Ready to say goodbye to 2020? If so, you’re in good company. This year has been a challenging one, and many of us are more than ready to throw out the old and ring in the new.
But that doesn’t mean that law firms should neglect key end-of-year tasks. While pandemic fatigue might make it tempting to skip out on these, you should resist that temptation. After all, the key to having a productive 2021 is setting yourself up for success now—and the last thing you need is to add to this year’s chaos by waiting until the last minute to complete your firm’s year-end accounting.
Reviewing your law firm’s financials now will ensure that errors caught are in time and performance can be analyzed. It will also prepare you for filing season—having clear and correct information will help your accountant prepare accurate tax returns, and you’ll also be able to produce documentation easily in the event of an audit.
To start 2021 off right, consult this year-end accounting checklist for law firms.
Bills and Billing
Year-end billing tasks are all about making sure that you get paid—and that if you don’t, you can take all applicable write-offs.
Invoice clients through December 31, pay bills that are due so that you can take the applicable deduction, and make sure that all bills paid in December have been entered.
Sweet, Sweet Reconciliation
December is also the time to perform reconciliations across the board—you want to be sure that your 2020 books are all in order (and that any discrepancies have been accounted for) before the end of the fiscal year.
To begin with, reconcile all bank accounts through December 31. To do this, enter all bank fees and interest, match transactions between bank statements and books, and identify aged transactions that have not cleared.
For uncleared transactions less than 30 days old, determine if the transactions were near the statement closing date and flag. For transitions greater than 31 days old, determine why transactions have not cleared by contacting parties about possible outstanding checks and checking for duplicate entries or other errors.
If uncleared transactions show up in trust accounts, follow local jurisdiction rules to dispose of those assets. For operating accounts, formulate a plan for reissuance or voiding of these transactions.
You should also reconcile credit card statements. Enter finance charges, interest, late fees, and cash rewards, and match transactions between credit card statements and books. You should also review statements and confirm that client costs are linked to matters.
Trust accounting compliance is critical for any law firm, and staying on top of trust account financials is important year-round.
First, confirm all client account balances. If a client has an account receivable balance, pay from their retainer if appropriate. You should also issue refunds for closed matters and invoices for required retainer replenishments.
Next, run three-way bank reconciliations. You should print and archive three-way reconciliation reports separately from bank reconciliation reports—ideally, one for each month in the year. If your local bar requires it, be sure to also print and send out annual trust ledger reports to clients.
To avoid any nasty surprises in the new year, review your balance sheet as of December 31 and look for any irregularities.
If your firm incurred any new liabilities during the year, add them to your balance sheet. For both long and short-term liabilities, review opening date and terms, check that payments reflect debt service, and determine that principal has been reduced.
Likewise, if your firm acquired any new assets during the year, add these to your balance sheet too. This should include accrued depreciation according to the IRS schedules and advanced client costs, if applicable.
Finally, run reports on owner-initiated contributions to equity and owner’s draw and review to ensure appropriate owner non-business expenses are allocated correctly. Additionally, if income to the owner is not allocated under salary expense, ensure all draws are included.
Profit and Loss Reports
End-of-year reporting should include an analysis of profit and loss for the preceding fiscal year. To generate this report, look at both income and expense accounts.
For income accounts, review to confirm allocated transactions, including both fee income and any discounts. If your firm tracks reimbursed client costs in your income statement, include these as well.
When analyzing expense accounts, review to ensure that duplicate accounts have not been created, merge any duplicates, and ensure that sub-accounts are properly listed in the COA. Expense accounts should also include reimbursable client cost expenses. Review these to ensure that transactions are properly posted, check for unrecoverable expenses, and make a plan to write off any that you find.
The end of the year is a great time to run a trial balance report, have your accountant perform a review, and make adjustments as necessary.
Your accounting department should also prepare for tax season by issuing 1099 Misc for non-employee compensation in excess of $600. Run vendor reports and identify all vendors who must receive a 1099 such as expert witnesses, independent contractors, other lawyers, and unincorporated businesses.
Look to the Past—Look to the Future
Once you’ve run your reports, you can compare your earnings with last year’s numbers and note any changes.
Because 2020 was such an atypical year, using this year’s numbers to make predictions about what next year holds will be a trickier proposition than usual. Nonetheless, establishing a firm grasp of 2020’s profits will help you be prepared for whatever 2021 brings.
It’s also important to pat yourself (and your team) on the back. Even during a pandemic, it’s important to relax and rejoice—celebration reduces stress, encourages reflection, and builds the oh-so-important personal bonds that enrich our professional lives. Your firm might not be having a swanky party this year, but you still can raise a glass over Zoom on a Friday afternoon. Both you and your team deserve it!
And remember: taking these steps is about more than just ticking the boxes on 2020—it’s about making sure that you’re set up for a successful 2021.
Help your team enter the new year refreshed, relaxed, and ready for whatever the future holds.
Download our complete 2020 Year-end Accounting Checklist for Law Firms for an in-depth, step-by-step guide to closing your firm’s books.
Ready to make the switch?
Start a 10-day Free Trial of CosmoLex