5 Steps to Easy(ier) Legal Accounting

Joshua Lenon Lawyer-in-Residence

Clio

Agenda

1.  Create a Chart of Accounts 2.  Pick an accounting tool 3.  Set up Income Statements and Balance

Sheets to determine profitability of firm 4.  Implement best practices for trust

accounting 5.  Set weekly, monthly, quarterly, annual

reviews of time entry, billing, and accounting

CHART OF ACCOUNTS

Chart of Accounts

Chart of Accounts is a detailed listing of all the names of the accounts useful for reporting •  Assets •  Liabilities •  Equity

State Bar of Georgia’s Standard Chart of Accounts

•  Assets –  Cash in Bank –  Petty Cash –  Client Advances –

Unbilled –  Client Advances – Billed –  Real Property

•  Liabilities –  Accounts Payable –  Tax Withholdings

•  Segregated Liabilities –  Client Trust Funds

•  Equity –  Owners’ Equity

Accounts

•  Compensation Costs –  Secretarial –  Paralegals –  Associates

ACCOUNTING TOOLS

Types of Accounting

Cash Basis •  Revenues are recognized

when cash is received •  Expenses are recognized

when paid •  Usually followed by

individuals and small companies

•  Not in compliance with accounting's matching principle.

Accrual Basis •  Revenues are recognized

when they are earned •  Expenses are matched to

revenues or the accounting period when they are incurred (rather than paid)

•  Better for tracking profitability

•  Required for use by accountants

Types of Accounting

Choose a tool that can handle both cash basis & accrual basis

accounting methods.

Accounting Requirements

•  Accounts Receivable – A system to track what funds are owed a law firm

•  Client / Matter Specific Billing –  Linking exact amounts of funds in a firm’s possession

to a client or matter •  Multiple Accounts –  Tracking funds in both operating accounts and trust

accounts •  Fund Transfers – Ability to track fund transfers between accounts

Accounts Receivable

Client/Matter Specific Billing

Multiple Accounts

Funds Transfers

Syncing

Proper Accounting

Proper accounting tools should produce the following: 1.  Income Statement 2.  Balance Sheet 3.  Statement of Cash Flows

DETERMINE PROFITABILITY

Income Statement

•  Tracks profitability over a specified time interval

•  Often called the profit and loss statement (P&L)

•  Shows revenues, expenses, gains, and losses

•  Does not track cash receipts nor cash disbursements

Income Statement

Bottom Line = (revenues + gains) – (expenses + losses)

Balance Sheet

•  “Snapshot" of a company's financial position at a given moment

•  Tracks current state of assets, liabilities, equity – Lawyer’s assets include operating accounts,

work-in-progress fees, office equipment – Lawyer’s liabilities include loans, accounts

payables – Law firm equity include capital, retained

earnings, income distributions

Balance Sheet

Balance sheets should always balance.

Assets = liabilities + equity

Statement of Cash Flows

Cash amount change over an interval of time •  This is one place where lawyers’ trust

accounts will be tracked •  Pulls information from income statement and

balance sheet

Double Entry Bookkeeping

Every entry to an account requires a corresponding and opposite entry to a different

account.

TRUST ACCOUNTS BEST PRACTICES

Trust Account Records

•  Have an IOLTA / Trust Account

•  Deposit Slips –  Date –  Source –  Client or Matter

•  Cash Receipts Book

•  Disbursement Records –  Cancelled Checks –  Electronic Records

•  Ledger –  Client or Matter entries –  Transfers, receipts,

balances & more

•  Bank Statements

Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(

Trust Account Records

Trust Accounting

•  Monthly reconciliation –  balance per bank –  deposits in transit –  outstanding checks

•  Comparison of reconciled balances and ledgers

•  Annual listings –  Unexpended trust

money

•  Annual accounting certificate

•  6 year retention requirements

Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(

Storing Trust Records

“original or clearly legible copies”

Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(

Storing Trust Records

TIP: Store PDF copies of cancelled checks,

reconciliation reports, & bank statements in your case files for

easy retrieval.

SET TIMELY REVIEWS

Timely Reviews

•  Daily – individual lawyers review daily time entries

•  Weekly – administrators review weekly •  Monthly – administrators and managing lawyers

review trust account information and complete reconciliations as part of billing cycle.

•  Quarterly – managing lawyers review their firm’s profitability

•  Annually – managing lawyers review the annual period to determine profitability and to prepare for annual tax filings

TAKEAWAYS

Takeaways

1.  Create a Chart of Accounts 2.  Pick an accounting tool 3.  Set up Income Statements and Balance

Sheets to determine profitability of firm 4.  Implement best practices for trust

accounting 5.  Set weekly, monthly, quarterly, annual

reviews of time entry, billing, and accounting

Questions?

Thank You

Joshua Lenon joshua@goclio.com @JoshuaLenon Linkedin.com/in/joshualenon

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