4 Common Accounting Pitfalls Law Firms Must Avoid

Updated: 2 days ago

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 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 in where one client’s funds are commingled with that of another’s, which can lead to compliance issues and ethics violations.

3. Income and Revenue Differentiation

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.

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

Some law firms use two different 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 service for contractors to help you with it.

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