With over 2.2 million users, QuickBooks is the go-to general accounting program for many small businesses. When it comes to law practices, however, QuickBooks does not directly address many of the crucial needs of legal accounting. Therefore there are several reasons lawyers (and their accountants) choose to avoid it. In this post, we’ll be discussing the common challenges associated with using QuickBooks for legal accounting, and why choosing a legal-specific accounting alternative might be the best move for your firm.
Regardless of size or type of practice, the basic needs of nearly every law firm remain the same:
- Legal Time & Billing
- Business Accounting
- Trust Accounting
- Calendar & Tasks
- Documents & Emails
Often, these functions are completed or recorded in multiple tools that are not legal-specific, which presents several potential obstacles including compliance concerns. Here, we’ll be focusing on the area of business and trust accounting (or IOLTA), and specifically, considering the difficulties associated with using a general accounting program like QuickBooks.
Challenge #1: Lack of flexibility when setting up timekeeper rates
Firms need to be able to vary rates based on a number of factors and parties involved: attorney, paralegal, client, matter, flat vs. contingency work, unbillable time, and so on. Since these scenarios can become complex, defaults are necessary. When using a general accounting software, QuickBooks, or even QuickBooks Pro, these options are very limited and require substantial advanced setup.
Challenge #2: Unique invoicing requirements
Most businesses follow a generic invoicing process; however, there are often unique requirements in the legal space that QuickBooks does not support. Specifically, it lacks the ability to:
- Create custom templates per client or job
- List prior balances and payments
- Document trust activity, since matters and trust accounts are not recognized
- Facilitate batch billing
- Perform eBilling
Challenge #3: Managing evergreen retainers
It’s best practice to maintain evergreen retainers, which involves seeking replenishment prior to depletion. To do this, there must be a mechanism in place that can track a minimum for a matter, and issue an alert if/when a retainer has fallen beneath that amount. While QuickBooks allows you to enter a note regarding a specific minimum, it will not automatically track the balance for your firm. Additionally, it does not display a trust balance at all times, so you must generate a report each time to verify the account amount.
Challenge #4: Trust-specific reports are required
For trust accounting compliance, reporting is key. While QuickBooks supports the creation of reports on the bank level (e.g., receipts and disbursement journals), it is not equipped to handle matter level trust reports, including:
- Client ledger balance, which details the current trust balance for each matter
- Client trust ledger, which provides a detailed listing of trust activity for a matter
- Three-way reconciliation, which is a trust-specific report that compares the book balance, bank balance, and the sum of individual card balances (i.e., all accounting for funds in transit)
Challenge #5: Avoiding overdrafts on client trust accounts
When it comes to trust accounts, the main compliance concern is the potential for an overdraft. While QuickBooks may be an excellent resource for conducting general business, it does not have safeguards in place to protect against overdrafts, which is critical for law firms. Moreover, since incorrect/improper recordkeeping is the main culprit for overdrafts, it’s important to:
- Track matter-specific balances
- Keep these balances visible at all times, especially when entering a withdrawal
Challenge #6: Allocating revenue according to legal accounting standards
Once an invoice payment is received, funds must be allocated to items such as cost and fees.
In legal accounting, allocation and order matter. Especially when dealing with partial payments, funds must be first allocated to items like taxes and costs, and only then can they be applied to fees. In other words, all costs should be covered before any fee income is earned. It’s important to keep in mind that in QuickBooks, legal-specific revenue is always tied to items. As a result, whenever an item is selected on an invoice, only the associated accounts will be affected. Also, when applying a partial payment, those accounts will be affected proportionally.
Challenge #7: Calculating fee distribution should be streamlined and accurate
Whenever a partnership is involved, it’s important to document any and all income that is brought in by a particular party (e.g., originating attorney, responsible attorney, timekeeper, etc.). General accounting software is simply unequipped to properly handle tracking and distribution, and consequently, is unable to generate automated collections reports. Because of this, firms must manually calculate fee distribution, making the process both time-consuming and prone to error.
The Legal Accounting Takeaway
At the end of the day, law firms require more than what QuickBooks (or any other general accounting software) can offer when it comes to fulfilling their accounting needs. Still considering using QuickBooks for your law practice? Watch our full webinar Finding a QuickBooks Alternative for Your Law Firm, co-hosted by QuickBooks ProAdvisor Elizabeth Vera for an in-depth explanation of the facts.