The pumpkins have been carved, the candy has been bought, and soon enough, the streets will be filled with eager trick-or-treaters. And we all know what comes next…As October comes to a close, we gear up for yet another busy holiday season. But don’t get caught up in the rush and wait until it’s too late, now is the time to begin getting your law firm’s accounting in order.
Of course, it’s important to regularly review your practice’s financials throughout the year in order to address potential errors, evaluate performance, and adjust business plans as necessary. However, it is especially crucial to review your firm’s financials at the year’s end, as this information will be used to prepare your tax returns. Maintaining clear and correct records on your end will save both time and money by making the process as straightforward as possible for your accountant once tax season arrives. Additionally, in the event of an audit, you will be able to easily create and submit the obligatory records.
The following are an excerpt from our complete 2017 Year-End Accounting Checklist for Law Firms. We recommend paying extra attention in these final few months to these points although they are great rules of thumb to keep in mind throughout the entire year. While some items will require input from your accountant, you can take the first steps to make sure your law firm financials are ready-to-go come January 1st:
- Invoice clients through December 31st
- Pay any outstanding bills so you will be eligible to take the deduction in the current year.
- Reconcile all bank accounts through December 31st. This involves entering all bank fees and interest, matching transactions between the bank statement and what’s on your books, and identifying any aged transaction that hasn’t cleared. In the case of a transaction that has not cleared, timing is important: if it’s been less than 30 days, consider whether the transaction took place close to the statement closing date. If it’s been over 31 days, you must determine why the transaction has not cleared, confirm correct entry (e.g. duplicate checks), and contact the appropriate party/parties (e.g. outstanding checks). If a trust transaction is not cleared for an extended duration, be sure to follow local jurisdiction rules to dispose of those assets, and make the necessary adjustments after consulting with your accounting professional.
- Reconcile credit card statements by entering finance charges and interest as well as any late fees and/or cash rewards. Additionally, match each transaction to the credit card statement and what’s in your book, and review and confirm that client costs are associated with the appropriate matter.
While maintaining accurate trust accounting for your clients is important to the survival of your business year-round, the end of the year requires that you pay special attention to client funds that your firm is managing.
- First, confirm client retainer balances, and if the client has an account receivable balance, pay it from their retainer.
- Identify closed matters with retainer balances and issue refunds accordingly; conversely, should a retainer require replenishment, issue an invoice. When checking client trust activities, identify balances, verify all trust activities are accurately posted, and be sure the balances for any closed matters are at zero.
- After running a 3-way bank reconciliation, print and archive it separately from monthly reconciliation reports so that it will be readily available in the event of an audit.
Other key components of the end-of-year report include profit and loss within the fiscal year (i.e. January 1st through December 31st). Review income accounts, expense accounts, reimbursable client costs expenses, general expense accounts, accounts receivables/collections, and client retainer balances (both as of December 31st), as well as any 1099-MISC for non-employee compensation in excess of $600. Compare these numbers with the previous fiscal year, paying special attention to anything grossly out of line, as this may indicate an error or an issue within the practice that needs to be addressed.
- Run and review end-of-year reports. Your balance sheet should be as of December 31st, and when reviewing it, keep an eye out for irregularities in balances and any liabilities. Additionally, consider whether your firm acquired any new assets during the year (if so, they must be added to the balance sheet), and post accrued depreciation (according to the IRS schedules) as well as advanced client costs, if applicable. When it comes to equity, identify owner-initiated contributions, and ensure that owner’s draws are appropriately allocated. (NOTE: this is a function of the type of business designation, e.g. LLC or LLP, S-Corp, etc.)
- Your firm’s accountant should run a trial balance report, and make any necessary adjustments. At a later date, remember to post this review.
The next few months are sure to be eventful, from carving the turkey to planning the holiday office party. End the year successfully by starting to take the necessary steps now to guarantee your firm’s financials are orderly and up-to-date. For more information about your end of the year responsibilities, download our complete 2017 Year-End Accounting Checklist for Law Firms.