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How To Set Up The Chart Of Accounts For Law Firm Clients

Updated: Jul 23

Lawyers and law firms have specific financial needs that are unique to their industry. When a lawyer decides to make the jump from being an attorney to managing their own practice, they are required to consider their legal accounting. Lawyers with accounting expertise and accountants, and law firm bookkeeping who understand all the intricacies and regulations associated with legal accounting are hard to find. Therefore, creating and maintaining the law firm’s Chart of Accounts is very important. A law firm chart is essential for organizing financial accounts, such as trust accounts and client retainer funds, to ensure compliance and effective management. A well-structured law firm chart supports the firm's financial health and provides the foundation for accurate financial statements. The chart of accounts is also crucial for managing law firm finances and understanding the firm's financial position.

There are certain things to be included in your client’s Chart of Accounts in order to easily comply with most recordkeeping requirements. Consider using an accounts template or accounts sample tailored for law firm finances to ensure all necessary categories are included.

Introduction to Chart of Accounts

A chart of accounts is the backbone of any law firm’s accounting system, providing a comprehensive and organized list of all financial accounts used to record and manage financial transactions. For law firms, a well-structured chart of accounts is essential for effective financial management, as it allows for precise tracking of income, expenses, assets, liabilities, and equity. By organizing financial accounts in a logical manner, law firms can streamline their financial processes, ensure compliance with industry regulations, and generate accurate financial reports. This structure not only supports day-to-day tracking of income and assets liabilities but also lays the groundwork for long-term financial health and informed decision-making. With a well-structured chart of accounts, law firms can easily monitor their financial performance and maintain accurate records for all financial transactions.

Setting Up the Firm Chart of Accounts

When setting up a law firm’s chart of accounts, it’s important to tailor the structure to the unique financial management needs of the firm. This means creating separate accounts for assets, liabilities, equity, revenue, and expenses, as well as detailed sub-accounts for items like client funds, trust accounts, reimbursable client costs, and advanced client costs. For example, law firms often need to track client funds and trust accounts separately from their operating accounts to ensure compliance and accurate reporting. Sub-accounts can be used to monitor specific categories, such as advanced client costs or expenses by practice area. Customizing the chart of accounts in this way enables law firms to track income and expenses with greater precision, improve financial analysis, and generate financial reports that reflect the true financial position of the firm. By establishing clear and separate accounts, law firms can better manage assets liabilities and make informed decisions that support their financial goals.

Trust Liability

The most unique feature of the law firm’s chart of accounts and law firm bookkeeping is the IOLTA or trust account. The lawyer does not own the funds in this account, so it must be recorded on a per-client basis. Client trust funds must be managed in compliance with state bar regulations, and pooled trust accounts may be used to hold multiple clients' funds in a single account, with sub-accounts for each client to ensure accurate recordkeeping. Create separate bank accounts, to avoid any commingling of client funds and operational funds. Besides, the Chart of Accounts should include a Trust Liability account, representing what the firm owes to clients until the funds are earned by the lawyer or disbursed in some other way. The funds are owed to the client until they are earned by the lawyer or disbursed in some other way. Remember to create separate general ledger expense accounts to differentiate between expenses incurred for your firm and expenses to be billed and reimbursed by your clients.

Law firms must also show the trust balance on a per-client basis. To comply with this rule, you can use your client’s name to set up sub-accounts under Trust Liability, especially when managing pooled trust accounts. Any client-related deposit and payments going out would be marked as Trust Liability: Client ABC. This method helps your law firm bookkeeping to easily keep track of the trust balance for each of your clients. Just a look at the balance sheet and you know exactly how much each client has in the trust account. Or bookkeeping services can help your firm do it. It ensures the balance per client matches the balance in the IOLTA bank account as well, supporting compliance with lawyers trust accounts regulatory requirements.

Trust Interest Payable

Another special feature of the Chart of accounts and an IOLTA bank account is the way the interest is handled. Since the funds do not belong to the attorney, the interest on the IOLTA bank account should not be entered as interest income in law firm bookkeeping when the funds are received or interest expense when the money is paid to the state. This makes sure your client's records will reflect correctly what these funds are for in the IOLTA account.

At times, banks deposit the interest in one month but withdraw the money in the next month. If you run the balance sheet for the first month, it should show your client owes the interest to the state. When the money is paid to the state, the interest payable account should be zero.

trust-accounting


enrolled-agent


Reimbursable Client Expenses

Most law firms have expenses that are reimbursed by their clients. If you do not keep track of these and the chart of accounts, expenses can be left out and never get collected. The simplest way to keep track of these is to create one or many billable expense accounts in your law firm's Chart of Accounts. You need to check if your client wants to separately keep track of filing fees, medical records, travel & other expenses.

You need to set up an income account in the chart of accounts. Then you create an expense that is billable and feeds into the relevant income account. Below is an example of how to set up a billable expense using QuickBooks Online:

Set up a billable expense in QuickBooks online
Set up a billable expense in QuickBooks Online

After the billable expense is set up, expenses can be assigned to clients and listed on invoices to get reimbursed. The difference between the billable expenses and the income will show how much your client's law practice has in outstanding reimbursable expenses.

Referral Income

In case your client refers clients to other professionals, they may receive referral income. This income should be recorded on the Chart of Accounts for the law firms as ‘Other income’ because it does not actually come from practicing the law. On the profit and loss statement (income statement), it should not be listed at the top with all the other income earned from the main business. Instead, it will appear at the bottom.

Once all the above-mentioned accounts have been added to the Chart of Accounts, it is easy for law firms to enter each financial transaction accordingly into QuickBooks Online. The data needed for state reporting, including the three-way reconciliation reports, will be easily found in the balance sheet and profit and loss statement. Accurate recording of every financial transaction is essential for maintaining reliable financial information, supporting tax preparation, and generating accurate financial statements.

It’s actually really simple—just employ law firm accounting software designed for the legal industry and legal practice. Such software not only provides access to a wide range of legal accounts out of the box but also enforces the correct use of these accounts, including trust accounting, matter management, and integration with client invoices. Do not try to customize general business accounting to meet your needs. It is not only costly but also ineffective. The following legal-specific accounts are suggested for the common use of small law firms:


Account Type

Operating Bank

Trust Account Bank

Accounts Receivable Accounts Receivable

Advanced Client Costs Other Current Asset

Advanced Client Costs: Court Costs Other Current Asset

Advanced Client Costs: Filing Fees Other Current Asset

Undeposited Funds Other Current Asset

Accumulated Depreciation Fixed Asset

Furniture and Equipment Fixed Asset

Client Trust Liability Other Current Liability

Client Trust Liability: Firm Funds Other Current Liability

Client Trust Liability: IOLTA Interest Other Current Liability

Payroll Liabilities Other Current Liability

Capital Stock Equity

Opening Balance Equity Equity

Retained Earnings Equity

Shareholder Distributions Equity

Legal Fee Income Income

Reimbursed Client Expenses Income Income

Accounting Fees Expense

Advertising and Promotion Expense

Automobile Expense Expense

Bank Service Charges Expense

Client Cost Expense

Computer and Internet Expenses Expense

Continuing Legal Education Expense

Depreciation Expense Expense

Dues and Subscriptions Expense

Insurance Expense Expense

Insurance Expense: Disability Expense

Insurance Expense: Professional Liability Expense

Interest Expense Expense

Legal Library Expense

Meals and Entertainment Expense

Office Supplies Expense

Payroll Expenses Expense

Postage and Delivery Expense

Professional Fees Expense

Rent Expense Expense

Repairs and Maintenance Expense

Research Services Expense

Telephone Expense Expense

Travel Expense Expense

Utilities Expense

Ask My Account Other Expense


Hopefully, the above Chart of Accounts for law firms in QuickBooks helps set up the most basics for a law firm’s needs. Proper organization of the firm's financial accounts and finances is crucial for assessing the firm's financial performance, managing cash flow, and generating accurate financial statements. Come back for more from our series of law firm accounting guides.

Irvine Bookkeeping offers a full range of Law firm bookkeeping services and promises that in 2-3 weeks, we clean up a whole book for you to prepare for tax season. We believe knowing your company's financial health is the key to maintaining control of your business.

As a business owner, if you see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.


Call Irvine Bookkeeping now for a Free Quote!

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