5 steps to easy(ier) legal accounting handout
TRANSCRIPT
5 Steps to Easy(ier) Legal Accounting
Joshua Lenon Lawyer-in-Residence
Clio
Agenda
1. Create a Chart of Accounts 2. Pick an accounting tool 3. Set up Income Statements and Balance
Sheets to determine profitability of firm 4. Implement best practices for trust
accounting 5. Set weekly, monthly, quarterly, annual
reviews of time entry, billing, and accounting
CHART OF ACCOUNTS
Chart of Accounts
Chart of Accounts is a detailed listing of all the names of the accounts useful for reporting • Assets • Liabilities • Equity
State Bar of Georgia’s Standard Chart of Accounts
• Assets – Cash in Bank – Petty Cash – Client Advances –
Unbilled – Client Advances – Billed – Real Property
• Liabilities – Accounts Payable – Tax Withholdings
• Segregated Liabilities – Client Trust Funds
• Equity – Owners’ Equity
Accounts
• Compensation Costs – Secretarial – Paralegals – Associates
ACCOUNTING TOOLS
Types of Accounting
Cash Basis • Revenues are recognized
when cash is received • Expenses are recognized
when paid • Usually followed by
individuals and small companies
• Not in compliance with accounting's matching principle.
Accrual Basis • Revenues are recognized
when they are earned • Expenses are matched to
revenues or the accounting period when they are incurred (rather than paid)
• Better for tracking profitability
• Required for use by accountants
Types of Accounting
Choose a tool that can handle both cash basis & accrual basis
accounting methods.
Accounting Requirements
• Accounts Receivable – A system to track what funds are owed a law firm
• Client / Matter Specific Billing – Linking exact amounts of funds in a firm’s possession
to a client or matter • Multiple Accounts – Tracking funds in both operating accounts and trust
accounts • Fund Transfers – Ability to track fund transfers between accounts
Accounts Receivable
Client/Matter Specific Billing
Multiple Accounts
Funds Transfers
Syncing
Proper Accounting
Proper accounting tools should produce the following: 1. Income Statement 2. Balance Sheet 3. Statement of Cash Flows
DETERMINE PROFITABILITY
Income Statement
• Tracks profitability over a specified time interval
• Often called the profit and loss statement (P&L)
• Shows revenues, expenses, gains, and losses
• Does not track cash receipts nor cash disbursements
Income Statement
Bottom Line = (revenues + gains) – (expenses + losses)
Balance Sheet
• “Snapshot" of a company's financial position at a given moment
• Tracks current state of assets, liabilities, equity – Lawyer’s assets include operating accounts,
work-in-progress fees, office equipment – Lawyer’s liabilities include loans, accounts
payables – Law firm equity include capital, retained
earnings, income distributions
Balance Sheet
Balance sheets should always balance.
Assets = liabilities + equity
Statement of Cash Flows
Cash amount change over an interval of time • This is one place where lawyers’ trust
accounts will be tracked • Pulls information from income statement and
balance sheet
Double Entry Bookkeeping
Every entry to an account requires a corresponding and opposite entry to a different
account.
TRUST ACCOUNTS BEST PRACTICES
Trust Account Records
• Have an IOLTA / Trust Account
• Deposit Slips – Date – Source – Client or Matter
• Cash Receipts Book
• Disbursement Records – Cancelled Checks – Electronic Records
• Ledger – Client or Matter entries – Transfers, receipts,
balances & more
• Bank Statements
Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(
Trust Account Records
Trust Accounting
• Monthly reconciliation – balance per bank – deposits in transit – outstanding checks
• Comparison of reconciled balances and ledgers
• Annual listings – Unexpended trust
money
• Annual accounting certificate
• 6 year retention requirements
Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(
Storing Trust Records
“original or clearly legible copies”
Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(
Storing Trust Records
TIP: Store PDF copies of cancelled checks,
reconciliation reports, & bank statements in your case files for
easy retrieval.
SET TIMELY REVIEWS
Timely Reviews
• Daily – individual lawyers review daily time entries
• Weekly – administrators review weekly • Monthly – administrators and managing lawyers
review trust account information and complete reconciliations as part of billing cycle.
• Quarterly – managing lawyers review their firm’s profitability
• Annually – managing lawyers review the annual period to determine profitability and to prepare for annual tax filings
TAKEAWAYS
Takeaways
1. Create a Chart of Accounts 2. Pick an accounting tool 3. Set up Income Statements and Balance
Sheets to determine profitability of firm 4. Implement best practices for trust
accounting 5. Set weekly, monthly, quarterly, annual
reviews of time entry, billing, and accounting
Questions?
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Code: ABA0414