accounting uses the financial records prepared by the bookkeeper to prepare financial statements, monthly balance, and income-sheet statements tax returns, and forecasts the financial health of the law firm.

Bookkeeping is the “dirty work” before the legal accounting process.

Risks of not having a Legal Bookkeeper:

Proper bookkeeping will show the financial performance of your law firm. Without a legal bookkeeper, money that flows in and out of your law firm will be left unrecorded and will further lead to you not knowing where your law firm stands financially.

• Risk of Losing Money

Neglecting proper bookkeeping will make your law firm lose money because you will not understand where revenue is coming from and where you are spending your firm’s money.

If you do not have updated information on your firm’s expenses, you will be unable to control the costs. Without updated reports, you will also tend to pay for unnecessary costs before noticing them. Leaks in your cash flow can kill your law firm.

Not keeping track and maintaining the accurate financial records will also cost your law firm a lot of money come tax season.

It is impossible to prepare the right tax documents in the absence of the correct financial reports. Conversely, no bookkeeping will result in tax errors because you may over or under-report your firm’s expenses.

If the IRS does not agree with your figures, you may have to pay interest and penalties. You may also need to pay more taxes than you should have with proper bookkeeping.

It will be difficult for your law firm to find an accountant willing to work with you if your financial reports are not in order.

• You will be Unable to Make Smart Decisions.

When you cannot reconcile your financial accounts and reports, you will not have the right information you need to make smart decisions to grow your law firm.

You will need to know if you can afford additional expenses required to grow your business, such as other lawyers, staff, equipment, and more aggressive marketing strategies.

Your law firm will risk losing a lot of money should you decide on investing in these items without knowing the right financial standing off your firm.

• You are Bound to Make Billing Mistakes

Your law firm thrives on billable hours and payment of such on time. Most clients will not come knocking in your door and pay for your legal services. Some clients will not pay unless they really have to. Others do not pay because they were not sent an invoice, and in some instances, they were not correctly billed.

Without proper bookkeeping, your firm will not know which clients owed your law firm money when they are due. An updated record of billable hours and an accounts receivable report done by a legal bookkeeper will allow your firm to the bill, collect, and invoice clients in a timely manner.

• You are  Prone to Payroll Errors

Payroll preparation is one of the more essential tasks of a bookkeeper. Lawyers, paralegals, legal researchers, and support staff are frontlines off your business. Without them, your law firm will cease to operate, unless you want to do everything yourself.

Everyone in your law firm needs to be paid correctly and on time every payday. Proper bookkeeping ensures everyone gets their pay benefits (salaries and/or billable hours), retirement benefits, leave credits, and others are properly tracked.

Without a bookkeeper, the person-in-charge of disbursing pay benefits to employees, other than her current duties, may need to rush payments, which may cost over or underpayments of salaries as well as failure, over or under-collection of taxes.

Payroll errors and even delays can cause employee de-motivation and can also affect relationships within your firm’s workforce. If their paycheck is always delayed it won’t be long before they move on to other job opportunities.


Some law firms still waste a lot of time doing their own bookkeeping. Time is always essential when you are running a law firm. Most law firms earn through hourly billings, so time spent trying to manage the firm’s book of accounts means time lost in generating income.

An honest and reliable legal bookkeeper will know what your law firm’s transactions are to record and how to record them. Your legal bookkeeper will manage the daily financial upkeep of your law firm.

Martin Vermaak

The Lawyer Marketing Pro Digital Marketing Agency for Lawyers and Law Firms.

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