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Law Firm Bookkeeping and Accounting: A Completed Guide 2022

Updated: Dec 13, 2022

While you spend many years honing your expertise and experience to become a professional attorney and run your law firm, you didn’t learn about bookkeeping and accounting for law firms. And even you have an overview of what is bookkeeping and accounting, you wouldn’t know what involve when it comes to bookkeeping and accounting for law firms. Law firm accounting is more complex than plain business accounting.

The good news is, we’ve made this guide to help you know the essentials of bookkeeping and accounting for law firms. Each aspect of law firm accounting is explained understandably and concisely. This way, you can have a practical overview of the fundamentals of bookkeeping for attorneys, which would help your firm stay compliant with ethics rules – and so that you aren’t leaving money on the table.

The Difference Between Law Firm Bookkeeping and Accounting

Every business needs to have a bookkeeping and accounting process. Although the roles of bookkeeping and accounting are different, there is a thin line to distinguish between them.

While bookkeeping and accounting share common to help the business evaluate its worth and take future decisions, they support your business in different stages of the financial cycle


Bookkeepers maintain and record all financial transactions in the original books of entry and balance the financial accounts for your firms. They summarize and organize all the company’s financial transactions chronologically in a systematic manner. In law firms, legal bookkeeping takes place first and relates to the administrative side of tracking cash.


While bookkeeping is more transactional and administrative, accounting is more subjective, giving you insights into your law firm’s financial health based on legal bookkeeping information. One key part of the accounting process is analyzing financial reports that provide you with a better understanding of actual profitability and awareness of cash flow in your business.

Accountants also help you with strategic tax planning, analyzing your business financial position, forecasting, and tax filling. All the comprehensive adjusted owner's information would help you make informed business decisions.

The difference in functions between bookkeeping and accounting:

Bookkeeping Tasks

Accounting Tasks

Records and categorize daily payments and expenses

Prepare adjusting entries

Conduct bank reconciliation every month

Advise business owner during financial decision making

Generate monthly financial statements

Review and analyze financial statements

Process payroll

Assess financial health and make financial forecasts

Prepare the books for the accountant

Perform audits

Provide year-end financials and tax documents to the accountant

File tax returns, conduct tax planning, and provide tax advisory

Law Firm Bookkeeping and Accounting Terms

A Chart of Accounts

A chart of accounts is a list of all your firm’s financial accounts, usually used by an accountant and available for bookkeepers. Account numbers of the chart of accounts are structured to suit the needs of your law firm, the jurisdiction, and the practice area. Typically, there are 5 core categories consisting of assets, liabilities, owner’s equity, revenue, and expenses.

Setting up and recording the chart of accounts for law firms isn’t just suggestions, they are requirements. State Bar association rules require law practices to record transactions meticulously so there is no impropriety when dealing with Interest on Lawyers Trust Accounts (IOLTA), or other trust accounts.

Double-Entry Accounting

Double-entry bookkeeping or double-bookkeeping accounting is a method that keeps track of where your money comes from and where it’s going. Every financial transaction involves at least two accounts, including debit and credit. Every entry to an account requires a corresponding and opposite entry to a different account. Additionally, the total debits recorded must equal the total credits recorded. Total assets are also required to equal total liabilities plus equity (net worth or capital) of a law firm).

Law firms can use double-entry bookkeeping as a way to better monitor the financial health of a company.

Interest in Lawyers Trust Accounts (IOLTA)

An IOLTA account is a pool, interest-bearing business checking account for the deposit of client funds which interest earned belongs to the Lawyer Trust Fund. More specifically, the interest generated on IOLTA accounts is an important source of funding for the IOLTA program that is used for the purpose of civil legal aid and assistance to low-income residents.

Lawyers are required to deposit all short-term and nominal client funds in an IOLTA account. They mustn’t deposit client funds in accounts that do not bear interests, or in their business accounts.

If your law firm is handling trust accounting, there are some basic rules that you must abide by to ensure compliance:

  • The balance in your IOLTA trust bank account must match the amount reflected on your books in the IOLTA trust liability account balance.

  • Each client’s trust balance has a detailed ledger showing specific transactions for every single inflow and outflow.

  • When taken together, the total amounts reflect in each client’s IOLTA trust account balance on your firm’s books add up to the balance in your IOLTA bank account.

Trust Accounting

A trust account is a special bank account where client funds are kept safe and in a separate account from law firm operating funds.

Three-way Reconciliation

An attorney is required to reconcile their trust bank statement to their client’s individual balance on a quarterly, or even monthly basis. While the reconciliation process is one of the most important rules in trust account management, attorneys most often fail to properly perform this step on a regular basis, which causes unfortunate consequences.

3 components involved in the reconciliation process consist of the trust ledger, the client ledger, and the trust reconciliation.

The Trust ledger provides a summary of all the transactions involved in a trust account.

The Client ledger assigns each transaction to a specific client and groups together all the trust account activity associated with each individual client.

The Trust Reconciliation - the trust bank statement provides a third-party verification to the transactions posted to the trust account.

5 Common Bookkeeping Mistakes and How to Avoid Them

Lawyers are not accountants and they often make the same common mistakes when it comes to accounting for law firms. Legal accounting and attorney bookkeeping mistakes have catastrophic consequences for your business, income taxes, and license. Below we’ll show you the most commonly fall short in accounting practice.

Mismanaging trust accounts

As an attorney, you may be aware of state bar requirements for trust accounts, but that doesn’t prevent you make mistakes. It’s true. The most common mistakes are putting funds in the wrong account, accidentally or intentionally withdrawing funds, fail to report monthly, and so on. Poor management of trust accounts can lead to penalties, suspension, or even losing the right to practice law.

Commingle operating and Client Trust Account funds

In other industries, it is allowed to keep clients’ prepayments in your operating account and use the money to fund client projects. But legal bookkeeping and accounting in law firms are different than for other businesses. If you are running a law firm, don’t make that severe mistake. Your client trust accounts are required to keep separate from your business accounts.

Incorrectly differentiating income and revenue

When an invoice is paid, you must first allocate the payment to the incurred cost. This portion is not income, so you must record it separately. Nevertheless, many attorneys fail to separate revenue that covers incurred costs from their actual income. Failure to allocate appropriately can lead to inaccurate books, and battle compliance issues. It’s a nightmare.

Making Data Entry Mistakes

Handling client funds is a significant responsibility and you must remember a large number of rules to conduct your role ethically and responsibly. However, it’s easy to make attorney bookkeeping and data entry mistakes when you have to maintain and complete your day-to-day transactions manually. duplicated data entry. Only a small mistake or duplicated data entry may result in wasted time, mismatched records, billing complications, and even compliance violations.

Not asking professionals for help

While you spent most of your life becoming a seasoned lawyer, accounting is a different area and not your expertise. Although you now understand the common mistakes in accounting for law firms, you’re still an accountant or bookkeeper. There will come a point when you need to call in professionals for legal accounting, so don’t be afraid to delegate when you need help.

Making the jump from an attorney to running a law firm can bring a ton of new intimidating challenges. Legal accounting and attorney bookkeeping are surely one of the largest you face. That’s why we recommend you should hire a professional legal account. Now, you can dedicate your valuable time to growing your business.

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Irvine Bookkeeping Services - We're here to help

Growing your business is hard. Handing trust accounting is more daunting. Let's make it a whole lot easier with Irvine Bookkeeping services. We deliver comprehensive, streamlined law firm bookkeeping solutions, consisting of:

  • Maintaining detailed ledgers for attorney trust accounts

  • Balancing quickly three-way reconciliations

  • Keeping up with client billing and following up on unpaid invoices

  • Administering payroll

Now you cross off law bookkeeping out of your to-do list and feel stress-free about the financial aspect. As a result, you take comfort in allowing yourself to offload financial tasks and turn your attention exclusively to business development and legal cases.

Irvine bookkeeping offers you comprehensive, cost-effective, and long-term law firm bookkeeping solutions. With our dedicated and experienced bookkeepers, you potentially transform the financial management of your law firm.

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mix bell
mix bell

Great Article! the issue at our firm is 1099s and trust account disbursements to doctors. Any info on this? thanks

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