Ah, legal accounting. It’s one of those necessary tasks that can make even the most experienced attorneys pause.  

After all, for law firms, managing finances is more than keeping the books in order. It requires navigating a maze of legal-specific regulations and requirements that can make or break your practice.  

The complexities only increase when you use separate systems for billing and accounting, which can lead to time-consuming, resource-draining errors and inefficiencies.  

Thankfully, there’s a solution that can completely transform your law firm finances: CosmoLex’s legal-specific accounting software.  

This powerful cloud-based solution revolutionizes how law firms handle their finances by integrating billing and accounting into a single platform. Let’s talk about how CosmoLex can help you tackle seven common legal accounting challenges so you can simplify the financial management process and focus on your firm’s growth. 

Seven common legal accounting challenges 

When considering your firm’s needs for an accounting program, it’s important to first identify the three major components of legal accounting your firm will need to address: 

• General Business Accounting 
• Matter Cost/Income Accounting 
• Fee Advances/Retainer Accounting 

Within each of these, there are several bookkeeping-related tasks, some of which must be completed on a daily or weekly basis, while others take place monthly or annually. Regardless of their frequency, billing, trust accounting, and/or general business accounting are all elements of those tasks. 

However, many law firms still use a segregated setup, with multiple tools that treat billing and accounting as separate entities, despite the fact that crossover often occurs. This results in two common problems.  

Firstly, segregated systems (even those that rely on a sync) often lead to an increase in double data entries and possible inaccuracies. Secondly, when the separate accounting program being used is a general business accounting tool like QuickBooks or Xero, issues with legal-specific accounting functions and compliance are likely to arise. 

These two problems lead to seven legal accounting challenges that can jeopardize your law firm’s finances.  

Challenge #1: Enforcing correct use of COAs 

Since legal-specific accounts are required—and must be used at the correct times—it’s imperative that your business accounting software supports the legal-specific needs of law firms which includes a properly structured Chart of Accounts (COA) involving IOLTA/trust liabilities and cost accounts. 

Challenge #2: Double data entry 

Needing to enter data multiple times is not only time-consuming but also opens you up to a higher risk of error. And when it comes time for reconciliation, both systems must be updated and/or corrected.  

There are several sources of crossover where double data entry can become a concern: 

• Matter costs 
• Invoice payments (income) 
• Trust retainers 

Challenge #3: Handling client funds 

Client funds typically involve trust accounts, and since trust accounting is a specific function of law firms, it carries its own compliance regulations.  

So, what can go wrong with non-legal-specific business accounting?  

Several things, including: 

• Absence of safeguards 
• Commingling of trust funds 
• Trust ledger overdrafts 
• Un-cleared funds not addressed 
• Sloppy bank reconciliation 
• Billing and trust records kept separate 

Challenge #4: Client cost recovery 

Very often, firms are forced to pay for client costs up-front. Because of this, you want to ensure they are properly accounted for and billed to the client for reimbursement. But in order for this to happen, the item must be linked to the appropriate matter and correctly identified by the type of cost: 

• Hard costs (direct): directly linked to a transaction 
• Soft costs (indirect): indirect charges like overhead, copies, etc. 

Challenge #5: Allocation of revenue receipts 

Law firm accounting requires a certain order of allocation, and this is especially important when dealing with partial invoice payments. Generic tools like QuickBooks don’t adhere to these guidelines and instead apply payment proportionally.  

When allocating revenue receipts, the following sequence must be followed: 

• Sales tax payables 
• ACC 
• RCC (hard costs) 
• RCC (soft costs) 
• Finance charges and late fees 
• Fee income 

Challenge #6: Tracking financials by class 

While not required, tracking financials by class is a useful means for capturing accurate data that will allow you to make informed business decisions in the future.  

This includes (among others): 

• Matter owner 
• Timekeeper 
• Practice area 
• Location 

Challenge #7: Fee distributions by party 

Whenever a partnership is involved, income distribution is necessary. However, without a legal-specific business accounting tool, it is very difficult to identify who brought in which matter, who worked on what, which matters are earning income, and how compensation is calculated and distributed.  

This can become a complicated process, as it involves matter party setup, billing, and income recording. And since fee distributions by party is an uncommon practice in other business sectors, a generic accounting tool requires law firms to manually extract data and manipulate it to connect the dots. 

The risks of using the wrong accounting solutions 

As you can see, not using the right accounting solutions causes many issues within law firms. These issues can have negative consequences for your firm’s financial health and reputation, your clients, and even your licensure, including: 

• Lost time: Spending hours managing manual entries and corrections decreases efficiency and takes attention away from core legal activities, affecting service quality and client satisfaction.
   
• Compliance violations: Lacking legal accounting compliance features, such as detailed tracking of trust account activities and proper separation of clients, leads to legal penalties, fines, and even disbarment.  

• Financial discrepancies and errors: Human error and/or software limitation lead to distorted financial statements and incorrect financial assessments. In turn, this can erode trust among clients and stakeholders and lead to financial liabilities.
   
• Inadequate client trust account management: Mismanagement of trusts risk regulatory penalties and damage attorney-client trust, potentially causing you to lose clients and your reputation.
   
• Compromised decision-making and strategic planning: Poor visibility into your firm’s financial health makes it difficult to make informed strategic decisions, leading to missed opportunities or failure to notice and correct challenges as they emerge effectively.

How CosmoLex’s accounting features optimize law firm finances 

With unique features and capabilities, CosmoLex’s legal-specific accounting software is the right solution to combat and even eliminate these common challenges and their resulting problems.  

Legal-specific chart of accounts 

CosmoLex supports the legal-specific needs of law firms with a properly structured chart of accounts located within the general ledger. It contains all the accounts that occur on your financial reports: 

• Assets 
• Liabilities 
• Owner’s equity 
• Operating revenue 
• Operating expenses 
• Non-operating revenues and gains 
• Non-operating expenses and losses 

Recognizing that every law firm is different, CosmoLex allows you to customize your chart of accounts so you can add your own, change account types, and even create sub-accounts. Since some law firms aren’t as complex as other larger organizations, your chart of accounts doesn’t have to be too complicated. That means it’s best to base your customizations on your company’s tax return format. 

For example, you could set up your expense accounts to mirror your Schedule-C expense categories. CosmoLex’s software will automatically assign the correct number to each account according to category. You can also set up a default chart of account for payees or vendors to which you regularly or frequently submit payments to save time.  

Built-in legal billing integration 

General and traditional accounting software solutions typically require complex integrations or expensive add-ons to integrate billing with practice management and accounting software.  

This leads to manually entering time, revenue, and expense entries into accounting software, which wastes hours on duplicate data entry, correcting errors, and reconciling bank statements at the end of the month.  

CosmoLex eliminates this problem with legal billing software that’s built into your accounting platform.  

Every function that you carry out for legal billing—including time and expense entry and tracking, generating and sending invoices, and processing payments—automatically syncs with your accounting software. This includes: 

• Accounts payable tracking 
• Write-offs tracking 
• Accrual and cash basis general ledger accounting 
• Accurate, automated accounting for matter costs, both direct/hard and indirect/soft 
• Automatic allocation of invoice payments to the proper general ledger accounts 
• Customizable, legal-specific chart of accounts 
• Automatic daily bank data feed 
• Automated bank reconciliations 
• Automated, sophisticated revenue distribution calculations 
• Electronic bank/electronic credit card statement imports 
• Deposit slips and check printing 
• A comprehensive set of detailed financial and management reports 

With this seamless connection, you reduce the risk of double data entry and related inaccuracies. You can enjoy real-time financial tracking and enhanced accuracy in your financial reporting instead, much like one Ontario solo law firm that reduced time spent on reconciliations from 2-3 days to minutes and was able to solve billing problems in real time. 

This holistic view of your firm’s financial health allows you to make informed, strategic decisions more efficiently. It also speeds up reconciliation and ensures compliance with legal accounting regulations by automatically aligning income and expenses with the correct client matters and trust accounts.  

Together, these advantages allow you to remain financially strong so you can focus more on serving your clients and less on tedious administrative tasks. 

Trust accounting 

CosmoLex also includes comprehensive legal trust accounting software right alongside your billing and general accounting platforms. It includes features such as:  

• Individual client ledger management 
• Automatic trust-to-general transfer 
• Online payments for individual and bulk invoices using trust funds 
• Electronic bank statement imports and auto-reconcile books 
• Three-way reconciliation reporting in just one click 
• Third-party lien claim tracking and disbursement 
• Disbursement check printing 
• Trust record-keeping and financial reporting, including client balance, transactions, transfer records, receipt and disbursement journals, and more 

The best part is that the trust accounting software works automatically in the background in real time as you work. It also has built-in trust safeguards to prevent negative trust ledger balances for hassle-free, virtually effortless compliance. 

Client-centric financial management 

Today’s clients expect convenience and transparency in billing. However, general accounting solutions don’t always offer visibility or simplify the law firm billing process.  

But CosmoLex does! It allows you to create customizable, legal-specific invoice templates where you can include detailed information that informs your clients of every billable minute you spent on their case.  

This can include information such as:  

• An itemized listing of services and disbursements  
• Services performed by hourly rate  
• The last payment made  
• Payment plans or alternative billing arrangements  
• Your company information, such as your logo and financial information  

You may choose to include a simple summary of services and costs for clients who prefer to only see what they have to pay. Either way, you can create multiple templates to batch send to multiple clients so they see the information exactly how they prefer.  

You can also create detailed expense reports to further build trust. This level of customization and detail shows that you’re committed to improving the client experience with exceptional service. 

Efficient expense management 

Expense management challenges are a thing of the past with CosmoLex. 

Managing, tracking, and categorizing expenses is easier than ever before thanks to the mobile expense capture. It lets you upload pictures of your receipts and enter your expenses straight from your smart device, on the spot, no matter where you are. 

The software also automatically categorizes your expenses as direct or indirect costs depending on how you set it up so you never have to worry about being disorganized, incorrectly attributing expenses to your clients, or not getting the reimbursement you deserve for your hard work. 

These features are all fully integrated with your legal practice management and accounting software so the information automatically syncs in real time. You can rest assured that everything is compliant and accurate, and save countless hours from redundant data entry and corrections. 

Transform your law firm finances with CosmoLex’s legal-specific accounting software 

In addition to utilizing legal-specific accounting tools, there are many other advantages to leveraging CosmoLex’s cloud technology: 

• Mobile access for timely entries 
• Anytime/anywhere bookkeeper access 
• Statement imports 
• Foolproof legal accounting 
• Real-time reports 

The goal of every attorney is to come out on top, and when it comes to business accounting, legal-specific is the key to success. CosmoLex is here to provide you with all the features you need to transform your law firm finances and thrive now and in the future. 

Book a demo or start your free trial today to see how we can help you take your practice to the next level.