While closing out your law firm’s books for the fiscal year tends to be one of the least favorite tasks for many people, its completion is critical for your accountant’s review and provides an accurate picture of the law firm’s financial stability. Your firm’s records will also be used to prepare your tax returns, so having accurate books will save you time and money when your accountant has less to correct. In the event you’re audited, a year-end review will also make sure you have all the documentation necessary to pass.
Law Firm Accounting
Law firm accounting has three main components: business accounting, fee advances/retainer accounting, and matter cost accounting. Each of these pieces requires specific items to be handled properly throughout the year to ensure the accuracy of the financial books. Having a solid understanding of them will help you tackle the year-end review.
Business accounting covers anything to do with your accounts payable and bills. Depending on the size of your firm, you may simply cut a check, but firms with significantly more financial activity should track all of their bills. Business accounting activities also include managing bill amounts, their due dates and any check, debit card, or credit card activity.
Advances/retainer accounting essentially deals with trust accounts and their management. Proper maintenance of client ledgers, being aware of individual client trust account amounts in order to prevent overdrafts and monthly reconciliations should all be attended to. As part of compliance, you should be running regular three-way reconciliation reports and ledger reports.
Matter cost accounting is one of the trickier areas of accounting and involves differentiating between the two different types of client costs — hard costs and soft costs. Hard (direct) costs can be directly attributed to a matter, such as filing fees and expert witnesses whereas soft (indirect) costs are considered part of firm operations like postage and photocopies. These need to be entered correctly for each transaction or there could be an issue with tax liability. To learn more about matter costs, take a look at our Introduction to Matter Cost Accounting for Law Firms.
2018 Year-End Steps
Now that you have a strong grasp on the different areas of accounting you can start to prepare for the end of year tasks necessary to close out your books. Each of these requires more in-depth evaluation but consider these a kick-start to your to-do list.
- Review Accounts Receivable. Run a final billing and review your existing A/R.
- Reconcile All Bank Accounts. Finalize reconciliations of all accounts including trust and operations accounts and catch up on overdue reconciliations.
- Trust Accounts. Check retainer account balances and make sure records are accurate and complete.
- Review Balance Sheet. Review Work In Progress, accounts receivable, and capture any new assets or clients costs.
- Review Profit and Loss. Review all accounts and make sure write-offs are properly handled.
- Review Remaining Accounting Activities. Make any adjustments as needed, close out your books to prevent edits and review any trends.
Tips for 2019 Accounting Success
With 2018 coming to a close, this is the perfect time to set your firm up for improved accounting processes and ensure accurate record keeping for the new year. Here are some tips to get you started toward 2019 success:
- Use a Legal-Specific Chart of Accounts. Traditional accounting software doesn’t take into consideration the unique requirements for law firms, so be sure the necessary accounts are accurately represented.
- Compliant Trust Accounting. To avoid trust accounting pitfalls proper bookkeeping is required at every step. A legal-specific solution with safeguards can provide mechanisms to help you avoid compliance issues when dealing with client funds.
- Client Cost Recovery. Make sure clients costs are being properly designated and recorded.
- Allocate Revenue Receipts. Appropriately apply received payments in the proper order.
- Eliminate Duplicate Data Entries. When billing and accounting are separate errors can easily occur if entries are inaccurately entered.
Choose Your Tools Wisely
As you wrap up your books for the year and strategize for 2019, also evaluate the tools you’re using to keep your records accurate. The right software can make all the difference in being able to efficiently handle every area of law firm accounting while maintaining compliance. No matter what tool you’re using though, always be sure to take the time to analyze and prepare your records for year-end.
For an in-depth list of year-end accounting tasks and 2019 accounting tips check out our Year-End Accounting Checklist for Law Firms. You’ll feel fully prepared to take on your end of year review and start the new year off right!