After starting a law practice firm, one of the most important decisions is about the financial structure of the firm.
The financial structure of the law practice firm will determine how you set up trust accounts and accept payment.
Just like any other business, time is also crucial for lawyers, so having an accurate book of records is essential.
It helps to track your business expenses and budget appropriately. Thus, it is very important to understand the basics of accounting for lawyers.
Knowledge of the fundamentals of accounting allows lawyers to evaluate their practice from a business perspective and analyze their performance to identify areas for improvement.
Accountancy for lawyers in professional ethics helps to develop better relationships with banking and financial institutions, abide by accounting law, and prepare GAAP-compliant tax returns.
Basics of accounting for lawyers: one should know
- Understanding the Generally Accepted Accounting Principles
GAAP is a common accounting law, standard, and procedure laid out by the Financial Accounting Standard Board (FASB).
The GAAP serves as the basic accounting principle for the preparation and reporting of financial statements. These accounting laws serve as the foundation for accounting for lawyers.
Law firms have many accounting laws that need to be properly addressed, and accountants for lawyers must ensure they are maintaining books of accounts in accordance with IRS rules and GAAP.
- Choose an appropriate accounting method
When it comes to accountancy for lawyers, there are standard methods for accounting for law firms:
1. Cash-based accounting:
Cash-based accounting is the easiest and most simple method to track expenses and revenue. Thus, the method records revenue or expense only when the monetary transaction takes place. It is preferable as an easy way to keep track of cash on hand and is simple to follow.
2. Accrual basis accounting:
Accrual basis accounting, on the other hand, records revenue or expenses on the day it occurs, irrespective of the monetary transaction. It is the preferred method as per GAAP, as the law firm can view month-to-month for effective budgeting and financial forecasting.
3. Modified cash basis accounting:
Modified cash basis accounting is the midway solution for law firms. It is a hybrid model where you can use cash basis accounting for day-to-day bookkeeping needs and accrual accounting for long-term expenses.
- Get familiar with the general ledger
A general ledger maintains a complete record of all the financial transactions of the law firm, separated by transaction types that include assets, liabilities, revenue, owners’ equity, and expenses.
The maintenance of the general ledger is based on the double-entry bookkeeping method. The double-entry accounting method tracks the flow of money in and out of your law firm.
Every financial transaction has debit and credit entries. These entries after journal entry are recorded in the general ledger to show the movement of funds.
- Learn about the three key Financial Statements.
Accounting for lawyers requires getting through these three financial statements:
- The income statements represent the performance of the firm for one accounting period. They show the income and expenses of the company as well as the profit earned during the year.
- The balance sheet shows the assets and liabilities of the firm as of a particular date. It also shows the owner’s equity on that particular date.
- The cash flow demonstrates the inflow and outflow of money in the business for a specified period.
Learn more about the basics of accounting for lawyers by consulting our accountants.
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