Law Firm Bookkeeping and Accounting: A Completed Guide 2022

Updated: Sep 22

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 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.

>>> More: 5 Reasons to Reconcile Accounts Monthly

>>> More: Three-Way Reconciliation of Your Trust Account