As a lawyer, you know that setting up a legal chart of accounts is essential for managing your law firm’s finances. The legal accounting process can be complicated, but a well-organized chart of accounts can help you keep track of your finances and ensure compliance with the Lawyer Trust Account (IOLTA) and other legal accounting regulations. In this blog, we will guide you through the process of setting up your law firm’s chart of accounts.
Step 1: Understand the Legal Chart of Accounts
The legal chart of accounts is a list of accounts used to track financial transactions for your law firm. This list typically includes accounts for income, expenses, assets, and liabilities. You should also include accounts specific to trust accounting for law firms, such as IOLTA accounts.
Step 2: Choose a Chart of Accounts Template
There are several templates available for setting up your legal chart of accounts, the ABA provides model rules for law firms. You can use a general accounting template and customize it to fit your law firm’s needs, or you can use a legal-specific template provided by your accounting software.
|a. Cash on hand|
b. Accounts receivable
c. Trust accounts
d. Prepaid expenses
e. Furniture and equipment
f. Other assets
|a. Accounts payable|
b. Trust liabilities
c. Accrued expenses
d. Taxes payable
e. Loans payable
f. Other liabilities
|a. Fees earned|
b. Interest income
d. Other income
|a. Rent and occupancy|
b. Salaries and wages
c. Office supplies
d. Equipment and maintenance
e. Professional fees
f. Advertising and marketing
i. Other expenses
|a. Owner’s equity|
b. Retained earnings
c. Other equity
Step 3: Customize the Chart of Accounts
Once you have chosen a template, you must customize it to fit your law firm’s needs. Start by reviewing the accounts listed in the template and adding or deleting accounts as necessary. For example, you may need to add accounts for expenses related to legal research, continuing education, or office supplies.
Step 4: Organize Accounts by Category
Organize your accounts by category to make it easier to track your law firm’s finances. Some categories you may consider include income, expenses, assets, liabilities, and trust accounts. Within each category, you can further organize accounts by subcategory.
Set up your income accounts
Once you’ve determined the accounts you need, the next step is to set up your income accounts. This may include accounts for fees earned, interest income, and other sources of income. Be sure to choose account names that are clear and specific, so that you can easily track your income.
Set up your expense accounts
After you’ve set up your income accounts, the next step is to set up your expense accounts. This may include accounts for rent, salaries, office supplies, and other expenses. Again, be sure to choose clear and specific account names.
Set up your asset accounts
Asset accounts are used to track your law firm’s assets, such as accounts receivable and office equipment. Set up your asset accounts in a way that makes sense for your business, and be sure to include all relevant assets.
Set up your liability accounts
Liability accounts are used to track your law firm’s liabilities, such as accounts payable and taxes payable. Set up your liability accounts in a way that makes sense for your business, and be sure to include all relevant liabilities.
Set up your trust accounts
Trust accounts are a crucial component of a law firm’s chart of accounts. These accounts are used to hold client funds and must be managed in accordance with strict regulations. Set up separate trust accounts for each client, and be sure to keep detailed records of all transactions that occur within these accounts.
Step 5: Assign Account Numbers
Assign a unique account number to each account in your chart of accounts. This number will make it easier to reference specific accounts when recording financial transactions.
Step 6: Set up Your Accounting Software
Once you have your legal chart of accounts set up, you need to set up your legal accounting software to track your finances. Most accounting software will allow you to import your chart of accounts and customize it within the software.
Step 7: Train Your Staff
It’s essential to train your staff on how to use the chart of accounts and accounting software. This training should include how to record financial transactions, reconcile accounts, and generate reports.
Setting up a legal chart of accounts is essential for managing your law firm’s finances. By following these steps, you can set up a chart of accounts that will help you keep track of your finances and ensure compliance with legal accounting regulations. Remember to review your chart of accounts regularly to ensure it is up-to-date and accurate.