5 steps to easy(ier) legal accounting handout
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A talk given before the ABA's Legal Technology Research Center in April 2014 by Joshua Lenon. Every year during tax season, you probably end up thinking the same thing: “I’ll be more organized next year!” We’re here to help you follow through with that goal this year – or maybe next. - Get a handle on the basics of accounting - Understand how legal accounting differs from regular accounting - Learn how to pick and integrate the best accounting tools for your practice
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5 steps to easy(ier) legal accounting handout
- 1. 5 Steps to Easy(ier) Legal Accounting Joshua Lenon Lawyer-in-Residence Clio
- 2. 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
- 4. Chart of Accounts Chart of Accounts is a detailed listing of all the names of the accounts useful for reporting • Assets • Liabilities • Equity
- 5. 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
- 7. 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
- 8. Types of Accounting Choose a tool that can handle both cash basis & accrual basis accounting methods.
- 9. 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
- 13. Funds Transfers
- 14. Syncing
- 15. Proper Accounting Proper accounting tools should produce the following: 1. Income Statement 2. Balance Sheet 3. Statement of Cash Flows
- 17. 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
- 18. Income Statement Bottom Line = (revenues + gains) – (expenses + losses)
- 19. 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
- 20. Balance Sheet Balance sheets should always balance. Assets = liabilities + equity
- 21. 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
- 22. Double Entry Bookkeeping Every entry to an account requires a corresponding and opposite entry to a different account.
- 24. 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(
- 26. 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(
- 27. Storing Trust Records “original or clearly legible copies” Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(
- 28. Storing Trust Records TIP: Store PDF copies of cancelled checks, reconciliation reports, & bank statements in your case files for easy retrieval.
- 30. 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
- 31. TAKEAWAYS
- 32. 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
- 33. Questions?
- 35. And Get Your Free Trial of Clio goclio.com/signup Code: ABA0414