This article will help you become familiar with accounting and general money movement for law firms. Whether you’re an accountant who just started working for a law firm, or you have a remote bookkeeping business and want to specialize in this industry, it helps to be familiar with some of the processes. This will be a general outline to help you understand basic processes and concepts. Please note that every law firm is unique.
1. Retainers
Sometimes attorneys will collect a retainer fee when engaging with a new client. A retainer is a payment held for future work. This retainer is often held in a Trust bank account at first. The attorney will start working on the case or matter, and then create invoices for legal fees and expenses periodically. The law firm will use money from the retainer balance to pay the invoice. The funds are moved from the Trust bank account to the Operating bank account in order to pay the invoice.
Not all attorneys collect retainers. Some law firms collect a lump sum such as in the case of a settlement case. An example of this is a personal injury settlement. Typically the entire amount of the settlement is deposited into the Trust bank account, and then disbursed according to the agreement in place. A portion might go to the client, a portion to the law firm for legal fees and any reimbursement of costs paid by the firm, and then any other associated bills would be paid according to the agreement and settlement details.
Another situation where the attorney might collect a lump sum is in the case of a property purchase. In this type of situation, the attorney would hold funds in a Trust bank account and then disburse as needed once the property is closed.
See additional information about Trust bank accounts in #4 below.
2. Client costs
Law firms typically have costs associated with their clients. Typically these will be reimbursable to the law firm. They spend money on behalf of the client for costs related to the case. Typically these costs are paid from the Operating bank account, then later billed to the client for reimbursement. Some law firms require clients to pay some costs in advance, and some bill the client after the cost is paid by the law firm. See some examples of reimbursable costs below:
- Court filing fees
- Messenger/delivery services
- Medical records
- Medical expenses
- Postage/Shipping
- Expert witnesses
- Depositions
- Court transcripts
- Travel expenses
These reimbursable costs are often treated as a current asset account. When costs are paid, the reimbursable costs account is debited, and when the costs are reimbursed by the client, the reimbursable costs account is credited. The net effect should be zero. This account should be reviewed periodically to ensure costs are being properly posted and billed to customers.
3. Time Entries
For law firms that bill by the hour, time entries become extremely important. Typically the attorneys and paralegals and law clerks will record their time in a software program so that the clients can be billed periodically by putting those time entries onto an invoice. Often there are different billable rates for attorneys vs paralegals. Reimbursable costs will be added to the invoice as well if there are any.
4. Trust Accounts
Understanding Trust bank accounts is crucial if doing accounting for law firms. These bank accounts are held to a higher standard than Operating bank accounts because they hold money that belongs to other people. Each state or locality may have specific rules that attorneys must follow regarding these bank accounts. These bank accounts are where retainers and other settlement funds are held. Until the attorney “earns” money via legal fees for work done and reimbursable costs, the retainer is money simply being held temporarily until services are provided or funds are distributed.
Money held in a Trust bank account is treated as a current liability account. When money is deposited, the current liability account is credited. When money is taken out of the Trust bank account, the current liability account is debited.
It’s extremely important that the funds in Trust bank accounts are reconciled regularly and records are immaculate. A “three-way reconciliation” would be done regularly. This is a second reconciliation after the regular bank account reconciliation. A regular reconciliation compares the book balance to the bank balance. A three-way reconciliation takes it a step further and looks at how much is held on behalf of each entity or client or matter, and that must be matched to the bank balance. “Matter” is simply terminology to refer to each client case.
For example, if you have a Trust bank account with $40,000 in it, the account would first be reconciled in the same way as other bank accounts. Then a three-way reconciliation would be performed. In the three-way reconciliation, you would confirm that the client matter balances add up to the $40,000 total. See below:
•Bank and book balances are $40,000
•What client matter balances make up that $40,000?
| Client/Matter A | $10,000 |
| Client/Matter B | $5,000 |
| Client/Matter C | $8,000 |
| Client/Matter D | $10,000 |
| Client/Matter E | $7,000 |
| Total | $40,000 |
*In a real situation, outstanding checks and deposits in transit would also be factored into the reconciliation.
5. Client Billing
Most law firms bill their clients in similar manner to other industries. They create the invoice in their software, and then send to the client. However some companies have to use LEDES billing formatting for some of their clients. LEDES stands for Legal Electronic Data Exchange Standard. This is a standardized file format of the invoice so that it can be sent electronically. If you work in a law firm that uses this format, you’ll have to learn how to prepare and send invoices accordingly. For a further explanation of LEDES billing, please refer to this article: https://legal.thomsonreuters.com/en/insights/articles/what-is-ledes-format
Fee structures of law firms vary greatly. Some law firms bill clients using an hourly rate for legal fees. Some law firms have predetermined flat fees for various services. And some law firms collect a percentage of a settlement. Legal fees are posted as income once earned in the same way as other industries. It’s important to remember that earned legal fees would be deposited into the Operating bank account and not the Trust bank account.
Newberry Accounting Inc 