Understanding the Role of a Bookkeeper: Key Differences with Legal Bookkeeping
Dec 23, 2024Bookkeeping is a cornerstone of any successful business, and for those working with legal clients, the nuances of legal bookkeeping add another layer of complexity. Whether you’re a brand-new bookkeeper or considering entering the field, understanding the fundamentals is essential. Let’s break down what a bookkeeper does and explore the specialized tasks involved in legal bookkeeping.
The Basics of Bookkeeping
At its core, bookkeeping involves tracking financial transactions for a business. Bookkeepers typically use accounting software, with QuickBooks being the most popular choice in the U.S. and worldwide. The primary tasks include:
- Bank Feeds: Bookkeepers aggregate data from connected bank accounts, downloading and categorizing transactions such as income and expenses.
- Transaction Matching: This involves reconciling transactions in the system to avoid duplication. For example, if a check to a vendor has already been recorded, the bank feed entry must be matched to the existing transaction, not added again.
- Chart of Accounts: This is the list of all financial categories used to organize transactions. Setting up an industry-specific chart of accounts—such as one tailored for attorneys—is crucial for proper categorization.
- Financial Reporting: Bookkeepers generate reports like the profit and loss statement (P&L) and balance sheet monthly to give clients a clear view of their financial health.
Specialized Tasks in Legal Bookkeeping
While the core principles of bookkeeping remain the same, legal bookkeeping introduces industry-specific requirements that bookkeepers must master.
- Handling Trust Accounts:
- Attorneys manage client funds through trust accounts (IOLTA accounts in the U.S.). Bookkeepers must record these transactions accurately, ensuring deposits and disbursements are properly tracked.
- A three-way reconciliation—reconciling the trust bank account, client ledgers, and the trust liability account—is required monthly.
- Advanced Client Costs:
- Legal firms often incur expenses on behalf of their clients, such as court fees or expert witness costs. These are recorded as advanced client costs and later billed back to the client.
- Bookkeepers must track these expenses meticulously to ensure they align with client invoicing and firm reimbursement.
- Legal Billing Software Integration:
- Many law firms use specialized billing software like Clio, LeanLaw, or PracticePanther. Bookkeepers must sync this software with QuickBooks, ensuring that invoices and payments flow correctly into the accounting system.
- Partnership Accounting:
- Many law firms operate as partnerships. This requires bookkeepers to handle equity accounts, partner contributions, and distributions accurately.
Tools of the Trade
While QuickBooks is the go-to software, additional tools can simplify and enhance bookkeeping:
- RightTool: A browser extension that streamlines categorization and data entry tasks.
- Accountant’s Logins: For payroll services like Gusto or ADP, bookkeepers should use accountant logins to map transactions correctly into QuickBooks.
Best Practices for Legal Bookkeepers
- Learn the Legal Lingo:
- Understanding terms like trust accounting, retainer funds, and advanced client costs is essential.
- Familiarize yourself with billing terms, as legal professionals often use “billing” instead of “invoicing.”
- Know the Law Firm’s Tax Requirements:
- Align the chart of accounts with the firm’s tax return to ensure accuracy and compliance.
- Study the firm’s prior year tax returns to understand categorization practices.
- Get Certified:
- Obtain QuickBooks certification to deepen your software knowledge.
- Take the bookkeeping exam to ensure you understand the bigger financial picture.
- Use the Right QuickBooks Plan:
- For law firms, QuickBooks Plus or Advanced is often necessary to handle trust accounts and detailed reporting.
- Collaborate with Clients:
- Establish a system for addressing unclear transactions, such as using an “Ask My Accountant” or “Need Help” account for questions.
Conclusion
Legal bookkeeping is a specialized field that demands precision, industry knowledge, and the right tools. By mastering these skills, you’ll provide invaluable support to your legal clients, ensuring their financial records are accurate and compliant with industry regulations.
If you’re ready to dive deeper into legal bookkeeping, join our Accountants Law Lab community—a supportive group of professionals sharing insights and learning together. Whether you’re just starting or looking to expand your knowledge, there’s always more to learn in this dynamic field.
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