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4 Common Accounting Pitfalls Law Firms Must Avoid (2023 Updated)

Updated: Jan 16, 2023


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Accounting pitfalls for law firms sometimes cause businesses headaches. But by all means, businesses need to avoid the pitfalls below so that their business can be healthy. Our law firm bookkeeping services will list 4 common accounting pitfalls that companies often make strong accounting systems and how to fix them.


1. Mismanaging trust accounts

Every law firms have an account to hold money on behalf of a client for their case. This is a common practice in law firms to secure cash flows from their clients. This means that the funds may be owned by the law firm, but they do not belong to the law firm until earned.

It is quite complex since law firms need to keep track of each client’s ledger while keeping all trust amounts pooled in one bank trust account. Law firms need to ensure that one client’s funds are not mingled with one another. Moreover, the client’s funds must not be used to pay the law firm’s fees.

Common pitfalls faced by law firms:

- There is no Money In and Out of the fund (no flow of transactions)

- Overdraft client ledgers at the transaction level.

- Post transactions to an inappropriate account, such as an income or expense account.

- Failure to comply by neglecting the three-way reconciliation process.


2. Clients Like to Pay with Credit Cards

For law firms, accepting credit cards from clients is more complicated than in other industries. One of the biggest challenges in law firm bookkeeping that lawyers face when they consider accepting credit cards is finding a provider that understands the unique requirements to process legal payments.

It is also important to note that accepting payments from credit cards of multiple clients can become a single deposit into the Trust Account in the firm’s accounting system. This means the company MUST adjust these payments on a daily basis or specific notes to make sure which fund belongs to which client. Otherwise, this could create a situation where one client’s funds are commingled with another’s, which can lead to compliance issues and ethics violations.

3. Income and Revenue Differentiation

In law firm bookkeeping, recording income is not always as simple as recording an entry when a payment is received. Therefore, the incidental cost of a case must be allocated before the invoice is paid. Since this is not income, this part must be recorded separately.

Law firms that do not separate revenue from actual income will have inaccurate books. This creates compliance issues and makes it difficult to identify which cases are of value to them. Hiring outsourcing law firm bookkeeping services to carry out the recording income and revenue.

4. Data Entry Errors While Syncing Legal Billing & Accounting Systems

Some law firms use two different accounting systems for their accounting and billing payments. This means that all financial data must be recorded twice, but must be done accurately on both systems. Failure when synchronizing these two systems will create bookkeeping problems, leading to complicated billing or a violation of ethics, and wrong financial data to be analyzed.

Every law firm is a business and to achieve success, accurate financial data is required to make the right business decisions.

 
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If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy or law firm bookkeeping services for contractors to help you with it.

Call Irvine Bookkeeping now for a Free Quote!

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