The Winning Argument: Legal-Specific Business Accounting (Part 2 of 3)


Welcome to part two of our three-part series titled “The Winning Argument”, where we make the case for intentionally utilizing modern, legal-specific software in your law practice. We kicked off the series in our last post by highlighting the advantages of modern legal-specific billing software for law firms. In this post, we’ll be discussing the second component of “The Winning Argument,” legal-specific business accounting.   

When considering your firm’s needs when it comes to an accounting program, it’s important to first identify the three major components of legal accounting that you will face:

  1. General Business Accounting
  2. Matter Cost/Income Accounting
  3. Fee Advances/Retainer Accounting

Within each of these, there are several bookkeeping-related tasks, some of which must be completed on a daily or weekly basis, while others take place monthly or annually.


Regardless of their frequency, all of the tasks listed above involve billing, trust accounting, and/or general business accounting. However, many law firms still use a segregated setup, with multiple tools that treat billing and accounting as separate entities, despite the fact that crossover often occurs. This results in two common problems:

  1. Segregated systems (even those that rely on a sync) often lead to an increase in double data entries and possible inaccuracies.
  2. When the separate accounting program being used is a general business accounting tool like QuickBooks or Xero, issues with legal-specific accounting functions and compliance are likely to arise.

In the remainder of this post, we’re pinpointing seven legal accounting challenges, and explaining why choosing a legal-specific option is “The Winning Argument.”

Challenge #1: Enforcing Correct Use of COAs

Since legal-specific accounts are required—and must be used at the correct times—it’s imperative that your business accounting software supports the legal-specific needs of law firms which includes a properly structured Chart of Accounts involving: IOLTA/trust liabilities & Cost accounts

Challenge #2: Double Data Entry

Needing to enter data multiple times is not only time-consuming, but it also opens you up to a higher risk of error. And when it comes time for reconciliation, both systems must be updated and/or corrected. There are several sources of crossover where double data entry can become a concern:

  • Matter costs
  • Invoice payments (income)
  • Trust retainers

Challenge #3: Handling Client Funds

Client funds typically involve a trust account, and since trust accounting is a specific function of law firms, it carries its own compliance regulations. So what can go wrong with non-legal-specific business accounting?

  • Absence of safeguards
  • Commingling of trust funds
  • Trust ledger overdrafts
  • Un-cleared funds not addressed
  • Sloppy bank reconciliation
  • Billing and trust records kept separate

Challenge #4: Client Cost Recovery

Very often, firms are forced to pay for client costs up-front. Because of this, you want to ensure they are properly accounted for and billed to the client for reimbursement. But in order for this to happen, the item must be linked to the appropriate matter and correctly identified by the type of cost:

  • Hard costs (direct): directly linked to a transaction
  • Soft costs (indirect): indirect charges like overhead, copies, etc.

Challenge #5: Allocation of Revenue Receipts

Law firm accounting requires a certain order of allocation, and this is especially important when dealing with partial invoice payments. Generic tools like QuickBooks don’t adhere to these guidelines and instead apply payment proportionally. When allocating revenue receipts, the following sequence must be followed:

  1. Sales tax payables
  2. ACC
  3. RCC (hard costs)
  4. RCC (soft costs)
  5. Finance charges and late fees
  6. Fee income

Challenge #6: Tracking Financials by Class

While not required, tracking financials by class is a useful means for capturing accurate data that will allow you to make informed business decisions in the future. This includes (among others):

  • Matter owner
  • Timekeeper
  • Practice area
  • Location

Challenge #7: Fee Distributions by Party

Whenever a partnership is involved, income distribution is necessary. However, without a legal-specific business accounting tool, it is very difficult to identify who brought in which matter, who worked on what, which matters are earning income, and how compensation is calculated and distributed. This can become a complicated process, as it involves matter party set up, billing, and income recording. And since fee distributions by party is an uncommon practice in other business sectors, a generic accounting tool requires law firms to manually extract data and manipulate it in order to connect the dots.

Take it to the Next Level with the Cloud

In addition to utilizing legal-specific accounting tools, there are many other advantages to leveraging cloud technology:

  • Mobile access for timely entries
  • Anytime/anywhere bookkeeper access
  • Statement imports
  • Foolproof legal accounting
  • Real-time reports

The goal of every attorney is to come out on top, and when it comes to business accounting, legal-specific is the key to success. Learn more about the Winning Argument for Legal-Specific Business Accounting by watching our on-demand webinar on the topic.


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