When it comes to legal-specific accounting complexities, CosmoLex has you covered.
Law firm accounting is complex, and many of the requirements of legal accounting are specific to the practice of law. Managing fee allocations, trust reports, reconciliations, and retainers, for example, requires accounting methods designed specifically for legal purposes—and they are best managed by software designed specifically for law firms.
Read on to learn more about accounting challenges that are specific to the legal field, as well as how CosmoLex can help.
One of the reasons that legal accounting is so complicated is because it involves more than just business accounting. A legal accounting system has to manage both business accounting and matter accounting, all while maintaining compliance with the regulations of the field.
Problems often arise around integrating separate billing and accounting systems, ensuring accurate postings, maintaining trust compliance, managing fee allocations, and running reports.
Integrating Separate Billing and Accounting Tools
In order to manage trust accounting requirements, many firms use two different tools: a legal-specific billing and practice management tool and a separate, more general accounting software program. This can cause a range of problems.
One issue with this system is the difficulty of capturing costs. For example, when something is paid for out of pocket, that cost is first entered on the accounting side so that the person who paid can be reimbursed. The cost then also has to be entered into the billing software for reimbursement, which is an extra step that can lead to error. Thousands of dollars can be lost by firms that don’t have a streamlined cost recovery workflow.
Another issue can arise in receiving invoice payments. When you apply an invoice payment, the money is deposited in the bank – but it also needs to be recorded in your accounting software. That invoice could be made of fees, costs, or other items, and somebody needs to transfer the information in order for the breakdown to be recorded.
Retainers can also cause issues. Retainers are typically held with the intention of being earned. This means that they are tracked in billing tools as funds on hand, but also in accounting tools as dollars in the bank. If at any point these records do not match, firms run the risk of thinking there are more funds available than there are. With a simple payment of an invoice, you can end up accidentally overdrafting on a client’s ledger.
All of these issues can be avoided by using an all-in-one billing and accounting tool like CosmoLex. CosmoLex allows for a streamlined posting and reimbursement of matter costs by leveraging the integration of bank feeds. CosmoLex also allows for automated invoice payment allocations and offers built-in bank reconciliation to ensure that representation of client funds is accurate.
Risk of Incorrect Postings
Another common struggle law firms face is the risk of incorrect posts.
Law firm accounting requires legal-specific accounts such as trust liability accounts, fee income accounts, and client costs accounts. Because non-legal software has no restrictions on account use, the user has to know which type of account to post to, which can lead to error. A user also has to have the knowledge and time to ensure that items are linked to matters when appropriate.
CosmoLex comes preloaded with a legal-specific chart of accounts and offers automated posting to correct accounts. It also provides account defaults for categories like hard costs, trust transactions, and other common expenses, which enables automated accounting. Comsmolex also has the ability to remember payees so that pathways for certain transactions can be preserved and replicated as well as customizable mapping functions for imports.
Trust Accounting Compliance
Trust accounting compliance is another major area of concern for law firms. Trust accounting requires separating operating accounts and trust accounts, managing separate, accurate ledgers, and familiarity with the compliance requirements of trust accounts. It also requires timely bank reconciliation.
To simplify trust accounting, CosmoLex offers matter selection required for retainers funds, separate ledgers for operating funds and trust retainers, safeguards against overdrafts, and built-in reconciliation and reporting.
Fee allocations are another area of struggle. Different types of feeds are treated differently, and multiple parties often work together on the same matter. They can have different allocation percentages, and both the collection and reporting of the data can both be difficult. Fixed fee matters may also require fee allocations.
CosmoLex can help by offering the ability to set parties at the matter level and designate distribution percentages by party. It also offers reporting by categories such as matter owner, timekeeper, and others.
One additional common struggle firms face is producing advanced reports. Reports can have multiple data sources, and producing compliance reports with a generalized accounting program can be difficult. CosmoLex helps by offering billing and accounting reports as well as trust compliance reports.
Not only are some of these reports required, but certain ones also help you get a better picture of financial trends, areas for opportunities and where cutbacks may be necessary.
Simplified Accounting with All-in-one Software
Investing in a comprehensive practice management and legal accounting tool can save time and money.
Want to learn more about how to simplify your law firm’s accounting practices? Check out our webinar, Simplify Your Law Firm Accounting with CosmoLex.