Accounting is a business function that helps determine whether the business is profitable. It is crucial for every business, including law firms and lawyers.
Accounting for law firms is a bit complicated as it has some special funds to manage, like trust funds, and different sets of regulations to comply with. To reduce the complications and make the process easier and smoother, a law firm can hire outsourced accounting services.
Outsourced accounting is more convenient for law firms than having full-time in-house finance personnel. Let us learn about law firm accounting, and accounting services are beneficial.
What Is Accounting For Law Firms?
Accounting for law firms refers to the accounting services provided specifically for law firms or lawyers. It helps them record and manage their financial inflows and outflows, financial statements, and reports.
It also involves drafting business payment policies, handling trust accounts, and filing taxes while following the legal and regulatory compliances required by the industry.
What Are The Accounting Challenges Faced By Law Firms?
Proper accounts management is necessary for every business, but legal firms and lawyers find it difficult as they don’t specialize in this field.
Without industry knowledge and prior experience, even an accountant or accounting services provider can make some basic accounting mistakes.
Some of the most common accounting challenges faced by a law firm are:
Incorrect Revenue Postings
The most significant accounting issue for a law firm is inaccurate revenue postings. The invoice payments the law firms receive must include other items like the sales tax payable before depositing the amount in the bank.
Failure To Recover Costs Properly
A substantial amount of money is spent on matters related to the law firm’s clients. The money spent on such activities is considered costs or expenses and can hamper the firm’s profit determination if not appropriately charged to the client’s account. Therefore, accurate cost recording and billing to the right client is necessary.
Inability To Make The Right Business Decisions
Every important business decision is made based on the firm’s financial statements and reports. Inaccurate statements and records or ignoring financial data lead to bad decision-making. It affects future business planning and forecasting.
Mishandling Client Funds
Regarding client funds, it is important to follow the compliance guidelines. Every penny must be accurately recorded and tracked until it is marked ‘earned’ in the books.
Mishandling or inconsistency of client funds can attract hefty fines and penalties on the firm and affect its market reputation.
Benefits Of Accounting Services For Law Firms
Accurate accounting determines the business’s current financial position and helps strategize to improve future business performance. It helps enhance business productivity and profitability.
Accounting and bookkeeping services bring expertise and the latest accounting tools to strengthen the reliability of business accounts. Following are some of the top benefits that a law firm receives by using accounting services:
1. Managing The Firm’s Financial Information
Proper accounting and bookkeeping help businesses get accurate financial information. Accounting services track all business transactions properly and help prepare accurate financial statements and reports.
They ascertain any inaccuracies in the records and help fix them on time to prevent their effect on the final statements. It also helps the business properly understand its financial condition and work towards providing better client services with judicious use of its resources.
2. Forecasting and designing
The accounting and bookkeeping services provide the financial reports enabling the business to understand and interpret the current business environment.
It helps the business determine whether its existing resources are enough to deal with the environment and offer adequate services to its clients. Businesses can forecast and make guidelines to plan and design future actions to enhance business profitability.
3. Payroll Management
Every business needs human resources for better performance and profitability, making it important to keep them happy as it directly affects the business’s productivity. Having expert accounting services helps businesses efficiently manage the payroll function to ensure accuracy and punctuality.
Payroll management is complicated as it involves numerous deductions and benefits and must comply with regulatory and legal requirements.
4. Aids In The Tax Filing
Tax filing is a critical function that a business must fulfill carefully. Any inaccuracy or delay in tax filing attracts fines and penalties for the business, and the business can also get IRS notices. These things affect the business reputation and might even lead to business closure if ignored for a long time. The risks arising from tax filing issues can easily be managed by hiring accounting services with complete knowledge, expertise, and experience in tax filing for law firms. It is important to follow the laws and regulations applicable to the legal industry while filing taxes.
5. Helps In Business Decision-Making
The decision taken by a business affects the current and future financial health and profitability of the business. Business decisions are based on the financial statements and reports prepared at the year-end.
Accounting services manage the business’s accounting function, from recording to preparing financial statements and reports based on the records.
The accuracy of the reports directly affects the accuracy and efficiency of the crucial decisions taken by the business. It will ultimately affect whether the business will be profitable in the future.
Accounting and bookkeeping are critical business functions that pave the way for a profitable future. Therefore, it becomes necessary to manage these functions diligently.
Though the business can hire an in-house finance team to manage the accounting function, it is more beneficial for law firms to outsource to an accounting services provider. The service providers remove the burden of accounts management from the shoulder of law firms, allowing them to focus on their core activity of helping their clients.
The team that works under an accounting services provider is expert and experienced in managing accounts for firms in the legal industry. Thus, their expertise and knowledge help law firms much better than an in-house team.