Computerized accounting programs (legal or general) automate journal entries for routine business transactions such as payments from clients, payments to vendors, or deposits to bank accounts. For this reason, law firms should not use general journal entries to enter everyday transactions into their accounting program. Instead, firms should only make the following types of journal entries: adjusting entries, reversing entries, and compound entries.
Firms that use the accrual-based accounting method, will use adjusting entries to ensure that all earned revenues and all incurred expenses for a specific month appear on the month-end books. Then, when you are ready to record the actual revenue or actual expense amount, you will use a reversing entry to undo the previous month’s adjusting entry. For example, your end-of-month payroll adjusting entry will be reversed once you know what your actual payroll expenses were for that month.
Law firms that use the cash-based accounting method generally don’t need to make adjusting or reversing entries. They may, however, need to make compound entries – entries which affect more than two general ledger accounts. For example, payroll transactions can affect three or more accounts – the salary expense account, the payroll tax expense account, and the cash asset account. So you will need to use a compound entry in order to record the payroll transactions into the three affected general ledger accounts.