Effectively managing law firm accounting is a vital process that provides valuable insights into the health of your firm. 

A clear picture of your law firm’s financial state enables you to run profitable practices and prepare for the following year. Doing a year-end accounting check-in will tell you exactly where your firm stands so you can make any necessary course corrections.

More than a regulatory obligation, a year-end accounting review is a powerful tool that drives business, ensures compliance, fosters stakeholder confidence and trust, and informs strategic planning.

While you could hire an accountant to handle your end-of-year review, you may end up paying a high premium for their services. Instead, follow this law firm accounting guide to efficiently manage a year-end check-in yourself.

Seven Best Practices for Legal Accounting

To run an end-of-year accounting review, start by asking yourself three key questions: 

1. Are you staying compliant with your trust accounting records? 
2. Does your firm have enough funds to weather a significant downturn?  
3. Which practice area(s) do most of your profits come from?  

Once you’ve raised the right questions, it’s time to answer them. Here are seven year-end accounting best practices to proactively address accounting issues and understand your firm’s financial state. 

1. Keep Up With General Accounting 

While it’s true that law firms have unique accounting requirements, there are several industry-agnostic general accounting processes to keep in mind. 

For example, you’ll want to ensure your billing is current by invoicing your clients through December 31st. Without an invoice, you won’t get paid, making it challenging to keep up with paying your staff (and your bills).  

You should also run regular reconciliations of all your bank accounts through December 31st. Match all your transactions between bank statements and your books, and keep an eye out for uncleared transactions, as they may require further action. Depending on your jurisdiction, you may also need to determine where to send unclaimed assets.

You’ll also need to reconcile your credit card statements. Everything should be entered and matched, and all client costs should link to associated transactions.

You should never simply enter an adjustment into your accounting software and call it a day. Accuracy in accounting is vital, and your license to practice law depends on it. If you’re struggling with a conflict, it may be time to bring in expert services for help.

2. Monitor Trust Accounts

Trust accounting requires ongoing monitoring at your firm, not just during a yearly check. Completing a year-end check allows you to validate your processes and address any issues before they become a bigger headache (or trigger a red flag during an audit.) 

Check client retainer balances and invoice amounts, issued payments, refunds, and invoices in situations where it’s necessary (and you’re permitted to do so). Complete your three-way reconciliations and print and archive them to ensure you’re audit-ready. 

A legal-specific accounting solution is one way to prevent any issues with your trust accounting. Designed to run three-way reconciliation for law firms, robust accounting software can save you time with accounting and keep you compliant with trust accounting safeguards. 

3. Create a Chart of Accounts

A chart of accounts is an organizational tool that helps you understand the full scope of your law firm’s financials. A chart of accounts assigns a number to every single account or type of transaction used in your business and typically includes assets, liabilities, equity, revenue, and expenses.

It’s wise to customize your chart of accounts to include categories unique to the legal industry, such as client trust funds, retainers, disbursements, and contingency fees. A tailored chart of accounts allows for more precise tracking of legal transactions and ensures compliance with legal accounting standards.

In legal accounting, consistency is key. Maintain consistency in how you manage and categorize your accounts. This will make generating meaningful financial reports and analyzes easier, reducing possible errors and misinterpretations.

4. Run Reports and Track Progress

A quality reporting system isn’t just good for maintaining accurate accounting records. It ensures that you always have the finger on the pulse of your firm’s financial health. Without running and assessing regular reports, you can face significant issues that could have been easily handled sooner.

Staying up to date with your reports can also help you look at your practice areas and assets that are bringing in the most and the least money and adjust your strategies as needed. For example, your reports may indicate that you should increase your marketing spend or reduce the time you allocate to practice areas that aren’t generating revenue. 

 Some reports you should be running are: 

• Balance sheet reports (liabilities, assets, long and short-term items) 
• Equity and owner’s draw 
• Profit and loss statement reports (income accounts and expense accounts) 
• Accounts receivable and collections 
• Client retainer balances 

You don’t have to try to gather all this information alone, though. Legal-specific accounting software provides you with actionable data that helps you streamline your firm’s processes. 

5. Streamline Your Invoicing and Billing 

A clear invoicing and billing process will help you foster good relationships with your clients and ensure you get paid accurately and on time. Communicate invoicing procedures with new clients, stick to a billing schedule, and make sure your invoices are easy to understand, with accurate descriptions for each billed item.

Many law firms still accept payments the old-fashioned way, but an online billing and payment system is an excellent alternative to checks, credit cards, and in-person payments. Accepting online payments for your services with legal-specific payment solutions makes things more convenient for your clients and simplifies your accounting and reporting processes.

The right online billing solution will also provide a portal that allows you to run reports by item, sales, deposits, reconciliations, and more. These reports should provide data that includes: 

• Scheduled invoices  
• How much money you’ve taken during a specific time frame  
• Advanced metrics and analytics 

6. Adapt and Improve

Regularly reviewing and improving your accounting processes helps you evolve and stay updated with legal industry changes. 

Set specific benchmarks or goals for your financial performance and use the year-end review to assess whether you met your targets. For example, evaluate metrics such as cash flow, profitability, and client acquisition costs. This will help you understand what’s working and where adjustments are needed. Continuing to develop your accounting skills and analyzing your financial performance from year to year enables you to identify the most profitable areas of your business, spot potential issues, and optimize as you go.

Accounting software that offers AI-driven insights or predictive analytics to identify trends and make data-driven decisions can significantly improve the accuracy and efficiency of your accounting practices.

7. Keep An Eye On Legal Accounting Rules

Tax laws and industry regulations constantly shift, so remaining compliant keeps you in practice and competitive. Subscribe to industry publications and invest in regular training and continuous education for your team to ensure you’re fully current and using the latest industry best practices.

Establish strong internal controls and conduct regular internal audits to ensure you’re adhering to regulatory accounting best practices. This proactive approach can help you catch and correct issues before they become significant problems.

Keep your firm’s financials healthy with CosmoLex

Keeping up with the ins and outs of accounting for law firms can be challenging and time-consuming, leaving even the most seasoned legal professionals feeling frazzled.

When you use a legal-specific practice management software like CosmoLex, you’ll access all your essential accounting data from one convenient location. Rest easy knowing you’re following accounting best practices, ensuring you have a holistic view of your firm’s finances.

You can also integrate CosmoLexPay to streamline your payment processes. This means you get paid faster, clients enjoy greater convenience when working with you, and you’re guaranteed to have accurate records of all your transactions when it’s time to do your year-end check-in.